<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1999.
FILE NOS. 2-69062 AND 811-3091
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-LA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 22 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 24 [X]
(Check appropriate box or boxes)
------------------------
MERRILL LYNCH SERIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
TERRY K. GLENN
MERRILL LYNCH SERIES FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Name and Address of Agent for Service)
Copies to:
<TABLE>
<S> <C> <C>
MICHAEL S. HENNEWINKEL, Esq. and LEONARD B. MACKEY, JR., Esq.
Merrill Lynch Asset Management, L.P. Rogers & Wells LLP
P.O. Box 9011 200 Park Avenue
Princeton, New Jersey 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)
[X] on May 7, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[MERRILL LYNCH LOGO]
Subject to Completion Preliminary Prospectus Dated
March 8, 1999
Merrill Lynch Series Fund, Inc.
April , 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.
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL
THE REGISTRATION STATEMENT CONTAINING THIS PROSPECTUS, WHICH HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
LOGO
<PAGE> 3
Merrill Lynch Intermediate Government
Bond Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Intermediate Government Bond Portfolio at 3
a Glance....................................................
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE Portfolio ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 9
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Table of Contents
<PAGE> 4
THE MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The Portfolio's investment objective is to seek the highest current income
consistent with the protection of capital afforded by investing in
intermediate-term debt securities issued or guaranteed by the U.S. Government or
its agencies.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio tries to provide current income from an actively managed portfolio
of U.S. government and agency securities with a maximum MATURITY not to exceed
fifteen years. We cannot guarantee that the Portfolio will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests in bonds and other debt securities that are issued or
guaranteed by the U.S. government or U.S. government AGENCIES or
government-sponsored enterprises. The Portfolio may invest a substantial portion
of its portfolio in MORTGAGE-BACKED SECURITIES issued or guaranteed by
GOVERNMENT SPONSORED ENTERPRISES. The Portfolio may also invest in securities
linked to an interest rate or other index. Under normal circumstances, the
Portfolio will maintain a dollar-weighted average maturity of six to eight
years. The Portfolio may invest in securities with a maximum maturity not to
exceed fifteen years.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of the Portfolio's shares, may go up or down. Although government
securities involve minimal credit risk, changes in the value of government
securities may occur in response to interest rate movements -- generally, when
interest rates go up, the value of most government securities, like other fixed
income instruments, goes down. If the value of the Portfolio's investments goes
down, you may lose money.
The Portfolio may invest a substantial portion of its portfolio in
mortgage-backed securities. Mortgage-backed securities involve special risks,
including prepayment risk and extension risk, and may be more VOLATILE than
other fixed-income securities of similar maturities.
[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.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a debt instrument may be short-term (two
years or under), intermediate-term (two to fifteen years) or long-term (over
fifteen years).
AGENCIES -- entities that are part of or sponsored by the federal government,
such as the Government National Mortgage Administration ("Ginnie Mae"), the
Tennessee Valley Authority or the Federal Housing Administration.
MORTGAGE-BACKED SECURITIES -- securities backed by pools of mortgages, which in
many cases are guaranteed against default by government agencies such as Ginnie
Mae.
GOVERNMENT SPONSORED ENTERPRISES -- private corporations sponsored by the
federal government which have the legal status of government agencies, such as
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student Loan
Marketing Association ("Sallie Mae") or Fannie Mae.
VOLATILITY -- the amount and
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO
3
frequency of changes to a security's value.
<PAGE> 5
[KEY FACTS ICON]
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- have long-term goals in mind
- are looking for an investment that provides income with minimal
credit risk
- are willing to accept the risk that the value of the Portfolio's
shares may decline as the result of interest rate movements
4 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<PAGE> 6
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
Merrill Lynch US Treasuries 7-10 years. How the Portfolio performed in the past
is not necessarily an indication of how the Portfolio will perform in the
future.
<TABLE>
<CAPTION>
'1989' 13.46
- ------ -----
<S> <C>
'1990' 8.98
'1991' 15.57
'1992' 7.03
'1993' 11.20
'1994' -4.78
'1995' 18.87
'1996' 2.61
'1997' 8.42
'1998' 8.94
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 7.35% (quarter ended June 30, 1989) and the lowest return for a
quarter was -3.93% (quarter ended March 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS PAST TEN YEARS
- --------------------------------------------------------
<S> <C> <C> <C>
Series: Intermediate
Government Bond
Portfolio 8.94% 6.53% 8.84%
- ----------------------------------------------------------------------------
ML US Treasuries 7 - 10 years* 12.39% 7.87% 10.12%
- ----------------------------------------------------------------------------
</TABLE>
* This unmanaged index is comprised of intermediate-term US Government Bond and
US Treasury Securities maturing in 7 years - 10 years. Past performance is not
predictive of future performance.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO 5
<PAGE> 7
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997+ 1996+ 1995+ 1994+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $10.93 $11.41 $10.32 $12.02
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .73 .76 .78 .75
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments
and foreign currency transactions -- net .15 (.49) 1.10 (1.30)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .88 .27 1.88 (.55)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.73) (.75) (.79) (.75)
Realized gain on investments -- net -- -- -- (.39)
In excess of realized gain on
investments -- net -- -- -- (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.73) (.75) (.79) (1.15)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $11.08 $10.93 $11.41 $10.32
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 8.42% 2.61% 18.87% (4.78)%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses % .37% .38% .38% .37%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net % 6.74% 6.85% 7.22% 6.89%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $222,212 $221,863 $239,340 $218,611
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 41.23% 29.35% 57.38% 140.55%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<PAGE> 8
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio will invest in securities issued or guaranteed by the U.S.
government or its agencies with a maximum maturity not to exceed fifteen years.
Certain securities, such as U.S. Treasury obligations, are direct obligations of
the U.S. Government. The Portfolio also invests in securities that are issued by
government-sponsored enterprises or agencies but are not direct obligations of
the U.S. Government. These securities are, however, backed by the credit of the
particular agency or government-sponsored enterprise that issued the securities
and are generally considered to have a relatively low risk of default.
Under normal circumstances, the Portfolio will maintain a dollar-weighted
average maturity of six to eight years. The Portfolio, however, may invest in
government securities with a maximum maturity not to exceed fifteen years.
Although government securities involve minimal risk of default, changes in the
value of government securities may occur in response to interest rate
movements -- generally, when interest rates go up, the value of most government
securities, like other fixed-income securities, goes down. In most cases, when
interest rates go up, the value of fixed-income securities with longer-term
maturities goes down more than the value of fixed-income securities with shorter
maturities. Because the Portfolio will invest a substantial portion of its
assets in government securities with intermediate-term maturities, rising
interest rates may cause the value of the Portfolio's investments to decline
significantly.
Government agency securities, like other fixed-income securities, may have
redemption features that permit the government agency to repurchase the
security from the Portfolio at certain times prior to maturity at a specified
price, which is generally equal to or greater than the amount due at maturity.
In many cases, when interest rates go down, government agencies redeem
fixed-income securities that allow for redemption. When a government agency
redeems fixed-income securities, the Portfolio may receive less than the market
value of the securities prior to redemption. In addition, the Portfolio may have
to invest the proceeds in fixed-income securities with lower YIELDS and
therefore lose expected future income.
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Christopher G. Ayoub has served as the Portfolio Manager of the Intermediate
Government Bond Portfolio since April 1998. Mr. Ayoub has served as First Vice
President of MLAM since 1998 and as Vice President of MLAM from 1985 to 1997.
ABOUT THE INVESTMENT ADVISER
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO 7
The Portfolio is managed by Merrill Lynch Asset Management.
<PAGE> 9
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio may invest a portion of its assets in various types of
mortgage-backed securities issued or guaranteed by government-sponsored
enterprises such as Fannie Mae or Freddie Mac. Mortgage-backed securities
represent the right to receive a portion of principal and/or interest payments
made on a pool of residential or commercial mortgage loans. Mortgage-backed
securities frequently react differently to changes in interest rates than other
fixed-income securities. When interest rates fall, borrowers may refinance or
otherwise repay principal on their mortgages earlier than scheduled. If this
happens, certain types of mortgage-backed securities will be paid off more
quickly than originally anticipated and owners of these securities have to
invest the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rise, however, fewer borrowers refinance and
certain types of mortgage-backed securities are paid off more slowly than
originally anticipated, which causes the value of these securities to fall. This
risk is known as "extension risk." Because of prepayment risk and extension
risk, small movements in interest rates (both increases and decreases) may
significantly reduce the value of certain mortgage-backed securities. Although
mortgage-backed securities issued by government-sponsored enterprises have low
risk of default, neither the U.S. government nor government-sponsored
enterprises guarantee mortgage-backed securities against declines in market
value as the result of prepayment risk or extension risk.
The Portfolio may also invest in securities the potential return of which is
based on the change in a specified interest rate or interest rate index (an
"indexed floater"). For example, the Portfolio may invest in a security that
pays a variable amount of interest at each payment based on the current level of
LIBOR (a well-known short-term interest rate index). Certain indexed floaters
have greater sensitivity to changes in interest rates than typical fixed-income
securities, and the Portfolio's investments in such instruments may decline in
value significantly if interest rates move in a manner not anticipated by
Portfolio management. For more information regarding these securities and other
types of derivatives in which the Portfolio may invest, please see the table
below and the Appendix to this Prospectus.
The Portfolio has no minimum holding period for investments and will buy or sell
securities whenever Portfolio management sees a potentially favorable
opportunity to do so.
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents the security's current expected rate
of return.
8 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INDEX -- a measure of value or rates.
<PAGE> 10
The Portfolio may use different investment strategies which involve various
types of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized on the following page:
INVESTMENT RISKS
- --------------------------------------------------------------------------------
The Portfolio could lose money if:
- The issuer of an instrument held by the Portfolio defaults;
- Interest rates increase; or
- Interest rates move sharply up or down in a manner not
anticipated by Portfolio management that causes the market value
of the Portfolio's holdings of mortgage-backed securities or
indexed securities to decline.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO 9
<PAGE> 11
[DETAILS ABOUT THE PORTFOLIO ICON]
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Index 500 Chart]
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
10 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<PAGE> 12
Merrill Lynch High Yield Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch High Yield Portfolio at a Glance.......... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE PORTFOLIO ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH HIGH YIELD PORTFOLIO
Table of Contents
<PAGE> 13
THE MERRILL LYNCH HIGH YIELD PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S STATED INVESTMENT OBJECTIVES?
The primary investment objective of the High Yield Portfolio is to seek a high
level of current income. As a secondary objective, the High Yield Portfolio
seeks capital appreciation when consistent with its primary objective.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio's main goal is current income -- it looks for securities that pay
interest or dividends. The Portfolio may also seek growth of capital by looking
for investments that will increase in value. However, the Portfolio's
investments emphasize current income more than growth of capital. We cannot
guarantee that the Portfolio will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests primarily in FIXED-INCOME SECURITIES with lower credit
quality, which means credit quality equivalent to or below the fourth highest
rating level of recognized rating agencies. Securities with credit quality below
the fourth highest rating category are known as "junk bonds." The Portfolio may
invest in junk bonds of any MATURITY. Junk bonds are high-risk investments, and
may result in the Portfolio losing both income and principal.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of Portfolio shares, may go up or down. These changes may occur in
response to interest rate changes or in response to other factors that may
affect a particular issuer or obligation. Generally, when interest rates go up,
the value of fixed-income instruments goes down. The Portfolio should be
considered high risk because it invests in junk bonds. Investing in junk bonds
is riskier than investing in higher quality fixed income securities -- price
fluctuations may be larger and more frequent, and there is greater risk of
losing both income and principal. The Portfolio faces additional risks when it
invests in securities of foreign companies or governments, including the
possibility of substantial volatility due to adverse political, economic or
other developments. If the value of the Portfolio's investments goes down, you
may lose money.
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 -- Instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as convertible
securities and preferred stock that carries a promised level of dividend
payments.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a high yield debt instrument may be
short-term (two years or under), intermediate-term
MERRILL LYNCH HIGH YIELD PORTFOLIO 3
(two to five years) or long-term (over five years).
[KEY FACTS ICON]
<PAGE> 14
[KEY FACTS ICON]
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- have long-term goals in mind
- are looking for income, with higher returns than money market
funds
- are willing to accept the risk of greater loss of income and
principal in return for the possibility of receiving higher
current income
4 MERRILL LYNCH HIGH YIELD PORTFOLIO
<PAGE> 15
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
First Boston High Yield Index. How the Portfolio performed in the past is not
necessarily an indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 5.08
- ------ ----
<S> <C>
'1990' -8.83
'1991' 37.77
'1992' 20.63
'1993' 18.11
'1994' -1.88
'1995' 17.12
'1996' 12.32
'1997' 10.74
'1998' -5.19
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
14.98%
(quarter
ended
March
31,
1991)
and
the
lowest
return
for
a
quarter
was
-10.15%
(quarter
ended
September
30,
1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- --------------------------------------------------------
<S> <C> <C> <C>
Series: High Yield Portfolio -5.19% 6.27% 9.81%
- ---------------------------------------------------------------------
First Boston High Yield Index* 0.58% 8.16% 10.74%
- ---------------------------------------------------------------------
</TABLE>
* This unmanaged market-weighted index of high-yield debt securities is
comprised of 423 securities rated BBB or lower. Past performance is not
predictive of future performance.
MERRILL LYNCH HIGH YIELD PORTFOLIO 5
<PAGE> 16
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO
-------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997+ 1996+ 1995+ 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $9.15 $8.99 $8.53 $9.68
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .90 .89 .93 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
and foreign currency transactions -- net .04 .16 .46 (1.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .94 1.05 1.39 (.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends from investment income -- net (.90) (.89) (.93) (.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $9.19 $9.15 $8.99 $8.53
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 10.74% 12.32% 17.12% (1.88)%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses % .39% .39% .38% .41%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net % 9.67% 9.77% 10.25% 10.88%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $143,764 $123,643 $107,378 $82,421
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 60.94% 50.48% 63.39% 63.43%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH HIGH YIELD PORTFOLIO
<PAGE> 17
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio normally expects to invest over 80% of its total assets in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. Most of the Portfolio's investments will be
corporate or foreign government debt securities, but the Portfolio may also buy
preferred stocks. The Portfolio will not buy equity securities other than
preferred stocks, but may acquire and hold equity securities offered as part of
a unit in conjunction with a fixed-income security, received as the result of a
conversion or exchange of a fixed-income security, or obtained in connection
with the bankruptcy or workout of a distressed fixed-income security.
The Portfolio invests primarily in fixed-income securities that are rated Baa or
lower by Moody's Investor's Service, Inc. ("Moody's"), rated BBB or lower by
Standard & Poor's Ratings Group ("S&P"), or unrated but have quality comparable
to these ratings levels. Securities with credit quality below the fourth highest
rating category are known as "junk bonds." Junk bonds are high-risk investments,
and may result in the Portfolio losing both income and principal.
The Portfolio may invest up to 100% of its assets in junk bonds. Although junk
bonds generally have higher YIELDS than fixed-income securities with higher
credit ratings, they are high risk investments that may not pay interest or
return principal as scheduled. Junk bonds generally are less LIQUID and
experience more price VOLATILITY than higher rated fixed-income securities.
Issuers of junk bonds frequently have large amounts of outstanding debt relative
to their assets and their outstanding equity, which means that issuers of junk
bonds generally have more difficulty making payments in the event of adverse
business circumstances than issuers of more highly rated fixed-income
securities. Junk bonds may be unsecured and subordinated to an issuer's other
debt, which means that in the event the issuer defaults claims of other
creditors may receive priority over the claims of holders of junk bonds. In such
circumstances, there may be few or no assets available to repay holders of junk
bonds. The Portfolio may suffer a significant loss of expected future income or
a significant loss of principal if its holdings default.
The Portfolio may also buy securities that are:
- Rated higher quality, but only when Portfolio management
believes the Portfolio can gain a substantial reduction in its
risk of losing income and principal, with only a small decrease
in yield.
- Rated Ca or lower by Moody's or rated CC or lower by
S&P, but only if Portfolio management believes the security or
the issuer is showing a stronger financial position than the low
rating usually indicates.
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Robert F. Murray has served as Portfolio Manager and has been primarily
responsible for the Portfolio's day-to-day management since February 1999. He
has served as Vice President of MLAM since 1995 and employee of MLAM since 1989.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents the security's current expected rate
of return.
LIQUIDITY -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence, greater
volatility.
VOLATILITY -- the frequency and
MERRILL LYNCH HIGH YIELD PORTFOLIO 7
amount of changes in a security's market value.
<PAGE> 18
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio will not purchase defaulted securities. If, however, the Portfolio
buys a security and the security defaults or the issuer goes into bankruptcy,
the Portfolio may continue to hold the security.
The Portfolio may invest in junk bonds of any maturity. In addition to the risk
of default, changes in the value of junk bonds, like other fixed-income
securities, may occur in response to interest rate movements -- generally, when
interest rates go up, the value of most fixed-income securities goes down. In
most cases, when interest rates go up, the value of ZERO-COUPON SECURITIES and
fixed-income securities with longer-term maturities goes down more than the
value of fixed-income securities with shorter maturities. Because the Portfolio
will invest a substantial portion of its assets in zero-coupon securities and
fixed-income securities with long-term maturities, rising interest rates may
cause the value of the Portfolio's investments to decline significantly.
Junk bonds, like other fixed-income securities, frequently have redemption
features that permit an issuer to repurchase the security from the Portfolio at
certain times prior to maturity at a specified price, which is generally equal
or greater than the amount due at maturity. In many cases, when interest rates
go down, issuers redeem bonds that allow for redemption. When an issuer redeems
junk bonds, the Portfolio may receive less than the market value of the bonds
prior to redemption. In addition, the Portfolio may have to invest the proceeds
in new bonds with lower yields and therefore lose expected future income.
To analyze a security, Portfolio management looks at both the issuer and at
general business conditions. Portfolio management looks at the issuer's:
- Historic and current financial conditions
- Current or anticipated cash flow and borrowing needs. For new
companies, or companies with minimal revenues, management may
look at whether the company has attracted reputable equity
investors or sponsors
- Management strength
- Ability to respond to changes in business conditions
- Credit standing
- Current and anticipated results of operations
- Visibility in the market, because securities of companies that
are less well known may be less liquid
- Value of assets in relation to historical cost
ZERO-COUPON SECURITIES -- bonds that are sold at a substantial discount to
8
MERRILL LYNCH HIGH YIELD PORTFOLIO
their value at maturity and do not pay current interest.
<PAGE> 19
Portfolio management also looks at general business conditions, including:
- Expected changes in the general economy and interest rates
- Economic outlook for specific industries
- The availability of new investment opportunities
Portfolio management's analysis of the issuer and business conditions does not
guarantee successful results.
The Portfolio may invest up to 10% of its total assets in fixed-income
securities of issuers outside the U.S. The Portfolio's management anticipates
that the Portfolio's investments in foreign corporate and government securities
will primarily be in issuers in Canada, Australia and the developed countries of
Europe, although the Portfolio may also invest in issuers in emerging markets.
The Portfolio will invest in securities of foreign issuers that are denominated
in U.S. dollars. Foreign investing involves special risks, including the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
The Portfolio has no minimum holding period for investments, and will buy or
sell securities whenever the Portfolio's management sees an appropriate
opportunity.
The Portfolio may use different investment strategies which involve various
types of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized on the following page:
MERRILL LYNCH HIGH YIELD PORTFOLIO 9
<PAGE> 20
[DETAILS ABOUT THE PORTFOLIO ICON]
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of total Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
LOGO
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
10 MERRILL LYNCH HIGH YIELD PORTFOLIO
<PAGE> 21
Merrill Lynch Long Term
Corporate Bond Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Long Term Corporate Bond Portfolio at a 3
Glance......................................................
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE PORTFOLIO ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO
Table of Contents
<PAGE> 22
THE MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S STATED INVESTMENT OBJECTIVES?
The primary investment objective of the Long Term Corporate Bond Portfolio is to
seek to provide a high level of current income. An additional objective is to
seek preservation of shareholders' capital.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio seeks to provide current income by investing in long-term
corporate debt securities -- it looks for securities that pay interest. The
Portfolio also seeks preservation of shareholders' capital. However, the
Portfolio's investments emphasize current income more than preservation of
shareholders' capital. We cannot guarantee that the Portfolio will achieve its
goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests primarily in FIXED-INCOME SECURITIES of all MATURITIES
rated within the three highest grades as determined by Standard & Poor's (AAA,
AA, or A) or Moody's (Aaa, Aa, or A). Fixed-income securities in any of the four
highest rating categories can be called "investment grade." Under normal
circumstances, the Portfolio invests at least 80% of the value of its total
assets in investment grade debt securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of Portfolio shares, may go up or down. These changes may occur in
response to interest rate changes or in response to 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 the Portfolio's
investments goes down, you may lose money.
[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 --
Instruments that pay a stated rate of interest or other form of scheduled
payment, including regular debt obligations as well as preferred stock that
carries a promised level of dividend payments.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a debt instrument may be short-term (two
years or under), intermediate-term (two to
MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO 3
fifteen years) or long-term (over fifteen years).
<PAGE> 23
[KEY FACTS ICON]
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are investing with long-term goals in mind
- are looking for current income, with higher returns than money
market funds
- are willing to accept the risk of greater loss of income and
principal in return for the possibility of receiving higher
current income
4 MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO
<PAGE> 24
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
Merrill Lynch US Corporate Master. How the Portfolio performed in the past is
not necessarily an indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 13.96
- ------ -----
<S> <C>
'1990' 7.83
'1991' 17.01
'1992' 8.05
'1993' 13.01
'1994' -5.13
'1995' 20.66
'1996' 2.77
'1997' 8.80
'1998' 8.45
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
7.87%
(quarter
ended
June
30,
1989)
and
the
lowest
return
for
a
quarter
was
-4.30%
(quarter
ended
March
31,
1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- --------------------------------------------------------
<S> <C> <C> <C>
Series: Long Term Corporate
Bond Portfolio 8.45% 6.78% 9.32%
- ---------------------------------------------------------------------
ML US Corporate Master* 8.72% 7.83% 9.98%
- ---------------------------------------------------------------------
</TABLE>
* This unmanaged index is comprised of all corporate bonds rated BBB3 or higher,
of all maturities. Past performance is not predictive of future performance.
MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO 5
<PAGE> 25
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
LONG TERM CORPORATE BOND PORTFOLIO
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN -------------------------------------------------------------------------
NET ASSET VALUE: 1998 1997+ 1996+ 1995+ 1994+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $11.53 $12.02 $10.72 $12.59
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .79 .80 .83 .81
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .18 (.50) 1.30 (1.42)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .97 .30 2.13 (.61)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.78) (.79) (.83) (.82)
Realized gain on investments -- net -- -- -- (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.78) (.79) (.83) (1.26)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.72 $11.53 $12.02 $10.72
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 8.80% 2.77% 20.66% (5.13)%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .38% .39% .40% .39%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 6.87% 6.90% 7.32% 7.16%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $124,746 $117,988 $125,033 $111,878
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 107.02% 92.45% 110.49% 134.53%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH LONG TERM CORPORATE BOND
PORTFOLIO
<PAGE> 26
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio normally expects to invest at least 80% of its total assets in
nonconvertible investment grade corporate debt securities. The Portfolio may
also invest up to 20% of its total assets in:
- investment grade CONVERTIBLE DEBT SECURITIES
- investment grade nonconvertible and convertible preferred stock
- investment grade ASSET-BACKED SECURITIES and mortgage-backed
securities
- corporate and government debt securities rated below investment
grade.
Securities rated below investment grade are commonly known as "junk bonds" and
are high-risk investments.
The Portfolio will not buy equity securities other than preferred stocks.
However, the Portfolio may purchase convertible fixed-income securities or
fixed-income securities with attached WARRANTS, and may maintain up to 10% of
its total assets in common stock acquired through conversion of fixed-income
securities or exercise of warrants.
Under normal circumstances the Portfolio will invest at least 80% of its total
assets in corporate debt securities that are rated A or higher by Moody's or
S&P. Moody's and S&P are two of the most widely recognized independent credit
rating services for fixed-income securities, and a substantial majority of high
credit quality fixed-income securities carry a credit rating from at least one
of these two services. A rating of "A" is the third highest rating these
agencies give to long-term corporate debt, and indicates that the issuer has a
strong current capacity to pay principal and interest but may be susceptible to
some weakening in future adverse economic conditions, although risk of default
is low. Debt in any of the four highest rating categories can be called
"investment grade."
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Christopher G. Ayoub has served as the Portfolio Manager of the Long Term
Corporate Bond Portfolio since February 1999 and Co-Portfolio Manager since
April 1998. Mr. Ayoub has served as First Vice President of MLAM since 1998 and
as Vice President of MLAM from 1985 to 1997.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
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.
ASSET-BACKED SECURITIES -- fixed-income securities issued by a trust or other
legal entity established for the purpose of issuing securities and holding
certain assets, such as credit card receivables or auto leases, that pay down
over time and generate
MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO 7
sufficient cash to pay holders of the securities.
<PAGE> 27
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio may invest in fixed-income securities of any maturity. Although
investment grade fixed-income securities generally involve low risk of default,
changes in the value of fixed-income securities may occur in response to
interest rate movements -- generally, when interest rates go up, the value of
most fixed-income securities goes down. In most cases, when interest rates go
up, the value of fixed-income securities with longer-term maturities goes down
more than the value of fixed-income securities with shorter maturities. Because
the Portfolio will invest a substantial portion of its assets in fixed-income
securities with long-term maturities, rising interest rates may cause the value
of the Portfolio's investments to decline significantly.
Fixed-income securities frequently have redemption features that permit an
issuer to repurchase the security from the Portfolio at certain times prior to
maturity at a specified price, which is generally the amount due at maturity. In
many cases, when interest rates go down, issuers redeem fixed-income securities
that allow for redemption. When an issuer redeems fixed-income securities, the
Portfolio may receive less than the market value of the securities prior to
redemption. In addition, the Portfolio may have to invest the proceeds in new
fixed-income securities with lower YIELDS and therefore lose expected future
income.
The Portfolio may invest in fixed-income securities of issuers outside the U.S.
The Portfolio's management anticipates that the Portfolio's investment in
foreign securities will primarily be in issuers in Canada, the developed
countries of Europe, Australia, New Zealand, and certain Caribbean countries,
although the Portfolio may also invest in issuers elsewhere, including high
credit-quality sovereign and corporate issuers in emerging markets. The
Portfolio will invest in securities of foreign issuers that are denominated in
U.S. dollars. Foreign investing involves special risks, including the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
WARRANTS -- rights to acquire common stock at a specified price.
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents
8 MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO
the security's current expected rate of return.
<PAGE> 28
The Portfolio may invest a portion of its assets in various types of
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. Mortgage-backed securities frequently
react differently to changes in interest rates than other fixed-income
securities. When interest rates fall, borrowers may refinance or otherwise repay
principal on their mortgages earlier than scheduled. If this happens, certain
types of mortgage-backed securities will be paid off more quickly than
originally anticipated and owners of these securities have to invest the
proceeds in securities with lower yields. This risk is known as "prepayment
risk."
When interest rates rise, however, fewer borrowers refinance and certain types
of mortgage-backed securities are paid off more slowly than originally
anticipated, which causes the value of these securities to fall. This risk is
known as "extension risk." Because of prepayment risk and extension risk, small
movements in interest rates (both increases and decreases) may significantly
reduce the value of certain mortgage-backed securities. Although high
credit-quality mortgage-backed securities have relatively low risk of default,
mortgage-backed securities are subject to declines in market value as the result
of prepayment risk or extension risk.
The Portfolio may also invest in securities the potential return of which is
based on the change in a specified interest rate or interest rate index (an
"indexed floater"). For example, the Portfolio may invest in a security that
pays a variable amount of interest at each payment based on the current level of
LIBOR (a well-known short-term interest rate index). Certain indexed floaters
have greater sensitivity to changes in interest rates than typical fixed-income
securities, and the Portfolio's investments in such instruments may decline in
value significantly if interest rates move in a manner not anticipated by
Portfolio management. For more information regarding these securities and other
types of derivatives in which this Portfolio may invest, please see the table
below and the Appendix to this Prospectus.
The Portfolio has no minimum holding period for investments, and will buy or
sell securities whenever the Portfolio's management sees an appropriate
opportunity.
The Portfolio may use different investment strategies which involve various
types of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized on the following page:
MORTGAGE-BACKED SECURITIES -- securities backed by pools of mortgages,
MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO
9
which in many cases are guaranteed against default by government agencies.
<PAGE> 29
[DETAILS ABOUT THE PORTFOLIO ICON]
INVESTMENT RISKS
- --------------------------------------------------------------------------------
The Portfolio's management will attempt to preserve shareholder capital, but
there is no guarantee that it will be able to do so. The Portfolio could lose
money if:
- The issuer of an instrument held by the Portfolio defaults; or
- Interest rates increase.
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Index 500 Chart]
10 MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO
<PAGE> 30
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
MERRILL LYNCH LONG TERM CORPORATE BOND PORTFOLIO 11
<PAGE> 31
Merrill Lynch Global Strategy Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Global Strategy Portfolio at a Glance..... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE PORTFOLIO ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 11
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares Are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO
Table of Contents
<PAGE> 32
THE MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Global Strategy Portfolio is to seek high TOTAL
INVESTMENT RETURN.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio tries to choose some investments that will increase in value and
others that pay dividends or interest. We cannot guarantee that the Portfolio
will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests in U.S. and foreign equity and fixed-income securities.
There are no limits on the Portfolio's ability to invest in specific geographic
regions. At the present time, the Portfolio focuses on investments in Canada,
Western Europe, the Far East, and Latin America, as well as in the U.S. The
Portfolio normally invests in at least three countries at any given time. The
Portfolio usually invests more in EQUITIES than in FIXED-INCOME SECURITIES. When
it invests in fixed-income securities, the Portfolio will select INVESTMENT
GRADE corporate securities, and obligations of U.S. or foreign government and
agencies or international organizations. The Portfolio can invest in securities
denominated in foreign currencies. The Portfolio is non-diversified, which means
that the Portfolio can invest more of its assets in fewer securities than most
other funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of the Portfolio's shares, may fluctuate. These changes in the value
of the Portfolio's investments may occur because one or more stock markets
around the world are generally rising or falling. At other times, specific
factors may affect the value of a particular investment. If the value of the
Portfolio's investments goes down, you may lose money.
The Portfolio is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Portfolio's risk is increased because
each investment has a greater effect on the Portfolio's performance. This helps
the Portfolio's performance when its investments are successful, but hurts the
Portfolio's performance when its investments are unsuccessful.
[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.
TOTAL INVESTMENT RETURN -- the combination of capital appreciation (from
increases or decreases in market value) and income (from interest or dividends).
EQUITIES -- securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
FIXED-INCOME SECURITIES -- instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as preferred stock
that carries a promised level of dividend payments.
INVESTMENT GRADE -- fixed income securities may be rated according to their
credit quality. Securities with credit quality equivalent to any of the
MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO 3
four highest rating categories can be called "investment grade."
<PAGE> 33
[KEY FACTS ICON]
The Portfolio can invest a significant portion of its assets in foreign
securities. Foreign investing involves special risks, including foreign currency
risk and the possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may also be less liquid and
harder to value than U.S. securities. These risks are greater for investments in
emerging markets.
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are investing for long-term goals
- want a professionally managed portfolio
- are looking for exposure to a variety of asset classes,
including investments in foreign markets
- are willing to accept higher risk in exchange for potentially
higher long-term returns
- are not looking for a significant amount of current income
4 MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO
<PAGE> 34
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
Morgan Stanley World Index and the Weighted Index. How the Portfolio performed
in the past is not necessarily an indication of how the Portfolio will perform
in the future.
<TABLE>
<CAPTION>
'1989' 17.76
- ------ -----
<S> <C>
'1990' 6.01
'1991' 17.50
'1992' 3.00
'1993' 23.73
'1994' -1.62
'1995' 10.44
'1996' 13.78
'1997' 11.72
'1998' 9.49
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 12.03% (quarter ended June 30, 1997) and the lowest return for a
quarter was -11.67% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- --------------------------------------------------------
<S> <C> <C> <C>
Series: Global Strategy
Portfolio 9.49% 8.62% 10.95%
- ----------------------------------------------------------------------------
Morgan Stanley World Index* 24.34% 15.67% 10.65%
- ----------------------------------------------------------------------------
Weighted Index** 14.64% 12.14% 11.48%
- ----------------------------------------------------------------------------
</TABLE>
* This unmanaged market capitalization-weighted index, calculated by Morgan
Stanley Capital International, is comprised of a representative sampling of
stocks of large-, medium-, and small-capitalization companies in 22
countries, including the United States. Past performance is not predictive of
future performance.
** This unmanaged index, which is an equally weighted blend of the MSCI World
Index, the Salomon Brothers World Government Bond Index, and the Salomon
Brothers World Money Market Index, is comprised of a representative sampling
of stocks of large-, medium-, and small-capitalization companies in 22
countries, and government bonds and money market securities in the major
markets including the United States. Past performance is not predictive of
future performance.
MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO 5
<PAGE> 35
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
GLOBAL STRATEGY PORTFOLIO
----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997+ 1996+ 1995+ 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $16.80 $15.25 $14.54 $15.42
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .47 .47 .52 .47
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net 1.35 1.56 .94 (.71)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.82 2.03 1.46 (.24)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.55) (.39) (.55) (.41)
Realized gain on investments -- net (.63) (.09) (.20) (.23)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.18) (.48) (.75) (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $17.44 $16.80 $15.25 $14.54
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 11.72% 13.78% 10.44% (1.62)%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses % .45% .42% .44% .48%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net % 2.69% 3.02% 3.59% 3.22%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $248,505 $232,530 $212,683 $223,493
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 108.04% 160.89% 26.81% 27.31%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO
<PAGE> 36
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio can invest in both equity securities and fixed-income securities.
The equity securities in which the Portfolio invests consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as options and futures, the value of
which is based on a common stock or group of common stocks.
The fixed-income securities in which the Portfolio invests consist of:
- short-, intermediate-, and long-term U.S. and foreign government
debt securities
- short-, intermediate-, and long-term corporate debt securities
issued by U.S. and foreign companies
- money market securities
The Portfolio may invest entirely in equity securities, entirely in fixed-income
securities, or partly in equity securities and partly in fixed-income
securities. The Portfolio will usually hold at least some equity securities and
some fixed-income securities.
There are no limits on the Portfolio's ability to invest in any country or
geographic region. The Portfolio can invest primarily in U.S. securities,
primarily in foreign securities, or partly in U.S. securities and partly in
foreign securities. At the present time, the Portfolio focuses on investments in
Canada, Western Europe, the Far East, and Latin America, as well as in the U.S.
The Portfolio normally invests in at least three countries at any given time.
The Portfolio's management will select the percentages of the total portfolio
invested in equity securities and fixed-income securities, as well as the
geographic allocation of the Portfolio's investments, based on its views of
general economic and financial trends in various countries and industries.
Portfolio management places particular emphasis on the following considerations:
- inflation,
- commodity prices,
- the direction of interest and currency movements,
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson has served as the Portfolio Manager of the Global Strategy
Portfolio since November 1995, and is primarily responsible for such Portfolio's
day-to-day management. He has served as a First Vice President of MLAM since
1997 and as a Senior Portfolio Manager of MLAM from November 1995 to 1997. From
1989 to 1995, he served as Manager of International Strategy for Merrill Lynch &
Co. Global Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO 7
The Portfolio is managed by Merrill Lynch Asset Management.
<PAGE> 37
[DETAILS ABOUT THE PORTFOLIO ICON]
- estimates of growth in industrial output and profits, and
- government fiscal policies.
Portfolio management's analysis of economic and financial trends does not
guarantee successful results.
The Portfolio's management will seek to allocate the Portfolio's investments
among the various types of securities in which the Portfolio may invest in a
manner that it believes will best capitalize on the economic and financial
trends that it perceives. For example, if the Portfolio's management believes
that falling commodity prices and decreasing estimates of industrial output
globally signal low growth and limited returns from equity securities, the
Portfolio may emphasize fixed-income investments. Similarly, if the Portfolio's
management believes that low inflation, new technologies and improvements in
economic productivity in a country or region signal a promising environment for
equity securities in that country or region, the Portfolio may emphasize equity
investments in that country or region. There is no guarantee that Portfolio
management will be able to correctly forecast economic or financial trends or be
able to select investments that will benefit from the trends perceived by
Portfolio management.
Under normal circumstances, the Portfolio will invest a significant portion of
its assets in equity securities. The equity securities in which the Portfolio
invests will primarily be common stocks of large companies. The Portfolio may
invest in equity securities of companies throughout the world. The Portfolio's
management, however, anticipates that the Portfolio's investments will primarily
be in companies in the United States, Canada, the Far East, Latin America and
the developed countries of Europe. The Portfolio may invest in companies in
emerging markets, but the Portfolio's management anticipates that a
substantially greater portion of the Portfolio's equity investments will be in
companies in developed countries.
The Portfolio may also invest in fixed-income securities, including U.S. and
foreign government securities and corporate debt securities. The Portfolio will
only invest in debt securities that are rated investment grade by Standard &
Poor's Ratings Group or Moody's Investor's Service, Inc., or unrated securities
which, in the opinion of Portfolio management, are of comparable quality. The
Portfolio may invest in fixed-income securities of any maturity. Changes in the
value of fixed-income securities may occur in response to interest rate
movements -- generally, when interest rates go up, the value of most
fixed-income
8 MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO
<PAGE> 38
securities goes down. In most cases, when interest rates go up, the value of
fixed-income securities with longer-term maturities goes down more than the
value of fixed-income securities with shorter maturities. Because the Portfolio
may invest a substantial portion of its assets in fixed-income securities with
long-term maturities, rising interest rates may cause the value of the
Portfolio's fixed-income investments to decline significantly.
The Portfolio may invest in securities denominated in currencies other than the
U.S. dollar. The Portfolio's return on investments denominated in foreign
currencies will be affected by changes in currency exchange rates. The Portfolio
may engage in currency transactions to seek to hedge against the risk of loss
from changes in currency exchange rates, but Portfolio management cannot
guarantee that it will be able to enter into such transactions or that such
transactions will be effective. The Portfolio is not required to hedge and may
choose not do so.
The Portfolio may also invest in debt securities the potential return of which
is based on the change in a specified interest rate or equity index (an "indexed
note"). For example, the Portfolio may invest in a security that pays a variable
amount of interest or principal based on the current level of the French or
Korean stock markets. The Portfolio may also invest in indexed securities the
potential return of which is based inversely on the change in a specified
interest rate or equity index (an "inverse note"). Inverse notes generally
change in value in a manner that is opposite to most fixed-income
securities -- that is, interest rates or principal payments on inverse notes
increase when the underlying interest rate or equity index decreases and
decrease when the underlying interest rate or equity index increases. Certain
indexed notes and inverse notes have greater sensitivity to changes in interest
rates or equity index levels than other securities, and the Portfolio's
investments in such instruments may decline in value significantly if interest
rates or equity index levels move in a manner not anticipated by Portfolio
management. For more information regarding these securities and other types of
derivatives in which the Portfolio may invest, please see the table on the
following page and the Appendix to this Prospectus.
The Portfolio has no stated minimum holding period for investments, and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO 9
<PAGE> 39
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio may use different investment strategies which involve various
types of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized below:
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Global Strategy Fund Chart]
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
10 MERRILL LYNCH GLOBAL STRATEGY PORTFOLIO
<PAGE> 40
Merrill Lynch Money Reserve Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Money Reserve Portfolio at a Glance....... 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE PORTFOLIO ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 6
Investment Risks............................................ 9
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares Are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH MONEY RESERVE PORTFOLIO
Table of Contents
<PAGE> 41
THE MERRILL LYNCH MONEY RESERVE PORTFOLIO
AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S STATED INVESTMENT OBJECTIVES?
The investment objective of the Money Reserve Portfolio is to seek to preserve
capital, to maintain LIQUIDITY and achieve the highest possible current income
consistent with the foregoing.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio's goals are to produce current income while attempting to maintain
a share value of $1.00. We cannot guarantee that the Portfolio will achieve its
goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests in money market instruments with a remaining maturity of
no more than 25 months in the case of U.S. government and agency securities and
no more than 13 months in the case of all other securities. Other than U.S.
government and government agency securities, the Portfolio invests only in money
market instruments of issuers with one of the two highest short-term ratings
from a nationally recognized credit rating organization or unrated instruments
which, in the opinion of the Portfolio's management, are of similar credit
quality.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
Portfolio seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Portfolio.
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are investing with short-term goals in mind
- are looking for preservation of capital
- are looking for current income and liquidity
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.
LIQUIDITY -- the ease with which a security can be traded. Securities that
MERRILL LYNCH MONEY RESERVE PORTFOLIO
3
are less liquid have fewer potential buyers.
[KEY FACTS ICON]
<PAGE> 42
[KEY FACTS LOGO]
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table shows the average annual
total returns for the Portfolio's shares for the periods shown. How the
Portfolio performed in the past is not necessarily an indication of how the
Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 9.3
- ------ ---
<S> <C>
'1990' 8.26
'1991' 6.11
'1992' 3.77
'1993' 3.08
'1994' 4.04
'1995' 5.81
'1996' 5.33
'1997' 5.43
'1998' 5.42
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 2.44% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.74% (quarter ended June 30, 1993).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(AS OF THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Series: Money Reserve Portfolio 5.42% 5.20% 5.64%
</TABLE>
4 MERRILL LYNCH MONEY RESERVE PORTFOLIO
<PAGE> 43
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
MONEY RESERVE PORTFOLIO
--------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN --------------------------------------------------------------------
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income--net .05 .05 .06 .04
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .05 .05 .06 .04
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.05) (.05) (.06) (.04)
Realized gain on investments -- net --+ --+ -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.05) (.05) (.06) (.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 5.43% 5.33% 5.81% 4.04%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .36% .36% .35% .36%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net, and realized gain on
investments -- net 5.30% 5.16% 5.67% 4.00%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $525,717 $557,690 $568,439 $583,992
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Amount is less than $.01 per share.
</TABLE>
MERRILL LYNCH MONEY RESERVE PORTFOLIO 5
<PAGE> 44
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio invests all of its assets in money market securities. These
instruments are generally fixed-income securities that MATURE or reset to a new
interest rate within 13 months (25 months if the U.S. government or a government
agency has issued or guaranteed the debt). Other than U.S. government and
government agency securities, the Portfolio only invests in money market
instruments of issuers with one of the two highest short-term ratings from a
nationally recognized credit rating organization or unrated instruments which,
in the opinion of the Portfolio's management, are of similar credit quality.
The money market instruments in which the Portfolio may invest include:
- United States Government Securities. Debt securities issued or
guaranteed as to principal and interest by the U.S. government
that are supported by the full faith and credit of the United
States.
- United States Government Agency Securities. Debt securities
issued or guaranteed as to principal and interest by U.S.
government AGENCIES, GOVERNMENT SPONSORED ENTERPRISES and
government INSTRUMENTALITIES. Agency securities may be supported
only by the credit of the issuer, not the full faith and credit
of the United States.
- Bank Money Instruments. Obligations of commercial banks or
other depository institutions, such as certificates of deposit,
time deposits, bank notes and bankers' acceptances. Except with
respect to investments in EURODOLLAR or YANKEEDOLLAR
obligations, the Portfolio may not invest in any security issued
by a commercial bank or a savings and loan association unless
the bank or association is organized and operating in the United
States, has total assets of at least one billion dollars and has
its deposits insured by the Federal Deposit Insurance
Corporation.
- Commercial Paper. Obligations, usually of nine months or less,
issued by corporations and other businesses for short-term
funding.
- Short-Term Obligations. Corporate debt and ASSET-BACKED
SECURITIES with a period of 397 days or less remaining to
maturity.
- Floating Rate Obligations. Obligations of government agencies,
corporations, depository institutions or other
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Jacqueline Rogers has served as the Portfolio Manager of the Money Reserve
Portfolio since June 1992, and is primarily responsible for the Portfolio's
day-to-day management. She has served as Vice President of MLAM since January
1986.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
MATURITY -- the time at which the full principal amount of a fixed-income
security is scheduled to be repaid.
AGENCIES -- entities that are part of or sponsored by the federal government,
such as the Government National Mortgage Administration ("Ginnie Mae"), the
Tennessee Valley Authority or the Federal Housing Administration.
GOVERNMENT SPONSORED ENTERPRISES -- private corporations sponsored by the
federal government which have the legal status of government agencies, such as
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student Loan
Marketing Association ("Sallie Mae") or Fannie Mae.
INSTRUMENTALITIES -- supranational
entities sponsored by the U.S. and
other governments, such as the
6 MERRILL LYNCH MONEY RESERVE PORTFOLIO
World Bank or the Inter-American
Development Bank.
<PAGE> 45
issuers which periodically reset their interest rate to reflect
a current market rate, such as the federal funds rate or a
bank's prime rate, or the level of an interest rate INDEX, such
as LIBOR (a well-known short-term interest rate index).
- Insurance Company Obligations. Short-term funding agreements
and guaranteed insurance contracts with fixed or floating
interest rates.
- Master Notes. Variable principal amount demand instruments
issued by securities firms and other corporate issuers.
- Other Eligible Investments. Other money market instruments
permitted by SEC rules governing money market funds.
The Portfolio may also engage in the following investment practices:
- Repurchase Agreements. Repurchase agreements are transactions
in which the Portfolio purchases a class of securities with the
obligation to resell the securities shortly thereafter at a
specified price which reflects interest payable to the
Portfolio. The Portfolio may engage in repurchase agreements
involving any of the above instruments (without regard to the
instrument's maturity).
- Reverse Repurchase Agreements. Reverse repurchase agreements
are transactions in which the Portfolio sells a security with
the obligation to repurchase the security shortly thereafter at
a specified price which reflects a payment by the Portfolio. The
Portfolio profits from entering into a reverse repurchase
agreement by reinvesting the proceeds of the sale at a higher
return than it has to pay to repurchase its security.
The Portfolio's management will vary the types of money market instruments in
the Portfolio's portfolio, as well as the Portfolio's average maturity, in
response to its assessment of the relative value of different securities and
future short-term interest rates.
The Portfolio may invest in obligations of foreign issuers, including Eurodollar
and Yankeedollar obligations.
ASSET-BACKED SECURITIES -- fixed-income
securities issued by a trust or
other legal entity established for the
purpose of issuing securities and
holding certain assets, such as credit
card receivables or auto leases, that
pay down over time and generate
sufficient cash to pay holders of the
securities.
INDEX -- a measure of value or rates.
EURODOLLAR -- obligations issued
by foreign branches or subsidiaries
of U.S. banks.
YANKEEDOLLAR -- obligations
MERRILL LYNCH MONEY RESERVE PORTFOLIO
7
issued by U.S. branches or
subsidiaries of foreign banks.
<PAGE> 46
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio's management will attempt to maintain a share value of $1.00, but
there is a guarantee that it will be able to do so. The Portfolio could lose
money if
- the issuer of an instrument held by the Portfolio defaults
- short-term interest rates move sharply in a manner not
anticipated by Portfolio management
The risk of loss is minimized, however, by the high credit quality and
short-term maturity of the Portfolio's investments. In order to maintain a share
value of $1.00, the Portfolio may reduce the number of shares held by its
shareholders.
The Portfolio has no stated minimum holding period for investments, and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
The Portfolio may use different investment strategies that involve various types
of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized on the following page:
8 MERRILL LYNCH MONEY RESERVE PORTFOLIO
<PAGE> 47
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/ semi-annual reports.
[Index 500 Chart]
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
MERRILL LYNCH MONEY RESERVE PORTFOLIO 9
<PAGE> 48
Merrill Lynch Balanced Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Balanced Portfolio at a Glance............ 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE PORTFOLIO ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 6
Investment Risks............................................ 7
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares Are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH BALANCED PORTFOLIO
Table of Contents
<PAGE> 49
THE MERRILL LYNCH BALANCED PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Balanced Portfolio is to seek a level of current
income and degree of stability of principal not normally available from an
investment solely in EQUITY SECURITIES, as well as to seek the opportunity for
capital appreciation greater than is normally available from an investment
solely in DEBT SECURITIES.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio tries to choose a mix of investments including some that will
increase in value, some that provide current income through interest or
dividends, and some that may do both. The Portfolio tries to blend these
investments to create a portfolio that produces more current income with less
VOLATILITY than an all stock fund would have, but also produces more capital
growth than an all bond fund would have. We cannot guarantee that the Portfolio
will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests in equity and debt securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of the Portfolio's shares, may go up or down. Changes in the value of
the Portfolio's equity investments may occur because the stock market is rising
or falling. Changes in the value of the Portfolio's FIXED-INCOME INVESTMENTS may
occur in response to interest rate movements. Generally, when interest rates go
up, the value of the fixed-income instruments goes down. Changes in the value of
the Portfolio's equity and fixed-income investments may also occur as the result
of specific factors that affect particular investments. If the value of the
Portfolio's investments goes down, you may lose money.
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- want a professionally managed and diversified portfolio
- are looking for exposure to a variety of asset classes
- are willing to accept the risk of short-term changes in the
Portfolio's share value in exchange for the potential of higher
long-term returns than available from a fund invested only in
fixed-income securities
- are looking for an investment that provides some current income
with less volatility than a fund invested only in equity
securities and the potential for higher long-term returns than
available from a money market fund
[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.
EQUITY SECURITIES -- securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
DEBT SECURITIES -- securities representing an obligation to pay specified
amounts at specified times.
VOLATILITY -- the frequency and amount of changes to the Portfolio's net asset
value.
FIXED-INCOME INVESTMENTS -- instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as
MERRILL LYNCH BALANCED PORTFOLIO 3
preferred stock that carries a promised level of dividend payments.
<PAGE> 50
[KEY FACTS ICON]
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
S&P 500 Index and the Weighted Index. How the Portfolio performed in the past is
not necessarily an indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 20.75
- ------ -----
<S> <C>
'1990' 1.57
'1991' 20.95
'1992' 6.67
'1993' 14.31
'1994' -4.28
'1995' 21.59
'1996' 9.76
'1997' 16.93
'1998' 13.45
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
10.75%
(quarter
ended
December
31,
1998)
and
the
lowest
return
for
a
quarter
was
-7.71%
(quarter
ended
September
30,
1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST
(FOR THE CALENDAR YEAR ENDED) PAST FIVE
DECEMBER 31, 1998 ONE YEAR YEARS PAST TEN YEARS
- -----------------------------------------------------
<S> <C> <C> <C>
Series: Balanced Portfolio 13.45% 11.13% 11.85%
- -------------------------------------------------------------------------
S&P 500 Index* 28.58% 24.05% 19.20%
- -------------------------------------------------------------------------
Weighted Index** 14.64% 12.14% 11.48%
- -------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance
is not predictive of future performance.
** This unmanaged index, which is an equally weighted blend of the Three-Month
US Treasury Bill Index, The Merrill Lynch U.S. Corporate & Government Master
Index, and the Standard & Poor's 500 Index, is comprised of US Treasury bills
maturing in up to 3 months, investment-grade bonds, and common stocks. Past
performance is not predictive of future performance.
4 MERRILL LYNCH BALANCED PORTFOLIO
<PAGE> 51
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
-----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $15.36 $14.86 $13.27 $14.62
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .51 .54 .60 .61
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
and foreign currency transactions -- net 1.76 .83 2.07 (1.21)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.27 1.37 2.67 (.60)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.27) (.57) (.62) (.53)
Realized gain on investments -- net (1.58) (.30) (.46) (.22)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.85) (.87) (1.08) (.75)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $15.78 $15.36 $14.86 $13.27
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 16.93% 9.76% 21.59% (4.28)%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses % .39% .39% .38% .40%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net % 3.40% 3.63% 4.47% 4.28%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $108,324 $98,853 $97,181 $75,893
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 143.20% 234.79% 32.92% 46.94%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
MERRILL LYNCH BALANCED PORTFOLIO 5
<PAGE> 52
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio will invest at least 25% of its total assets in senior
fixed-income securities. The fixed-income securities in which the Portfolio
invests consist of:
- short-, intermediate-, and long-term U.S. government debt
securities
- short-, intermediate- and long-term corporate debt securities
issued by U.S. companies and rated INVESTMENT GRADE
- term preferred stock (that is, preferred stock which returns
principal at a set time) issued by U.S. companies
- corporate debt securities convertible into common stock
- money market securities
The Portfolio normally will invest a portion of its assets in equity securities.
The equity securities in which the Portfolio invests will primarily be common
stocks of large U.S. companies. The Portfolio will limit its investments in
equity securities to 65% of total Portfolio assets at the time of purchase of
any equity security. The Portfolio's investment in equity securities may from
time to time exceed 65% of total Portfolio assets as the result of changes in
the value of its holdings. In the event that equity securities exceed 65% of
total Portfolio assets, the Portfolio will not purchase additional equity
securities until the percentage of its holdings of equity securities has been
reduced below 65% of total Portfolio assets.
The Portfolio has no stated minimum holding period for investments, and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson has served as the Portfolio Manager of the Balanced
Portfolio, since November 1995, and is primarily responsible for each of the
Portfolio's day-to-day management. He has served as a First Vice President of
MLAM since 1997 and as a Senior Portfolio Manager of MLAM from November 1995 to
1997. From 1989 to 1995, he served as Manager of International Strategy for
Merrill Lynch & Co. Global Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
INVESTMENT GRADE -- any of the four highest debt obligation ratings of a
recognized rating agency such as: Moody's Investors
6 MERRILL LYNCH BALANCED PORTFOLIO
Service, Inc. or Standard & Poor's Ratings Group or Fitch IBCA, Inc.
<PAGE> 53
The Portfolio may use different investment strategies which involve various
types of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized below:
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of total Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Merrill Lynch Balanced Chart]
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
MERRILL LYNCH BALANCED PORTFOLIO 7
<PAGE> 54
Merrill Lynch Natural Resources Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Natural Resources Portfolio at a Glance... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO
Table of Contents
<PAGE> 55
THE MERRILL LYNCH NATURAL RESOURCES PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Natural Resources Portfolio is to seek capital
appreciation and to seek to protect the purchasing power of shareholders'
capital by investing primarily in a portfolio of EQUITY SECURITIES of domestic
and foreign companies with substantial NATURAL RESOURCE ASSETS.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio tries to choose investments that will increase in value and that,
during inflationary periods, will increase in value at a rate that is at least
approximately equal to the rate of inflation. We cannot guarantee that the
Portfolio will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests in equity securities of companies with substantial natural
resources assets. The Portfolio normally invests in a portfolio consisting of
companies from a variety of natural resource-related sectors, such as mining,
energy, chemicals, paper, steel, or agriculture. Under certain economic
circumstances, however, the Portfolio may concentrate its investments in one or
more of these sectors (although under usual circumstances the Portfolio will not
invest more than 25% of its total assets in any one industry within a sector).
The Portfolio is a non-diversified fund, which means that it can invest more of
its assets in fewer companies than other funds. The Portfolio can invest in both
U.S. and non-U.S. companies, and in securities denominated in either U.S.
dollars or foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of the Portfolio's shares, may go up or down. Changes in the value of
the Portfolio's equity investments may occur because the stock market is rising
or falling or as the result of specified factors that affect particular
investments. If the value of the Portfolio's investments goes down, you may lose
money.
As a sector fund investing in companies with natural resource assets, the
Portfolio is subject to the risks associated with natural resource investments,
[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.
EQUITY SECURITIES -- securities representing ownership of a company, such as
common stock or preferred stock, as well as derivative instruments the value of
which is based on a common stock or group of common stocks, such as OPTIONS and
FUTURES.
NATURAL RESOURCE ASSETS -- materials with economic value that are directly or
indirectly derived from natural sources, such as
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO 3
metals, fuels, timber, undeveloped land and agricultural products.
<PAGE> 56
in addition to the general risk of the stock market. This means the Portfolio is
more vulnerable to the price movements of natural resources and factors that
particularly affect the mining, energy, chemicals, paper, steel or agriculture
sectors more than a more broadly diversified mutual fund. Because the Portfolio
invests primarily in companies with natural resource assets, there is the risk
that the Portfolio will perform poorly during a downturn in natural resource
prices. The Portfolio should be considered a vehicle for diversification and
should not be considered a balanced investment program by itself.
The Portfolio may invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
The Portfolio is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Portfolio's risk is increased because
each investment has a greater effect on the Portfolio's performance. This helps
the Portfolio's performance when its investments are successful, but hurts the
Portfolio's performance when its investments are unsuccessful.
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are looking for capital appreciation for long-term goals
- want a professionally managed portfolio
- want to diversify the types of investment funding their policy
- are looking for exposure to companies with natural resource
assets
- are willing to accept the risks of foreign investing in exchange
for potentially higher long-term returns
- are not looking for current income
4 MERRILL LYNCH NATURAL RESOURCES PORTFOLIO
<PAGE> 57
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
S&P Industrials Index, the Lipper Natural Resources Average and the Consumer
Price Index. How the Portfolio performed in the past is not necessarily an
indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 25.23
- ------ -----
<S> <C>
'1990' -6.18
'1991' 1.67
'1992' 1.35
'1993' 11.65
'1994' 0.88
'1995' 12.22
'1996' 14.72
'1997' -10.97
'1998' -13.57
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
10.20%
(quarter
ended
March
31,
1989)
and
the
lowest
return
for
a
quarter
was
-19.68%
(quarter
ended
December
31,
1997).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS PAST TEN YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Series: Natural Resources
Portfolio -13.57% -0.01% 3.05%
- -------------------------------------------------------------------------------
S&P Industrials Index* 33.74% 24.67% 19.28%
- -------------------------------------------------------------------------------
Lipper Natural Resources
Average** -23.92% 3.05% 6.32%
- -------------------------------------------------------------------------------
Consumer Price Index*** 1.98% 2.36% 3.13%
- -------------------------------------------------------------------------------
</TABLE>
* This unmanaged index measures the pattern of movements of the common stocks
of 400 large industrial companies and their weighting by capitalization.
Past performance is not predictive of future performance.
** This unmanaged index is comprised of all US Mutual Funds classified by
Lipper Analytical Services Inc. as natural resource-related funds. Past
performance is not predictive of future performance.
*** This unmanaged index is the most widely used index of price changes over
time and is designed to measure changes in the typical market basket of
purchases by urban consumers. Past performance is not predictive of future
performance.
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO 5
<PAGE> 58
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
NATURAL RESOURCES PORTFOLIO
-----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997+ 1996+ 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $9.19 $8.17 $7.43 $7.53
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .14 .16 .17 .17
- -------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net (1.14) 1.03 .73 (.10)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations (1.00) 1.19 .90 .07
- -------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.07) (.17) (.16) (.17)
Realized gain on investments -- net -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.07) (.17) (.16) (.17)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $8.12 $9.19 $8.17 $7.43
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -------------------------------------------------------------------------------------------------------------
Based on net asset value per share % (10.97)% 14.72% 12.22% .88%
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement % .50% .50% .47% .50%
- -------------------------------------------------------------------------------------------------------------
Expenses % .59% .57% .47% .59%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net % 1.65% 1.79% 1.99% 2.23%
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $17,352 $25,029 $21,035 $21,455
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover % 24.10% 31.29% 38.50% 48.16%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH NATURAL RESOURCES PORTFOLIO
<PAGE> 59
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio will invest in a portfolio primarily consisting of equity
securities of U.S. and non-U.S. companies. Equity securities consist of:
- Common Stock
- PREFERRED STOCK
- Securities convertible into Common Stock
- Derivative securities, such as OPTIONS and FUTURES, the values
of which are based on a common stock or group of common stocks
The Portfolio will focus on investments in common stock. The Portfolio may also
invest up to 35% of its total assets in nonconvertible debt securities.
The Portfolio invests in companies with substantial natural resource assets. In
the opinion of Portfolio management, a company has substantial natural resource
assets when the company's market value or profitability is significantly
affected by changes in the value of a natural resource. The Portfolio will not
invest directly in natural resource assets but may invest in derivative
securities, such as futures and options, the value of which are tied to the
value of a natural resource asset or natural resource-related INDEX. Under
normal circumstances, the Portfolio will invest at least 65% of its total assets
in companies with substantial natural resource assets and natural
resource-related derivatives.
The Portfolio's management chooses equity securities using a combination of "top
down" and "bottom up" investment styles. "Top down" means that the Portfolio
seeks to allocate its investments to natural resource-related economic sectors
the Portfolio's management believes have the potential to outperform other
economic sectors due to factors such as supply-and-demand trends and global
economic conditions. "Bottom up" means that the Portfolio also selects
investments based on management's assessment of the earnings prospects of
individual companies. When assessing individual companies, the Portfolio seeks
to invest in companies that the Portfolio's management believes to be
undervalued. A company's stock is undervalued when the stock's current price is
less that what the Portfolio believes a share of the company is worth. A
company's worth can be assessed by several factors, such as financial resources,
value of tangible assets, rate of return on capital, quality of management, and
overall business prospects. A company's stock may become undervalued when most
investors fail to perceive the company's strengths in one or more of these
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Robert M. Shearer has served as the Natural Resources Focus Portfolio's
Portfolio Manager since December 1997, and is primarily responsible for the
Portfolio's day-to-day management. Mr. Shearer has served as First Vice
President of MLAM since January 1998 and was an Associate Portfolio Manager of
the Portfolio from September 1997 to December 1997. From 1996 to 1997 he was a
Vice President and an Assistant Portfolio Manager at David L. Babson and Fund,
Incorporated. From 1993 to 1996 he was a Vice President/Sector Manager at
Concert Capital Management. From 1988 to 1993 he was the Senior Energy Analyst
at Fiduciary Trust Fund International.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
PREFERRED STOCK -- a type of equity security that typically pays dividends at a
fixed rate and gives holders priority over common stock holders with respect to
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO 7
dividend payments and liquidation rights.
<PAGE> 60
[DETAILS ABOUT THE FUND ICON]
areas. Portfolio management may also determine a company is undervalued if its
stock price is down because of temporary factors from which Portfolio management
believes the company will recover.
The Portfolio will focus on attempting to identify companies that are
undervalued relative to the value underlying natural resource assets. In seeking
to identify such companies, Portfolio management considers which of the
companies that meet its criteria would be most likely to benefit from the
economic circumstances anticipated by Portfolio management.
The Portfolio's concentration in the securities of companies with substantial
natural resource assets will expose the Portfolio to the price movements of
natural resources to a greater extent than a more broadly diversified mutual
Portfolio. The Portfolio is vulnerable to the price movements of natural
resources and factors that particularly affect the mining, energy, chemicals,
paper, steel or agriculture sectors. Because the Portfolio invests primarily in
these economic sectors, there is the risk that the Portfolio will perform poorly
during an economic downturn or a slump in demand for natural resources. The
Portfolio should be considered a vehicle for diversification and should not be
considered a balanced investment program by itself.
The Portfolio may also invest in debt securities the potential return of which
is based on the change in a specified interest rate or equity index (an "indexed
note"). For example, the Portfolio may invest in a security that pays a variable
amount of interest or principal based on the current level of a securities
index, such as the AMEX Oil & Gas Index, or of a natural resource COMMODITY,
such as gold or oil. The Portfolio may also invest in indexed securities the
potential return of which is based inversely on the change in a specified
interest rate or equity index (an "inverse note"). Inverse notes generally
change in value in a manner that is opposite to most fixed-income
securities -- that is, interest rates or principal payments on inverse notes
increase when the underlying equity index or commodity increases. Certain
indexed notes and inverse notes have greater sensitivity to changes in commodity
prices or equity index levels than other securities, and the Portfolio's
investments in such instruments may decline in value significantly if the equity
index or commodity levels move in a manner not anticipated by Portfolio
management. For more information regarding these securities and other types of
derivatives in which the Portfolio may invest, please see the table below and
the Appendix to the Prospectus.
OPTIONS -- exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change of certain assets or an index) from another party at a
specified price within a specified time period.
FUTURES -- exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
INDEX -- a measure of value or rate.
COMMODITY -- a tangible asset such as
8
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO
copper, tin, heating oil, coffee, natural gas or wheat.
<PAGE> 61
The Portfolio can invest primarily in U.S. securities, primarily in foreign
securities, or partly in U.S. securities and partly in foreign securities. The
Portfolio may invest in foreign companies in developed markets, such as Canada
and Australia, or in emerging markets, such as South Africa, Russia or Latin
American countries. Foreign securities involve special risks not present in U.S.
investments that can increase the chances that the Portfolio will lose money.
The risks of foreign securities are typically much greater for emerging markets.
Emerging market countries are often less politically and economically stable
than developed countries, and more likely to suffer from serious adverse
economic circumstances such as hyperinflation, currency devaluation or extremely
high interest rate levels. In addition, reliable information about individual
companies may be difficult to obtain in many emerging markets.
When Portfolio management anticipates significant economic, political or
financial instability, such as high inflationary pressures or upheaval in the
foreign currency exchange markets, the Portfolio may invest a majority of
Portfolio assets in companies that explore for, extract, process or deal in gold
or in indexed securities that are indexed to the value of gold bullion.
The Portfolio may invest in securities denominated in currencies other than the
U.S. dollar. The Portfolio's return on investments denominated in foreign
currencies will be effected by changes in currency exchange rates. The Portfolio
may engage in currency transactions to seek to hedge against the risk of loss
from changes in currency exchange rates, but Portfolio management cannot
guarantee that it will be able to enter into such transactions or that such
transactions will be effective. The Portfolio is not required to hedge and may
choose not do so. The Portfolio may also engage in other types of transactions
involving derivatives, as set forth in the table below and described in detail
in the Appendix to this Prospectus.
The Portfolio has no stated minimum holding period for investments, and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO 9
<PAGE> 62
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio may use different investment strategies which involve various
types of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized below:
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of total Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Natural Resources Portfolio Table]
10 MERRILL LYNCH NATURAL RESOURCES PORTFOLIO
<PAGE> 63
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
MERRILL LYNCH NATURAL RESOURCES PORTFOLIO 11
<PAGE> 64
Merrill Lynch Growth Stock Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Growth Stock Portfolio at a Glance........ 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 6
Investment Risks............................................ 7
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares Are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GROWTH STOCK PORTFOLIO
Table of Contents
<PAGE> 65
THE MERRILL LYNCH GROWTH STOCK PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Growth Stock Portfolio is to seek long-term
growth of capital.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio tries to choose investments that will increase in value. We cannot
guarantee that the Portfolio will achieve its goal.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio primarily invests in EQUITY SECURITIES of companies with the
potential to achieve above-average earnings growth.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of Portfolio shares, may go up or down. These changes may occur
because the stock market is rising or falling. At other times, specific factors
may affect the value of a particular investment. If the value of the Portfolio's
investments goes down, you may lose money.
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are investing with long-term goals in mind
- want a professionally managed and diversified portfolio
- are willing to accept higher risk in exchange for potentially
higher long-term returns
- are not looking for a significant amount of current income
[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.
EQUITY SECURITIES -- securities representing ownership of a company ("stock") or
securities whose price is
MERRILL LYNCH GROWTH STOCK PORTFOLIO 3
linked to the value of securities that represent company ownership.
<PAGE> 66
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
S&P 500 Index. How the Portfolio performed in the past is not necessarily an
indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 23.2
- ------ ----
<S> <C>
'1990' -12.41
'1991' 45.31
'1992' 3.40
'1993' 8.63
'1994' -6.93
'1995' 35.35
'1996' 19.57
'1997' 33.75
'1998' 38.18
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
28.55%
(quarter
ended
December
31,
1998)
and
the
lowest
return
for
a
quarter
was
-23.60%
(quarter
ended
September
30,
1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS PAST TEN YEARS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Series: Growth Stock Portfolio 38.18% 22.72% 17.23%
- ----------------------------------------------------------------------------
S&P 500 Index* 28.58% 24.05% 19.20%
- ----------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance is
not predictive of future performance.
4 MERRILL LYNCH GROWTH STOCK PORTFOLIO
<PAGE> 67
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
GROWTH STOCK PORTFOLIO
---------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN ---------------------------------------------------
NET ASSET VALUE: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $27.79 $24.06 $19.20 $24.65
- -----------------------------------------------------------------------------------------------------------------
Investment income -- net .24 .32 .15 .31
- -----------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net 8.01 4.24 6.13 (1.81)
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 8.25 4.56 6.28 (1.50)
- -----------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net (.18) (.24) (.23) (.30)
Realized gain on investments -- net (3.04) (.59) (1.19) (3.65)
- -----------------------------------------------------------------------------------------------------------------
Total dividends and distributions (3.22) (.83) (1.42) (3.95)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $32.82 $27.79 $24.06 $19.20
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -----------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 33.75% 19.57% 35.35% (6.93)%
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------
Expenses % .37% .38% .38% .40%
- -----------------------------------------------------------------------------------------------------------------
Investment income -- net % .86% 1.25% .82% 1.53%
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $333,023 $240,666 $184,152 $101,702
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 84.90% 78.04% 87.66% 102.96%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
</TABLE>
MERRILL LYNCH GROWTH STOCK PORTFOLIO 5
<PAGE> 68
Details About the Portfolio [DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Lawrence R. Fuller is the Portfolio Manager of the Global Growth Focus
Portfolio. Mr. Fuller has been a Vice President of the Investment Adviser since
1992 and is responsible for the day-to- day management of the Portfolio's
investment portfolio.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
EQUITY SECURITIES -- securities representing ownership of a company, such as
common stock.
PREFERRED STOCK -- a type of equity that typically pays dividends at a fixed
rate and gives holders priority over common stock holders with respect to
dividend payments and liquidation rights.
MARKET CAPITALIZATION -- the number of shares of a company's stock, multiplied
by the price per share of that stock. Market capitalization is a measure of a
company's size.
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio tries to choose investments for capital appreciation -- that is,
investments that will increase in value. The Portfolio will invest at least 80%
of its total assets in equity securities of U.S. companies. The EQUITY
SECURITIES in which the Portfolio invests consist of:
- Common Stock
- PREFERRED STOCK
- Securities convertible into common stock
- Rights to subscribe for common stock
The Portfolio will focus on investments in common stock of large and mid-size
companies having stock MARKET CAPITALIZATIONS of $2 billion or more.
Portfolio management emphasizes stocks of companies that Portfolio management
believes have a high potential for above-average growth rates in earnings.
Portfolio management looks for companies that are leaders in their industries
and that have the ability to achieve above-average earnings growth by
capitalizing on favorable economic trends that favor those industries. Portfolio
management also looks for companies that are introducing promising new products,
achieving strong growth in sales of existing products through improved pricing
or increasing sales volume, developing operating efficiencies or increasing
market share. Companies with a high potential for above-average earnings growth
can produce significant capital appreciation over time, but also frequently have
above-average price/earnings ratios, above-average price/book value ratios,
below-average dividends or other statistical characteristics associated with
high relative valuation.
The Portfolio has no stated minimum holding period for investments and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
6 MERRILL LYNCH GROWTH STOCK PORTFOLIO
<PAGE> 69
INVESTMENT RISKS
- --------------------------------------------------------------------------------
The Portfolio may use different investment strategies that involve various types
of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized below.
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of total Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use;
consult the Portfolio's annual/semi-annual reports.
MERRILL LYNCH GROWTH STOCK PORTFOLIO 7
<PAGE> 70
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix that is
part of this prospectus.
If you would like further information about the Portfolio, including how it
invests, please see the Statement of Additional Information.
8 MERRILL LYNCH GROWTH STOCK PORTFOLIO
<PAGE> 71
Merrill Lynch Capital Stock Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Capital Stock Portfolio at a Glance....... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 8
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH CAPITAL STOCK PORTFOLIO
Table of Contents
<PAGE> 72
MERRILL LYNCH CAPITAL STOCK PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Capital Stock Portfolio is to seek long-term
growth of capital and income, and moderate current income.
WHAT ARE THE PORTFOLIO'S GOALS?
The Portfolio tries to choose a mix of investments including some that will
increase in value, some that provide current income through interest or
dividends, and some that may do both. The Portfolio tries to blend these
investments to create a portfolio that produces long-term growth of capital and
income and moderate current income while maintaining a low level of VOLATILITY
during periods when equity markets are declining. We cannot guarantee that the
Portfolio will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests primarily in EQUITY SECURITIES that are considered to be
of good or improving quality or which are thought to be undervalued based on
criteria such as historical price/book value ratios and price/earnings ratios.
The Portfolio invests in equities of U.S. and foreign companies. The Portfolio
also may make defensive investments in other securities, including investment
grade convertible and non-convertible, long-term debt securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of the Portfolio's shares, may go up or down. Changes in the value of
the Portfolio's equity investments may occur because the stock market is rising
or falling, or as the result of specific factors that affect particular
investments. If the value of the Portfolio's investments goes down, you may lose
money.
The Portfolio may invest a substantial portion of its assets in non-U.S.
securities. Foreign investing involves special risks, including foreign currency
risk and the possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may be less liquid and harder
to value than U.S. securities.
[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.
VOLATILITY -- the frequency and amount of charges in a security's market value.
EQUITY SECURITIES -- securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
INVESTMENT GRADE -- fixed income securities rated in one of the four highest
ratings categories by a major credit rating agency.
CONVERTIBLE SECURITIES -- fixed-income securities, such as corporate bonds or
preferred stock, that are exchangeable
MERRILL LYNCH CAPITAL STOCK PORTFOLIO 3
for shares of common stock of the issuer or another company.
<PAGE> 73
[KEY FACTS LOGO]
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are investing with long-term goals
- want a professionally managed and diversified portfolio
- are willing to accept the risk that the value of their
investment may decline in exchange for potentially higher
long-term returns
- are looking for moderate current income
4 MERRILL LYNCH CAPITAL STOCK PORTFOLIO
<PAGE> 74
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
S&P 500 Index. How the Portfolio performed in the past is not necessarily an
indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 30.2
- ------ ----
<S> <C>
'1990' 0.61
'1991' 29.05
'1992' 2.47
'1993' 17.01
'1994' -5.12
'1995' 20.73
'1996' 16.54
'1997' 22.47
'1998' 15.56
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
21.05%
(quarter
ended
December
31,
1998)
and
the
lowest
return
for
a
quarter
was
-16.77%
(quarter
ended
September
30,
1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS PAST TEN YEARS
- --------------------------------------------------------
<S> <C> <C> <C>
Series: Capital Stock
Portfolio 15.56% 13.57% 14.37%
- ----------------------------------------------------------------------------
S&P 500 Index* 28.58% 24.05% 19.20%
- ----------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance is
not predictive of future performance.
MERRILL LYNCH CAPITAL STOCK PORTFOLIO 5
<PAGE> 75
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
CAPITAL STOCK PORTFOLIO
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997+ 1996+ 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $23.25 $23.88 $21.64 $25.73
- ------------------------------------------------------------------------------------------------------------------
Investment income -- net .33 .46 .41 .29
- ------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net 4.57 2.86 3.70 (1.50)
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.90 3.32 4.11 (1.21)
- ------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.22) (.47) (.34) (.28)
Realized gain on investments -- net (1.14) (3.48) (1.53) (2.60)
- ------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.36) (3.95) (1.87) (2.88)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $26.79 $23.25 $23.88 $21.64
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 22.47% 16.54% 20.73% (5.12)%
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------
Expenses % .41% .40% .41% .39%
- ------------------------------------------------------------------------------------------------------------------
Investment income -- net % 1.38% 2.11% 1.98% 1.32%
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ $335,802 $289,696 $252,957 $206,647
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 90.19% 74.30% 130.54% 71.19%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH CAPITAL STOCK PORTFOLIO
<PAGE> 76
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio will invest in a diversified portfolio consisting of equity
securities that are considered to be of good or improving quality or which are
thought to be undervalued based on criteria such as historical price/book value
ratios and price/earnings ratios. The Portfolio will generally invest at least
65% of its total assets in equity securities. Equity securities consist of:
- Common Stock
- PREFERRED STOCK
- Securities convertible into Common Stock
The Portfolio may invest up to 20% of its total assets in foreign securities.
There are no limits on the geographical allocation of the Portfolio's foreign
investments. The Portfolio's management, however, anticipates that the
Portfolio's foreign investments will primarily be in companies in Canada, Japan
and the developed markets of Europe. The Portfolio may also invest in companies
in emerging markets, but the Portfolio's management anticipates that a
substantially greater portion of the Portfolio's investments will be in
companies in developed countries.
When market or financial conditions warrant, the Portfolio may make temporary
defensive investments in other securities. These securities include:
- Non-convertible, investment grade long-term debt securities
- Cash or money market securities
The Portfolio may invest in securities denominated in currencies other than the
U.S. dollar. The Portfolio's return on investments denominated in foreign
currencies will be affected by changes in currency exchange rates. The Portfolio
may engage in currency transactions to seek to hedge against the risk of loss
from changes in currency exchange rates. Portfolio management, however, cannot
guarantee that it will be able to enter into such transactions or that such
transactions will be effective. The Portfolio is not required to hedge and may
not do so.
The Portfolio has no stated minimum holding period for investments, and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson has served as the Portfolio Manager of the Capital Stock
Portfolio, since November 1995, and is primarily responsible for each of the
Portfolio's day-to-day management. He has served as a First Vice President of
MLAM since 1997 and as a Senior Portfolio Manager of MLAM from November 1995 to
1997. From 1989 to 1995, he served as Manager of International Strategy for
Merrill Lynch & Co. Global Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
PREFERRED STOCK -- a type of equity security that typically pays dividends at a
fixed rate and gives holders priority over common stock holders
MERRILL LYNCH CAPITAL STOCK PORTFOLIO 7
with respect to dividend payments and liquidation rights.
<PAGE> 77
[DETAILS ABOUT THE PORTFOLIO ICON]
INVESTMENT RISKS
- --------------------------------------------------------------------------------
The Portfolio may use different investment strategies that involve various types
of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized below.
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Capital Stock Portfolio Chart]
8 MERRILL LYNCH CAPITAL STOCK PORTFOLIO
<PAGE> 78
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix which
is part of this prospectus.
If you would like further information about the Portfolio, including how it
invests please see the Statement of Additional Information.
MERRILL LYNCH CAPITAL STOCK PORTFOLIO 9
<PAGE> 79
Merrill Lynch Multiple Strategy Portfolio
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Multiple Strategy Portfolio at a Glance... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE PORTFOLIO
- ------------------------------------------------------------------
How the Portfolio Invests................................... 7
Investment Risks............................................ 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-2
Investment Risks............................................ A-2
How to Buy and Sell Shares.................................. A-11
How Shares are Priced....................................... A-12
Dividends and Taxes......................................... A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE PORTFOLIO
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-13
Additional Information...................................... A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO
Table of Contents
<PAGE> 80
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Multiple Strategy Portfolio is to seek high
TOTAL INVESTMENT RETURN.
WHAT ARE THE PORTFOLIO'S OBJECTIVE AND GOALS?
The Portfolio tries to choose some investments that will increase in value and
others that pay dividends or interest. We cannot guarantee that the Portfolio
will achieve its goals.
WHAT ARE THE PORTFOLIO'S MAIN INVESTMENT STRATEGIES?
The Portfolio invests in U.S. and foreign equity and fixed-income securities.
The Portfolio may invest up to 25% of its total assets in foreign securities.
The Portfolio usually invests more in EQUITIES than in FIXED-INCOME securities.
When it invests in fixed-income securities, the Portfolio will select INVESTMENT
GRADE corporate securities, and obligations of U.S. or foreign governments and
agencies or international organizations. The Portfolio can invest in securities
denominated in foreign currencies. The Portfolio is non-diversified, which means
that the Portfolio can invest more of its assets in fewer securities than most
other funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIO?
As with any mutual fund, the value of the Portfolio's investments, and therefore
the value of the Portfolio's shares, may fluctuate. These changes in the value
of the Portfolio's equity investments may occur because one or more stock
markets around the world are generally rising or falling. Changes in the value
of the Portfolio's fixed-income securities may occur in response to interest
rate movements. Generally, when interest rates go up, the value of fixed-income
securities goes down. Changes in the value of the Portfolio's equity and fixed-
income investments may also occur as the result of specific factors that affect
the value of a particular investment. If the value of the Portfolio's
investments goes down, you may lose money.
[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.
TOTAL INVESTMENT RETURN -- the combination of capital appreciation (from
increases or decreases in market value of investments) and current income (from
interest or dividends).
EQUITIES -- securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
FIXED-INCOME SECURITIES -- instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as preferred stock
that carries a promised level of dividend payments.
INVESTMENT GRADE -- fixed income securities may be rated according to their
credit quality. Securities with credit quality equivalent to any of the
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO 3
four highest rating categories can be called "investment grade."
<PAGE> 81
[KEY FACTS LOGO]
The Portfolio is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Portfolio's risk is increased because
each investment has a greater effect on the Portfolio's performance. This helps
the Portfolio's performance when its investments are successful, but hurts the
Portfolio's performance when its investments are unsuccessful.
The Portfolio can invest a significant portion of its assets in foreign
securities. Foreign investing involves special risks, including foreign currency
risk and the possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may also be less liquid and
harder to value than U.S. securities. These risks are greater for investments in
emerging markets.
WHO SHOULD INVEST?
The Portfolio may be an appropriate investment to fund a portion of a variable
life insurance policy for policy owners who:
- are investing for long-term goals
- want a professionally managed portfolio
- are looking for exposure to a variety of asset classes,
including investments in foreign markets
- are willing to accept higher risk in exchange for potentially
higher long-term returns
- are not looking for a significant amount of current income
4 MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO
<PAGE> 82
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Portfolio. The bar chart shows changes in the Portfolio's
performance for the past ten calendar years. The table compares the average
annual total returns for the Portfolio's shares for the periods shown with the
S&P 500 Index and the Weighted Index. How the Portfolio performed in the past is
not necessarily an indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
'1989' 21.31
- ------ -----
<S> <C>
'1990' 4.91
'1991' 25.97
'1992' 4.35
'1993' 16.66
'1994' -5.05
'1995' 17.55
'1996' 14.32
'1997' 19.17
'1998' 10.83
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter
was
12.72%
(quarter
ended
June
30,
1997)
and
the
lowest
return
for
a
quarter
was
-10.85%
(quarter
ended
September
30,
1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST TEN
DECEMBER 31, 1998 ONE YEAR FIVE YEARS YEARS
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Series: Multiple Strategy
Portfolio 10.83% 11.00% 12.64%
- --------------------------------------------------------------------------
S&P 500 Index* 28.58% 24.05% 19.20%
- --------------------------------------------------------------------------
Weighted Index** 19.47% 15.66% 14.39%
- --------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance
is not predictive of future performance.
** This unmanaged index, which is an equally weighted blend of the S&P 500 Index
and the Merrill Lynch U.S. Corporate & Government Master Index, is comprised
of common stocks as well as investment-grade bonds. Past performance is not
predictive of future performance.
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO 5
<PAGE> 83
[KEY FACTS ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate an investor would have earned on an investment in
the Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Portfolio's financial statements, are included in the Portfolio's annual
report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
MULTIPLE STRATEGY PORTFOLIO
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997+ 1996+ 1995+ 1994+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $17.13 $17.24 $16.22 $19.84
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .47 .53 .56 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net 2.57 1.63 2.03 (1.39)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.04 2.16 2.59 (.89)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.29) (.60) (.48) (.57)
Realized gain on investments -- net (.91) (1.57) (1.09) (2.16)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.20) (2.27) (1.57) (2.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $ 18.97 $ 17.13 $ 17.24 $ 16.22
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 19.17% 14.32% 17.55% (5.05)%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses % .39% .39% .38%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net % 2.65% 3.26% 3.44% 2.97%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ $1,329,531 $1,211,185 $1,169,357 $1,082,083
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 108.41% 143.82% 140.83% 68.12%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO
<PAGE> 84
HOW THE PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The Portfolio can invest in both equity securities and fixed-income securities.
The equity securities in which the Portfolio invests consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as OPTIONS and FUTURES, the value of
which is based on a common stock or group of common stocks.
The fixed-income securities in which the Portfolio invests consist of:
- short-, intermediate-, and long-term U.S. and foreign government
debt securities
- short-, intermediate-, and long-term investment grade corporate
debt securities and asset backed securities
- money market securities
The Portfolio may invest entirely in equity securities, entirely in fixed-income
securities, or partly in equity securities and partly in fixed-income
securities. The Portfolio will usually hold at least some equity securities and
some fixed-income securities.
The Portfolio will invest primarily in U.S. securities, but may invest up to 25%
of its total assets in foreign securities. At the present time, the Portfolio
expects its foreign investments will be focused on Canada, Western Europe, the
Far East, and Latin America.
The Portfolio's management will select the percentages of the total portfolio
invested in equity securities and fixed-income securities, as well as the
geographic allocation of the Portfolio's investments, based on its views of
general economic and financial trends in various countries and industries.
Portfolio management may place particular emphasis on the following
considerations:
- inflation
- commodity prices
- the direction of interest and currency movements
- estimates of growth in industrial output and profits and
- government fiscal policies
Portfolio management's analysis of economic and financial trends does not
guarantee successful results.
[DETAILS ABOUT THE PORTFOLIO ICON]
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson has served as the Portfolio Manager of the Multiple Strategy
Portfolio since November 1995, and is primarily responsible for the Portfolio's
day-to-day management. He has served as a First Vice President of MLAM since
1997 and as a Senior Portfolio Manager of MLAM from November 1995 to 1997. From
1989 to 1995, he served as Manager of International Strategy for Merrill Lynch &
Co. Global Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
The Portfolio is managed by Merrill Lynch Asset Management.
OPTIONS -- exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change of certain assets or an index) from another party at a
specified price within a specified time period.
FUTURES -- exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO 7
certain assets or an index) at a specified time.
<PAGE> 85
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio's management will seek to allocate the Portfolio's investments
among the various types of securities in which the Portfolio may invest in a
manner that it believes will best capitalize on the economic and financial
trends that it perceives. For example, if the Portfolio's management believes
that falling commodity prices and decreasing estimates of industrial output
globally signal low growth and limited returns from equity securities, the
Portfolio may emphasize fixed-income investments. Similarly, if the Portfolio's
management believes that low inflation, new technologies and improvements in
economic productivity in a country or region signal a promising environment for
equity securities in that country or region, the Portfolio may emphasize equity
investments in that country or region. There is no guarantee that Portfolio
management will be able to correctly forecast economic or financial trends or be
able to select investments that will benefit from the trends perceived by
Portfolio management.
The Portfolio may also invest in fixed-income securities, including U.S. and
foreign government securities and corporate debt securities. The Portfolio will
only invest in debt securities that are rated investment grade by Standard &
Poor's Ratings Group or Moody's Investor's Service, Inc., or unrated securities
which, in the opinion of Portfolio management, are of comparable quality. The
Portfolio may invest in fixed-income securities of any maturity. Changes in the
value of fixed income securities may occur in response to interest rate
movements. Generally, when interest rates go up, the value of most fixed-income
securities goes down. In most cases, when interest rates go up, the value of
fixed-income securities with longer-term maturities goes down more than the
value of fixed-income securities with shorter maturities. Because the Portfolio
may invest a substantial portion of its assets in fixed-income securities with
long-term maturities, rising interest rates may cause the value of the
Portfolio's fixed-income investments to decline significantly.
The Portfolio may invest in securities denominated in currencies other than the
U.S. dollar. The Portfolio's return on investments denominated in foreign
currencies will be affected by changes in currency exchange rates. The Portfolio
may engage in currency transactions to seek to hedge against the risk of loss
from changes in currency exchange rates, but Portfolio management cannot
guarantee that it will be able to enter into such transactions or that such
transactions will be effective.
The Portfolio may also invest in securities the potential return of which is
based on the change in the specified interest rate or equity index (an "indexed
note"). For example, the Portfolio may invest in a security that pays a variable
amount
8 MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO
<PAGE> 86
of interest or principal based on the current level of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500"). The Portfolio may also invest in
indexed securities the potential return of which is based inversely on the
change in a specified interest rate or equity index (an "inverse note"). Inverse
notes generally change in value in a manner that is opposite to most
fixed-income securities -- that is, interest rates or principal payments on
inverse notes increase when the underlying interest or equity index decreases
and decrease when the underlying interest rate or equity index increases.
Certain indexed notes and inverse notes have greater sensitivity to changes in
interest rates or equity index levels than other securities, and the Portfolio's
investments in such instruments may decline in value significantly if interest
rates or equity index levels move in a manner not anticipated by Portfolio
management. For more information regarding these securities and other types of
derivatives in which the Portfolio may invest, please see the table below and
the Appendix to this Prospectus.
The Portfolio has no stated minimum holding period for investments, and will buy
or sell securities whenever the Portfolio's management sees an appropriate
opportunity.
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO 9
<PAGE> 87
[DETAILS ABOUT THE PORTFOLIO ICON]
The Portfolio may use different investment strategies that involve various types
of risk. The strategies that this Portfolio may use and the types of risk
involved are summarized below:
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Portfolio may use and the
investment limitations, if any, as a percentage of total Portfolio assets. The
principal types of risk associated with each investment strategy are also
listed. Numbers in this table show maximum allowable use only; for actual use,
consult the Portfolio's annual/semi-annual reports.
[Capital Focus Portfolio Chart]
10 MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO
<PAGE> 88
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Portfolio is discussed in the Appendix which
is part of this prospectus.
If you would like further information about the Portfolio, including how it
invests please see the Statement of Additional Information.
MERRILL LYNCH MULTIPLE STRATEGY PORTFOLIO 11
<PAGE> 89
APPENDIX
Merrill Lynch Series Fund, Inc.
This Appendix constitutes part of the Prospectus for the shares of Merrill Lynch
Money Reserve Portfolio, Merrill Lynch Intermediate Government Bond Portfolio,
Merrill Lynch Long Term Corporate Bond Portfolio, Merrill Lynch High Yield
Portfolio, Merrill Lynch Capital Stock Portfolio, Merrill Lynch Growth Stock
Portfolio, Merrill Lynch Multiple Strategy Portfolio, Merrill Lynch Natural
Resources Portfolio, Merrill Lynch Global Strategy Portfolio and Merrill Lynch
Balanced Portfolio (hereinafter referred to as the "Portfolios" or individually
as a "Portfolio").
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
YOUR ACCOUNT
- -----------------------------------------------------------------
The Insurance Companies..................................... 2
Investment Risks............................................ 2
How to Buy and Sell Shares.................................. 11
How Shares are Priced....................................... 12
Dividends and Taxes......................................... 12
[MANAGEMENT OF THE PORTFOLIO ICON]
MANAGEMENT OF THE PORTFOLIO
- -----------------------------------------------------------------
Merrill Lynch Asset Management.............................. 13
Additional Information...................................... 14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- -----------------------------------------------------------------
Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>
MERRILL LYNCH SERIES FUND, INC.
Table of Contents
<PAGE> 90
THE INSURANCE COMPANIES
- --------------------------------------------------------------------------------
Shares of the Portfolios currently are sold only to separate accounts of the
Merrill Lynch Life Insurance Companies, as defined below, and Monarch Life
Insurance Company's Variable Account A (collectively, the "Accounts") to fund
benefits under Variable Life Insurance Policies (the "Policies") issued by
Merrill Lynch Life Insurance Company and ML Life Insurance Company of New York,
indirect wholly owned subsidiaries of Merrill Lynch & Co., Inc. (collectively,
the "Merrill Lynch Insurance Companies"), and Monarch Life Insurance Company
("Monarch" and, together with the Merrill Lynch Life Insurance Companies, the
"Insurance Companies"). The investment adviser of the Merrill Lynch Series Fund,
Inc. (the "Fund"), Merrill Lynch Asset Management, L.P. (the "Investment
Adviser"), is also a wholly owned subsidiary of Merrill Lynch & Co., Inc. The
rights of the Insurance Companies as shareholders should be distinguished from
the rights of a Policy owner, which are set forth in the Policy. A Policy owner
has no interest in the shares of a Portfolio, but only in the Policy. A Policy
is described in the prospectus for that Policy. That prospectus describes the
relationship between increases or decreases in the net asset value of shares of
a Portfolio, and any distributions on such shares, and the benefits provided
under a Policy. The prospectus for the Policy also describes various fees
payable to the Insurance Companies and charges to the separate accounts made by
the Insurance Companies with respect to the Policy. Since shares of the
Portfolios will be sold only to the Insurance Companies for the Accounts, the
terms "shareholder" and "shareholders" in this Prospectus refer to the Insurance
Companies.
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This section contains a discussion of certain investment strategies that may be
used by the Portfolios. The forepart of this Prospectus indicates which of the
following strategies may be used by each Portfolio. The risks associated with
each of these strategies are described in greater detail in the following
section of this Appendix, "Types of Investment Risk". As with any mutual fund,
there can be no guarantee that a Portfolio will meet its goals or that a
Portfolio's performance will be positive for any period of time.
BORROWING AND LEVERAGE -- Each Portfolio may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Portfolio shares and in the yield on the Portfolio's
portfolio. Borrowing will cost the Portfolio interest expense and
MERRILL LYNCH SERIES FUND, INC. 3
[YOUR ACCOUNT ICON]
<PAGE> 91
[YOUR ACCOUNT ICON]
other fees. The cost of borrowing may reduce the Portfolio's return. Borrowing
involves leverage risk.
SHORT-TERM INVESTMENTS -- Each Portfolio will normally invest a portion of its
assets in short-term debt securities, such as commercial paper or treasury
bills. As a temporary measure for defensive purposes, each Portfolio may invest
more heavily in these securities, without limitation. A Portfolio may also
increase its investment in these securities when Portfolio management is unable
to find enough attractive long-term investments, to reduce exposure to long-term
investments when management believes it is advisable to do so on a temporary
basis, or to meet redemptions. Investments in short-term debt securities can be
sold easily and have limited risk of loss but earn only limited returns.
Short-term investments may therefore limit the potential for a Portfolio to
achieve its investment objective. Short-term investments involve credit risk.
REPURCHASE AGREEMENTS -- Each Portfolio may invest in repurchase agreements. A
repurchase agreement involves the purchase of a security together with a
simultaneous agreement to resell the security to the seller at a later date at
approximately the purchase price less an amount that represents interest to the
buyer. Repurchase agreements are considered relatively safe, liquid investments
for short-term cash, but involve the risk that the seller will fail to
repurchase the security and that the Portfolio will have to attempt to sell the
security in the market for its current value, which may be less than the amount
the Portfolio paid for the security. Repurchase agreements involve credit risk.
SECURITIES LENDING -- Each Portfolio may lend a portion of its portfolio
securities. A Portfolio may lend portfolio securities to financial institutions
in return for collateral in the form of government securities or cash. A
Portfolio making a securities loan will either receive a fee from the borrower
or pay the borrower interest in return for the right to seek to invest cash
collateral at a higher rate. If a borrower fails to return a Portfolio's
security, the Portfolio will have to attempt to liquidate the borrower's
collateral, which may be worth less than the Portfolio's security. Securities
loans involve leverage risk and credit risk.
SHORT-TERM TRADING -- Each Portfolio can buy and sell securities whenever it
sees a market opportunity, and therefore each Portfolio may engage in short-term
trading. Short-term trading may increase a Portfolio's expenses and have tax
consequences. Short-term trading involves market risk and selection risk.
4 MERRILL LYNCH SERIES FUND, INC.
<PAGE> 92
WHEN-ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued and delayed-delivery securities and forward
commitments involve the risk that the security a Portfolio buys will lose value
prior to its delivery. There also is the risk that the security will not be
issued or that the other party will not meet its obligation. If this occurs, the
Portfolio both loses the investment opportunity for the assets it has set aside
to pay for the security and any gain in the security's price. When-issued and
delayed-delivery securities and forward commitments involve market risk,
selection risk and leverage risk.
NON-INVESTMENT GRADE SECURITIES -- Non-investment grade securities, otherwise
known as "junk bonds", are debt securities that are rated below investment grade
by the major rating agencies or are unrated securities that Portfolio management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Portfolio. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The 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 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 involve credit risk, market risk, selection risk,
valuation risk and liquidity risk, and certain junk bonds may also involve
information risk, political risk or currency risk.
FOREIGN SECURITIES -- Certain Portfolios may invest in foreign securities.
Foreign investing involves special risks not present in U.S. securities that may
increase the chance a Portfolio will lose money, including foreign currency risk
and the possibility of substantial volatility due to adverse political, economic
or other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets. Foreign investing involves market risk, selection risk and political
risk, and certain foreign investments may also involve credit risk, information
risk, valuation risk, currency risk and liquidity risk.
RESTRICTED AND ILLIQUID SECURITIES -- Each Portfolio may invest a portion of its
assets in restricted and illiquid securities, which are investments that the
Portfolio cannot easily resell within seven days at current value or that have
contractual or legal restrictions on resale. If the Portfolio buys illiquid
securities it may be unable to quickly resell them or may be able to sell them
only at a price below current value. Restricted and illiquid securities involve
liquidity risk,
MERRILL LYNCH SERIES FUND, INC. 5
<PAGE> 93
[YOUR ACCOUNT ICON]
market risk, selection risk and valuation risk, and may involve information risk
and credit risk.
COVERED CALL OPTIONS -- Certain Portfolios can sell covered call options, which
are options that give the purchaser the right to require a Portfolio to sell a
security owned by the Portfolio to the purchaser at a specified price within a
limited time period. These Portfolios may also sell the purchaser a right to
require the Portfolio to make a payment based on the level of an index that is
closely correlated with some of the Portfolio's holdings. A Portfolio will
receive a premium (an upfront payment) for selling a covered call option, and if
the option expires unexercised because the price of the underlying security has
gone down the premium received by the Portfolio will partially offset any losses
on the underlying security. By writing a covered call option, however, a
Portfolio limits its ability to sell the underlying security and gives up the
opportunity to profit from any increase in the value of the underlying security
beyond the sale price specified in the option. Covered call options involve
market risk, correlation risk, liquidity risk and selection risk.
INDEXED DERIVATIVE SECURITIES -- Certain Portfolios may invest in debt
securities the potential returns of which are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. Some Portfolios may also invest
in securities whose return is inversely related to changes in an index or
interest rate. In general, inverse securities change in value in a manner that
is opposite to most securities -- that is, the return of inverse securities will
decrease when the index increases in value and increase in value when the index
decreases in value. Investments in indexed and inverse securities may subject
the Portfolio to the risks of reduced or eliminated interest payments and losses
of principal. In addition, certain indexed and inverse securities may increase
or decrease in value at a greater rate than the underlying index, which
effectively leverages the Portfolio's investment. As a result, the market value
of such securities will generally be more volatile than that of other
securities. Indexed and inverse securities involve credit risk, market risk and
selection risk, and may also involve leverage risk, valuation risk, political
risk, currency risk, liquidity risk or correlation risk.
FUTURES AND OPTIONS -- Certain Portfolios may use futures and options. Futures
are exchange-traded contracts involving the obligation of the seller to deliver,
and the buyer to receive, certain assets (or a money payment based on the change
in value of certain assets or an index) at a specified time. Futures
6 MERRILL LYNCH SERIES FUND, INC.
<PAGE> 94
involve leverage risk and correlation risk and may involve currency risk and
political risk. Options are exchange-traded or private contracts involving the
right of a holder to deliver (a "put") or receive (a "call") certain assets (or
a money payment based on the change of certain assets or an index) from another
party at a specified price within a specified time period. Options involve
leverage risk and correlation risk. Private options also involve credit risk,
valuation risk and liquidity risk. Options may involve currency risk and
political risk.
The Portfolios will use futures and options primarily for hedging purposes --
that is, to offset the risk that other holdings may decrease in value or that
potential investment opportunities may increase in value before the Portfolio
can fully implement its investment strategy. The Natural Resources, Global
Strategy and Multiple Strategy Portfolios may use options, however, to enhance
total return as well as for hedging purposes. While hedging can reduce losses,
it can also reduce or eliminate gains if markets move in a different manner than
anticipated by the Portfolio or if the cost of the future or option outweighs
the benefit of the hedge. Hedging also involves the risk that changes in the
value of the future or option will not match those of the holdings being hedged
as expected by the Portfolio, in which case losses on the holdings being hedged
may not be reduced.
CURRENCY CONTRACTS -- Certain Portfolios may buy securities denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates will affect the value of the securities of the Portfolio. In
order to seek to limit such changes, certain Portfolios may buy or sell
contracts relating to foreign currencies for hedging purposes. Hedging is a
strategy in which a currency contract is used to offset the risk that other
Portfolio holdings may decrease in U.S. dollar value as the result of changes in
exchange rates. Losses on the other investment may be substantially reduced by
gains on a currency contract that reacts in an opposite manner to market
movements. While hedging can reduce losses, it can also reduce or eliminate
gains if exchange rates move in a different manner than anticipated by the
Portfolio or if the cost of the currency contract outweighs the benefit of the
hedge. Hedging also involves the risk that changes in the value of the currency
contract will not match those of the holdings being hedged as expected by the
Portfolio, in which case any losses on the holdings being hedged may not be
reduced. A Portfolio may not be able to (or may not try to) hedge all currency
risks, and there is no guaranty that a Portfolio's currency hedging, if
attempted, will be successful. A Portfolio may attempt to hedge through several
different types of currency contracts, including currency forwards, currency
options and currency-indexed instruments. Currency contracts involve currency
risk, market risk, political risk and correla
MERRILL LYNCH SERIES FUND, INC. 7
<PAGE> 95
[YOUR ACCOUNT ICON]
TYPES OF INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a discussion of various risks that may be associated with
certain investment strategies. The forepart of this Prospectus indicates which
investment strategies may be used by each Portfolio.
CORRELATION RISK -- The risk that changes in the value of two investments do not
track or offset each other in the manner anticipated by Portfolio management.
Correlation risk is associated with hedging transactions, in which a Portfolio
uses a derivative to offset the risk that other Portfolio holdings may decrease
in value or that potential investment opportunities may increase in value before
the Portfolio can fully implement its investment strategy. Correlation risk
means that changes in the value of the derivative may not match those of the
holdings being hedged as expected by the Portfolio, in which case any losses on
the holdings or potential holdings being hedged may not be reduced.
CREDIT RISK -- The risk that the issuer of an investment or other party to a
trade will be unable to honor its obligations to a 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.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value to a U.S. investor because the
currency is worth fewer U.S. dollars.
INFORMATION RISK -- The risk that important information about a security or
market is inaccurate, unreliable or unavailable.
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 value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
LIQUIDITY RISK -- The risk that certain securities may be difficult or
impossible to sell at the time that a Portfolio would like or at the price that
a Portfolio believes the security is currently worth.
MARKET RISK/INTEREST RATE RISK -- The risk that the entire market will undergo
an unanticipated change in value, including the possibility that the market will
go down sharply and unpredictably. For fixed-income investments, this includes
the risk that the value of an investment will decrease as a result of changes in
interest rates. Generally, when interest rates increase, fixed-income
8 MERRILL LYNCH SERIES FUND, INC.
<PAGE> 96
securities decrease in value and longer-term fixed-income securities decrease in
value more than short-term fixed-income securities.
POLITICAL RISK -- The risk of losses arising from government or legal events,
such as changes in tax or trade laws, imposition of currency controls, adverse
court or administrative rulings, or change of a government or political system.
SELECTION RISK -- The risk that a specific Portfolio investment will
underperform the market.
VALUATION RISK -- The risk that a Portfolio has valued an investment at a higher
price than it can actually obtain upon a sale.
SPECIAL RISKS ASSOCIATED WITH
FOREIGN INVESTMENTS GENERALLY
- --------------------------------------------------------------------------------
FOREIGN MARKET RISK -- Investment in foreign securities involves the following
risks, which are generally greater for investments in emerging markets.
- The economies of some foreign markets often do not compare
favorably with that of the United States in areas such as growth
of gross domestic product, reinvestment of capital, resources
and balance of payments. Some of these economies may rely
heavily on particular industries or foreign capital. They may be
more vulnerable to adverse diplomatic developments, the
imposition of economic sanctions against a particular country or
countries, changes in international 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. They could also impair the
Portfolio's ability to purchase or sell foreign securities or
MERRILL LYNCH SERIES FUND, INC. 9
<PAGE> 97
[YOUR ACCOUNT ICON]
transfer its assets or income back into the United States, or
otherwise adversely affect the 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 some
foreign countries may be less extensive than those available to
investors in the United States.
- Because there are generally fewer investors on foreign exchanges
and a smaller number of shares traded each day, it may be
difficult for a Portfolio to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up
and down more than prices of securities traded in the United
States.
- Foreign markets may have different clearance and settlement
procedures. In certain markets, settlements may be unable to
keep pace with the volume of securities transactions. If this
occurs, settlement may be delayed and a Portfolio's assets may
be uninvested and not earning returns. The Portfolio may miss
investment opportunities or be unable to sell an investment
because of these delays.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- A Portfolio
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on a Portfolio's ability to recover its assets
if a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for a Portfolio to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount a Portfolio
can earn on its investments and typically results in a higher operating expense
ratio for a Portfolio than investment companies invested only in the U.S.
10 MERRILL LYNCH SERIES FUND, INC.
<PAGE> 98
SPECIAL RISKS ASSOCIATED WITH 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 was
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)
were redenominated in the euro. These securities trade and make dividend and
other payments only in euros. Like other investment companies and business
organizations, including the companies in which a Portfolio may invest, a
Portfolio 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
Portfolio's service providers, or by other entities with which
the Portfolio or its service providers do business, are not
capable of recognizing the euro as a distinct currency beginning
with euro conversion.
HOW TO BUY AND SELL SHARES
- --------------------------------------------------------------------------------
The Fund continuously offers shares in each of its Portfolios, without sales
charge, to the Insurance Companies. The price of shares purchased by the
Insurance Companies is based on the next calculation of the per share net asset
value of the Portfolio after an order is placed.
The Fund may reject any order to buy shares and may suspend the sale of shares
at any time.
The Fund will redeem all full and fractional shares of the Portfolios for cash.
The price of redeemed shares is based on the next calculation of net asset value
MERRILL LYNCH SERIES FUND, INC. 11
<PAGE> 99
[YOUR ACCOUNT ICON]
after a redemption order is placed. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending in part on
the net asset value of such shares at such time.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When an Insurance Company purchases shares, the Insurance Company pays the NET
ASSET VALUE. This is the offering price. Shares are also redeemed at their net
asset value. 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 the price for
the purchase or redemption of shares is the next one calculated after the
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, the Portfolio's net asset value may change on days when an
Insurance Company will not be able to purchase or redeem the Portfolio's shares.
The Money Reserve Portfolio will generally maintain a net asset value of $1.00
per share.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Money Reserve Portfolio will declare DIVIDENDS daily and will reinvest
dividends monthly in additional full and fractional shares of the Portfolio. The
Intermediate Government Bond, High Yield and Long Term Corporate Bond Portfolios
will declare dividends monthly and reinvest dividends monthly in additional
shares of those Portfolios. The Natural Resources, Global Strategy, Balanced,
Capital Stock, Growth Stock and Multiple Strategy Portfolios will declare
dividends at least semi-annually and will reinvest dividends at least
semi-annually in additional shares of the respective Portfolios.
Dividends paid by the Fund may be included in an Insurance Company's gross
income. The tax treatment of these dividends depends on the Insurance Company's
tax status. A description of an Insurance Company's tax status is contained in
the prospectus for the Policy.
NET ASSET VALUE -- the market value of the Portfolio's total assets after
deducting liabilities divided by the number of shares outstanding.
DIVIDENDS -- Ordinary income and capital gains paid to shareholders.
12 MERRILL LYNCH SERIES FUND, INC.
Dividends will be reinvested in additional Portfolio shares as they are paid.
<PAGE> 100
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, 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 Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. For the fiscal year ended December 31, 1998 the Investment Adviser
received a management fee of $[ ] of which $[ ] related to the
Money Reserve Portfolio (representing [ ]% of its average net assets),
$[ ] related to the Intermediate Government Bond Portfolio
(representing [ ]% of its average net assets), $[ ] related to
the Long Term Corporate Bond Portfolio (representing [ ]% of its
average net assets), $[ ] related to the High Yield Portfolio
(representing [ ]% of its average net assets), $[ ] related to
the Capital Stock Portfolio (representing [ ]% of its average net
assets), $[ ] related to the Growth Stock Portfolio (representing
[ ]% of its average net assets), $[ ] related to the Multiple
Strategy Portfolio (representing [ ]% of its average net assets),
$[ ] related to the Natural Resources Portfolio (representing
[ ]% of its average net assets), $[ ] related to the Global
Strategy Portfolio (representing [ ]% of its average net assets), and
$[ ] related to the Balanced Portfolio (representing [ ]% of
its average net assets).
Monarch has an agreement with the Investment Adviser and Merrill Lynch Life
Agency, Inc. under which Monarch reimburses the expenses of each Portfolio which
exceeds 0.50% of its average net assets. For the fiscal year ended December 31,
1998, Monarch reimbursed a total of $ in expenses, $ of which
were attributed to .
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $473 billion in investment company and other portfolio
assets under management as of September 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.
MERRILL LYNCH SERIES FUND, INC. 13
[MANAGEMENT OF THE PORTFOLIO ICON]
<PAGE> 101
[MANAGEMENT OF THE PORTFOLIO ICON]
The Fund's other service providers have told the Fund's 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 Fund invests, and this could hurt the Fund's investment returns.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ADVISER -- Merrill Lynch Asset Management, L.P., 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, has been selected as the investment adviser
of the Fund.
INDEPENDENT AUDITORS -- Deloitte & Touche LLP, 117 Campus Drive, Princeton, New
Jersey 08540, has been selected as the independent auditors of the Fund. The
selection of independent auditors is subject to annual ratification by the
Fund's shareholders.
CUSTODIAN -- The Bank of New York, 110 Washington Street, New York, New York
10286, acts as Custodian of the Fund's assets, except that Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, acts as Custodian
for assets of the Fund's Developing Capital Markets Focus Portfolio.
TRANSFER AND DIVIDEND DISBURSING AGENT -- Merrill Lynch Financial Data Services,
Inc. ("MLFDS"), which is a wholly owned subsidiary of Merrill Lynch & Co., Inc.,
acts as the Fund's Transfer Agent and is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. MLFDS will receive an annual fee of $5,000 per Portfolio and will be
entitled to reimbursement of out-of-pocket expenses.
LEGAL COUNSEL -- Rogers & Wells LLP, New York, New York, is counsel for the
Fund.
14 MERRILL LYNCH SERIES FUND, INC.
<PAGE> 102
(LOGO)
[MORE INFORMATION ICON]
SHAREHOLDER REPORTS
Additional information about the investments of each Portfolio 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 (609)
282-2800.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about each Portfolio and is incorporated by reference (legally considered to be
part of this prospectus). You may request a free copy by writing the Fund at
Merrill Lynch Series Fund, Inc. P.O. Box 9011, Princeton, New Jersey 08543-9011
or by calling (609) 282-2800.
Contact the Fund at the telephone number or address indicated above 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.
Investment Company Act file nos. 2-69062 and 811-3091
Code #
Merrill Lynch
Series Fund, Inc.
LOGO
April , 1999
<PAGE> 103
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
APRIL , 1999
MERRILL LYNCH SERIES FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Series Fund, Inc. (the "Fund") is an open-end management
investment company which has a wide range of investment objectives among its ten
separate Portfolios: Money Reserve Portfolio, Intermediate Government Bond
Portfolio, Long Term Corporate Bond Portfolio, High Yield Portfolio, Capital
Stock Portfolio, Growth Stock Portfolio, Multiple Strategy Portfolio, Natural
Resources Portfolio, Global Strategy Portfolio and Balanced Portfolio. Each
Portfolio is in effect a separate fund issuing its own shares.
The shares of the Portfolios will be sold only to separate accounts of the
Merrill Lynch Insurance Companies, as defined below, and Monarch Life Insurance
Company's Variable Account A (collectively, the "Accounts") to fund benefits
under Variable Life Insurance Policies (the "Policies") issued by Merrill Lynch
Life Insurance Company and ML Life Insurance Company of New York, indirect
wholly owned subsidiaries of Merrill Lynch & Co., Inc. (collectively, the
"Merrill Lynch Insurance Companies"), and Monarch Life Insurance Company
("Monarch" and, together with the Merrill Lynch Insurance Companies, the
"Insurance Companies"). The investment adviser of the Fund, Merrill Lynch Asset
Management, L.P. (the "Investment Adviser"), is also a wholly owned subsidiary
of Merrill Lynch & Co., Inc. The Accounts invest in shares of the Fund in
accordance with allocation instructions received from Policyowners. Such
allocation rights are further described in the accompanying Prospectus for the
Policies. The Insurance Companies redeem shares to the extent necessary to
provide benefits under the Policies.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund (the
"Prospectus") dated April , 1999, which has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon oral or written request
without charge. Copies of the Prospectus can be obtained by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
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.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Maturity of Fixed Income Investments........................ 2
Investment Restrictions..................................... 2
Portfolio Strategies........................................ 4
Management of the Fund...................................... 13
Investment Advisory Arrangements............................ 15
Determination of Net Asset Value............................ 16
Portfolio Transactions and Brokerage........................ 17
Redemption of Shares........................................ 18
Dividends, Distributions and Taxes.......................... 19
Distribution Arrangements................................... 19
Performance Data............................................ 20
Additional Information...................................... 21
Financial Statements........................................ 22
</TABLE>
<PAGE> 104
MATURITY OF FIXED INCOME INVESTMENTS
Certain Portfolios that invest in fixed-income securities have limits on
the maturity of each fixed-income investment or on the average maturity of the
portfolio. For purposes of applying these limits, each Portfolio will consider a
fixed-income security's maturity to be its stated maturity (the date the issuer
is scheduled to make its final payment of principal), except that
- for a security with an unconditional put entitling a Portfolio to receive
the security's approximate amortized cost, the maturity will be
considered to be the next put date;
- for mortgage-backed and other amortizing securities, the maturity will be
considered to be the average life remaining (the length of time it is
expected to take to retire half of the remaining principal through
amortizing payments) based on prepayment assumptions that the Portfolio
manager believes to be reasonable;
- for a variable or floating rate investment grade security that the
Portfolio manager believes will have a market value approximating
amortized cost on the next interest reset date, the maturity will be
considered to be the next reset date; and
- for a Portfolio that operates under SEC rules that specifically define
the maturity of a security, the maturity of a security will be the
maturity determined in a manner consistent with the SEC rules.
INVESTMENT RESTRICTIONS
RESTRICTIONS APPLICABLE TO ALL OF THE PORTFOLIOS
The Fund has adopted the following restrictions and policies relating to
the investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940 (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). A change in policy affecting only one
Portfolio may be effected with the approval of a majority of the outstanding
shares of such Portfolio. The Fund may not issue senior securities (except to
the extent that borrowings under item (9) below exceeding 5% may be deemed to be
senior securities under the Investment Company Act of 1940) and, subject to the
separate restrictions on the types of securities in which the Money Reserve and
Intermediate Government Bond Portfolios may invest as set forth below, each
Portfolio of the Fund may not:
1. Except with respect to the Natural Resources and Global Strategy
Portfolios, (a) invest more than 5% of its total assets (taken at market
value at the time of each investment) in the securities (other than U.S.
Government or government agency securities) of any one issuer (including
repurchase agreements with any one bank) and (b) purchase more than either
(i) 10% in principal amount of the outstanding debt securities of an
issuer, or (ii) 10% of the outstanding voting securities of an issuer,
except that such restrictions shall not apply to securities issued or
guaranteed by the U.S. Government or its agencies, bank money instruments
or bank repurchase agreements.
2. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers primarily engaged
in the same industry (utilities will be divided according to their
services; for example, gas, gas transmission, electric and telephone each
will be considered a separate industry for purposes of this restriction),
except for the Natural Resources Portfolio, which when management
anticipates significant economic, political or financial instability, may,
subject to the diversification requirements of the Internal Revenue Code of
1986 (the "Code") relating to qualification under the Code as a regulated
investment company, invest more than 25% of its total assets in gold-
related companies.
3. Alone, or together with any other Portfolio or Portfolios, make
investments for the purpose of exercising control over, or management of,
any issuer.
2
<PAGE> 105
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved, and only if immediately
thereafter not more than 10% of such Portfolio's total assets, taken at
market value, would be invested in such securities.
5. Purchase or sell interests in oil, gas or other mineral exploration
or development programs, commodities, commodity contracts or real estate,
except that any Portfolio may purchase securities of issuers which invest
or deal in any of the above and the Multiple Strategy, Natural Resources
and Global Strategy Portfolios may engage in transactions in currency,
forward currency contracts, futures contracts and options thereon and the
Natural Resources Portfolio may purchase, sell or otherwise invest or deal
in commodities or commodity contracts. (As a matter of operating policy,
however, the Natural Resources Portfolio at present does not intend to
engage in transactions in commodities or commodity contracts, other than
foreign currency, futures contracts and options on futures.)
6. Purchase any securities on margin (except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities and the Multiple Strategy, Natural
Resources and Global Strategy Portfolios may make margin payments in
connection with transactions in options, forward currency contracts,
futures contracts and options on futures contracts) or make short sales of
securities or maintain a short position (except that the Multiple Strategy
Portfolio, Natural Resources and Global Strategy Portfolios may maintain
short positions in forward currency contracts, options, futures contracts
and options on futures contracts).
7. Make loans, except as provided in (8) below and except through the
purchase of obligations in private placements (the purchase of
publicly-traded obligations not being considered the making of a loan).
8. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value at the time of the loan, and provided that
such loan shall be made in accordance with the guidelines set forth under
"Other Portfolio Strategies--Lending of Portfolio Securities" on page of
the Prospectus.
9. Borrow amounts in excess of 10% of its total assets, taken at
market value at the time of the borrowing, and then only from banks as a
temporary measure for extraordinary or emergency purposes.
10. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by such Portfolio
except as may be necessary in connection with borrowings mentioned in (9)
above (and then such mortgaging, pledging or hypothecating may not exceed
10% of such Portfolio's total assets, taken at market value at the time
thereof), and except as may be necessary for the Multiple Strategy
Portfolio, Natural Resources Portfolio or Global Strategy Portfolio in
connection with transactions in options, forward currency contracts,
futures contracts and options on futures contracts. In order to comply with
certain state statutes, each Portfolio, other than the Multiple Strategy
Portfolio, Natural Resources Portfolio or Global Strategy Portfolio, will
not, as a matter of operating policy, mortgage, pledge or hypothecate its
portfolio securities to the extent that at any time the percentage of the
value of pledged securities plus the maximum sales charge will exceed 10%
of the value of such Portfolio's shares at the maximum offering price.
11. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 (the
"Securities Act") in selling portfolio securities.
12. Except for the Multiple Strategy, Natural Resources and Global
Strategy Portfolios, write, purchase or sell puts, calls or combinations
thereof, except that the Capital Stock Portfolio and the Balanced Portfolio
may write covered call options.
13. Except with respect to the Capital Stock Portfolio, the Natural
Resources Portfolio, the Global Strategy Portfolio and the Multiple
Strategy Portfolio, invest in securities of foreign issuers if at the time
of acquisition more than 10% of its total assets, and in the case of the
Capital Stock Portfolio 20% of its total assets, taken at market value at
the time of the investment, would be invested in such securities;
3
<PAGE> 106
provided, however, that up to 25% of the total assets of such Portfolio may
be invested in securities (i) issued, assumed or guaranteed by foreign
governments, or political subdivisions or instrumentalities thereof, (ii)
assumed or guaranteed by domestic issuers, including Eurodollar securities,
or (iii) issued, assumed or guaranteed by foreign issuers having a class of
securities listed for trading on the New York Stock Exchange (the "NYSE").
(As a matter of operating policy, however, the Multiple Strategy Portfolio
will not invest in the securities of foreign issuers if at the time of
acquisition more than 25% of its total assets would be invested in such
securities. In addition, the Balanced Portfolio, as a matter of operating
policy, does not intend to invest any portion of its assets in the
securities of foreign issuers.) See "Other Portfolio Strategies--Foreign
Securities" in the Prospectus. Consistent with the general policy of the
Securities and Exchange Commission, the nationality or domicile of an
issuer for determination of foreign issuer status may be (i) the country
under whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) a country in which the
issuer derives a significant proportion (at least 50%) of its revenues or
profits from goods produced or sold, investments made, or services
performed in the country, or in which at least 50% of the assets of the
issuer are situated.
14. Participate on a joint (or a joint and several) basis in any
trading account in securities (but this does not include the "bunching" of
orders for the sale or purchase of portfolio securities with the other
Portfolios or with individually managed accounts advised or sponsored by
Merrill Lynch Asset Management L.P. (the "Investment Adviser") or any of
its affiliates to reduce brokerage commissions or otherwise to achieve best
overall execution).
15. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the Investment Adviser or
any subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer, own in the aggregate more than 5% of the
securities of such issuer.
RESTRICTIONS APPLICABLE ONLY TO THE MONEY RESERVE AND INTERMEDIATE GOVERNMENT
BOND PORTFOLIOS
The Money Reserve Portfolio may not invest in any security which is not a
short-term money market security as described under "Investment Objectives and
Policies of the Portfolios--Money Reserve Portfolio" in the Prospectus. The
Intermediate Government Bond Portfolio may not invest in any security which is
not issued or guaranteed by the U.S. Government or one of its agencies or which
has a stated maturity greater than fifteen years from the date of purchase.
SPECIAL CONSIDERATIONS WITH RESPECT TO THE NATURAL RESOURCES PORTFOLIO
In determining compliance by the Natural Resources Portfolio with its
policy on investing in the securities of issuers primarily engaged in the same
industry, management will rely on the industrial classifications contained in
the Standard & Poor's Register of Corporations, Directors and Executives.
PORTFOLIO STRATEGIES
Gold-Related Companies and Securities. Under certain circumstances, the
Natural Resources Portfolio has reserved the right to invest a majority of its
assets in gold-related companies or securities. Based on historic experience,
during periods of economic or financial instability, the securities of such
companies may be subject to extreme price fluctuations, reflecting the high
volatility of gold prices during such periods. In addition, the instability of
gold prices may result in volatile earnings of gold-related companies which, in
turn, may affect adversely the financial condition of such companies. Gold
mining companies also are subject to the risks generally associated with mining
operations.
The major producers of gold include the Republic of South Africa, Russia,
Canada, the United States, the People's Republic of China, the Philippines and
Australia. Sales of gold by Russia and China are largely unpredictable and often
relate to political and economic considerations rather than to market forces.
Economic, social and political developments within South Africa may affect
significantly South African gold production.
4
<PAGE> 107
See "Portfolio Strategies--Foreign Securities" for special considerations
in investments in foreign securities.
The Portfolio should be considered a long-term investment and a vehicle for
diversification, and not as a balanced investment program. The Portfolio may not
be appropriate as the exclusive investment to fund a variable life insurance
policy ("Policy") for all Policy owners.
The Natural Resources Portfolio may seek to hedge against adverse currency
fluctuations of its non-dollar denominated securities and other assets and
liabilities by engaging in currency transactions, such as currency swaps and
purchasing and selling options on currencies. The Portfolio is also authorized
to purchase and to write (i.e., sell) call and put options on securities held in
its portfolio, securities indicies whose performance is substantially correlated
with securities held in its portfolio, or on securities it intends to purchase
and to purchase put options on securities held in its portfolio, and may also
invest in futures and in securities the potential return of which is based on
the change in particular measurements of value or rate (i.e., indexed and
inverse securities). See "Transactions in Options. Futures and Currency."
The Fund and Merrill Lynch Funds Distributor, Inc., the distributor of the
Fund's shares, reserve the right to suspend the sale of shares of the Natural
Resources Portfolio in response to conditions in the securities markets or
otherwise.
Forward Commitments. Portfolios may purchase U.S. Government securities
and corporate bonds on a forward commitment basis at fixed purchase terms with
periods of up to 45 days or, in the case of the Money Reserve Portfolio, 180
days between the commitment and settlement dates. The purchase will be recorded
on the date a 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. The value of the security on the delivery date may be more or less than
its purchase price. A separate account of the Portfolio will be established with
The Bank of New York, Custodian of the Fund, consisting of cash or liquid
securities having a market value at all times until the delivery date at least
equal to the amount of the forward commitment. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio, it may dispose of a commitment prior to settlement
if management of the Fund 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 Portfolios
will enter into forward commitment arrangements only with respect to securities
in which they may otherwise invest as described under "Investment Objectives and
Policies of the Portfolios" on page of the Prospectus.
Lending of Portfolio Securities. Subject to investment restriction (8)
above, each Portfolio may from time to time loan securities from its portfolio
to brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the U.S. Government which will be maintained
in amounts equal to at least 100% of the current market value of the loaned
securities at all times while the loan is outstanding. Any cash collateral will
be invested in short-term securities, the income from which will increase the
return to the Portfolio. Such loans, which will not have terms longer than 30
days, will be terminable at any time. The Portfolio will retain all rights of
beneficial ownership as to the loaned portfolio securities, including voting
rights and rights to interest or other distributions, and will have the right to
regain record ownership of loaned securities to exercise such beneficial rights.
Such loans will be terminable at any time. The Portfolio may pay reasonable
finders', administrative and custodial fees to persons unaffiliated with the
Portfolio in connection with the arranging of such loans. The dividends,
interest, and other distributions received by the Portfolio on loaned securities
may, for tax purposes, be treated as income other than qualified income for the
90% test discussed under "Dividends, Distributions and Taxes--Federal Income
Taxes." The Fund's Portfolios intend to lend portfolio securities only to the
extent that such activity does not jeopardize the Fund's qualification as a
regulated investment company under Subchapter M of the Code.
Foreign Securities. No Portfolio, other than the Capital Stock Portfolio,
Multiple Strategy Portfolio, Natural Resources Portfolio and the Global Strategy
Portfolio, may invest in securities of foreign issuers if at the time of
acquisition more than 10% of its total assets, taken at market value at the time
of the investment, would be invested in such securities; provided, however, that
up to 25% of the total assets of such Portfolio, other than the Multiple
Strategy Portfolio. Natural Resources Portfolio or Global Strategy Portfolio,
may be
5
<PAGE> 108
invested in securities (i) issued, assumed or guaranteed by foreign governments,
or political subdivisions or instrumentalities thereof, (ii) assumed or
guaranteed by domestic issuers, including Eurodollar securities, or (iii)
issued, assumed or guaranteed by foreign issuers having a class of securities
listed for trading on the New York Stock Exchange (the "NYSE"). In order for
shares of the Portfolios to remain eligible investments for the Accounts, the
Fund has undertaken to comply with certain diversification requirements in
accordance with state insurance laws. As a matter of operating policy, the
Multiple Strategy Portfolio will not invest in the securities of foreign issuers
if at the time of acquisition more than 25% of its total assets would be
invested in such securities, and the Capital Stock Portfolio will not invest in
such securities if at the time of acquisition more than 20% of its total assets
would be invested in such securities. In addition, as a matter of operating
policy, the Balanced Portfolio will not invest any portion of its assets in the
securities of foreign issuers.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations and risks which are not ordinarily associated
with investing in domestic issuers. These considerations and risks include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or the
difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. If it should
become necessary, the Fund could encounter greater difficulties in invoking
legal processes abroad than would be the case in the United States. The
operating expense ratio of a Portfolio investing in foreign securities can be
expected to be higher than that of an investment company investing exclusively
in United States securities because the expenses of the Portfolio, such as
custodial and brokerage costs, are higher. Transaction costs in foreign
securities may be higher. In addition, net investment income received by a
Portfolio on a foreign security may be subject to withholding and other taxes
imposed by foreign governments, which will reduce the Portfolio's net investment
income. 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 standards and objectives of a
particular Portfolio. As a matter of operating policy, no Portfolio which may
invest in foreign securities (other than the Natural Resources Portfolio,
Capital Stock Portfolio and Global Strategy Portfolio) may concentrate its
investments in any particular foreign country, and each such Portfolio (other
than the Multiple Strategy Portfolio, High Yield Portfolio, Capital Stock
Portfolio, Natural Resources Portfolio and Global Strategy Portfolio) will
purchase only securities issued in U.S. dollar denominations. A Portfolio's
return on investments in non-U.S. dollar denominated securities may be reduced
or enhanced as a result of changes in foreign currency rates during the period
in which the Portfolio holds such investments.
Investment in Eurodollar and Yankeedollar Obligations. As is discussed in
the Prospectus, the Money Reserve Portfolio may invest in U.S.
dollar-denominated obligations issued by foreign banks or branches or
subsidiaries of U.S. or foreign banks ("Eurodollar" obligations) or U.S.
branches or subsidiaries of foreign banks ("Yankeedollar" obligations).
Investment in Eurodollar and Yankeedollar obligations may involve different
risks from the risks of investing in obligations of U.S. banks. See "Other
Portfolio Strategies--Foreign Securities" in the Prospectus. Such risks include
adverse political and economic developments, the possible imposition of
withholding taxes on interest income payable on such obligations, the possible
seizure or nationalization of foreign deposits and the possible establishment of
exchange controls or other foreign governmental laws or restrictions which might
adversely affect the payment of principal and interest. Generally the issuers of
such obligations are subject to fewer U.S. regulatory requirements than are
applicable to U.S. banks. Foreign branches or subsidiaries of U.S. banks may be
subject to less stringent reserve requirements than U.S. banks. U.S. branches or
subsidiaries of foreign banks are subject to the reserve requirements of the
state in which they are located. There may be less publicly available
information about a U.S. branch or subsidiary of a foreign bank than about a
U.S. bank, and such branches or subsidiaries may not be subject to the same
accounting, auditing and financial record keeping standards and requirements as
U.S. banks. Evidence of ownership of Eurodollar obligations may be held outside
of the United States, and the Money Reserve Portfolio may be subject to the
risks associated with the holding of such property overseas. Eurodollar
obligations of the Money Reserve Portfolio held overseas will be held by foreign
branches of the Custodian for the Money Reserve Portfolio or by other U.S. or
foreign banks under subcustodian arrangements complying with the requirements of
the Investment Company Act of 1940.
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The Investment Adviser will consider the above factors in making
investments in Eurodollar and Yankeedollar obligations and will not knowingly
purchase obligations which, at the time of purchase, are subject to exchange
controls or withholding taxes. Generally, the Money Reserve Portfolio will limit
its Eurodollar and Yankeedollar investments to obligations of banks organized in
Canada, France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom
and other industrialized nations.
Liquidity. In order to assure that each Portfolio of the Fund has
sufficient liquidity, as a matter of operating policy no Portfolio may invest
more than 10% of its net assets in securities for which market disposition is
not readily available. Market disposition may not be readily available for
repurchase agreements maturing in more than seven days and for securities having
restrictions on resale.
While no Portfolio may purchase illiquid securities in an amount exceeding
10% of its net assets, each Portfolio may purchase without regard to that
limitation securities that are not registered under the Securities Act of 1933
(the "Securities Act"), but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Investment Adviser the daily
function of determining and monitoring the liquidity of restricted securities.
The Board has determined that securities which are freely tradeable in their
primary market offshore should be deemed liquid. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
Restricted Securities. From time to time each Portfolio may invest up to
10% of its assets in securities the disposition of which is subject to legal
restrictions, such as restrictions imposed by 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, the
Portfolio 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 Yield Portfolio 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
commitment. At the time of entering into the agreement the Portfolio is paid a
commitment fee, regardless of whether or not the security is ultimately issued,
which is typically approximately 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 the 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 the Fund's 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 security will
thereafter be reflected in the calculation of the Portfolio's net asset value.
If the security is issued, 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.
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TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
Certain Portfolios of the Fund are authorized to use derivative
instruments, including indexed and inverse securities, options, and futures, and
to purchase and sell foreign exchange, as described below. Such instruments are
referred to collectively herein as "Strategic Instruments."
Indexed and Inverse Securities. The Money Reserve Portfolio, the Long Term
Corporate Bond Portfolio, the Balanced Portfolio, the Natural Resources
Portfolio, the Global Strategy Portfolio, the Intermediate Government Bond
Portfolio and the Multiple Strategy Portfolio may invest in securities the
potential return of which is based on the change in particular measurements of
value or rate (an "index"). As an illustration, a Portfolio may invest in a debt
security that pays interest and returns principal based on the change in the
value of an interest rate index (such as the prime rate or federal funds rate),
a securities index (such as the S&P 500 Index or a more narrowly-focused index
such as the AMEX Oil & Gas Index) or a basket of securities, or based on the
relative changes of two indices. In addition, the Natural Resources Portfolio,
the Global Strategy Portfolio, and the Multiple Strategy Portfolio may invest in
securities the potential return of which is based inversely on the change in an
index. For example, these Portfolios may invest in securities that pay a higher
rate of interest when a particular index decreases and pay a lower rate of
interest (or do not fully return principal) when the value of the index
increases. If a Portfolio invests in such securities, it may be subject to
reduced or eliminated interest payments or loss of principal in the event of an
adverse movement in the relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Fund believes that indexed and inverse securities may provide portfolio
management flexibility that permits Portfolios to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Options on Securities and Securities Indices
Purchasing Options. The Natural Resources Portfolio, the Global Strategy
Portfolio and the Multiple Strategy Portfolio are each authorized to purchase
put options on securities held in its portfolio or securities indices the
performance of which is substantially correlated with securities held in its
portfolio. When a Portfolio purchases a put option, in consideration for an
upfront payment (the "option premium") the Portfolio acquires a right to sell to
another party specified securities owned by the Portfolio at a specified price
(the "exercise price") on or before a specified date (the "expiration date"), in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index declines below a specified
level on or before the expiration date, in the case of an option on a securities
index. The purchase of a put option limits the Portfolio's risk of loss in the
event of a decline in the market value of the portfolio holdings underlying the
put option prior to the option's expiration date. If the market value of the
portfolio holdings associated with the put option increases rather than
decreases, however, the Portfolio will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized with the purchase of the put.
The Natural Resources Portfolio, the Global Strategy Portfolio and the
Multiple Strategy Portfolio are each also authorized to purchase call options on
securities it intends to purchase or securities indices the performance of which
are substantially correlated with the performance of the types of securities it
intends to purchase. When a Portfolio purchases a call option, in consideration
for the option premium the Portfolio acquires a right to purchase from another
party specified securities at the exercise price on or before the expiration
date, in the case of an option on securities, or to receive from another party a
payment based on the amount a specified securities index increases beyond a
specified level on or before the expiration date, in the case of an option on a
securities index. The purchase of a call option may protect the Portfolio from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Portfolio is contemplating its
purchase, in the case of an option on a security, or attempting to identify
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specific securities in which to invest in a market the Portfolio believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Portfolio determines not to purchase a security underlying a call
option, however, the Portfolio may lose the entire option premium.
Each of the Natural Resources Portfolio, the Global Strategy Portfolio and
the Multiple Strategy Portfolio also is authorized to purchase put or call
options in connection with closing out put or call options it has previously
sold.
Writing Options. The Natural Resources Portfolio, the Global Strategy
Portfolio, the Balanced Portfolio and the Multiple Strategy Portfolio are each
authorized to write (i.e., sell) call options on securities held in its
portfolio or securities indices the performance of which is substantially
correlated with securities held in its portfolio. When a Portfolio writes a call
option, in return for an option premium the Portfolio gives another party the
right to buy specified securities owned by the Portfolio at the exercise price
on or before the expiration date, in the case of an option on securities, or
agrees to pay to another party an amount based on any gain in a specified
securities index beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The Portfolio may write call
options to earn income, through the receipt of option premiums. In the event the
party to which the Portfolio has written an option fails to exercise its rights
under the option because the value of the underlying securities is less than the
exercise price, the Portfolio will partially offset any decline in the value of
the underlying securities through the receipt of the option premium. By writing
a call option, however, the Portfolio limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
The Natural Resources Portfolio, the Global Strategy Portfolio and the
Multiple Strategy Portfolio each may also write put options on securities or
securities indices. When a Portfolio writes a put option, in return for an
option premium the Portfolio gives another party the right to sell to the
Portfolio a specified security at the exercise price on or before the expiration
date, in the case of an option on a security, or agrees to pay to another party
an amount based on any decline in a specified securities index below a specified
level on or before the expiration date, in the case of an option on a securities
index. The Portfolio may write put options to earn income, through the receipt
of option premiums. In the event the party to which the Portfolio has written an
option fails to exercise its rights under the option because the value of the
underlying securities is greater than the exercise price, the Portfolio will
profit by the amount of the option premium. By writing a put option, however,
the Portfolio will be obligated to purchase the underlying security at a price
that may be higher than the market value of the security at the time of exercise
as long as the put option is outstanding, in the case of an option on a
security, or make a cash payment reflecting any decline in the index, in the
case of an option on an index. Accordingly, when the Portfolio writes a put
option it is exposed to a risk of loss in the event the value of the underlying
securities falls below the exercise price, which loss potentially may
substantially exceed the amount of option premium received by the Portfolio for
writing the put option. The Portfolio will write a put option on a security or a
securities index only if the Portfolio would be willing to purchase the security
at the exercise price for investment purposes (in the case of an option on a
security) or is writing the put in connection with trading strategies involving
combinations of options--for example, the sale and purchase of options with
identical expiration dates on the same security or index but different exercise
prices (a technique called a "spread").
Each of these Portfolios also is authorized to sell call or put options in
connection with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, a Portfolio will only
write call or put options that are "covered." A call or put option will be
considered covered if the Portfolio has segregated assets with respect to such
option in the manner described in "Risk Factors in Options, Futures and Currency
Instruments" below. A call option will also be considered covered if a Portfolio
owns the securities it would be required to deliver upon exercise of the option
(or, in the case of option on a securities index, securities which are
substantially correlated with the performance of such index) or owns a call
option, warrant or convertible instrument which is immediately exercisable for,
or convertible into, such security.
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Types of Options. A Portfolio may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
Futures
The Natural Resources Portfolio and the Multiple Strategy Portfolio may
engage in transactions in futures and options thereon. Futures are standardized,
exchange-traded 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. No price is paid upon entering into a futures
contract. Rather, upon purchasing or selling a futures contract the 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.
The sale of a futures contract limits a Portfolio's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Portfolio will realize a loss on
the futures position and a lower return on the portfolio holdings than would
have been realized without the purchase of the futures contract.
The purchase of a futures contract may protect a Portfolio from having to
pay more for securities as a consequence of increases in the market value for
such securities during a period when the Portfolio was attempting to identify
specific securities in which to invest in a market the Portfolio believes to be
attractive. In the event that such securities decline in value or the Portfolio
determines not to complete an anticipatory hedge transaction relating to a
futures contract, however, the Portfolio may realize a loss relating to the
futures position.
A Portfolio will limit transactions in futures and options on futures to
financial futures contracts (i.e. contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). Each of the Natural Resources
Portfolio and the Multiple Strategy Portfolio will further limit transactions in
futures and options on futures to the extent necessary to prevent the Portfolio
from being deemed a "commodity pool" under regulations of the Commodity Futures
Trading Commission.
Foreign Exchange Transactions
The Natural Resources Portfolio, the Global Strategy Portfolio, the Capital
Stock Portfolio and the Multiple Strategy Portfolio may engage in spot and
forward foreign exchange transactions and currency swaps, purchase and sell
options on currencies and purchase and sell currency futures and related options
thereon (collectively, "Currency Instruments") for purposes of hedging against
the decline in the value of currencies in which its portfolio holdings are
denominated against the U.S. dollar.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement. A
Portfolio will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. A Portfolio may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Portfolio has received or
anticipates receiving a dividend or distribution. A Portfolio may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in
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which a portfolio position of the Portfolio is denominated or by purchasing a
currency in which the Portfolio anticipates acquiring a portfolio position in
the near future. A Portfolio may also hedge portfolio positions through currency
swaps, which are transactions in which one currency is simultaneously bought for
a second currency on a spot basis and sold for the second currency on a forward
basis.
The Portfolios authorized to engage in Currency Instrument transactions may
also hedge against the decline in the value of a currency against the U.S.
dollar through use of currency, futures or options thereon. Currency futures are
similar to forward foreign exchange transactions except that futures are
standardized, exchange-traded contracts. See "Futures" above.
The Portfolios authorized to engage in Currency Instrument transactions may
also hedge against the decline in the value of a currency against the U.S.
dollar through the use of currency options. Currency options are similar to
options in securities, but in consideration for an option premium the writer of
a currency option is obligated to sell (in the case of a call option) or
purchase (in the case of a put option) a specified amount of a specified
currency on or before the expiration date for a specified amount of another
currency. The Portfolio may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Options on Securities and Securities
Indices--Types of Options" above and "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
No Portfolio will speculate in Currency Instruments. Accordingly, a
Portfolio will not hedge a currency in excess of the aggregate market value of
the securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated in
such currency. A Portfolio may, however, hedge a currency by entering into a
transaction in a Currency Instrument denominated in a currency other than the
currency being hedged (a "cross-hedge"). The Portfolio will only enter into a
cross-hedge if the Investment Adviser believes that (i) there is a demonstrable
high correlation between the currency in which the cross-hedge is denominated
and the currency being hedged, and (ii) executing a cross-hedge through the
currency in which the cross-hedge is denominated will be significantly more
cost-effective or provide substantially greater liquidity than executing a
similar hedging transaction by means of the currency being hedged.
Risk Factors in Hedging Foreign Currency Risks. While a Portfolio's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Portfolio's shares, the net asset value
of the Portfolio's shares will fluctuate. Moreover, although Currency
Instruments will be used with the intention of hedging against adverse currency
movements, transactions in Currency Instruments involve the risk that
anticipated currency movements will not be accurately predicted and that the
Portfolio's hedging strategies will be ineffective. To the extent that a
Portfolio hedges against anticipated currency movements which do not occur, the
Portfolio may realize losses, and decrease its total return, as the result of
its hedging transactions. Furthermore, a Portfolio will only engage in hedging
activities from time to time and may not be engaging in hedging activities when
movements in currency exchange rates occur. It may not be possible for a
Portfolio to hedge against currency exchange rate movements, even if correctly
anticipated, in the event that (i) the currency exchange rate movement is so
generally anticipated that the Portfolio is not able to enter into a hedging
transaction at an effective price, or (ii) the currency exchange rate movement
relates to a market with respect to which Currency Instruments are not available
(such as certain developing markets) and it is not possible to engage in
effective foreign currency hedging.
Risk Factors in Options, Futures and Currency Instruments
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments, a
Portfolio will experience a gain or loss which will not be completely offset by
movements in the value of the hedged instruments.
Each Portfolio intends to enter into transactions involving Strategic
Instruments only if there appears to be a liquid secondary market for such
instruments or, in the case of illiquid instruments traded in OTC transactions,
such instruments satisfy the criteria set forth below under "Additional Risk
Factors of OTC
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Transactions; Limitations on the Use of OTC Strategic Instruments." However,
there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a Strategic Instrument or the Portfolio will otherwise be
able to sell such instrument at an acceptable price. It may therefore not be
possible to close a position in a Strategic Instrument without incurring
substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose a
Portfolio to potential losses which exceed the amount originally invested by the
Portfolio in such instruments. When a Portfolio engages in such a transaction,
the Portfolio will deposit in a segregated account at its custodian liquid
securities with a value at least equal to the Portfolio's exposure, on a
mark-to-market basis, to the transaction (as calculated pursuant to requirements
of the Securities and Exchange Commission). Such segregation will ensure that
the Portfolio has assets available to satisfy its obligations with respect to
the transaction, but will not limit the Portfolio's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments
Certain Strategic Instruments traded in OTC markets, including indexed
securities and OTC options, may be substantially less liquid than other
instruments in which a Portfolio may invest. The absence of liquidity may make
it difficult or impossible for the Portfolio to sell such instruments promptly
at an acceptable price. The absence of liquidity may also make it more difficult
for the Portfolio to ascertain a market value for such instruments. A Portfolio
will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Investment Adviser
anticipates the Portfolio can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. Each Portfolio has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Portfolio, the market value of the securities underlying OTC call options
currently outstanding which have been sold by the Portfolio and margin deposits
on the Portfolio's outstanding OTC options exceeds 10% of the total assets of
the Portfolio, taken at market value, together with all other assets of the
Portfolio which are deemed to be illiquid or are otherwise not readily
marketable. However, if an OTC option is sold by the Portfolio to a dealer in
U.S. government securities recognized as a "primary dealer" by the Federal
Reserve Bank of New York and the Portfolio has the unconditional contractual
right to repurchase such OTC option at a predetermined price, then the Portfolio
will treat as illiquid such amount of the underlying securities as is equal to
the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying security minus the option's
exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that a Portfolio has unrealized gains in such instruments
or has deposited collateral with its counterparty, the Portfolio is at risk that
its counterparty will become bankrupt or otherwise fail to honor its
obligations. A Portfolio will attempt to minimize the risk that a counterparty
will become bankrupt or otherwise fail to honor its obligations by engaging in
transactions in Strategic Instruments traded in OTC markets only with financial
institutions which have substantial capital or which have provided the Portfolio
with a third-party guaranty or other credit enhancement.
Additional Limitations on the Use of Strategic Instruments
No Portfolio may use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly, except that the Natural Resources Portfolio may
acquire securities indexed to a precious metal or other natural resource index.
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MANAGEMENT OF THE FUND
The directors and executive officers of the Fund and their principal
occupations for at least the last five years, their ages and the public
companies for which they serve as directors are set forth below. Unless
otherwise noted, the address of each executive officer and director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
TERRY K. GLENN (58)--President and Director(1)(2)--Executive Vice President
of the Investment Adviser and Fund Asset Management, L.P. ("FAM") since 1983;
Executive Vice President and Director of Princeton Services, Inc. since 1993;
President of Princeton Funds Distributor, Inc. (the "Distributor") since 1986
and Director thereof since 1991; President of Princeton Administrators, L.P.
since 1988; Director of Merrill Lynch Financial Data Services, Inc. since 1985.
JACK B. SUNDERLAND (70)--Director(2)--P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (energy company) since 1987; Member of Council on Foreign Relations since
1971.
STEPHEN B. SWENSRUD (65)--Director(2)--24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman, Fernwood Advisors (financial consultants)
since 1996; Principal, Fernwood Associates (financial consultants) since 1975.
J. THOMAS TOUCHTON (60)--Director(2)--Suite 3405, One Tampa City Center,
201 North Franklin Street, Tampa, Florida 33602. Managing Partner of The
Witt-Touchton Company and its predecessor The Witt Co. (private investment
partnership) since 1972; Trustee Emeritus of Washington and Lee University;
Director of TECO Energy, Inc. (electric utility holding company).
JOSEPH T. MONAGLE, JR. (50)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser and FAM since 1983; Department Head of the
Global Fixed Income Division of the Investment Adviser and FAM since 1997;
Senior Vice President of Princeton Services since 1993.
DONALD C. BURKE (38)--Vice President and Treasurer(1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Vice President of the Investment Adviser from 1990 to 1997; Director of
Taxation of the Investment Adviser since 1990.
VINCENT T. LATHBURY, III (58)--Senior Vice President(1)(2)--First Vice
President of the Investment Adviser; Portfolio Manager of the Investment Adviser
since 1982; Vice President of the Investment Adviser from 1982 to 1997.
KEVIN J. MCKENNA (42)--Senior Vice President(1)(2)--First Vice President of
the Investment Adviser since 1997; Vice President of the Investment Adviser from
1985 to 1997.
LAWRENCE R. FULLER (58)--Senior Vice President(1)(2)--First Vice President
of the Investment Adviser since 1992.
THOMAS R. ROBINSON (55)--Senior Vice President(1)(2)--First Vice President
of the Investment Adviser since 1997; Vice President of the Investment Adviser
from 1996 to 1997. Manager of International Equity Strategy of Merrill Lynch &
Co.'s Global Securities Research and Economics Group from 1989 to 1995.
ROBERT M. SHEARER (43)--Senior Vice President(1)(2)--First Senior Vice
President of the Investment Adviser since 1998; Vice President from 1997 to
1998; Vice President and Assistant Portfolio Manager at David L. Babson and
Company, Incorporated from 1996 to 1997; Vice President/Selection Manager at
Concert Capital Management from 1993 to 1996.
CHRISTOPHER G. AYOUB (43)--Senior Vice President(1)(2)--First Vice
President of the Investment Adviser since 1998; Director (Global Fixed-Income)
of the Investment Adviser from 1997 to 1998; Vice President of the Investment
Adviser from 1985 to 1997.
JACQUELINE ROGERS (40)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1986.
ROBERT F. MURRAY (41)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1993.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
13
<PAGE> 116
(2) Mr. Glenn is a director or trustee and officer, Messrs. Sunderland, Swensrud
and Touchton are directors and Messrs. Ayoub, Burke, Fuller, Harbeck,
Harvey, Lathbury, McKenna, Monagle, Robinson, and Shearer and Ms. Rogers and
Ms. Schwartz are officers of certain other investment companies for which
the Investment Adviser or FAM acts as investment adviser (see "Investment
Advisory Arrangements").
Set forth below is a chart showing the aggregate compensation paid by the
Fund to each of its directors, as well as the total compensation paid to each
director of the Fund by the Fund and by other investment companies advised by
the Investment Adviser or FAM (collectively, the "Fund Complex") for their
services as directors or trustees of such investment companies for the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
PENSIONS
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM FUND
AGGREGATE ACCRUED AND FUND
COMPENSATION AS PART OF COMPLEX
FROM THE FUND PAID
NAME OF DIRECTOR FUND EXPENSES TO DIRECTORS
---------------- ------------ --------- ------------
<S> <C> <C> <C>
Jack B. Sunderland........................................ [$8,000] None [$133,600]
Stephen B. Swensrud....................................... [$8,000] None [$195,583]
J. Thomas Touchton........................................ [$8,000] None [$133,600]
</TABLE>
- ---------------
(1) In addition to the Fund, the Directors served on other MLAM/FAM advised
funds as follows: Mr. Sunderland (18 registered investment companies
consisting of 30 portfolios); Mr. Swensrud (23 registered investment
companies consisting of 56 portfolios); Mr. Touchton (18 registered
investment companies consisting of 30 portfolios).
The officers of the Fund owned on April , 1999, in the aggregate, less
than 1% of the outstanding Common Stock of Merrill Lynch & Co., Inc. On April
, 1999, the officers and directors of the Fund owned an aggregate of less than
1/4 of 1% of its outstanding shares. The Fund has an Audit Committee consisting
of all of the directors of the Fund who are not interested persons of the Fund.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all directors of the Fund who are affiliated persons of Merrill
Lynch & Co., Inc. or its subsidiaries. The Fund pays each non-affiliated
director an annual fee of $5,000 plus $500 per quarterly meeting attended and an
annual fee of $1,000 for membership on the Audit Committee, and pays all of the
actual out-of-pocket expenses of such directors relating to attendance at
meetings.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Investment Adviser
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Investment Adviser and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
14
<PAGE> 117
INVESTMENT ADVISORY ARRANGEMENTS
The Fund has entered into an Investment Advisory Agreement with the
Investment Adviser. The Investment Adviser is a wholly owned subsidiary of ML
Group, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. The
principal business address of the Investment Adviser is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
The principal executive officers and directors of the Investment Adviser
are Arthur Zeikel, President and Director; Terry K. Glenn, Director and
Executive Vice President; Vincent R. Giordano, Senior Vice President; Elizabeth
A. Griffin, Senior Vice President; Norman R. Harvey, Senior Vice President;
Michael J. Hennewinkel, Senior Vice President; Philip L. Kirstein, Senior Vice
President, General Counsel and Secretary; Ronald M. Kloss, Senior Vice President
and Controller; Stephen M.M. Miller, Senior Vice President; Joseph T. Monagle,
Senior Vice President; Richard L. Reller, Senior Vice President; Donald C.
Burke, Senior Vice President and Treasurer; Ronald L. Welburn, Senior Vice
President.
Securities held by any Portfolio may also be held by other funds for which
the Investment Adviser or FAM acts as an adviser, or by investment advisory
clients of the Investment Adviser. 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 other funds for which the Investment Adviser or
FAM 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 FAM 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. The Investment Advisory Agreement provides that as
compensation for its services to the Fund, the Investment Adviser receives
monthly compensation with respect to such Portfolios according to the following
schedule:
<TABLE>
<CAPTION>
AGGREGATE OF AVERAGE DAILY NET ASSETS OF
THE TEN COMBINED PORTFOLIOS ADVISORY FEE
--------------------------- ------------
<S> <C>
Not exceeding $250 million.................................. 0.50%
In excess of $250 million but not exceeding $300 million.... 0.45%
In excess of $300 million but not exceeding $400 million.... 0.40%
In excess of $400 million but not exceeding $800 million.... 0.35%
In excess of $800 million................................... 0.30%
</TABLE>
These fee rates are applied to the average daily net assets of each
Portfolio, with the reduced rates above applicable to portions of each Portfolio
to the extent that the aggregate of the average daily net assets of the combined
Portfolios exceed $250 million, $300 million, $400 million and $800 million
(each such amount being a "breakpoint level"). The portion of the assets of a
Portfolio to which the rate at each breakpoint level applies will be determined
on a "uniform percentage" basis. The uniform percentage applicable to a
breakpoint level is determined by dividing the amount of the aggregate of the
average daily net assets of the combined Portfolios that falls within that
breakpoint level by the aggregate of the average daily net assets of the
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.
For the fiscal years ended December 31, 1998, 1997 and 1996, the advisory
fees paid by the Fund to the Investment Adviser totalled $ , $10,816,978
and $10,000,508, respectively.
The Investment Advisory Agreement with respect to the Fund's Portfolios was
approved by the Fund's Board of Directors, including a majority of the Directors
who are not interested persons of the Investment Adviser, on February 3, 1998.
The Agreement was last approved by the Fund's shareholders in accordance with
instructions from Policyowners at the Annual Meeting of Shareholders held on
January 31, 1992. The Agreement will continue in effect from year to year if
approved annually (a) by the Board of Directors of the
15
<PAGE> 118
Fund or by a majority of the outstanding shares of the respective Portfolios,
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.
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 investment and economic research, trading and investment
management of the Portfolios, as well as the fees of all directors of the Fund
who are affiliated persons of Merrill Lynch & Co., Inc. or any of its
subsidiaries. Each Portfolio will pay all other expenses incurred in its
operation, including a portion of the Fund's general administrative expenses
allocated on the basis of the Portfolio's asset size. 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
(to the extent not paid for by the Distributor), Securities and Exchange
Commission fees, accounting costs and other expenses properly payable by the
Fund and allocable on the basis of size of the respective Portfolios. Accounting
services are provided for the Fund by the Investment Adviser, and the Fund
reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended December 31, 1998, the amount of such
reimbursement was $ . Depending upon the nature of the lawsuit, litigation
costs may be directly applicable to the Portfolios or allocated on the basis of
the size of the respective Portfolios. The Board of Directors has determined
that this is an appropriate method of allocation of expenses.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page A14 of the Prospectus.
The net asset value of each Portfolio (other than the Money Reserve
Portfolio) is determined by adding the value of all securities and other assets
in its portfolio, deducting the portfolio's liabilities, dividing by the number
of shares outstanding and rounding the result to the nearest whole cent. The net
asset value of the Money Reserve Portfolio is determined pursuant to the "penny
rounding method" under a rule of the Securities and Exchange Commission
described below by adding the value of all securities and other assets in its
portfolio, deducting the portfolio's liabilities, dividing by the number of
shares outstanding and rounding the result to the nearest whole cent.
In accordance with the Securities and Exchange Commission rule applicable
to the valuation of the portfolio securities of the Money Reserve Portfolio and
consistent with its operating policies, the Money Reserve Portfolio will
maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase instruments having remaining maturities of 397 calendar days (or 762
calendar days in the case of U.S. Government securities) or less only, and
invest only in securities determined by the directors to be of high quality with
minimal credit risks and which meet certain credit standards prescribed by the
rule. In addition, the directors have established procedures designed to
stabilize, to the extent reasonably possible, the Portfolio's price per share as
computed for the purpose of sales and redemptions at $1.00. Deviations of more
than an insignificant amount between the net asset value calculated using market
quotations and that calculated pursuant to the penny rounding method will be
reported to the directors by the Investment Adviser. In the event the directors
determine that a deviation exists which may result in material dilution or other
unfair results to investors or existing shareholders, the Portfolio will take
such corrective action as it regards as necessary and appropriate, including the
sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding dividends; or
establishing a net asset value per share by using available market quotations.
16
<PAGE> 119
If in the view of the Board of Directors of the Fund it is inadvisable to
continue the practice of maintaining the net asset value of the Money Reserve
Portfolio at $1.00 per share, the Board of Directors of the Fund reserves the
right to alter the procedure. The Fund will notify the Accounts of any such
alteration.
Securities held by each Portfolio with a remaining maturity of 60 days or
less are valued on an amortized cost basis, unless particular circumstances
dictate otherwise. Under this method of valuation, the security is initially
valued at cost on the date of purchase (or in the case of securities purchased
with more than 60 days remaining to maturity, the market value on the 61st day
prior to maturity); and thereafter the Portfolios assume a constant
proportionate amortization in value until maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the security. For purposes of this method of valuation, the maturity of a
variable rate certificate of deposit and variable amount master demand note is
deemed to be the next coupon date on which the interest rate is to be adjusted.
If, due to the impairment of the creditworthiness of the issuer of a security
held by a Portfolio or to other factors with respect to such security, the fair
value of such security is not fairly reflected through the amortized cost method
of valuation, such security will be valued at fair value as determined in good
faith by the Board of Directors. Any assets or liabilities initially expressed
in terms of non-U.S. dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on the day of
valuation.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Portfolio Transactions and Brokerage" on page of
the Prospectus.
If the securities in which a particular Portfolio of the Fund invests are
traded primarily in the over-the-counter market, where possible the Portfolio
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting 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 commission or transfer taxes. The cost of executing
portfolio securities transactions of each Fund will primarily consist of
brokerage commissions or underwriter or dealer spreads.
Under the Investment Company Act, persons affiliated with the Fund are
prohibited from dealing with the Fund as a principal in the purchase and sale of
the Fund's portfolio securities unless an exemptive order allowing such
transactions is obtained from the Securities and Exchange Commission. Since
over-the-counter transactions are usually principal transactions, affiliated
persons of the Fund, including Merrill Lynch Government Securities Inc. ("GSI"),
Merrill Lynch Money Markets Inc. ("MMI") and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), may not serve as dealers in connection
with such transactions except pursuant to exemptive orders from the Securities
and Exchange Commission, such as the order described below. However, affiliated
persons of the Fund may serve as its broker in over-the-counter or other
transactions conducted on an agency basis, subject to the Fund's policy of
obtaining best price and execution. The Fund may not purchase securities from
any underwriting syndicate of which Merrill Lynch is a member except in
accordance with rules and regulations under the Investment Company Act.
The Securities and Exchange Commission has issued an exemptive order
permitting the Fund to conduct principal transactions with respect to the Money
Reserve Portfolio with GSI and MMI in United States Government and government
agency securities, and certain other money market securities, subject to a
number of conditions, including conditions designed to insure that the prices to
the Portfolio available from GSI and MMI are equal to or better than those
available from other sources. GSI and MMI have informed the Fund that they will
in no way, at any time, attempt to influence or control the activities of the
Fund or the Investment Adviser in placing such principal transactions. The
exemptive order allows GSI and MMI to receive a dealer spread on any transaction
with the Fund no greater than their customary dealer spreads for transactions of
the type involved.
Certain court decisions have raised questions as to whether investment
companies should seek to "recapture" brokerage commissions and underwriting and
dealer spreads by effecting their purchases and sales through affiliated
entities. In order to effect such an arrangement, the Fund would be required to
seek an
17
<PAGE> 120
exemption from the Investment Company Act so that it could engage in principal
transactions with affiliates. The Board of Directors has considered the
possibilities of seeking to recapture spreads for the benefit of the Fund and,
after reviewing all factors deemed relevant, has made a determination not to
seek such recapture at this time. The Board will reconsider this matter from
time to time. The Fund will take such steps as may be necessary to effect
recapture, including the filing of applications for exemption under the
Investment Company Act, if the Directors should determine that recapture is in
the best interests of the Fund or otherwise required by developments in the law.
The Investment Adviser has arranged for the Fund's Custodian to receive on
behalf of the Fund any tender offer solicitation fees payable with respect to
portfolio securities of the Fund.
While the Investment Adviser seeks to obtain the most favorable net results
in effecting transactions in the Fund's portfolio securities, dealers who
provide supplemental investment research to the Investment Adviser may receive
orders for transactions by the Fund. 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 particular Portfolio or Portfolios 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 the 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 December 31, 1998, the Fund paid total brokerage
commissions of $ , of which $ was paid to Merrill Lynch. For
the fiscal year ended December 31, 1997, the Fund paid total brokerage
commissions of $4,142,987, of which $147,997 was paid to Merrill Lynch. For the
fiscal year ended December 31, 1996, the Fund paid brokerage commissions of
$4,018,947, of which $154,459 was paid to Merrill Lynch.
PORTFOLIO TURNOVER
Each Portfolio has a different expected rate of portfolio turnover;
however, rate of portfolio turnover will not be a limiting factor when
management of the Fund deems it appropriate to purchase or sell securities for a
Portfolio. Because of the short-term nature of the securities in which the Money
Reserve Portfolio will invest, and because such Portfolio's investments will be
constantly changing in response to market conditions, no portfolio turnover rate
may be accurately stated for the Money Reserve Portfolio. For the fiscal year
ended December 31, 1998, the portfolio turnover rates for the Fund's other
Portfolios were as follows: the Intermediate Government Bond Portfolio was
%; the Long Term Corporate Bond Portfolio was %; the Capital Stock
Portfolio was %; the Growth Stock Portfolio was %; the Multiple
Strategy Portfolio was %; the High Yield Portfolio was %; the Natural
Resources Portfolio was %; the Global Strategy Portfolio was %; and
the Balanced Portfolio was %.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the NYSE
is restricted as determined by the Securities and Exchange Commission or such
Exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Securities and
Exchange Commission as a result of which disposal of portfolio securities or
determination of the net asset value of each Portfolio is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of each
Portfolio.
18
<PAGE> 121
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Dividends, Distributions and Taxes" in the
Prospectus.
FEDERAL INCOME TAXES
Under the Code, each Portfolio of the Fund will be treated as a separate
corporation for federal income tax purposes and, thus, each Portfolio is
required to satisfy the qualification requirements under the Code for treatment
as a regulated investment company. There will be no offsetting of capital gains
and losses among the Portfolios.
Each Portfolio intends to continue to qualify as a regulated investment
company under the Code. Under such provisions, a Portfolio will not be subject
to federal income tax on such part of its net ordinary income and net realized
capital gains which it distributes to shareholders. To qualify for treatment as
a regulated investment company, a Portfolio must, among other things, derive in
each taxable year at least 90% of its gross income from dividends, interest and
gains from the sale or other disposition of securities and derive less than 30%
of its gross income in each taxable year from the gains (without deduction for
losses) from the sale or other disposition of securities and certain options,
futures or forward contracts held for less than three months.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Regulations
are subject to change by legislative or administrative action.
DISTRIBUTION ARRANGEMENTS
The Fund has entered into a distribution agreement (the "Distribution
Agreement") with the Distributor with respect to the sale of the Fund's shares
to the Distributor for resale to the Accounts. Such shares will be sold at their
respective net asset values and therefore will involve no sales charge. The
Distributor is a wholly owned subsidiary of the Investment Adviser.
The Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreement described above.
19
<PAGE> 122
PERFORMANCE DATA
From time to time one or more of the Fund's Portfolios may include its
average annual total return, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield figures are based on the Portfolio's historical performance and are
not intended to indicate future performance. Average annual total return and
yield are determined in accordance with formulas specified by the Securities and
Exchange Commission.
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.
The Fund's Money Reserve Portfolio normally computes its annualized yield
by determining the net change for a seven-day base period, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, dividing the net change in account
value by the value of the account at the beginning of the base period to obtain
the base period return, and multiplying the base period return by 365 an then
dividing by seven. Under this calculation, the yield does not reflect realized
and unrealized gains and losses on portfolio securities. The Securities and
Exchange Commission also permits the calculation of a standardized effective or
compounded yield. This is computed by compounding the unannualized base period
return by dividing the base period by seven, adding one to the quotient, raising
the sum to the 365th power, and subtracting one from the result. This compounded
yield calculation also excludes realized or unrealized gains or losses on
portfolio securities.
Set forth below is average annual return information for the shares of each
of the Fund's Portfolios, other than the Money Reserve Portfolio. The average
annual total return quotations may be of limited use for comparative purposes
because they do not reflect charges imposed at the Account level which, if
included, would decrease average annual total return.
20
<PAGE> 123
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------
REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT AT
ON A HYPOTHETICAL THE END OF THE
$1,000 INVESTMENT PERIOD
----------------- --------------------
<S> <C> <C>
Balanced Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Inception* Through December 31, 1998...................... % $
Capital Stock Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
Global Strategy Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
Growth Stock Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
High Yield Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
Intermediate Government Bond Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
Long Term Corporate Bond Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
Multiple Strategy Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Ten Years Ended December 31, 1998......................... % $
Natural Resources Portfolio:
One Year Ended December 31, 1998.......................... % $
Five Years Ended December 31, 1998........................ % $
Inception* Through December 31, 1998...................... % $
</TABLE>
- ------------------
* Inception for Balanced Portfolio, May 1, 1988.
ADDITIONAL INFORMATION
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.
21
<PAGE> 124
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 (609) 282-2800.
22
<PAGE> 125
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1(a) -- Articles of Incorporation of Registrant(a)
1(b) -- Articles of Amendment to Registrant's Articles of
Incorporation(b)
1(c) -- Articles of Amendment to Registrant's Articles of
Incorporation increasing the number of authorized shares of
Registrant(c)
1(d) -- Certificate of Collection of Articles of Amendment of
Registrant(d)
1(e) -- Articles Supplementary to Registrant's Articles of
Incorporation relating to the redesignation of shares of
common stock as Multiple Strategy Portfolio Common Stock(e)
1(f) -- Articles Supplementary to Registrant's Articles of
Incorporation relating to the designation of shares of
common stock as High Yield Portfolio Common Stock(f)
1(g) -- Form of Articles Supplementary to Registrant's Articles of
Incorporation relating to the designation of shares of
common stock as Natural Resources Portfolio Common Stock and
Global Strategy Portfolio Common Stock(g)
1(h) -- Form of Articles of Amendment to Registrant's Articles of
Incorporation increasing the number of authorized shares of
Registrant(h)
1(i) -- Articles Supplementary to Registrant's Articles of
Incorporation relating to the redesignation of shares of
common stock as Balanced Portfolio Common Stock and
increasing the authorized shares of Money Reserve Portfolio
Common Stock(i)
2 -- By-Laws of Registrant, as amended(j)
3 -- None
4 -- Specimen certificate for shares of common stock of
Registrant(k)
5(a) -- Investment Advisory Agreement(1)
5(b) -- Sub-Advisory Agreement(1)
6 -- Form of Amended Distribution Agreement(m)
7 -- None
8 -- Form of Custodian Agreement(n)
9(a) -- Form of Transfer Agency, and Dividend Disbursing
Agreement(o)
9(b) -- Form of Agreement relating to the use of the "Merrill Lynch"
name(p)
10 -- Opinion of Rogers & Wells (incorporated by reference to
Registrant's Rule 24f-2 notice of February 20, 1997)
11 -- Consent of Deloitte & Touche LLP(q)
12 -- None
13 -- None
14 -- None
15 -- None
16 -- Calculation of Performance Data(r)
27 -- Financial Data Schedules(s)
</TABLE>
- ---------------
(a) Incorporated by reference to Exhibit No. 21(a) filed with Pre-Effective
Amendment No. 2 to Registrant's Registration Statement on Form N-1A (the
"Pre-Effective Amendment No. 2").
(b) Incorporated by reference to Exhibit 1(b) filed with Pre-Effective Amendment
No. 2.
(c) Incorporated by reference to Exhibit 1(c) filed with Post-Effective
Amendment No. 4 to Registrant's Registration Statement on Form N-1A
("Post-Effective Amendment No. 4").
(d) Incorporated by reference to Exhibit 1(d) filed with Post-Effective
Amendment No. 4.
(e) Incorporated by reference to Exhibit 1(e) filed with Post-Effective
Amendment No. 4.
(f) Incorporated by reference to Exhibit 1(f) filed with Post-Effective
Amendment No. 5 to Registrant's Registration Statement on Form N-1A
("Post-Effective Amendment No. 5").
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<PAGE> 126
(g) Incorporated by reference to Exhibit 1(g) filed with Post-Effective
Amendment No. 6 to Registrant's Registration Statement on Form N-1A
("Post-Effective Amendment No. 6").
(h) Incorporated by reference to Exhibit 1(h) filed with Post-Effective
Amendment No. 9 to Registrant's Registration Statement on Form N-1A
("Post-Effective Amendment No. 9").
(i) Incorporated by reference to Exhibit 1(i) filed with Post-Effective
Amendment No. 9.
(j) Incorporated by reference to Exhibit 2 filed with Post-Effective Amendment
No. 9.
(k) Incorporated by reference to Exhibit 4 filed with Post-Effective Amendment
No. 5.
(l) Incorporated by reference to Exhibit 5(a) filed with Post-Effective
Amendment No. 2. Incorporated by reference to Exhibit 5(b) filed with
Post-Effective Amendment No. 19 to Registrant's Registration Statement on
Form N-1A.
(m) Incorporated by reference to Exhibit 6 filed with Post-Effective Amendment
No. 5.
(n) Incorporated by reference to Exhibit 8 filed with Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-1A ("Pre-Effective
Amendment No. 1").
(o) Incorporated by reference to Exhibit 9(a) filed with Post-Effective
Amendment No. 1.
(p) Incorporated by reference to Exhibit 9(b) filed with Post-Effective
Amendment No. 2.
(q) Incorporated by reference to Exhibit 11 filed with Post-Effective Amendment
No. 22 to Registrant's Registration Statement on Form N-1A ("Post-Effective
Amendment No. 22").
(r) Incorporated by reference to Exhibit 16 filed with Post-Effective Amendment
No. 10 to Registrant's Registration Statement on Form N-1A.
(s) Incorporated by reference to Exhibit 27 filed with Post-Effective Amendment
No. 22.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant does not control any other person. Except that substantially all
of Registrant's issued and outstanding shares are and will be held by Monarch
Life Insurance Company for its Variable Account A and by separate accounts of
Merrill Lynch Life Insurance Company and ML Life Insurance Company of New York,
the Registrant is not under common control with any other person.
ITEM 25. INDEMNIFICATION.
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the corporate representative in connection with the proceeding, if: (i) he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant; and (ii) with respect to any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the Maryland
General Corporation Law to indemnify a corporate representative under certain
circumstances against expenses incurred in connection with the defense of a suit
or action by or in the right of the Registrant. Under each Distribution
Agreement, the Registrant has agreed to indemnify the Distributor against any
loss, liability, claim, damage or expense arising out of any untrue statement of
a material fact, or an omission to state a material fact, in any registration
statement, prospectus or report to shareholders of the Registrant. Reference is
made to Article VI of Registrant's Certificate of Incorporation, Article VI of
Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and
Section 9 of each Distribution Agreement. The Registrant has obtained an
officers' and directors' liability insurance policy for its officers and
directors.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as the
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund,
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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 Technology Fund, Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Focus 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 Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM); and 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 subadviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of 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 Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings California Insured
Fund IV, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings Florida Insured Fund III, Inc., MuniHoldings Florida
Insured Fund IV, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings Insured
Fund II, Inc., MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund III, Inc., MuniHoldings New York Fund, Inc.,
MuniHoldings New York Fund II, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, Inc., MuniHoldings Pennsylvania Insured Fund, 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, MuniYield Arizona Fund, Inc., MuniYield California
Fund, 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 Dollar Vest Fund, Inc.
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The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2646. The address of the Manager and FAM is also P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of Princeton Funds Distributor, Inc. (PFD)
and of Merrill Lynch Funds Distributor ("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 World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10281. The
address of 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 director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
December 1, 1996 for his, her own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Glenn is President, and Mr. Burke
is Treasurer of all or substantially all of the investment companies described
in the first two paragraphs of this Item 26, and Messrs. Giordano and Monagle
are officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---- --------------------- ---------------------------------------
<S> <C> <C>
ML & Co............................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Fund Asset Management, Inc.......... Limited Partner Investment Advisory Services
Princeton Services, Inc............. General Partner General Partner of MLAM ("Princeton
Services")
Jeffrey M. Peek..................... President President and Director of Princeton
Services since 1997, Executive Vice
President of ML & Co.
Donald C. Burke..................... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President of PFD; First Vice President
of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997
Michael G. Clark.................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Director and Treasurer of PFD; First
Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1996
to 1997
Terry K. Glenn...................... Executive Vice Executive Vice President of MLAM and
President FAM; Executive Vice President and
Director of Princeton Services;
President and Director of PFD:
President of Princeton Administrations,
L.P.
Robert W. Crook..................... Senior Vice President Senior Vice President of MLFD; Vice
President of MLFD and Vice President of
FAM
</TABLE>
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<PAGE> 129
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---- --------------------- ---------------------------------------
<S> <C> <C>
Linda L. Federici................... Senior Vice President Senior Vice President of MLAM and FAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.............. Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary 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
Secretary Services
Ronald M. Kloss..................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Debra Landsman-Yaros................ Senior Vice President Senior Vice President of FAM; Vice
President of PFD; 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
Gregory D. Upah..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Ronald Welburn...................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies; 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 Corporate High Yield 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 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 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 Series Trust Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Special Value Fund,
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<PAGE> 130
Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc., Merrill Lynch World Income Fund, Inc., and Worldwide DollarVest
Fund, Inc. The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM,U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business profession, vocation or employment of a
substantial nature in which each such person had been engaged since December 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn and
Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 26:
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---- --------------------- ---------------------------------------
<S> <C> <C>
Arthur Zeikel....................... Director and Chairman Chairman of the Manager and FAM;
Chairman of Princeton Services,
Executive Vice President of ML & Co.
Alan J. Albert...................... Senior Managing Vice President of the Manager
Director
Terry K. Glenn...................... Director Executive Vice President of the Manager
and FAM; Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes....................... Managing Director Director of Merrill Lynch Global Asset
Management
Edward Gobora....................... Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride.................... Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan...................... Director Vice President, Institutional Marketing
Debt and Equity Group, Merrill Lynch
Capital Markets from 1989 to 1994.
Stephen J. Yardley.................. Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham................... Company Secretary None
Debra Anne Scarle................... Assistant Company None
Secretary
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the registered investment companies referred to in
the first two paragraphs of Item 26 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; and MLFD also acts as
principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
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<PAGE> 131
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081, Princeton,
New Jersey 08543-9081, except that the address of Messrs. Crook, Brady, Breen,
Fatseas and Wasel, is One Financial Center, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITIONS AND OFFICERS POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- ---- ---------------------- ---------------------------------------
<S> <C> <C>
Terry K. Glenn...................... President President and Director
Michael G. Clark.................... Director and Treasurer None
Thomas J. Verage.................... Director None
Robert W. Crook..................... Senior Vice President None
Donald C. Burke..................... Vice President Vice President and Treasurer
Mark A. DeSario..................... Vice President None
Michelle T. Lau..................... Vice President None
Salvatore Venezia................... Vice President None
Kevin Boman......................... Vice President None
Michael J. Brady.................... Vice President None
William M. Breen.................... Vice President None
James T. Fatseas.................... Vice President None
William Wasel....................... Vice President None
Debra W. Landsman-Yros.............. Vice President None
Mark E. Macguire.................... Vice President None
Patricia A. Schena.................. 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, as amended, and the Rules
thereunder will be maintained at the offices of the Registrant, its Investment
Adviser, its Custodian, and its Transfer Agent.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth in the Prospectus constituting Part A of the
Registration Statement and under the captions "Management of the Company" and
"Investment 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.
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request, and without charge.
The Company hereby undertakes to comply with the restrictions on
indemnification set forth in Investment Company Act Release No. IC-11330,
September 2, 1980.
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<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Post-Effective Amendment to
its Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933, as amended, and has caused this Post-Effective Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Plainsboro, and State of New Jersey on the
12th day of March, 1999.
MERRILL LYNCH SERIES FUND, INC.
(Registrant)
By: /s/ TERRY K. GLENN
------------------------------------
(Terry K. Glenn, President)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ TERRY K. GLENN President and Director March 12, 1999
- ----------------------------------------------------- (Principal Executive Officer)
(Terry K. Glenn)
* Treasurer (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
(Donald C. Burke)
* Director
- -----------------------------------------------------
(Walter Mintz)
* Director
- -----------------------------------------------------
(Melvin R. Seiden)
* Director
- -----------------------------------------------------
(Stephen B. Swensrud)
* Director
- -----------------------------------------------------
(Joe Grills)
* Director
- -----------------------------------------------------
(Robert S. Salomon, Jr.)
By: /s/ TERRY K. GLENN March 12, 1999
------------------------------------------------
(Terry K. Glenn)
Attorney-in-Fact
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
</TABLE>
