<PAGE>
Rule 497(c)
Registration No. 2-74452
PROSPECTUS
APRIL 29, 1994
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds (hereinafter referred to as the 'Funds' or
individually as a 'Fund'). A separate class of common stock ('Common Stock') is
issued for each Fund.
The shares of the Funds will be sold to Merrill Lynch Life Insurance Company
('MLLIC') and ML Life Insurance Company of New York ('ML of New York') and
shares of certain of the Funds will be sold to Family Life Insurance Company
('Family Life' and, together with ML of New York and MLLIC, the 'Insurance
Companies') for certain separate accounts ('Separate Accounts') to fund benefits
under variable annuity contracts ('Variable Annuity Contracts') issued by the
Insurance Companies. Shares of the funds sold only to MLLIC and ML of New York
also will be sold to MLLIC and ML of New York for certain of their other
separate accounts to fund variable life insurance contracts issued by them (such
contracts, together with Variable Annuity Contracts are collectively referred to
as the 'Contracts'). The Insurance Companies will redeem shares to the extent
necessary to provide benefits under the respective Contracts or for such other
purposes as may be consistent with the respective Contracts. MLLIC and ML of New
York are wholly-owned subsidiaries of Merrill Lynch & Co., Inc., as is the
Company's investment adviser, Merrill Lynch Asset Management, L.P. (the
'Investment Adviser'). The investment objectives of the Funds, each of whose
name is preceded by 'Merrill Lynch', are as follows:
DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the
highest possible current income consistent with the foregoing objectives by
investing in short-term domestic money market securities. Shares of this
Fund are sold only to MLLIC and ML of New York.
RESERVE ASSETS FUND. Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing objectives by
investing in short-term money market securities.
PRIME BOND FUND. As high a level of current income as is consistent
with prudent investment management, and capital appreciation to the extent
consistent with the foregoing objective, by investing primarily in long-term
corporate bonds rated A or better by either Moody's Investors Service, Inc.
or Standard & Poor's Corporation.
HIGH CURRENT INCOME FUND. As high a level of current income as is
consistent with prudent investment management, and capital appreciation to
the extent consistent with the foregoing objective, by investing principally
in fixed-income securities which are rated in the lower rating categories of
the established rating services or in unrated securities of comparable
quality.
(continued on next page)
THE RESERVE ASSETS FUND AND THE DOMESTIC MONEY MARKET FUND ATTEMPT TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO DO SO. AN INVESTMENT IN THE RESERVE ASSETS
FUND OR THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND, WORLD INCOME FOCUS FUND AND
DEVELOPING CAPITAL MARKETS FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS
(COMMONLY KNOWN AS 'JUNK BONDS'), WHICH INVOLVE SPECIAL RISKS. SEE 'INVESTMENT
OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY
THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 29, 1994, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET
FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(continuation of cover page)
QUALITY EQUITY FUND. Highest total investment return consistent with
prudent risk through a fully managed investment policy utilizing equity
securities, primarily common stocks of large-capitalization companies, as
well as investment grade debt and convertible securities.
EQUITY GROWTH FUND. Long-term capital growth by investing primarily in
common shares of small companies and emerging growth companies regardless of
size.
FLEXIBLE STRATEGY FUND. High total investment return consistent with
prudent risk through a flexible investment policy using equity securities,
intermediate and long-term debt obligations and money market securities of
domestic and foreign issuers. While the Fund will generally emphasize
investment in common stocks of larger-capitalization issuers and in
investment grade debt obligations, the Fund may from time to time invest in
small company and emerging growth company stocks when consistent with the
Fund's objective.
NATURAL RESOURCES FOCUS FUND. Long-term growth of capital and
protection of the purchasing power of shareholders' capital by investing
primarily in equity securities of domestic and foreign companies with
substantial natural resource assets.
AMERICAN BALANCED FUND. A level of current income and a degree of
stability of principal not normally available from an investment solely in
equity securities and the opportunity for capital appreciation greater than
is normally available from an investment solely in debt securities by
investing in a balanced portfolio of fixed income and equity securities.
GLOBAL STRATEGY FOCUS FUND. High total investment return by investing
primarily in a portfolio of equity and fixed income securities of U.S. and
foreign issuers. Shares of this Fund are sold only to MLLIC and ML of New
York.
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income
by investing in securities, primarily equities that management of the Fund
believes are undervalued and therefore represent basic investment value.
Shares of this Fund are sold only to MLLIC and ML of New York.
WORLD INCOME FOCUS FUND. High current income by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units. The Fund may invest in United States
and foreign government and corporate fixed income securities, including high
yield, high risk, lower rated and unrated securities. Shares of this Fund
are sold only to MLLIC and ML of New York.
GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. Shares of this Fund are sold
only to MLLIC and ML of New York.
INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation through
investment in securities, principally equities of issuers in countries other
than the United States. Shares of this Fund are sold only to MLLIC and ML of
New York.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation
by investing in securities, principally equities, of issuers in countries
having smaller capital markets. Shares of this Fund are sold only to MLLIC
and ML of New York.
INTERNATIONAL BOND FUND. High total investment return by investing in a
non-U.S. international portfolio of debt instruments denominated in various
currencies and multi-national currency units. Shares of this Fund are sold
only to MLLIC and ML of New York.
INTERMEDIATE GOVERNMENT BOND FUND. Highest possible current income
consistent with the protection of capital afforded by investing in
intermediate-term debt securities issued or guaranteed by the United States
Government, its agencies or instrumentalities. Shares of this Fund are sold
only to MLLIC and ML of New York.
There can be no assurance that the objectives of any Fund will be realized.
See 'Investment Objectives and Policies of the Funds,' page 17.
2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Finanical Highlights............................................................................. 4
The Insurance Companies.......................................................................... 16
Reserve Assets Fund and Domestic Money Market Fund Yield Information............................. 16
Investment Objectives and Policies of the Funds.................................................. 17
Directors........................................................................................ 48
Investment Adviser............................................................................... 50
Portfolio Transactions and Brokerage............................................................. 53
Purchase of Shares............................................................................... 53
Redemption of Shares............................................................................. 54
Dividends, Distributions and Taxes............................................................... 54
Performance Data................................................................................. 55
Additional Information........................................................................... 56
Appendix A....................................................................................... A-1
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Company's Funds, other than the Developing Capital
Markets Focus, International Bond and Intermediate Government Bond Funds, none
of which had commenced operations on December 31, 1993. The table has been
audited by Deloitte & Touche, independent auditors, in connection with their
annual audits of the Company's financial statements. Financial statements for
the year ended December 31, 1993 and the independent auditors' report thereon
appear in the Statement of Additional Information. The information in the
following table should be read in conjunction with the financial statements.
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
----------------------------------------------------------------
The following per share data and ratios have been
derived from FOR THE YEAR ENDED DECEMBER 31,
information provided in the financial statements. ----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 12.85 $ 12.82 $ 11.26 $ 11.74 $ 10.41
-------- ------- ------- ------- -------
Investment income--net.................................. .32 .31 .47 .47 .44
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net..................... 1.37 .37 1.76 (.35) 1.40
-------- ------- ------- ------- -------
Total from investment operations........................ 1.69 .68 2.23 .12 1.84
-------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net............................... (.34) (.37) (.49) (.46) (.50)
Realized gain on investments--net.................... (.12) (.28) (.18) (.14) (.01)
-------- ------- ------- ------- -------
Total dividends and distributions....................... (.46) (.65) (.67) (.60) (.51)
-------- ------- ------- ------- -------
Net asset value, end of period.......................... $ 14.08 $ 12.85 $ 12.82 $ 11.26 $ 11.74
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... 13.49% 5.72% 20.65% 1.22% 18.11%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................... .70% .97% 1.20% 1.25% 1.25%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Expenses................................................ .70% .97% 1.20% 1.50% 2.29%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Investment income--net.................................. 3.20% 3.71% 4.16% 4.71% 4.71%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $115,420 $24,918 $ 7,937 $ 5,675 $ 3,854
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Portfolio turnover...................................... 12.55% 36.34% 50.82% 23.52% 37.60%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
<CAPTION>
AMERICAN
BALANCED
FUND
--------------
FOR THE
PERIOD
The following per share data and ratios have been JUNE 1,
derived from 1988+ TO
information provided in the financial statements. DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1988
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 10.00
--------
Investment income--net.................................. .29
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net..................... .12
--------
Total from investment operations........................ .41
--------
Less dividends and distributions:
Investment income--net............................... --
Realized gain on investments--net.................... --
--------
Total dividends and distributions....................... --
--------
Net asset value, end of period.......................... $ 10.41
--------
--------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... 4.10%++
--------
--------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................... 1.25%*
--------
--------
Expenses................................................ 1.25%*
--------
--------
Investment income--net.................................. 5.13%
--------
--------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $ 2,276
--------
--------
Portfolio turnover...................................... 2.04%
--------
--------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Fund commenced operations on June 1, 1988.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC MONEY
BASIC VALUE MARKET FUND
FOCUS FUND -----------------
-----------------
The following per share data and ratios have been derived from FOR THE PERIOD FOR THE YEAR
information provided in the financial statements. JULY 1, 1993+ TO ENDED
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31,1993 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 10.00 $ 1.00
------- ---------
Investment income--net................................................ .04 .0302
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net........................................... .91 .0005
------- ---------
Total from investment operations...................................... .95 .0307
------- ---------
Less dividends and distributions:
Investment income--net............................................. -- (.0302)
Realized gain on investments--net.................................. -- (.0005)
------- ---------
Total dividends and distributions..................................... -- (.0307)
------- ---------
Net asset value, end of period........................................ $ 10.95 $ 1.00
------- ---------
------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................... 9.50%++ 3.10%
------- ---------
------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................ .86%* .36%
------- ---------
------- ---------
Expenses.............................................................. .86%* .63%
------- ---------
------- ---------
Investment income--net................................................ 1.69%* --%
------- ---------
------- ---------
Investment income--net, and realized gain (loss) on
investments--net..................................................... -- 3.03%
------- ---------
------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................. $47,207 $ 170,531
------- ---------
------- ---------
Portfolio turnover.................................................... 30.86% --%
------- ---------
------- ---------
<CAPTION>
DOMESTIC MONEY
MARKET FUND
-----------------
FOR THE PERIOD
The following per share data and ratios have been derived from FEBRUARY 20,
information provided in the financial statements. 1992+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1992
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 1.00
-------
Investment income--net................................................ .0302
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net........................................... .0013
-------
Total from investment operations...................................... .0315
-------
Less dividends and distributions:
Investment income--net............................................. (.0302)
Realized gain on investments--net.................................. (.0010)
-------
Total dividends and distributions..................................... (.0312)
-------
Net asset value, end of period........................................ $ 1.00
-------
-------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................... 3.16%++
-------
-------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................ .32%*
-------
-------
Expenses.............................................................. .88%*
-------
-------
Investment income--net................................................ --%
-------
-------
Investment income--net, and realized gain (loss) on
investments--net..................................................... 3.48%*
-------
-------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................. $41,128
-------
-------
Portfolio turnover.................................................... --%
-------
-------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Basic Value Focus Fund commenced operations on July 1, 1993 and the
Domestic Money Market Fund commenced operations on February 20, 1992.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share data and EQUITY GROWTH FUND
ratios have been derived from ------------------------------------------------------------------------------------------
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET ------------------------------------------------------------------------------------------
VALUE: 1993+ 1992+ 1991 1990 1989 1988 1987 1986
------- --------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47 $ 18.42 $ 15.56
------- --------- ------- ------- ------- ------- ------- -------
Investment income--net............... (.01) .01 .09 .05 (.07) (.10) (.09) .04
Realized and unrealized gain (loss)
on investments--net................. 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01) 2.86
------- --------- ------- ------- ------- ------- ------- -------
Total from investment operations..... 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10) 2.90
------- --------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net............ -- (.07) (.02) -- -- -- (.03) (.04)
Realized gain on
investments--net................ -- -- -- -- -- (.22) (2.82) --
------- --------- ------- ------- ------- ------- ------- -------
Total dividends and distributions.... -- (.07) (.02) -- -- (.22) (2.85) (.04)
------- --------- ------- ------- ------- ------- ------- -------
Net asset value, end of period....... $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47 $ 18.42
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 17.78% (0.53)% 50.10% (12.55)% 16.60% 4.25% (22.29)% 18.68%
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... .96% 1.18% 1.25% 1.25% 1.25% 1.25% 1.24% 1.25%
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
Expenses............................. .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24% 1.44%
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
Investment income (loss)--net........ (.05)% .04% .51% .14% (.68)% (.56)% (.60)% .24%
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $98,976 $ 23,167 $11,318 $ 6,851 $ 6,811 $ 5,521 $ 6,707 $ 4,955
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
Portfolio turnover................... 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91% 80.52%
------- --------- ------- ------- ------- ------- ------- -------
------- --------- ------- ------- ------- ------- ------- -------
<CAPTION>
EQUITY GROWTH FUND
The following per share data and -------------------
ratios have been derived from FOR THE
information provided in the YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------
VALUE: 1985 1984
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 11.85 $ 14.97
------- -------
Investment income--net............... .05 .10
Realized and unrealized gain (loss)
on investments--net................. 3.73 (2.44)
------- -------
Total from investment operations..... 3.78 (2.34)
------- -------
Less dividends and distributions:
Investment income--net............ (.07) (.13)
Realized gain on
investments--net................ -- (.65)
------- -------
Total dividends and distributions.... (.07) (.78)
------- -------
Net asset value, end of period....... $ 15.56 $ 11.85
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 32.01% (16.44)%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... 1.08% .75%
------- -------
------- -------
Expenses............................. 1.48% 1.56%
------- -------
------- -------
Investment income (loss)--net........ .34% .73%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $ 2,662 $ 2,743
------- -------
------- -------
Portfolio turnover................... 66.55% 46.28%
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude the effects of sales loads.
+ Based on average number of shares outstanding during the year.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
-----------------------------------------------------------------------------------
The following per share data and
ratios have been derived from
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET -----------------------------------------------------------------------------------
ASSET VALUE: 1993 1992 1991 1990 1989 1988
--------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 $ 9.97
--------- -------- -------- -------- -------- -------
Investment income--net.......... .28 .33 .47 .65 .48 .52
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net.............. 1.94 .25 2.52 (.08) 1.67 .60
--------- -------- -------- -------- -------- -------
Total from investment
operations..................... 2.22 .58 2.99 .57 2.15 1.12
--------- -------- -------- -------- -------- -------
Less dividends and
distributions:
Investment income--net....... (.15) (.54) (.66) (.46) (.55) (.25)
Realized gain on
investments--net........... (.03) (.68) (.09) -- -- --
--------- -------- -------- -------- -------- -------
Total dividends and
distributions.................. (.18) (1.22) (.75) (.46) (.55) (.25)
--------- -------- -------- -------- -------- -------
Net asset value, end of
period......................... $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... 15.80% 4.25% 24.98% 4.81% 20.29% 11.26%
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement.................. .80% .90% .96% 1.08% 1.19% 1.09%
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
Expenses........................ .80% .90% .96% 1.08% 1.19% 1.09%
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
Investment income--net.......... 2.26% 2.62% 3.51% 5.19% 3.94% 4.37%
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $ 194,777 $ 82,549 $ 55,221 $ 47,428 $ 47,837 $46,662
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
Portfolio turnover.............. 56.42% 55.25% 67.13% 52.95% 83.31% 80.07%
--------- -------- -------- -------- -------- -------
--------- -------- -------- -------- -------- -------
<CAPTION>
FLEXIBLE STRATEGY FUND
----------------------------
The following per share data FOR THE FOR THE
and ratios have been derived YEAR PERIOD
from information provided in ENDED MAY 1,
the financial statements. DECEM- 1986+ TO
INCREASE (DECREASE) IN NET BER 31, DEC. 31,
ASSET VALUE: 1987 1986
------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 10.22 $ 10.00
------- --------
Investment income--net.......... .24 .11
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net.............. .03 .11
------- --------
Total from investment
operations..................... .27 .22
------- --------
Less dividends and
distributions:
Investment income--net....... (.34) --
Realized gain on
investments--net........... (.18) --
------- --------
Total dividends and
distributions.................. (.52) --
------- --------
Net asset value, end of
period......................... $ 9.97 $ 10.22
------- --------
------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... 2.43% 2.20%++
------- --------
------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement.................. 1.07% 1.25%*
------- --------
------- --------
Expenses........................ 1.07% 1.25%*
------- --------
------- --------
Investment income--net.......... 2.84% 3.65%*
------- --------
------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $61,305 $ 20,640
------- --------
------- --------
Portfolio turnover.............. 74.09% 48.88%
------- --------
------- --------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Fund commenced operations on May 1, 1986.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL
GLOBAL STRATEGY UTILITY
FOCUS FUND FOCUS FUND
--------------------------- ------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR FEBRUARY 28, JULY 1,
The following per share data and ratios have been derived from information provided ENDED 1992+ TO 1993+ TO
in the financial statements. DECEMBER 31, DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................. $ 10.22 $ 10.00 $ 10.00
---------- -------- ----------
Investment income--net................................................................ .07 .13 .04
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net.................................................................... 1.96 .13 .64
---------- -------- ----------
Total from investment operations...................................................... 2.03 .26 .68
---------- -------- ----------
Less dividends and distributions:
Investment income--net............................................................. (.08) (.04) (.02)
Realized gain on investments--net.................................................. -- -- --
---------- -------- ----------
Total dividends and distributions..................................................... (.08) (.04) (.02)
---------- -------- ----------
Net asset value, end of period........................................................ $ 12.17 $ 10.22 $ 10.66
---------- -------- ----------
---------- -------- ----------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................................... 21.03% 2.62%++ 6.85%++
---------- -------- ----------
---------- -------- ----------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................................ .88% 1.25%* .89%*
---------- -------- ----------
---------- -------- ----------
Expenses.............................................................................. .88% 1.35%* .89%*
---------- -------- ----------
---------- -------- ----------
Investment income--net................................................................ 2.41% 2.66%* 2.84%*
---------- -------- ----------
---------- -------- ----------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................................. $ 269,627 $ 15,527 $ 104,517
---------- -------- ----------
---------- -------- ----------
Portfolio turnover.................................................................... 17.07% 14.47% 1.72%
---------- -------- ----------
---------- -------- ----------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Global Strategy Focus Fund commenced operations on February 28, 1992 and
the Global Utility Focus Fund commenced operations on July 1, 1993.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share data and HIGH CURRENT INCOME FUND
ratios have been derived from -------------------------------------------------------------------------------------------
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------------------------------------------------------------------------------
VALUE: 1993 1992 1991 1990 1989 1988 1987 1986
-------- --------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 11.13 $ 10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 $ 11.42 $ 11.39
-------- --------- ------- ------- ------- ------- ------- -------
Investment income--net........... .95 1.07 1.19 1.40 1.29 1.21 1.23 1.25
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net.............. .95 .90 2.10 (2.08) (.64) .20 (.79) .03
-------- --------- ------- ------- ------- ------- ------- -------
Total from investment
operations..................... 1.90 1.97 3.29 (.68) .65 1.41 .44 1.28
-------- --------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net........... (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) (1.25)
Realized gain on
investments--net............... -- -- -- -- -- -- (.08) --
-------- --------- ------- ------- ------- ------- ------- -------
Total dividends and distributions... (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) (1.25)
-------- --------- ------- ------- ------- ------- ------- -------
Net asset value, end of period...... $ 12.06 $ 11.13 $ 10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 $ 11.42
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82% 11.74%
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% 1.12%
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
Expenses......................... .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% 1.12%
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
Investment income--net........... 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% 10.65%
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $163,428 $ 26,343 $ 9,649 $ 8,106 $12,942 $13,960 $13,075 $12,577
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
Portfolio turnover............... 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% 22.44%
-------- --------- ------- ------- ------- ------- ------- -------
-------- --------- ------- ------- ------- ------- ------- -------
<CAPTION>
HIGH CURRENT
The following per share data and INCOME FUND
ratios have been derived from -------------------
information provided in the FOR THE YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------
VALUE: 1985 1984
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 10.33 $ 11.17
------- -------
Investment income--net........... 1.32 1.38
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net.............. 1.06 (.58)
------- -------
Total from investment
operations..................... 2.38 .80
------- -------
Less dividends and distributions:
Investment income--net........... (1.32) (1.38)
Realized gain on
investments--net............... -- (.26)
------- -------
Total dividends and distributions... (1.32) (1.64)
------- -------
Net asset value, end of period...... $ 11.39 $ 10.33
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... 24.24% 7.97%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... 1.11% .75%
------- -------
------- -------
Expenses......................... 1.54% 1.60%
------- -------
------- -------
Investment income--net........... 11.87% 13.20%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $ 4,695 $ 2,786
------- -------
------- -------
Portfolio turnover............... 33.67% 43.59%
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude the effects of sales loads.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FOCUS
FUND
-------------
FOR THE
PERIOD
JULY 1,
The following per share data and ratios have been derived from information provided in the 1993+ TO
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1993
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................................................................... $ 10.00
--------
Investment income--net........................................................................................ .01
Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................... 1.02
--------
Total from investment operations.............................................................................. 1.03
--------
Less dividends and distributions:
Investment income--net..................................................................................... --
Realized gain on investments--net.......................................................................... --
--------
Total dividends and distributions............................................................................. --
--------
Net asset value, end of period................................................................................ $ 11.03
--------
--------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................................................................ 10.30%++
--------
--------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................................................................ 1.14%*
--------
--------
Expenses...................................................................................................... 1.14%*
--------
--------
Investment income--net........................................................................................ 0.30%*
--------
--------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................................................................... $ 76,906
--------
--------
Portfolio turnover............................................................................................ 17.39%
--------
--------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Fund commenced operations on July 1, 1993.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
------------------------------------------------------------------
The following per share data and ratios have been
derived from information provided in the financial FOR THE YEAR ENDED DECEMBER 31,
statements. ------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 9.84 $ 10.06 $ 10.17 $ 11.09 $ 9.58
------- -------- -------- -------- -------
Investment income--net................................ .11 .18 .25 .22 .24
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net................... .92 (.05) (.11) (.90) 1.49
------- -------- -------- -------- -------
Total from investment operations...................... 1.03 .13 .14 (.68) 1.73
------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net............................. (.05) (.29) (.25) (.24) (.22)
Realized gain on investments--net.................. -- (.06) -- -- --
------- -------- -------- -------- -------
Total dividends and distributions..................... (.05) (.35) (.25) (.24) (.22)
------- -------- -------- -------- -------
Net asset value, end of period........................ $ 10.82 $ 9.84 $ 10.06 $ 10.17 $ 11.09
------- -------- -------- -------- -------
------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................... 10.47% 1.36% 1.36% (6.21)% 18.23%
------- -------- -------- -------- -------
------- -------- -------- -------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................ 1.13% 1.25% 1.25% 1.25% 1.25%
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Expenses.............................................. 1.13% 1.27% 1.30% 1.38% 1.74%
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Investment income--net................................ 1.34% 2.00% 2.31% 2.26% 2.26%
------- -------- -------- -------- -------
------- -------- -------- -------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $14,778 $ 4,144 $ 3,084 $ 3,247 $ 2,704
------- -------- -------- -------- -------
------- -------- -------- -------- -------
Portfolio turnover.................................... 58.44% 22.88% 31.38% 27.61% 93.97%
------- -------- -------- -------- -------
------- -------- -------- -------- -------
<CAPTION>
NATURAL
RESOURCES
FOCUS FUND
--------------
FOR THE
PERIOD
The following per share data and ratios have been JUNE 1,
derived from information provided in the financial 1988+ TO
statements. DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1988
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 10.00
--------
Investment income--net................................ .12
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net................... (.54)
--------
Total from investment operations...................... (.42)
--------
Less dividends and distributions:
Investment income--net............................. --
Realized gain on investments--net.................. --
--------
Total dividends and distributions..................... --
--------
Net asset value, end of period........................ $ 9.58
--------
--------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................... (4.20)%++
--------
--------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................ 1.24%*
--------
--------
Expenses.............................................. 1.24%*
--------
--------
Investment income--net................................ 2.59%*
--------
--------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $ 2,371
--------
--------
Portfolio turnover.................................... 16.31%
--------
--------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Fund commenced operations on June 1, 1988.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share data and PRIME BOND FUND
ratios have been derived from --------------------------------------------------------------------------------------------
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET --------------------------------------------------------------------------------------------
VALUE: 1993 1992 1991 1990 1989 1988 1987 1986
-------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04 $ 11.50
-------- ------- ------- ------- ------- ------- ------- -------
Investment income--net.......... .70 .79 .90 .88 .90 .87 .87 .99
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. .71 .04 .84 (.12) .48 (.15) (1.00) .54
-------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.................... 1.41 .83 1.74 .76 1.38 .72 (.13) 1.53
-------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net.......... (.70) (.81) (.90) (.87) (.90) (.80) (.87) (.99)
Realized gain on
investments--net................ (.11) -- -- -- -- -- (.15) --
-------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions..................... (.81) (.81) (.90) (.87) (.90) (.80) (1.02) (.99)
-------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period..... $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 12.02% 7.27% 16.41% 7.13% 13.29% 6.75% (1.10)% 13.75%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. .63% .78% .78% 1.06% 1.16% 1.07% 1.07% 1.12%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Expenses........................ .63% .78% .78% 1.06% 1.16% 1.07% 1.07% 1.12%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Investment income--net.......... 5.86% 6.76% 7.94% 8.01% 8.12% 8.05% 7.66% 7.98%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $314,091 $84,810 $39,743 $34,655 $29,593 $22,499 $17,385 $20,869
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Portfolio turnover.............. 115.26% 82.74% 152.18% 155.17% 144.52% 225.81% 129.46% 103.63%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data and PRIME BOND FUND
ratios have been derived from -------------------
information provided in the FOR THE YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------
VALUE: 1985 1984
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 10.44 $ 10.24
------- -------
Investment income--net.......... 1.13 1.23
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. 1.06 .24
------- -------
Total from investment
operations.................... 2.19 1.47
------- -------
Less dividends and distributions:
Investment income--net.......... (1.13) (1.23)
Realized gain on
investments--net................ -- (.04)
------- -------
Total dividends and
distributions..................... (1.13) (1.27)
------- -------
Net asset value, end of period..... $ 11.50 $ 10.44
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 22.15% 15.82%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 1.11% .75%
------- -------
------- -------
Expenses........................ 1.43% 1.43%
------- -------
------- -------
Investment income--net.......... 10.26% 12.44%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $ 7,631 $ 4,755
------- -------
------- -------
Portfolio turnover.............. 16.58% 39.42%
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude the effects of sales loads.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share data and QUALITY EQUITY FUND
ratios have been derived from --------------------------------------------------------------------------------------------
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------------------------------------------------------------------------------
VALUE: 1993 1992 1991 1990 1989 1988 1987 1986
-------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15 $ 17.14
-------- ------- ------- ------- ------- ------- ------- -------
Investment income--net.............. .24 .34 .43 .47 .50 .43 .42 .43
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net.................. 3.46 .32 5.75 (.38) 4.96 1.73 (.35) 3.01
-------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations.... 3.70 .66 6.18 .09 5.46 2.16 .07 3.44
-------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net........... (.12) (.58) (.50) (.41) (.52) (.22) (.60) (.43)
Realized gain on
investments--net................. (.04) (.95) (1.05) (.84) -- -- (3.62) --
-------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions... (.16) (1.53) (1.55) (1.25) (.52) (.22) (4.22) (.43)
-------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period...... $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.............................. 14.57% 2.69% 30.18% 0.66% 30.77% 13.54% (0.70)% 20.38%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... .62% .74% .79% .94% 1.05% 1.02% .93% 1.09%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Expenses............................ .62% .74% .79% .94% 1.05% 1.02% .93% 1.09%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Investment income--net.............. 1.07% 1.54% 1.87% 2.36% 2.58% 2.25% 2.31% 2.41%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)......................... $309,420 $87,977 $55,005 $39,470 $31,467 $20,055 $23,986 $16,704
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Portfolio turnover.................. 88.25% 62.54% 55.83% 69.05% 44.23% 32.53% 65.58% 50.96%
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data and QUALITY EQUITY FUND
ratios have been derived from -------------------
information provided in the FOR THE YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------
VALUE: 1985 1984
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 13.94 $ 13.55
------- -------
Investment income--net.............. .45 .62
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net.................. 3.84 .45
------- -------
Total from investment operations.... 4.29 1.07
------- -------
Less dividends and distributions:
Investment income--net........... (.60) (.50)
Realized gain on
investments--net................. (.49) (.18)
------- -------
Total dividends and distributions... (1.09) (.68)
------- -------
Net asset value, end of period...... $ 17.14 $ 13.94
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.............................. 32.66% 8.54%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... 1.08% .75%
------- -------
------- -------
Expenses............................ 1.22% 1.27%
------- -------
------- -------
Investment income--net.............. 3.20% 4.55%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)......................... $ 9,973 $ 5,963
------- -------
------- -------
Portfolio turnover.................. 34.21% 83.91%
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude the effects of sales loads.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share data and RESERVE ASSETS FUND
ratios have been derived from -------------------------------------------------------------------------------------------
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -----------------------------------------------------------------------------------------
VALUE: 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net............... .0268 .0320 .0546 .0730 .0822 .0661 .0574 .0560
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net................... .0005 .0007 .0014 .0019 .0012 .0002 .0005 .0027
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations..... .0273 .0327 .0560 .0749 .0834 .0663 .0579 .0587
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net............ (.0268) (.0320) (.0546) (.0730) (.0822) (.0661) (.0574) (.0560)
Realized gain on
investments--net.................. (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+ (.0005)+ (.0027)+
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions.... (.0273) (.0325) (.0560) (.0749) (.0834) (.0663) (.0579) (.0587)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 2.77% 3.29% 5.68% 7.65% 8.62% 6.85% 5.96% 6.05%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... .70% .79% .79% .97% 1.03% 1.01% 1.04% 1.18%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Expenses............................. .70% .79% .79% .97% 1.03% 1.01% 1.04% 1.18%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net, and realized
gain (loss) on investments--net...... 2.73% 3.36% 5.64%+ 7.46%+ 8.34%+ 6.65%+ 5.86%+ 5.89%+
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $30,168 $26,767 $34,362 $35,871 $29,311 $24,951 $23,068 $17,214
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data and RESERVE ASSETS FUND
ratios have been derived from -------------------
information provided in the FOR THE YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET -------------------
VALUE: 1985 1984
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 1.00 $ 1.00
------- -------
Investment income--net............... .0712 .0967
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net................... .0016 .0022
------- -------
Total from investment operations..... .0728 .0989
------- -------
Less dividends and distributions:
Investment income--net............ (.0712) (.0967)
Realized gain on
investments--net.................. (.0016)+ (.0022)+
------- -------
Total dividends and distributions.... (.0728) (.0989)
------- -------
Net asset value, end of period....... $ 1.00 $ 1.00
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 7.55% 10.34%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... 1.07% .75%
------- -------
------- -------
Expenses............................. 1.26% 1.31%
------- -------
------- -------
Investment income--net, and realized
gain (loss) on investments--net...... 7.24%+ 9.89%+
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $15,955 $17,415
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude the effects of sales loads.
+ Includes unrealized gain (loss).
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
WORLD INCOME
FOCUS FUND
------------
FOR THE
PERIOD
JULY 1,
The following per share data and ratios have been derived from information provided in the financial 1993+ TO
statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1993
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................................................................... $ 10.00
--------
Investment income--net........................................................................................ .25
Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................... .33
--------
Total from investment operations.............................................................................. .58
--------
Less dividends and distributions
Investment income--net..................................................................................... (.20)
Realized gain on investments--net.......................................................................... --
--------
Total dividends and distributions............................................................................. (.20)
--------
Net asset value, end of period................................................................................ $ 10.38
--------
--------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................................................................ 5.90%++
--------
--------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................................................................ .94%*
--------
--------
Expenses...................................................................................................... .94%*
--------
--------
Investment income--net........................................................................................ 6.20%*
--------
--------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................................................................... $ 50,737
--------
--------
Portfolio turnover............................................................................................ 54.80%
--------
--------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
15
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under Contracts issued by Family
Life, formerly a wholly owned subsidiary of Merrill Lynch & Co., Inc. On June
12, 1991, Family Life was sold to a non-affiliated corporation and most
(although not all) of the Contracts were transferred to MLLIC and ML of New
York, two wholly-owned subsidiaries of Merrill Lynch & Co., Inc. The shares of
the Funds in existence at the time of that sale (Reserve Assets Fund, Prime Bond
Fund, High Current Income Fund, Quality Equity Fund, Equity Growth Fund,
Flexible Strategy Fund, Natural Resources Focus Fund and American Balanced Fund,
collectively, the 'Existing Funds') are sold to MLLIC, ML of New York and Family
Life (collectively, the 'Insurance Companies') for certain separate accounts
(the 'Separate Accounts') which serve as funding vehicles for, among other
things, Contracts originally sold by Family Life, Contracts transferred to MLLIC
and ML of New York and Contracts sold by MLLIC and ML of New York after the time
of the transfer. The shares of the Domestic Money Market Fund, Global Strategy
Focus Fund, the Basic Value Focus Fund, World Income Focus Fund, Global Utility
Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus
Fund, International Bond Fund and Intermediate Government Bond Fund
(collectively, the 'New Funds') are sold only to (i) MLLIC and ML of New York
Separate Accounts to fund certain Contracts sold after the time of the transfer
to MLLIC and ML of New York, respectively, and (ii) certain other separate
accounts of MLLIC and ML of New York to fund certain variable life insurance
contracts sold by MLLIC and ML of New York, respectively.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only in
the Contract. The Contract is described in the Prospectus for each Contract.
That Prospectus describes the relationship between increases or decreases in the
net asset value of shares of a Fund, and any distributions on such shares, and
the benefits provided under a Contract. The Prospectus for the Contracts also
describes various fees payable to the Insurance Companies and charges to the
Separate Accounts made by the Insurance Companies with respect to the Contracts.
Since shares of the Funds will be sold only to the Insurance Companies for the
Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus
refer to the Insurance Companies. MLLIC and ML of New York are wholly-owned
subsidiaries of Merrill Lynch & Co., Inc. ('Merrill Lynch & Co.'), as is the
Investment Adviser.
RESERVE ASSETS FUND AND DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Reserve Assets Fund and the
Domestic Money Market Fund for the seven-day period ended December 31, 1993,
computed to include and exclude realized and unrealized gains and losses, and
information as to the compounded annualized yield, excluding gains and losses,
for the same periods. The yield quotations may be of limited use for comparative
purposes because they do not reflect charges imposed at the Separate Account
level which, if included, would decrease the yield.
<TABLE>
<CAPTION>
RESERVE
ASSETS DOMESTIC MONEY
FUND FUND MARKET
--------- ---------------
<S> <C> <C>
Annualized Yield:
Including gains and losses................................................. 2.87% 2.94%
Excluding gains and losses................................................. 2.85% 2.93%
Compounded Annualized Yield..................................................... 2.89% 2.97%
Average maturity of portfolio at end of period.................................. 72 days 73 days
</TABLE>
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective which it
pursues through separate investment policies as described below. The differences
in objectives and policies among the Funds can be expected to affect the return
of each Fund and the degree of market and financial risk to which each Fund is
subject. Each Fund is classified as 'diversified,' as defined in the Investment
Company Act of 1940, except for the Natural Resources Focus Fund, the Global
Strategy Focus Fund, the World Income Focus Fund, Developing Capital Markets
Focus Fund and International Bond Fund, each of which is classified as
'non-diversified.' The investment objectives and classification of each Fund may
not be changed without the approval of the holders of a majority of the
outstanding shares of each Fund affected. The investment objectives and policies
of each Fund are discussed below.
Fixed Income Security Ratings. No Fund other than the High Current Income
Fund, the World Income Focus Fund and Developing Capital Markets Focus Fund
invests in fixed-income securities which are rated below investment grade (i.e.,
securities rated Ba or below by Moody's Investors Service, Inc. ('Moody's') or
BB or below by Standard & Poor's Corporation ('Standard & Poor's')). However,
securities purchased by a Fund may subsequently be downgraded. Such securities
may continue to be held and will be sold only if, in the judgment of the
Investment Adviser, it is advantageous to do so. Securities in the lowest
category of investment grade debt securities may have speculative
characteristics which may lead to weakened capacity to pay interest and
principal during periods of adverse economic conditions. See Appendix A for a
fuller description of corporate bond ratings.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in
short-term domestic money market securities. The Fund will invest in short-term
U.S. Government securities, U.S. Government agency securities, domestic
depository institution money instruments (including certificates of deposit,
bankers' acceptances, time deposits and bank notes) short-term debt securities
(such as commercial paper), variable amount master demand notes and repurchase
and reverse repurchase agreements of U.S. issuers. As a matter of fundamental
policy, which may be changed only with the approval of a majority of the
Domestic Money Market Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, the Fund may not purchase securities of foreign
issuers (including Eurodollar or Yankeedollar bank obligations). U.S. Government
securities may be purchased on a forward commitment basis. The types of money
market securities in which the Domestic Money Market Fund may invest are
described more fully in Appendix A to this Prospectus. The Domestic Money Market
Fund will be subject to portfolio maturity, quality and diversification
restrictions discussed below under 'Money Market Fund Portfolio Restrictions.'
RESERVE ASSETS FUND
The investment objectives of the Reserve Assets Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in
short-term money market securities. The Fund will invest in short-term U.S.
Government securities, U.S. Government agency securities, depository institution
money instruments (including certificates of deposit, bankers' acceptances, time
deposits and bank notes) short-term debt securities (such as commercial paper),
17
<PAGE>
variable amount master demand notes, securities of foreign issuers (including
Eurodollar, Yankeedollar and foreign bank obligations), repurchase and reverse
repurchase agreements. U.S. Government securities may be purchased on a forward
commitment basis. The types of money market securities in which the Reserve
Assets Fund may invest are described more fully in Appendix A to the Prospectus.
The Reserve Assets Fund will be subject to the portfolio maturity, quality and
diversification restrictions discussed below under 'Money Market Fund Portfolio
Restrictions.'
PRIME BOND FUND
The principal investment objective of the Prime Bond Fund is to provide
shareholders with as high a level of current income as is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its principal objective.
The Prime Bond Fund invests primarily in securities rated in the top three
rating categories of either Standard & Poor's (AAA, AA and A) or Moody's (Aaa,
Aa and A). Additional information regarding various bond ratings is set forth in
Appendix A to the Prospectus. The financial risk of the Fund should be minimized
by the quality of the bonds in which it will invest, but the long maturities
that typically provide the best yield will subject the Fund to possible
substantial price changes resulting from market yield fluctuations. The market
price of fixed-income securities such as those purchased by the Fund is affected
by changes in interest rates generally. As interest rates rise, the market value
of fixed-income securities will fall, adversely affecting the net asset value of
the Fund.
Fund management strategy will attempt to mitigate adverse price changes and
optimize favorable price changes through active trading that shifts the maturity
and/or quality structure of the Fund within the overall investment guidelines.
The Fund's investments will vary from time to time depending upon the judgment
of management as to prevailing conditions in the economy and the securities
markets and the prospects for interest rate changes among different categories
of fixed-income securities. The Fund anticipates that under normal circumstances
more than 90% of the assets of the Fund will be invested in fixed-income
securities, including convertible and non-convertible debt securities and
preferred stock. The Fund does not intend to invest in common stock, rights or
other equity securities. Under unusual market or economic conditions, the Fund
for defensive or other purposes may invest up to 100% of its assets in
obligations of or guaranteed by the U.S. Government or its instrumentalities or
agencies, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by an established
rating agency or other fixed-income securities deemed by the Investment Adviser
to be consistent with the objectives of the Fund, or the Fund may hold its
assets in cash.
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund, like the
Prime Bond Fund, is to obtain the highest level of current income that is
consistent with the investment policies of the Fund and with prudent investment
management. As a secondary objective, the Fund seeks capital appreciation when
consistent with its primary objective.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities which are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard & Poor's), or in unrated securities of comparable quality.
Securities rated below Baa by Moody's and below BBB by Standard & Poor's are
commonly known as 'junk bonds.'
18
<PAGE>
Additional information regarding various bond ratings is set forth in Appendix A
to the Prospectus. The market price of fixed-income securities such as those
purchased by the Fund is affected by changes in interest rates generally. As
interest rates rise, the market value of fixed-income securities will fall,
adversely affecting the net asset value of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater market
fluctuations and risks of loss of income and principal than lower-yielding,
higher-rated fixed-income securities. Such securities are generally issued by
corporations which are not as financially secure or as creditworthy as issuers
of higher-rated securities. There is, accordingly, a greater risk that the
issuers of higher-yielding securities will not be able to pay principal and
interest on such securities, especially during periods of adverse economic
conditions. Because investment in such high-yield securities entails relatively
greater risk of loss of income or principal, an investment in the High Current
Income Fund may not be appropriate as the exclusive investment to fund the
Contracts for all Contract Owners. See 'Risks of High Yield Securities' below.
Selection and supervision by the management of the Company of investments
in lower-rated fixed-income securities involves continuous analysis of
individual issuers, general business conditions and other factors which may be
too time consuming or too costly for the average investor. The furnishing of
these services does not, of course, guarantee successful results. The analysis
of issuers may include, among other things, historic and current financial
condition, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management, responsiveness
to business conditions, credit standing, and current and anticipated results or
operations. Analysis of general business conditions and other factors may
include anticipated changes in economic activity and interest rates, the
availability of new investment opportunities, and the economic outlook for
specific industries. While the Investment Adviser considers as one factor in its
credit analysis the ratings assigned by the rating services, the Investment
Adviser performs its own independent credit analysis of issuers and
consequently, the Fund may invest, without limit, in unrated securities if such
securities offer, in the opinion of the Investment Adviser, a relatively high
yield without undue risk. As a result, the High Current Income Fund's ability to
achieve its investment objective may depend to a greater extent on the
Investment Adviser's own credit analysis than the Funds which invest in
higher-rated securities. Although the High Current Income Fund will invest
primarily in lower-rated securities, it will not invest in securities rated Ca
or lower by Moody's and CC or lower by Standard & Poor's unless the Investment
Adviser believes that the financial condition of the issuer or the protection
afforded to the particular securities is stronger than would otherwise be
indicated by such low ratings. However, securities purchased by the Fund may
subsequently be downgraded. Such securities may continue to be held and will be
sold only if, in the judgment of the Investment Adviser, it is advantageous to
do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that the
risk of loss of income and principal may be substantially reduced with only a
relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending upon
the judgment of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. It is anticipated that under normal
circumstances more than 90% of the Fund's assets will be invested in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. Although it is expected that, in general, the
Fund will not invest in common stocks, rights or other equity securities, it
will acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in
19
<PAGE>
connection with an actual or proposed conversion or exchange of fixed-income
securities. In addition, under unusual market or economic conditions, the High
Current Income Fund for defensive purposes may invest up to 100% of its assets
in securities issued or guaranteed by the U.S. Government or its
instrumentalities or agencies, certificates of deposit, bankers' acceptances and
other bank obligations, commercial paper rated in the highest category by an
established rating agency, or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or may hold its
assets in cash. The yield on such securities may be lower than the yield on
lower-rated fixed-income securities.
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's rating category, of the securities held by the Fund during the
year ended December 31, 1993.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------------------------------------------------- ----------- -------------
<S> <C> <C>
AAA................................................ .09% .10%
AA................................................. .06 .06
A.................................................. .70 .79
BBB................................................ 1.06 1.18
BB................................................. 22.18 24.39
B.................................................. 50.72 55.98
CCC................................................ 2.73 3.19
CC................................................. 0.48 0.53
C.................................................. 1.18 0.32
D.................................................. 0.13 0.14
NR................................................. 12.77 13.32
-----
100.0%
</TABLE>
- ---------------
* A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
QUALITY EQUITY FUND
The Quality Equity Fund seeks to achieve the highest total investment
return, or the aggregate of income and capital value changes, consistent with
prudent risk. To do this, management will shift the emphasis among investment
alternatives for capital growth, capital stability and income as market trends
change. This 'fully managed' investment policy distinguishes the Fund from
investment companies which seek either capital growth or income. The Fund's
investment philosophy is based on management's belief that the structure of the
United States economy and its securities markets will undergo continuous change.
The flexibility of the Fund is designed to reduce overall exposure to risk by
achieving below-average volatility in a falling market and above-average
volatility in a rising market.
The Quality Equity Fund's fully managed investment approach will make use
of equity, debt and convertible securities. The majority of the Fund's equity
portfolio will be in the common stocks of large-capitalization, 'quality'
companies. For this purpose, 'large capitalization' companies are considered to
be those companies with market capitalizations in excess of 500 million dollars.
Management of the Company believes that a quality company is one which conforms
closely to the following criteria: good financial resources, strong balance
sheet, satisfactory rate of return on capital, good industry position and
superior management skills. The earnings of quality companies generally tend to
grow consistently. Whenever market or financial conditions warrant, the Fund
may, in order to reduce risk and achieve the highest total investment return,
invest in non-convertible, long-term debt securities, including 'deep discount'
corporate debt securities of investment grade
20
<PAGE>
or issues of fixed-income convertible securities which give the owner the option
of a later exchange for common stock. Management expects that over longer
periods the larger portion of the Fund's portfolio will consist of equity
securities. During defensive periods, the Fund may invest in money-market
securities to produce interest income or the Fund may hold its assets in cash.
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Company believes have special investment value and emerging growth companies
regardless of size. Companies are selected by management on the basis of their
long-term potential for expanding their size and profitability or for gaining
increased market recognition for their securities. Current income is not a
factor in the selection of securities. The Fund is intended to provide an
opportunity for Contract Owners who are not ordinarily in a position to perform
the specialized type of research or analysis of small and emerging growth
companies.
Management seeks to identify those small emerging growth companies which
can show significant and sustained increases in earnings over an extended period
of time and are in sound financial condition. Management believes that, while
these companies present above-average risks, properly selected companies of this
type also have the potential to increase their earnings at a rate substantially
in excess of the general growth of the economy. The Fund attempts to achieve its
objective by focusing on the long-range view of a company's prospects through a
fundamental analysis of its management, financial structure, product
development, marketing ability and other relevant factors. Full development of
these companies frequently takes time and, for this reason, the Fund should be
considered as a long-term investment and not as a vehicle for seeking short-term
profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalizations in the $50-$300 million range and generally are
little known to most individual investors, although some may be dominant in
their respective industries. Underlying this strategy is management's belief
that relatively small companies will continue to have the opportunity to develop
into significant business enterprises. Some such companies may be in a
relatively early stage of development; others may manufacture a new product or
perform a new service. Such companies may not be counted upon to develop into
major industrial companies, but management believes that eventual recognition of
their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Emerging growth companies. In selecting investments for the Equity Growth
Fund, management also seeks emerging growth companies that either occupy a
dominant position in an emerging industry or subindustry or have a significant
and growing market share in a large, fragmented industry. Management believes
that capable and flexible management is one of the most important criteria of
emerging growth companies and that such companies should employ sound financial
and accounting policies and also demonstrate effective research, successful
product development and marketing, efficient service and pricing flexibility.
Emphasis is given to companies with rapid historical growth rates, above-average
returns on equity and strong current balance sheets, all of which should enable
the company to finance its continued growth. Management of the Company also
analyzes and weighs relevant factors beyond the company itself, such as the
level of competition in the industry, the extent of governmental regulation, the
nature of labor conditions and other related matters.
The Equity Growth Fund emphasizes investments in companies that do most of
their business in the United States and therefore are free of the currency
exchange problems, foreign tax considerations and potential political and
economic upheavals that many multinational corporations face. Moreover, the size
and kinds of markets that
21
<PAGE>
they serve make these companies less susceptible than larger companies to
intervention from the Federal government by means of price controls, regulations
or litigation.
While the process of selection and continuous supervision by management
does not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
It should be apparent that an investment in a fund such as the Equity
Growth Fund involves greater risk than is customarily associated with more
established companies. The securities of smaller or emerging growth companies
may be subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may have
limited product lines, markets or financial resources, or they may be dependent
upon a limited management group. Because of these factors, management of the
Company believes that shares in the Equity Growth Fund are suitable for Contract
Owners who are in a financial position to assume above-average investment risk
in search of above-average long-term reward. As indicated, the Fund is designed
for Contract Owners whose investment objective is growth rather than income. It
is definitely not intended for exclusive funding of Contracts but is designed
for Contract Owners who are prepared to experience above-average fluctuations in
net asset value.
The securities in which the Equity Growth Fund invests will often be traded
only in the over-the-counter market or on a regional securities exchange and may
not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Fund or portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when in
management's judgment such disposition is not desirable or to make many small
sales over a lengthy period of time.
The investment emphasis of the Equity Growth Fund is on equities, primarily
common stock and, to a lesser extent, securities convertible into common stocks
and rights to subscribe for common stock, and the Fund will maintain at least
80% of its net assets invested in equity securities of small or emerging growth
companies except during defensive periods. The Fund reserves the right as a
defensive measure and to provide for redemptions to hold other types of
securities, including non-convertible preferred stocks and debt securities,
government and money market securities or cash, in such proportions as, in the
opinion of management, prevailing market or economic conditions warrant.
FLEXIBLE STRATEGY FUND
The investment objective of the Flexible Strategy Fund is to seek a high
total investment return consistent with prudent risk. Total investment return is
the aggregate of dividend and interest income and capital value changes. This
investment objective is a fundamental policy and may not be changed without a
vote of the majority of outstanding shares of the Fund. The Fund will seek to
achieve its objective by utilizing a flexible investment policy which permits
the Fund to vary its investment emphasis among equity securities, intermediate
and long-term debt obligations and money market securities and, to a lesser
extent, between the securities of domestic and foreign issuers. While the Fund
will generally emphasize investment in common stocks of larger-capitalization
issuers and in investment-grade debt obligations, the Fund may from time to time
invest a portion of its assets in small company and emerging growth company
stocks when consistent with the Fund's objective. The Fund may also seek to
enhance the return on its common stock portfolio by writing covered call options
listed on United States securities exchanges. The Fund's success in achieving
its investment objective depends upon management's ability to assess the effect
of economic and market trends on U.S. and foreign capital market and on
different sectors of those markets. There can be no assurance that the Fund's
investment objective will be
22
<PAGE>
achieved. As a matter of operating policy, this Fund may not invest more than
25% of its assets in the securities of foreign issuers.
Management will determine the composition of the Fund's portfolio based
upon its assessment of economic and market trends and the anticipated relative
total return available from investment in a particular type of security.
Accordingly, at any given time, the Fund may be substantially invested in common
stocks, bonds and notes or money market securities. Similarly, the portion of
the Fund's assets which are invested in foreign securities will be varied,
subject to the operating policy referred to above, in accordance with
management's judgment as to the anticipated relative performance of foreign
capital markets as compared to U.S. markets. Management will consider, among
other factors, the condition and growth potential of the various economies and
securities markets, currency and tax considerations and other pertinent
financial, social, national and political factors. The Fund's investments in
foreign securities may include American Depository Receipts and European
Depository Receipts, and the Fund may invest in non-dollar denominated
securities. For a discussion of the risks of investing in foreign securities,
see 'Other Portfolio Strategies--Foreign Securities,' below.
Because of the flexible investment policy of the Fund, portfolio turnover
may be greater resulting in increased transaction costs to the Fund.
NATURAL RESOURCES FOCUS FUND
The investment objectives of the Natural Resources Focus Fund are to
achieve long-term growth of capital and to protect the purchasing power of
shareholders' capital by investing primarily in a portfolio of equity securities
(e.g., common stocks and securities convertible into common stocks) of domestic
and foreign companies with substantial natural resource assets. This investment
objective is a fundamental policy and may not be changed without a vote of the
majority of outstanding shares of the Fund. The Fund also may invest in debt,
preferred or convertible securities, the value of which is related to the market
value of some natural resource asset ('asset-based securities'). See
'Asset-Based Securities' below. Management of the Company will seek to identify
companies or asset-based securities it believes are attractively priced relative
to the intrinsic value of the underlying natural resource assets or are
especially well positioned to benefit during particular portions of inflationary
cycles. There can be no assurance the investment objectives of the Fund will be
realized.
IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE
FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE COMPANY ANTICIPATES
SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY, SUCH AS HIGH
INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY EXCHANGE MARKETS, TO
INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE FOR, EXTRACT, PROCESS
OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO THE VALUE OF GOLD
BULLION. Such a switch in investment strategies could require the Fund to
liquidate portfolio securities and incur transaction costs. The Company has been
advised by counsel that it is uncertain under the current Federal tax law
whether the Fund may concentrate its investments in gold and gold-related
securities without adversely affecting the Federal tax status of the Contracts.
Accordingly, management of the Company has determined that the Fund will not
concentrate its investments in such securities until counsel has advised the
Company that such uncertainty has been resolved favorably.
Management attempts to achieve the investment objectives of the Fund by
seeking to identify securities of companies which, in its opinion, are
undervalued relative to the value of natural resource holdings of such companies
in light of current and anticipated economic or financial conditions. Natural
resource assets are materials derived from natural sources which have economic
value. Management will consider a company to have substantial natural resource
assets when, in its opinion, the company's holdings of the assets are of such
magnitude, when compared to the capitalization, revenues or operating profits of
the company, that changes in
23
<PAGE>
the economic value of the assets will affect the market price of the equity
securities of such company. Generally, a company has substantial natural
resource assets when at least 50% of the non-current assets, capitalization,
gross revenues or operating profits of the company in the most recent or current
fiscal year are involved in or result from directly or indirectly through
subsidiaries, exploring, mining, refining, processing, fabricating, dealing in
or owning natural resource assets. Examples of natural resource assets include
precious metals (e.g., gold, silver and platinum), ferrous and nonferrous metals
(e.g., iron, steel, aluminum and copper), strategic metals (e.g., uranium and
titanium), hydrocarbons (e.g., coal, oil and natural gas), timber land,
undeveloped real property and agricultural commodities. The Fund presently does
not intend to invest directly in natural resource assets or contracts related
thereto.
Management of the Company believes that, based upon past performance, the
securities of specific companies that hold different types of substantial
natural resource assets may move relatively independently of one another during
different stages of inflationary cycles due to different degrees of demand for,
or market values of, their respective natural resource holdings during
particular portions of such inflationary cycles. The Fund's fully-managed
investment approach enables it to switch its emphasis among various industry
groups depending upon management's outlook with respect to prevailing trends and
developments.
The Natural Resources Focus Fund may seek to hedge its portfolio against
adverse market fluctuations by writing covered call options or purchasing put
options on portfolio securities, writing call options or purchasing put options
on stock indices, or by purchasing or selling stock index futures contracts and
options thereon. The Fund may also seek to hedge its portfolio of non-dollar
denominated securities and other assets or liabilities against adverse currency
fluctuations by writing call options and purchasing put options on currency, by
buying or selling futures contracts on currency and options thereon and by
engaging in forward foreign exchange transactions. See 'Transactions in Options,
Futures and Currency.'
The Fund at all times, except during defensive periods, will maintain at
least 65% of its total assets invested in companies with substantial natural
resource assets or in asset-based securities. Current income from dividends and
interest will not be a primary consideration in selecting securities. The Fund
reserves the right as a temporary defensive measure and to provide for
redemptions, to hold short-term U.S. Government securities, money market
securities, including repurchase agreements, or cash, in such proportions as, in
the opinion of management, prevailing market or economic conditions warrant.
Asset-Based Securities. The Fund may invest in debt securities, preferred
stocks or convertible securities, the principal amount, redemption terms or
conversion terms of which are related to the market price of some natural
resource asset such as gold bullion. For the purposes of the Fund's investment
policies, these securities are referred to as 'asset-based securities.' The Fund
will purchase only asset-based securities which are rated, or are issued by
issuers that have outstanding debt obligations rated, investment grade (that is
AAA, AA, A or BBB by Standard & Poor's or Aaa, Aa, A or Baa by Moody's or
commercial paper rated A-1 by Standard & Poor's or Prime-1 by Moody's) or of
issuers that the Investment Adviser has determined to be of similar
creditworthiness. If the asset-based security is backed by a bank letter of
credit or other similar facility, the Investment Adviser may take such backing
into account in determining the creditworthiness of the issuer. While the market
prices for an asset-based security and the related natural resource asset
generally are expected to move in the same direction, there may not be perfect
correlation in the two price movements. Asset-based securities may not be
secured by a security interest in or claim on the underlying natural resource
asset. The asset-based securities in which the Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal) rates.
As an example, assume gold is selling at a market price of $300 per ounce and an
issuer sells a $1,000 face amount gold-related note with a seven-year maturity,
payable at maturity at the greater of either $1,000 in cash or the then market
price of three ounces of gold. If at maturity, the market price of gold is $400
per ounce, the amount payable on the note would be $1,200. Certain asset-based
securities may be payable at
24
<PAGE>
maturity in cash at the stated principal amount or, at the option of the holder,
directly in a stated amount of the asset to which it is related. In such
instance, because the Fund presently does not intend to invest directly in
natural resource assets, the Fund would sell the asset-based security in the
secondary market, to the extent one exists prior to maturity, if the value of
the stated amount of the asset exceeds the stated principal amount, and thereby
realize the appreciation in the underlying asset.
Risk Factors. As indicated above, under certain circumstances, the Fund
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, the
Confederation of Independent States ('CIS') (the former Soviet Union), the
United States, Australia, Canada, the People's Republic of China and the
Philippines. Sales of gold by the CIS and the People's Republic of China are
largely unpredictable and often relate to political and economic considerations
rather than to market forces. As a result of a change in policy adopted by the
Board of Directors of the Company in April 1993, the Fund is permitted to invest
in companies the assets of which are located primarily in the Republic of South
Africa, which produces approximately 38% of the gold mined in non-Communist
nations. Economic, social and political developments within the CIS, the
People's Republic of China and South Africa may affect significantly gold
production in those countries.
See 'Other Portfolio Strategies--Foreign Securities' for special
considerations in investments in foreign securities.
The Company and Merrill Lynch Funds Distributor, Inc., the distributor of
the Company's shares, reserve the right to suspend the sale of shares of the
Natural Resources Focus Fund in response to conditions in the securities markets
or otherwise.
AMERICAN BALANCED FUND
The investment objective of the American Balanced Fund is to seek a level
of current income and a degree of stability of principal not normally available
from an investment solely in equity securities and the opportunity for capital
appreciation greater than is normally available from an investment solely in
debt securities by investing in a balanced portfolio of fixed income and equity
securities. This investment objective is a fundamental policy and may not be
changed without a vote of the majority of the outstanding shares of the Fund.
The Fund will seek current income by investing a portion of its assets in a
portfolio of intermediate to long-term debt, convertible debt and money market
securities. The Fund will seek capital appreciation primarily by investing a
portion of its assets in equity securities, including preferred and convertible
preferred stock. At all times the Fund will maintain at least 25% of its net
assets in senior fixed income securities. As indicated under 'Investment
Restrictions' on page 5 of the Statement of Additional Information, the Fund is
not permitted to invest in securities of foreign issuers. There can be no
assurance that the Fund's objective will be achieved.
The Fund will normally seek to maintain the allocation of its assets
between debt securities and equity securities at approximately equal percentages
of the Fund's net asset value. However, the prices of debt and equity securities
will not generally move in the same direction or to the same extent, and,
consequently, the relative percentages of the Fund's debt and equity investments
will vary. The Fund will seek to reduce such variations by investing its
available cash in securities of the appropriate type. However, except as
discussed below, the Fund is not obligated to sell portfolio securities,
including money market securities, in order to reduce such discrepancies.
25
<PAGE>
The Fund will normally limit its allocation of assets to equity securities
to no more than 50% of its net assets. To the extent its equity position exceeds
this limitation, because of changes in the value of portfolio securities or
otherwise, the Fund will seek to reduce its equity position to less than 50% of
net assets by selling such securities at such times and in such amounts as
management of the Company deems appropriate in light of market conditions and
other pertinent factors. See 'Dividends, Distributions and Taxes--Tax Treatment
of the Company.'
The Fund will generally emphasize investment in common stocks of
larger-capitalization issuers and in investment-grade debt obligations. The Fund
may also seek to enhance the return on its common stock portfolio by writing
covered call options listed on United States securities exchanges. Under unusual
market or economic conditions, the Fund for defensive purposes may invest up to
100% of its assets in securities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, certificates of deposit, bankers' acceptances
and other bank obligations, commercial paper rated in the highest category by an
established rating agency, or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or may hold its
assets in cash.
GLOBAL STRATEGY FOCUS FUND
The investment objective of the Global Strategy Focus Fund is to seek high
total investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of U.S. and foreign
issuers. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of non-dollar
denominated securities and other assets and liabilities resulting from currency
fluctuations. Investing on an international basis involves special
considerations. See 'Other Portfolio Strategies--Foreign Securities' below.
The Global Strategy Focus Fund seeks to achieve its objective by investing
primarily in the securities of issuers located in the United States, Canada,
Western Europe and the Far East. There are no prescribed limits on the
geographical allocation of the Fund among these regions. Such allocation will be
made primarily on the basis of the anticipated total return from investments in
the securities of issuers wherever located, considering such factors as the
condition and growth potential of the various economies and securities markets
and the issuers domiciled therein, anticipated movements in interest rates in
the various capital markets and in the value of foreign currencies relative to
the U.S. dollar, tax considerations and economic, social, financial, national
and political factors which may affect the climate for investing within such
securities markets. When, in the judgment of the Investment Adviser, economic or
market conditions warrant, the Fund reserves the right to concentrate its
investments in one or more capital markets, including the United States. For
additional information concerning the risks of investing in foreign securities,
see 'Other Portfolio Strategies--Foreign Securities.'
The equity and convertible preferred securities in which the Global
Strategy Focus Fund may invest are primarily securities issued by quality
companies. Generally, the characteristics of such companies include a strong
balance sheet, good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be primarily those rated BBB or better by
Standard and Poor's or Baa or better by Moody's or of comparable quality. The
Fund may also invest in debt obligations issued or guaranteed by sovereign
governments, political subdivisions thereof (including states, provinces and
municipalities) or their agencies or instrumentalities or issued or guaranteed
by international organizations designated or supported by governmental entities
to promote economic reconstruction or development ('supranational entities')
such as the International Bank for Reconstruction and Development (the 'World
Bank') and the European Coal and Steel Community.
26
<PAGE>
Investments in securities of supranational entities are subject to the risk that
member governments will fail to make required capital contributions and that a
supranational entity will thus be unable to meet its obligations.
When market or financial conditions warrant, the Global Strategy Focus Fund
may invest as a temporary defensive measure up to 100% of its assets in
securities issued or guaranteed by the United States Government or its agencies
or instrumentalities, certificates of deposit, bankers' acceptances and other
bank obligations, commercial paper rated in the highest category by an
established rating agency, or other fixed income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or may hold its
assets in cash.
The Global Strategy Focus Fund may write covered call options and purchase
put options on its portfolio securities for the purpose of generating
incremental income or hedging its securities against market risk. The Fund may
seek to hedge its non-dollar denominated securities and other assets and
liabilities against adverse currency fluctuations by writing call options and
purchasing put options on currency, purchasing or selling futures contracts and
futures contract options on currency and entering into forward foreign exchange
transactions in currency. See 'Transactions in Options, Futures and Currency.'
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a discount, either from book value or historical
price-earnings ratios, or seem capable of recovering from temporarily out of
favor considerations. Particular emphasis is placed on securities which provide
an above-average dividend return and sell at a below-average price-earnings
ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates and
depress prices of securities in unfavorable climates. Based on this premise,
management believes that favorable changes in market prices are more likely to
begin when securities are out of favor, earnings are depressed, price-earnings
ratios are relatively low, investment expectations are limited, and there is no
real general interest in the particular security or industry involved. On the
other hand, management believes that negative developments are more likely to
occur when investment expectations are generally high, stock prices are
advancing or have advanced rapidly, price-earnings ratios have been inflated,
and the industry or issue continues to gain new investment acceptance on an
accelerated basis. In other words, management believes that market prices of
securities with relatively high price-earnings ratios are more susceptible to
unexpected adverse developments while securities with relatively low
price-earnings ratios are more favorably positioned to benefit from favorable,
but generally unanticipated, events. This investment policy departs from
traditional philosophy. Management of the Fund believes that the market risk
involved in this policy is moderated somewhat by an emphasis on securities with
above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation of
the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities and
utilize covered call options with respect to portfolio securities as described
below and in the Statement of Additional Information. It reserves the right as a
defensive measure to hold other types of securities, including Government and
money market securities, repurchase agreements or cash, in such proportions as,
in the
27
<PAGE>
opinion of management, prevailing market or economic conditions warrant. The
Fund may invest up to 10% of its total assets, taken at market value at the time
of acquisition, in the securities of foreign issuers.
WORLD INCOME FOCUS FUND
The investment objective of the World Income Focus Fund is to seek to
provide shareholders with high current income by investing in a global portfolio
of fixed income securities denominated in various currencies, including
multi-national currency units. The Fund may invest in United States and foreign
government and corporate fixed income securities, including high yield, high
risk securities (commonly known as 'junk bonds'). The Fund will, under normal
conditions, invest at least 90% of its total assets in such fixed income
securities and may invest up to 100% of its total assets in lower rated, high
yield, high risk securities. In pursuing its investment objective, the Fund will
allocate its investments among different types of fixed income securities
denominated in various currencies based upon the Investment Adviser's analysis
of the yield, maturity and currency considerations affecting such securities.
Investing on an international basis involves special considerations. See 'Other
Portfolio Strategies--Foreign Securities' below. The Fund should be considered
as a long-term investment and a vehicle for diversification and not as a
balanced investment program.
The Fund may purchase fixed income securities issued by United States or
foreign corporations or financial institutions, including debt securities of all
types and maturities, convertible securities and preferred stocks. The Fund also
may purchase securities issued or guaranteed by United States or foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities') or issued or guaranteed
by international organizations designated or supported by multiple governmental
entities to promote economic reconstruction or development ('supranational
entities').
International Investing. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of a
multinational currency unit is the European Currency Unit ('ECU') which is a
'basket' consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities (described further below), in particular, issue
ECU-denominated obligations. The Fund may invest in securities denominated in
the currency of one nation although issued by a governmental entity, corporation
or financial institution of another nation. For example, the Fund may invest in
a British pound sterling-denominated obligation issued by a United States
corporation. Such investments involve credit risks associated with the issuer
and currency risks associated with the currency in which the obligation is
denominated.
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well as
in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at least
three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States
dollar-denominated obligations only for temporary defensive purposes.
United States Government securities include:
(i) U.S. Treasury obligations (bills, notes and bonds), which differ
in their interest rates, maturities and times of issuance, all of which are
backed by the full faith and credit of the United States; and
28
<PAGE>
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related or
asset-backed securities, some of which are backed by the full faith and
credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association), some of which are supported by
the right of the issuer to borrow from the U.S. Government (e.g.,
obligations of Federal Home Loan Banks) and some of which are backed only
by the credit of the issuer itself (e.g., obligations of the Student Loan
Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of the mortgage-related securities.
(Asset-backed securities, other than those backed by home equity loans,
generally do not prepay in response to changes in interest rates but may be
subject to prepayment in response to other factors.) Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for securities purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for securities
purchased at a discount. The Fund may purchase mortgage-related (and
asset-backed) securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Fund's Investment Adviser. The Investment Adviser does not believe that the
credit risk inherent in the obligations of stable foreign governments is
significantly greater than that of U.S. Government securities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The government
members, or 'stockholders', usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Allocation of Investments and Risks of High Yield, High Risk
Securities. In seeking high current income, the Fund will allocate its
investments among fixed income securities of various types, maturities and
issuers in the various global markets based upon the analysis of the Investment
Adviser of yield and price differentials, currency considerations and general
market and economic conditions. In making such allocations, the Investment
Adviser will assess the overall quality of the portfolio considering in
particular the extent to which the differences in yield justify investments in
higher risk securities. In its evaluations, the Investment Adviser will utilize
its internal financial, economic and credit analysis resources as well as
information in this regard obtained from other sources.
The Fund has established no rating criteria for the fixed income securities
in which it may invest, and a substantial portion of the securities in the
Fund's portfolio may be securities rated in the medium to low rating categories
of nationally recognized statistical rating organizations such as Moody's or
Standard & Poor's, or in unrated securities of comparable quality. See Appendix
A to this Prospectus for a description of these rating categories. See also
'Risks of High Yield Securities' below.
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<PAGE>
The average maturity of the World Income Focus Fund's portfolio securities
will vary based upon the Investment Adviser's assessment of economic and market
conditions. As with all fixed income securities, changes in market yields will
affect the Fund's asset value as the prices of portfolio securities generally
increase when interest rates decline and decrease when interest rates rise.
Prices of longer term securities generally fluctuate more in response to
interest rate changes than do shorter term securities. The Fund does not expect
the average maturity of its portfolio to exceed ten years.
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's rating category, of the securities held by the Fund during the
year ended December 31, 1993.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------------------------------------------------- ----------- -------------
<S> <C> <C>
AA................................................. .54% 1.05%
BBB................................................ .50 .81
BB................................................. 16.58 25.91
B.................................................. 38.23 60.54
CCC................................................ .61 .71
NR................................................. 4.43 7.22
NA................................................. 2.51 3.76
-----
100.0%
</TABLE>
- ---------------
* A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
GLOBAL UTILITY FOCUS FUND
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of the Investment Adviser, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk, as described below under 'Transactions in
Options, Futures and Currency.' Investing on an international basis involves
special considerations. See 'Other Portfolio Strategies--Foreign Securities'
below.
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a tempororary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash in
such proportions as, in the opinion of the Investment Adviser, prevailing market
or economic conditions warrant. Except during temporary defensive periods, such
securities or cash will not exceed 20% of its total assets. Under normal
circumstances, the Fund will invest at least 65% of its total assets in issuers
domiciled in at least three countries, one of which may be the United States,
although the Investment Adviser expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities.
30
<PAGE>
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt securites.
The relative weightings among common stocks, debt securities and preferred
stocks will vary from time to time based upon the Investment Adviser's judgement
of the extent to which investments in each category will contribute to meeting
the Fund's investment objective. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade, that is, rated
in one of the four highest rating categories by Standard & Poor's or Moody's, or
deemed to be of equivalent quality (i.e., securities rated at least BBB by
Standard & Poor's or Baa by Moody's) in the judgment of the Investment Adviser.
Securities rated Baa by Moody's are described by it as having speculative
characteristics and, according to Standard & Poor's, fixed income securities
rated BBB normally exhibit adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal. The Fund's commercial
paper investments at the time of purchase will be rate 'A-1' or 'A-2' by
Standard & Poor's or 'Prime-1' or 'Prime-2' by Moody's or, if not rated, will be
of comparable quality as determined by the Investment Adviser. The Fund may also
invest up to 5% of its total assets at the time of purchase in fixed income
securities having a minimum rating no lower than Caa by Moody's or CCC by
Standard & Poor's. The Fund may, but need not, dispose of any security if it is
subsequently downgraded. For a description of ratings of debt securities, see
Appendix A to this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts ('EDRs') or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. Generally, ADRs which are issued
in registered form, are designated for use in the United States securities
markets, and EDRs, which are issued in bearer form, are designed for use in
European securities markets. The Fund may invest in ADRs and EDRs through both
sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement,
the foreign issuer assumes the obligation to pay some or all of the depository's
transaction fees, whereas in an unsponsored arrangement the foreign issuer
assumes no obligations and the depository's transaction fees are paid by the ADR
or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs
or EDRs have been issued are not necessarily obligated to disclose material
information in the markets in which the unsponsored ADRs or EDRs are traded and,
therefore, there may not be a correlation between such information and the
market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of common
stocks issued by domestic utility companies historically have significantly
exceeded those of industrial companies' common stocks, while the prices of
domestic utility stocks have tended to be less volatile than stocks of
industrial companies. Total returns on domestic utility stocks have also
generally exceeded those on stocks of industrial companies. Debt securities of
domestic utility companies historically also have yielded slightly more than
similar debt securities of industrial companies, and have had higher total
returns. For certain periods, the total return of
31
<PAGE>
utility companies' securities has underperformed that of industrial companies'
securities. There can be no assurance that positive relative returns on utility
securities will occur in the future. The Investment Adviser believes that the
average dividend yields of common stocks issued by foreign utility companies
have also historically exceeded those of foreign industrial companies' common
stocks. To meet its objective of capital appreciation, the Fund may invest in
foreign utility companies which pay lower than average dividends, but have a
greater potential for capital appreciation.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availabilty of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are
substantial differences between the regulatory practices and policies of various
jurisdicions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for these
utilities to obtain adequate relief. Certain of the issuers of securities of the
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies, and impose
additional requirements governing the licensing, construction and operation of
nuclear power plants.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. In some instances, utility companies
are operating on an unregulated basis. Because of trends toward deregulation and
the evolution of independent power producers as well as new entrants to the
field of telecommunications, non-regulated providers of utility services have
become a significant part of their respective industries. The Investment Adviser
believes that the emergence of competition and deregulation will result in
certain utility companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
businesses from increased competition and may be less profitable. The Investment
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Adviser seeks to take advantage of favorable investment opportunities that are
expected to arise from these structural changes. Of course, there can be no
assurance that favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The Global Utility Focus Fund's investment policies are designed to enable
it to capitalize on evolving investment opportunities throughout the world. For
example, the rapid growth of certain foreign economies will necessitate
expansion of capacity in the utility industries in those countries. Although
many foreign utility companies currently are government-owned, thereby limiting
current investment opportunities for the Fund, the Investment Adviser believes
that, in order to attract significant capital for growth, foreign governments
are likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership
of assets rather than government ownership, is expected to occur in newer,
faster-growing economies and in mature economies. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. The Investment Adviser will take into account anticipated economic
growth rates and other economic developments when selecting securities of
utility companies. The principal sectors of the global utility industries are
discussed below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates have
declined, many utilities have refinanced high cost debt and in doing so have
improved their fixed charges coverage. Regulators, however, have lowered allowed
rates of return as interest rates have declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of, the
Nuclear Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for decommissioning of such plants.
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In October 1993, S&P stiffened its debt-ratings formula for the electric
utility industry, stating that the industry is in long-term decline. In
addition, Moody's stated that it expected a drop in the next three years in its
average credit ratings for the industry. Reasons set forth for these outlooks
included slowing demand and increasing cost pressures as a result of competition
from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access to
the telephone networks comprise the greatest portion of this segment. Telephone
companies in the United States are still experiencing the effects of the breakup
of American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone communication services have expanded their
non-regulated activities into other businesses, including cellular telephone
services, data processing, equipment retailing, computer software and hardware
services, and financial services. This expansion has provided significant
opportunities for certain telephone companies to increase their earnings and
dividends at faster rates than had been allowed in traditional regulated
businesses. Increasing competition, technological innovations and other
structural changes, however, could adversely affect the profitability of such
utilities. Technological breakthroughs and the merger of telecommunications with
video and entertainment is now associated with the expansion of the role of
cable companies as providers of utility services in the telecommunications
industry and the competitive response of traditional telephone companies. Given
mergers and certain marketing tests currently underway, it is likely that both
traditional telephone companies and cable companies will soon provide a greatly
expanded range of utility services, including two-way video and informational
services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decades, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Investment
Adviser, however, environmental considerations could improve the gas industry
outlook in the future. For example, natural gas is the cleanest of the
hydrocarbon fuels, and this may result in incremental shifts in fuel consumption
toward natural gas and away from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic companies.
The Investment Adviser believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Investment Outside the Utility Industries. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that are
outside the utility industries. Such investments may include common stocks, debt
securities or preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies.
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Some of these issuers may be in industries related to utility industries and,
therefore, may be subject to similar risks. Securities that are issued by
foreign companies or are denominated in foreign currencies are subject to the
risks outlined above.
The Global Utility Focus Fund is also permitted to invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
('U.S. Government Securities'). Such investments may be backed by the 'full
faith and credit' of the United States, including U.S. Treasury bills, notes and
bonds as well as certain agency securities and mortgage-backed securities issued
by the Government National Mortgage Association (GNMA). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the 'full faith and credit' of the United States, such as
certain securities issued by the Federal National Mortgage Association (FNMA),
the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.
The Global Utility Focus Fund may invest in securities issued or guaranteed
by foreign governments. Such securities are typically denominated in foreign
currencies and are subject to the currency fluctuation and other risks of
foreign securities investments. The foreign government securities in which the
Fund intends to invest generally will consist of obligations supported by
national, state or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank.
Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities including quasi-governmental agencies. Foreign
government securities will not be considered government securities for purposes
of determining the Fund's compliance with diversification and concentration
policies.
INTERNATIONAL EQUITY FOCUS FUND
The investment objective of the International Equity Focus Fund is to seek
capital appreciation and, secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal conditions, at least 65% of the Fund's net assets
will be invested in such equity securities. The investment objective of the Fund
is a fundamental policy and may not be changed without approval of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. Investing
on an international basis involves special considerations. Investing in smaller
capital markets entails the risk of significant volatility in the Fund's
security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The
Fund is designed for investors seeking to complement their U.S.
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holdings through foreign investments. The Fund should be considered as a
long-term investment and a vehicle for diversification and not as a balanced
investment program.
The International Equity Focus Fund will invest in an international
portfolio of securities of foreign companies located thoughout the world. While
there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. However, for the reasons stated below, management of the Fund will give
special attention to investment opportunities in the developing countries of the
world, including, but not limited to Latin America, the Far East and Eastern
Europe. It is anticipated that a significant portion of the Fund's assets may be
invested in such developing countries.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser based primarily on its
assessment of the relative condition and growth potential of the various
economies and securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. Within such
allocations, the Investment Adviser will seek to identify equity investments in
each market which are expected to provide a total return which equals or exceeds
the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called 'emerging' countries (such as
Malaysia, Mexico and Thailand), which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Fund will primarily emphasize investments in common stock, the
Fund may also invest in preferred stocks and convertible debt securities. The
Fund reserves the right, as a temporary defensive measure and to provide for
redemptions, to hold cash or cash equivalents in U.S. dollars or foreign
currencies and short-term securities including money market securities. Under
certain adverse investment conditions, the Fund may restrict the markets in
which its assets will be invested and may increase the proportion of assets
invested in temporary defensive obligations of U.S. issuers. Under normal
conditions, at least 65% of the Fund's total assets will be invested in the
securities of issuers from at least three different foreign countries.
Investments made for defensive purposes will be maintained only during periods
in which the Investment Adviser determines that economic or financial conditions
are adverse for holding or being fully invested in equity securities of foreign
issuers.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Recipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued
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throughout the world which evidence a similar ownership arrangement. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
GDRs are tradeable both in the U.S. and Europe and are designed for use
throughout the world.
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental policy
and may not be changed without approval of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. Investing on an international basis involves
special considerations. Investing in smaller capital markets entails the risk of
significant volatility in the Fund's security prices. See 'Other Portfolio
Strategies--Foreign Securities' below. The Fund is designed for investors
seeking to complement their U.S. holdings through foreign investments. The Fund
should be considered as a long-term investment and a vehicle for diversification
and not as a balanced investment program.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four countries
having the largest equity market capitalizations. Currently, these four
countries are Japan, the United Kingdom, the United States and Germany. On March
31, 1994, those countries' equity market capitalizations totalled approximately
71% of the world's equity market capitalization according to data provided by
Morgan Stanley Capital International. The Fund will at all times, except during
defensive periods, maintain investments in at least three countries having
smaller capital markets.
The Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called 'emerging' countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries (such as France, the Netherlands and Spain), although
having relatively mature smaller capital markets, may also be in a position to
benefit from local or international developments encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in countries having smaller capital markets. It also
may not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
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In its investment decision-making, the Investment Adviser will emphasize
the allocation of assets among certain countries' capital markets, rather than
the selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. See 'Risks of High Yield Securities' below.
Such income can be used, however, to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ('supranational entities'), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the 'World Bank'), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or 'stockholders', usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Investment
Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign
Securities' and 'Risks of High Yield Securities' below.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market of
its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues
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or profits in any one of the two most recent fiscal years represents (directly
or indirectly through subsidiaries) assets or activities located in such
countries. The Fund also may consider closed-end investment companies to be
located in the country or countries in which they primarily make their portfolio
investments.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
INTERNATIONAL BOND FUND
The investment objective of the International Bond Fund is to seek a high
total investment return by investing in an international portfolio of non-U.S.
debt instruments denominated in various currencies and multinational currency
units. Total investment return is the aggregate of capital value changes and
income. The investment objective of the Fund is a fundamental policy and may not
be changed without approval of a majority of the Fund's outstanding shares.
There can be no assurance that the Fund's investment objective will be achieved.
Under normal circumstances, the Fund will invest at lest 65% of its assets in
non-U.S. debt instruments. The Fund may seek to hedge against interest rate and
currency risks through the use of option, futures and currency transactions.
Investing on an international basis involves special considerations. See 'Other
Portfolio Strategies--Foreign Securities' below. The Fund is designed for
investors seeking to complement their U.S. holdings through foreign investments.
The Fund should be considered as a vehicle for diversification and not as a
balanced investment program.
The Fund may purchase debt obligations issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
('supranational entities') such as the International Bank for Reconstruction and
Development (the 'World Bank') and the European Coal and Steel Community, or
issued by foreign corporations or financial institutions.
With respect to the creditworthiness of the Fund's portfolio securities,
under normal conditions all of the securities owned by the Fund will be (i)
obligations which have a credit rating of A or better by S&P or by Moody's or
commercial paper rated A-1 by S&P or Prime-1 by Moody's or obligations that the
Fund's Investment Adviser has determined to be of similar creditworthiness. The
Fund' Investment Adviser may determine that a non-dollar denominated obligation
of a foreign government is of similar creditworthiness notwithstanding S&P's or
Moody's less favorable rating of a dollar denominated obligation of the same
issuer, provided that the Investment Adviser believes that such dollar
denominated obligation is assigned a lower rating because it is denominated in a
currency other than the foreign government's own currency.
In evaluating obligations, the Investment Adviser will utilize its internal
credit analysis resources as well as financial and economic information obtained
from other sources. With respect to foreign corporate issuers, the Investment
Adviser will consider the financial condition of the issuer and market and
economic conditions
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relevant to its operations. In terms of foreign governmental obligations, the
Investment Adviser will review the financial position of the issuer and
political and economic conditions in the country. Investment in securities of
supranational entities is subject to the additional risk to be considered by the
Investment Adviser that member governments will fail to make required capital
contributions and that a supranational entity will thus be unable to meet its
obligations.
The Fund's fully managed approach enables it to seek high total investment
return by investing in debt instruments denominated in various currencies and
currency units on the basis of the potential capital appreciation of such
instruments in U.S. dollars and the rates of income paid on such instruments. As
a general matter, in evaluating investments, the Fund will consider, among other
factors, the relative levels of interest rates prevailing in various countries,
the potential appreciation of such investments in their denominated currencies
and, for debt instruments not denominated in U.S. dollars, the potential
movement in the value of such currencies compared to the U.S. dollar. In seeking
capital appreciation, the Fund may invest in relatively low-yielding instruments
in expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short-term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. As
with all debt securities, changes in market yields will affect the Fund's asset
value as the prices of portfolio securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer term
securities generally fluctuate more in response to interest rate changes than do
shorter term securities. The Fund does not expect the average maturity of its
portfolio to exceed ten years.
The Fund may invest in debt instruments denominated in any currency or
multinational currency unit. An illustration of a multinational currency unit is
the European Currency Unit ('ECU') which is a 'basket' consisting of specified
amounts of the currencies of certain of the twelve member states of the European
Community, a Western European economic cooperative association including France,
Germany, The Netherlands and the United Kingdom. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Investment Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranationals, in particular, issue ECU-denominated
obligations. The Fund may invest in debt instruments denominated in the currency
of one nation although issued by a governmental entity, corporation or financial
institution of another nation. For example, the Fund may invest in a Japanese
yen-denominated obligation issued by a German corporation. Such investments
involve credit risks associated with the issuer and currency risks associated
with the currency in which the obligation is denominated. It is anticipated that
the Fund will invest primarily in marketable instruments denominated in the
currencies of the U.S., Japan, Canada, Western European nations, New Zealand and
Australia as well as in ECUs. Further, it is anticipated that such instruments
will be issued primarily by entities located in such countries and by
supranational entities. Under certain adverse conditions, the Fund may restrict
the financial markets or currencies in which its assets will be invested and may
invest its assets solely in U.S. dollar-denominated obligations.
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The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in foreign markets, to hold
cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term
securities, including money market securities.
INTERMEDIATE GOVERNMENT BOND
The investment objective of the Intermediate Government Bond Fund is to
seek the highest possible current income consistent with the protection of
capital afforded by investing in intermediate-term debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities with a
maximum maturity not to exceed fifteen years. Under normal circumstances, all or
substantially all of the Fund's assets will be invested in such securities.
Depending on market conditions, an average maturity of six to eight years is
anticipated. When, in the opinion of management, prevailing market or economic
conditions warrant, a portion of the Fund may be invested in money market
securities or a liquid asset fund to effectively utilize cash reserves.
Certain of the securities in which the Fund invests are supported by the
full faith and credit of the U.S. Government, such as U.S. Treasury obligations.
Other of the securities in which the Fund invests are not supported by the full
faith and credit of the U.S. Government but are issued by U.S. Government
agencies, instrumentalities or government sponsored enterprises. Such securities
are generally supported only by the credit of the agency, instrumentality or
enterprise issuing the security and are generally considered to have a low
principal risk. However, because of the longer term maturities of the securities
in which the Fund will invest, interest rate fluctuations may adversely affect
the market value of such securities. As interest rates rise, the value of
fixed-income securities will fall, adversely affecting the net asset value of
the Fund.
The U.S. Treasury Department has enacted regulations prescribing
diversification standards to be met by investment company portfolios to which
the investment base for any variable annuity policy has been allocated as a
condition to such policies being treated as variable annuity contracts under the
Internal Revenue Code of 1986, as amended (the 'Code'). The regulations limit
the percentage of the total assets of any investment company portfolio which may
be invested in securities of any five or fewer issuers, including a requirement
that no more than 55% of a portfolio's total assets be invested in the
securities of any one issuer. Direct obligations of the U.S. Treasury, are not
excepted from the diversification requirements. Each Government agency or
instrumentality issuing, guaranteeing or insuring securities will be treated as
a separate issuer for purposes of the diversification standards.
NON-DIVERSIFIED FUNDS
The Natural Resources Focus, Global Strategy Focus, World Income Focus,
Developing Capital Markets Focus and International Bond Funds are classified as
non-diversified investment companies under the Investment Company Act of 1940.
However, each Fund will have to limit its investments to the extent required by
the diversification requirements applicable to regulated investment companies
under the Internal Revenue Code. To qualify as a regulated investment company, a
Fund, at the close of each fiscal quarter, may not have more than 25% of its
total assets invested in the securities (except obligations of the U.S.
Government, its agencies or instrumentalities) of any one issuer and with
respect to 50% of its assets, (i) may not have more than 5% of its total assets
invested in the securities of any one issuer and (ii) may not own more than 10%
of the outstanding voting securities of any one issuer.
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INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
MONEY MARKET FUND PORTFOLIO RESTRICTIONS
For purposes of the investment policies of the Domestic Money Market and
Reserve Assets Funds, the Company defines short-term money market securities as
securities having a maturity of no more than 762 days (25 months) in the case of
U.S. Government and agency securities and no more than 397 days (13 months) in
the case of all other securities. Management of the Company expects that
substantially all the assets of the Domestic Money Market and Reserve Assets
Funds will be invested in securities maturing in less than one year, but at
times some portion may have maturities of up to 25 months. For these purposes,
the maturity of a variable rate security is deemed to be the next coupon date on
which the interest rate is adjusted. The dollar-weighted average maturity of
each Fund's portfolio assets will not exceed 90 days. During the year ended
December 31, 1993, the average maturity of the Reserve Assets Fund's assets
ranged from 61 days to 90 days and the average maturity of the Domestic Money
Market Fund's assets ranged from 59 days to 89 days.
The Domestic Money Market and Reserve Asset Funds' investments in
short-term debt and depository institution money instruments will be rated, or
will be issued by issuers who have been rated, in one of the two highest rating
categories for short-term debt obligations by a nationally recognized
statistical rating organization (an 'NRSRO') or, if not rated, will be of
comparable quality as determined by the Directors of the Company. Each Fund's
investments in corporate bonds and debentures (which must have maturities at the
date of purchase of 397 days (13 months) or less) will be in issuers which have
received from an NRSRO a rating, with respect to a class of short-term debt
obligations that is comparable in priority and security with the investment, in
one of the two highest rating categories for short-term obligations or, if not
rated, are of comparable quality as determined by the Directors of the Company.
Currently, there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services,
Inc., IBCA Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and
Thomson BankWatch.
A recently adopted regulation of the Securities and Exchange Commission
will limit investments by the Domestic Money Market and Reserve Assets Funds in
securities issued by any one issuer (other than the U.S. Government, its
agencies or instrumentalities) ordinarily to not more than 5% of its total
assets, or in the event that such securities do not have the highest rating, not
more than 1% of its total assets. In addition, this regulation requires that not
more than 5% of each Fund's total assets be invested in securities that have a
rating lower than the highest rating.
OTHER PORTFOLIO STRATEGIES
Restricted Securities. Each of the Funds is subject to limitations on the
amount of illiquid securities they may purchase; however, each Fund may purchase
without regard to that limitation certain securities that are not registered
under the Securities Act of 1933 (the 'Securities Act'), including (a)
commercial paper exempt from registration under Section 4(2) of the Securities
Act, and (b) securities that can be offered and sold to 'qualified institutional
buyers' under Rule 144A under the Securities Act, provided that the Company's
Board of Directors continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The
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Board of Directors may adopt guidelines and delegate to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Board has determined that securities sold under Rule 144A 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.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Indexed and Inverse Securities. A Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an 'index'). As an illustration, a Fund may invest in a security that pays
interest and returns principal based on the change in an index of interest rates
or on the value of a precious or industrial metal. Interest and principal
payable on a security may also be based on relative changes among particular
indices. In addition, certain of the Funds may invest in securities whose
potential investment return is inversely based on the change in particular
indices. For example, a Fund may invest in securities that pay a higher rate of
interest and principal when a particular index decreases and pay a lower rate of
interest and principal when the value of the index increases. To the extent that
a Fund invests in such types of securities, it will be subject to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal. An example of
such types of securities are indexed or inverse securities issued with respect
to a stock market index in a particular emerging market Asia-Pacific country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Company believes that indexed securities, including inverse securities,
represent flexible portfolio management instruments that may allow a Fund to
seek potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
Foreign Securities. The Reserve Assets, Prime Bond, High Current Income,
Quality Equity, Equity Growth, Flexible Strategy, Natural Resources Focus,
Global Strategy Focus, Basic Value Focus, World Income Focus, Global Utility
Focus, International Equity Focus, Developing Capital Markets Focus and
International Bond Funds may invest in 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, a Fund could encounter greater difficulties in invoking legal
processes abroad than would be the case in the United States. Transaction costs
in foreign securities may be higher. The operating expense ratio of a Fund
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 Fund, such as custodial and brokerage costs, are higher. In
addition, net investment income earned by a Fund on a foreign security may be
subject to withholding and other taxes imposed by foreign
43
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governments which will reduce a Fund'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 Fund. No Fund
which may invest in foreign securities, other than the Natural Resources Focus
and Global Strategy Focus Funds, will concentrate its investments in any
particular country. The Flexible Strategy, Natural Resources Focus, Global
Strategy Focus, World Income Focus, Global Utility Focus, International Equity
Focus, Developing Capital Markets Focus and International Bond Funds may from
time to time be substantially invested in non-dollar-denominated securities of
foreign issuers. A Fund's return on investments in non-dollar-denominated
securities may be reduced or enhanced as a result of changes in foreign currency
rates during the period in which the Fund holds such investments. Each Fund
other than the Flexible Strategy, Natural Resources Focus, Global Strategy
Focus, Basic Value Focus, World Income Focus, Global Utility Focus and
International Equity Focus Funds, Developing Capital Markets Focus and
International Bond Funds will purchase only securities issued in dollar
denominations.
Each of the International Equity Focus Fund and Developing Capital Markets
Focus Fund may invest a significant portion of its assets in securities of
foreign issuers in smaller capital markets, while each of the other Funds which
is permitted to invest in foreign securities may from time to time invest in
securities of such foreign issuers. Foreign investments in smaller capital
markets involve risks not involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems and the existence or possible imposition
of exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. These risks are often heightened
for investments in small capital markets. Because a Fund which invests in
foreign securities will invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of securities in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Foreign currency exchange rates are determined by forces of
supply and demand in the foreign exchange markets. These forces are, in turn,
affected by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With respect
to certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries. In
addition, certain foreign investments may be subject to foreign withholding
taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities The transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller capital markets, which may
result in a Fund which invests in these
44
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markets incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays in settlement could result in
temporary periods when assets of such a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience. Due to its emphasis on securities
of issuers located in smaller capital markets, the Developing Capital Markets
Focus Fund and the International Equity Focus Fund should be considered as a
vehicle for diversification and not as a balanced investment program.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government debtor,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole and the political constraints to which a
government debtor may be subject. Government debtors may default on their debt
and may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. Holders of government debt, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing and
emerging market countries are among the world's largest debtors to commercial
banks, other governments, international financial organizations and other
financial institutions. The issuers of the government debt securities in which a
Fund may invest have in the past experienced substantial difficulties in
servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements.
The Developing Capital Markets Focus and International Equity Focus Funds
intend to invest in securities of foreign issuers in smaller capital markets.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries require governmental approval prior to investments by foreign persons,
or limit the amount of investment by foreign persons in a particular company, or
limit the
45
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investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms than securities of the company
available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the 'Investment Company Act'), the
Developing Capital Markets Focus and International Equity Focus Funds each may
invest up to 10% of its total assets in securities of closed-end investment
companies. This restriction on investments in securities of closed-end
investment companies may limit opportunities for the Fund to invest indirectly
in certain smaller capital markets. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their net asset values. If the Fund acquires shares in closed-end investment
companies, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such closed-end investment companies. The Fund also may seek, at its own
cost, to create its own investment entities under the laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a Fund's
investments in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from 'securities related
activities', as defined by the rules thereunder. These provisions may also
restrict the Fund's investments in certain foreign banks and other financial
institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash, securities issued or guaranteed by the U.S. Government or, in the case
of the Domestic Money Market and Reserve Assets Funds, cash equivalents which,
while the loan is outstanding, will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities plus
accrued interest. Such cash collateral will be invested in short-term
securities, the income from which will increase the return to the Fund.
Forward Commitments. Each of the Funds may purchase securities on a
when-issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be more
or less than its purchase price. A Fund entering into such transactions will
maintain a segregated account with its custodian of cash or liquid, high-grade
debt obligations in an aggregate amount equal to the amount of its commitments
in connection with such delayed delivery and purchase transactions.
Standby Commitment Agreements. The High Current Income, Global Utility
Focus and Developing Capital Markets Focus Funds may from time to time enter
into standby commitment agreements. Such agreements commit the respective Fund,
for a stated period of time, to purchase a stated amount of a fixed income
security which may be issued and sold to the Fund at the option of the issuer.
The price and coupon of the security is fixed at the time of the commitment. At
the time of entering into the agreement the Fund is paid a commitment fee which
is typically approximately 0.5% of the aggregate purchase price of the security
which the Fund has committed to purchase. The Fund will at all times maintain a
segregated account with its custodian of cash or liquid, high-grade debt
obligations in an amount equal to the purchase price of the securities
underlying the commitment. There can be no assurance that the securities subject
to a standby commitment will be issued, and the value of the security, if
issued, on the delivery date may be more or less than its purchase price.
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TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
The Quality Equity, Flexible Strategy, Natural Resources Focus, American
Balanced, Global Strategy Focus, Basic Value Focus, World Income Focus, Global
Utility Focus, International Equity Focus, Developing Capital Markets Focus and
International Bond Funds may engage in certain of the options, futures and
currency transactions discussed in Appendix A to this Prospectus. A Fund may
engage in transactions in futures contracts, options on futures contracts,
forward foreign exchange contracts, currency options and options on portfolio
securities and on stock indexes only for hedging purposes and not for
speculation. A Fund may write call options on portfolio securities and on stock
indexes for the purpose of achieving, through receipt of premium income, a
greater average total return than it would otherwise realize from holding
portfolio securities alone. There can be no assurance that the objectives sought
to be obtained from the use of these instruments will be achieved. A Fund's use
of such instruments may be limited by certain Internal Revenue Code requirements
for qualification of the Fund for the favorable tax treatment afforded
investment companies. There can be no assurance that a Fund's hedging
transactions will be effective. Furthermore, a Fund will only engage in hedging
activities from time to time and will not necessarily engage in hedging
transactions in all the smaller capital markets in which certain of the Funds
may be invested at any given time.
RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund, World Income Focus Fund and Developing
Capital Markets Focus Fund may invest a substantial portion of their assets in
high yield, high risk securities or junk bonds, which are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial risk.
Issuers of junk bonds may be highly leveraged and may not have available to them
more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During recessionary periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the High Current Income Fund, World Income Focus Fund or Developing
Capital Markets Focus Fund may invest normally do not include securities which,
at the time of investment, are in default or the issuers of which are in
bankruptcy, there can be no assurance that such events will not occur after a
Fund purchases a particular security, in which case a Fund may experience losses
and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund, World Income Focus Fund and Developing Capital Markets
Focus Fund each will diversify its holdings among many issuers. However, there
can be no assurance that diversification will protect a Fund from widespread
defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated
fixed-income securities, so that adverse economic events may have a greater
impact on their prices and yields than on higher-rated fixed-income securities.
Zero coupon bonds and bonds which pay interest and/or principal in additional
bonds rather than in cash are especially volatile. Like higher-rated
fixed-income securities, junk bonds are generally purchased and
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sold through dealers who make a market in such securities for their own
accounts. However, there are fewer dealers in this market, which may be less
liquid than the market for higher-rated fixed-income securities, even under
normal economic conditions. Also, there may be significant disparities in the
prices quoted for such bonds by various dealers. Adverse economic conditions or
investor perceptions (whether or not based on economic fundamentals) may impair
the liquidity of this market, and may cause the prices the High Current Income
Fund, World Income Focus Fund and International Bond Fund receive for their junk
bonds to be reduced, or a Fund may experience difficulty in liquidating a
portion of its portfolio when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Under such conditions, judgment may play a
greater role in valuing certain of each Fund's portfolio securities than in the
case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund, World Income Focus Fund and International Bond
Fund. In addition, each Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an 'ordinarily prudent person.' In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that compliance
with these standards will not have any negative impact on the performance of any
of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
DIRECTORS
The Directors of the Company consist of five individuals, four of whom are
not 'interested persons' of the Company as defined in the Investment Company Act
of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as follows:
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ARTHUR ZEIKEL*--President and Chief Investment Officer of the
Investment Adviser and Fund Asset Management, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch'); and Director of Merrill Lynch Funds
Distributor, Inc.
WALTER MINTZ--Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN--President of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial
consultants).
JOE GRILLS--Investment Management Advisor; Director of the Duke
Management Company and a member of the Executive Committee; formerly,
Assistant Treasurer of International Business Machines Corporation.
HARRY WOOLF--Professor and former Director of the Institute for
Advanced Study (private institution devoted to the encouragement, support
and patronage of learning).
- ---------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. ('MLAM'), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the investment adviser for the Fund.
The principal address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey
08543-9011). The Investment Adviser or its affiliate, Fund Asset Management,
L.P. ('FAM'), acts as the investment adviser for over 90 other registered
investment companies. MLAM also offers portfolio management and portfolio
analysis services to individuals and institutions. In the aggregate, as of
January 31, 1994, MLAM and FAM had a total of approximately $167.1 billion in
investment company and other portfolio assets under management.
Effective January 1, 1994, MLAM was reorganized as a Delaware limited
partnership. MLAM (the general partner of which is Princeton Services, Inc., a
wholly-owned subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. and has its principal place of business
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. Prior to the
reorganization, the Investment Adviser was a Delaware corporation known as
Merrill Lynch Investment Management, Inc., which did business as Merrill Lynch
Asset Management, which was incorporated in 1976. The reorganization did not
result in a change to the Investment Adviser's management or personnel, nor did
the reorganization cause any adverse change to the Investment Adviser's
financial condition. MLAM was a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. prior to its reorganization and continues to be after its reorganization.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the Funds,
who consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the
Company and is obligated to provide all the office space, facilities, equipment
and personnel necessary to perform its duties under the Agreements. The
Investment Adviser has access to the full range of the securities and economic
research facilities of Merrill Lynch.
During the Company's fiscal year ended December 31, 1993, the advisory fees
expense incurred by the Company totalled $5,421,039 of which $141,301 related to
the Reserve Assets Fund (representing 0.50% of its average net assets), $918,563
related to the Prime Bond Fund (representing 0.50% of its average net assets),
$439,699 related to the High Current Income Fund (representing 0.55% of its
average net assets), $874,617 related to the Quality Equity Fund (representing
0.50% of its average net assets), $393,786 related to the Equity Growth Fund
(representing 0.75% of its average net assets), $803,592 related to the Flexible
Strategy Fund (representing 0.65% of the average net assets), $59,420 related to
the Natural Resources Focus Fund (representing 0.65% of its average net assets),
$326,591 related to the American Balanced Fund (representing 0.55% of its
average net assets), $462,020 related to the Domestic Money Market Fund
(representing 0.50% of its average net assets), $582,082 related to the Global
Strategy Focus Fund (representing 0.65% of its average net assets), $54,569
related to the Basic Value Focus Fund (representing 0.60% of its average net
assets), $88,050 related to the World Income Focus Fund (representing 0.60% of
its average net assets), $142,995 related to the Global Utility Focus Fund
(representing 0.60% of its net assets) and $133,754 related to International
Equity Focus Fund (representing 0.75% of its net assets). Although the 0.75%
investment advisory fee of the Equity Growth Fund is higher than that of many
other mutual funds, the Fund believes it is justified by the high degree
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of care that must be given to the initial selection and continuous supervision
of the types of portfolio securities in which the Fund invests. The advisory
fees for the Developing Capital Markets Focus, International Bond and
Intermediate Government Bond Funds are 1.00%, 0.60% and 0.50% of their
respective average daily net assets.
During the Company's fiscal year ended December 31, 1993, the total
operating expenses of the Company's Funds (including the advisory fees paid to
the Investment Adviser), before reimbursement of a portion of such expenses,
were as follows: $196,431 by the Reserve Assets Fund (representing 0.70% of its
average net assets), $1,161,122 by the Prime Bond Fund (representing 0.63% of
its average net assets), $571,823 by the High Current Income Fund (representing
0.72% of its average net assets), $1,076,921 by the Quality Equity Fund
(representing 0.61% of its average net assets), $499,142 by the Equity Growth
Fund (representing 0.96% of its average net assets), $992,934 by the Flexible
Strategy Fund (representing 0.80% of its average net assets), $103,317 by the
Natural Resources Focus Fund (representing 1.13% of its average net assets)
$416,322 by the American Balanced Fund (representing 0.70% of its average net
assets), $581,716 by the Domestic Money Market Fund (representing 0.63% of its
average net assets), $787,580 by the Global Strategy Focus Fund (representing
0.88% of its average net assets), $77,816 related to the Basic Value Focus Fund
(representing 0.86% of its average net assets), $137,370 related to the World
Income Focus Fund (representing 0.94% of its average net assets), $212,080
related to the Global Utility Focus Fund (representing 0.89% of its net assets)
and $203,643 related to the International Equity Focus Fund (representing 1.14%
of its net assets).
The Investment Advisory Agreements require the Investment Adviser to
reimburse the Company's Funds if and to the extent that in any fiscal year the
operating expenses of each Fund exceeds the most restrictive expense limitations
then in effect under any state securities laws or published regulations
thereunder. At present the most restrictive expense limitation requires the
Investment Adviser to reimburse expenses which exceed 2.5% of each Fund's first
$30 million of average daily net assets, 2.0% of its average daily net assets in
excess of $30 million but less than $100 million, and 1.5% of its average daily
net assets in excess of $100 million. Expenses for this purpose include the
Investment Adviser's fee but exclude interest, taxes, brokerage fees and
commissions and extraordinary charges, such as litigation. No fee payments will
be made to the Investment Adviser with respect to any Fund during any fiscal
year which would cause the expenses of such Fund to exceed the pro rata expense
limitation applicable to such Fund at the time of such payment.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have
entered into two agreements which limit the operating expenses paid by each Fund
in a given year to 1.25% of its average daily net assets (the 'Reimbursement
Agreements'), which is less than the expense limitations imposed by state
securities laws or published regulations thereunder. The reimbursement
agreements, dated April 30, 1985 and February 11, 1992, provide that any
expenses in excess of 1.25% of average daily net assets will be reimbursed to
the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA.
During the Company's fiscal year ended December 31, 1993, the Domestic Money
Market Fund was reimbursed for operating expenses. Such reimbursement amounted
to $246,351. See 'Investment Advisory Arrangements' in the Statement of
Additional Information. MLLA sells the Contracts described in the Prospectus for
the Contracts.
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
Joel Heymsfeld has served as the American Balanced Fund's Portfolio Manager
since June 1988, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1978.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
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Christopher Ayoub has served as the Domestic Money Market Fund's Portfolio
Manager since June 1992, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1985.
Frederic Lutcher has served as the Equity Growth Fund's Portfolio Manager
since June 1989, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1989.
Dennis Cummings has served as the Flexible Strategy Focus Fund's Portfolio
Manager since May 1986, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1978.
Joel Heymsfeld has served as the Global Strategy Focus Fund's Portfolio
Manager since February 1992, and is primarily responsible for the Fund's
day-to-day management. He has served as Vice President of MLAM since 1978.
Walter Rogers has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and employee of
the Investment Adviser since 1986.
Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have served
as the International Equity Focus Fund's Portfolio Managers since July 1993, and
are primarily responsible for the Fund's day-to-day management. Andrew Bascand
has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global
Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P.
Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior
Research Officer of the Bank of England's International Department from 1986 to
1987. Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993;
Vice President from 1990 to 1993; and an employee since 1987. Grace Pineda and
Steve Silverman have served as Vice Presidents of MLAM since 1989 and 1983,
respectively.
Peter Lehman has served as the Natural Resources Focus Fund's Portfolio
Manager since January 1994, and is primarily responsible for the Fund's
day-to-day management. He has served as Vice President of MLAM since 1994;
Senior Fund Analyst for an international fund managed by the Investment Adviser
from 1992 to 1994; Director and Senior Portfolio Manager for Prudential
Insurance Company of America from 1989 to 1991.
Jay Harbeck has served as the Prime Bond Fund's Portfolio Manager since
July 1992, and is primarily responsible for the Fund's day-to-day management. He
has served as Vice President of MLAM since 1986.
Dennis Cummings has served as the Quality Equity Fund's Portfolio Manager
since April 1982, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1978.
Christopher Ayoub has served as the Reserve Assets Fund's Portfolio Manager
since June 1992, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1986.
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Vincent Lathbury, III and Robert Parish have served as the World Income
Focus Fund's Portfolio Managers since July 1993 and are primarily responsible
for the Fund's day-to-day management. They have served as Vice Presidents of
MLAM since 1982 and 1991, respectively. Mr. Parish was the Vice President and
Senior Portfolio Manager for Templeton International from 1987 to 1991.
Grace Pineda will serve as the Developing Capital Markets Focus Fund's
Portfolio Manager beginning May 1994, and is primarily responsible for the
Fund's day-to-day management. She has served as Vice President of MLAM since
1989.
Robert Parish will serve as the International Bond Fund's Portfolio Manager
beginning May 1994 and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1991, and was Vice
President and Senior Portfolio Manager for Templeton International from 1987 to
1991.
Jay Harbeck will serve as the Intermediate Government Fund's Portfolio
Manager beginning May 1994 and is primarily responsible for the Fund's
day-to-day management. He has served as Vice President of MLAM since 1986.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis. The Securities and
Exchange Commission has issued an order permitting the Company to conduct
certain principal transactions with respect to the Domestic Money Market and
Reserve Assets Funds with Merrill Lynch Government Securities Inc. and Merrill
Lynch Money Markets Inc. in U.S. Government and government agency securities,
and certain other money market securities, subject to certain terms and
conditions. During the year ended December 31, 1993, the Company engaged in 41
transactions pursuant to such order involving $99.1 million of securities. For
the year ended December 31, 1993, the Company paid brokerage commissions of
$2,120,358, of which $158,442 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company is offering shares in the Funds, without sales charge, only for
purchase by the Insurance Companies for the Separate Accounts to fund benefits
under the Contracts and for certain other separate accounts to fund benefits
under variable life insurance contracts. Shares of the Domestic Money Market
Fund, the Global Strategy Focus Fund, the Basic Value Focus Fund, World Income
Focus Fund, Global Utility Focus Fund, International Equity Focus Fund,
Developing Capital Markets Focus Fund, International Bond Fund and Intermediate
Government Bond Fund are sold only to MLLIC and ML of New York. The Company
continuously
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offers shares in each of its Funds to the Insurance Companies at prices equal to
the respective per share net asset value of the Funds. Merrill Lynch Funds
Distributor, Inc., a wholly-owned subsidiary of the Investment Adviser, acts as
the distributor of the shares. Net asset value is determined in the manner set
forth below under 'Additional Information-Determination of Net Asset Value.'
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market and Reserve Assets
Funds, will consist of all payments of dividends or interest received by such
Fund less the estimated expenses of such Fund (including fees payable to the
Investment Adviser). Net investment income of the Domestic Money Market and
Reserve Assets Funds (from the time of the immediate preceding determination
thereof) consists of (i) interest accrued and/or discount earned (including both
original issue and market discount), (ii) plus or minus all realized and
unrealized gains (other than realized long-term capital gains) and losses on its
portfolio securities, (iii) less the estimated expenses of the respective Fund
(including the fees payable to the Investment Adviser) applicable to that
dividend period.
Dividends on the Domestic Money Market and Reserve Assets Funds are
declared and reinvested daily in additional full and fractional shares of such
Fund. Dividends from net investment income of the Prime Bond, the High Current
Income, World Income Focus, International Bond and Intermediate Government Bond
Funds are declared and reinvested monthly in additional full and fractional
shares of the respective Funds at net asset value. Dividends from net investment
income of the Global Utility Focus Fund are declared and reinvested quarterly in
additional full and fractional shares of the Fund. Dividends from net investment
income of the Quality Equity, Equity Growth, Flexible Strategy, National
Resources Focus, American Balanced, Global Strategy Focus, International Equity
Focus, Basic Value Focus and Developing Capital Markets Focus Funds are declared
and reinvested at least annually in additional full and fractional shares of the
respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, other than short-term capital gains of the Domestic Money Market and
Reserve Assets Funds, are declared and distributed annually after the close of
the Company's fiscal year to the shareholders of the Fund or Funds to which such
gains are attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
'Code'). Under such provisions, a Fund 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. One of the requirements to qualify for treatment as
a regulated investment company under the Code is that a Fund, among other
things, derive less than 30% of its gross income in each taxable year from gains
(without deduction of losses) from the sale or other disposition of stocks,
securities and certain options, futures or forward contracts held for less than
three months. This requirement may limit the ability of certain Funds to
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dispose of certain securities at times when management of the Company might
otherwise deem such disposition appropriate or desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make distributions
in amounts necessary to satisfy its distribution requirements under the Code.
TAX TREATMENT OF MLLIC, ML OF NEW YORK AND FAMILY LIFE AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send to
the Insurance Companies a written notice required by the Code designating the
amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. The yield for the 30-day period ending
December 31, 1993 was 5.46% for the Prime Bond Fund, 8.17% for the High Current
Income Fund and 5.60% for the World Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's
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shares, when redeemed, may be worth more or less than their original cost. The
yield and total return quotations may be of limited use for comparative purposes
because they do not reflect charges imposed at the Separate Account level which,
if included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line
Composite Index, the Dow Jones Industrial Average, or performance data published
by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service
or contained in publications such as Morningstar Publications, Inc., Chase
Investment Performance Digest, Money Magazine, U.S. News & World Report,
Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Ibbotson Associates. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined (i) for shares of the Domestic Money Market, Reserve Assets,
Prime Bond, High Current Income, Quality Equity, Equity Growth, Flexible
Strategy, American Balanced, and Basic Value Focus Funds at 4:00 P.M. New York
City time on each day the New York Stock Exchange is open for business and (ii)
for shares of the Natural Resources Focus, Global Strategy Focus, World Income
Focus, Global Utility Focus, International Equity Focus, Developing Capital
Markets Focus, International Bond Funds and Intermediate Government Bond Funds,
as of 4:15 P.M. New York City time on each day the New York Stock Exchange is
open for business. The New York Stock Exchange is open on business days other
than national holidays (except for Martin Luther King Day, when it is open) and
Good Friday. The net asset value per share of each Fund other than the Domestic
Money Market and Reserve Assets Funds are computed by dividing the sum of the
value of the securities held by that Fund plus any cash or other assets
(including interest and dividends accrued) minus all liabilities (including
accrued expenses) by the total number of shares outstanding of that Fund at such
time, rounded to the nearest cent. Expenses, including the investment advisory
fees payable to the Investment Adviser, are accrued daily. Since the net
investment income of the Domestic Money Market and Reserve Assets Funds
(including realized and unrealized gains and losses on their portfolio
securities) are declared as a dividend each time the net income of the Funds are
determined (see 'Dividends, Distributions and Taxes'), the net asset value per
share of the Funds normally remains at $1.00 per share immediately after each
such determination and dividend declaration.
Except with respect to securities held by the Domestic Money Market and
Reserve Assets Funds having a remaining maturity of 60 days or less, securities
held by each Fund will be valued as follows: Portfolio securities which are
traded on stock exchanges are valued at the last sale price as of the close of
business on the day the securities are being valued, or, lacking any sales, at
the closing bid price. Securities traded in the over-the-counter market are
valued at the bid price or yield equivalent as obtained from one or more dealers
that make markets in the securities. Portfolio securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the over-the-counter market. Options are
valued at the last bid price in the case of options purchased and the last asked
price in the case of options written. Futures contracts are valued at settlement
price at the close of the applicable exchange. Securities and assets for which
market quotations are not readily available
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are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Company. 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. Securities held by the Domestic Money Market and
Reserve Assets Funds with a remaining maturity of 60 days or less are valued on
an amortized cost basis, unless particular circumstances dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
Pricing Service ('MLSPS'), to value securities held by the High Current Income
and Prime Bond Funds and to value bonds held by other of the Company's Funds.
The Board of Directors of the Company has examined the methods used by the
pricing services in estimating the value of securities held by the Funds and
believes that such methods will reasonably and fairly approximate the price at
which those securities may be sold and result in a good faith determination of
the fair value of such securities; however, there is no assurance that
securities can be sold at the prices at which they are valued. During the year
ended December 31, 1993, the Company did not use the pricing services of MLSPS
and therefore made no payment to MLSPS for such service.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981, and operations of its
Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime
Bond, High Current Income, Quality Equity and Equity Growth Funds commenced on
April 20, 1982. The Flexible Strategy Fund commenced operations on May 1, 1986.
The Natural Resources Focus Fund and the American Balanced Fund commenced
operations on June 1, 1988 and June 2, 1988, respectively. The Domestic Money
Market Fund and the Global Strategy Focus Fund commenced operations on February
20 and February 28, 1992, respectively. The Basic Value Focus, World Income
Focus, Global Utility Focus and International Equity Focus Funds commenced
operations on July 1, 1993. The Developing Capital Markets Focus and
International Bond Funds are expected to commence operations on or about May 2,
1994, and the Intermediate Government Bond Fund is expected to commence
operations on May 16, 1994. The authorized capital stock of the Company consists
of 2,300,000,000 shares of Common Stock, par value $0.10 per share. The shares
of Common Stock are divided into seventeen classes designated Merrill Lynch
Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock,
Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality
Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill
Lynch Flexible Strategy Fund Common Stock, Merrill Lynch Natural Resources Focus
Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill
Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money
Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock,
Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch Global Utility
Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common
Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill
Lynch International Bond Fund Common Stock and Merrill Lynch Intermediate
Government Bond Fund Common Stock, respectively. The Company may, from time to
time, at the sole discretion of its Board of Directors and without the need to
obtain the approval of its shareholders or of Contract Owners, offer and sell
shares of one or more of such classes. Each class consists of 100,000,000 shares
except for Domestic Money Market Fund Common Stock which consists of 300,000,000
shares Reserve Assets Fund Common Stock which consists of 500,000,000 shares.
All shares of Common Stock have equal voting rights, except that only shares of
the respective classes are entitled to vote on matters concerning only that
class. Pursuant to the Investment Company Act of 1940 and the rules and
regulations thereunder, certain matters approved by a vote of all shareholders
of the Company may not be binding on a class whose shareholders have not
approved such matter. Each issued and outstanding share of a class is entitled
to one vote and to participate equally in dividends and distributions declared
with respect to such class and in net assets of such class upon liquidation or
dissolution
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remaining after satisfaction of outstanding liabilities. The shares of each
class, when issued, will be fully paid and nonassessable, have no preference,
preemptive, conversion, exchange or similar rights, and will be freely
transferable. Holders of shares of any class are entitled to redeem their shares
as set forth under 'Redemption of Shares.' Shares do not have cumulative voting
rights and the holders of more than 50% of the shares of the Company voting for
the election of directors can elect all of the directors of the Company if they
choose to do so and in such event the holders of the remaining shares would not
be able to elect any directors. The Company does not intend to hold meetings of
shareholders unless under the Investment Company Act of 1940 shareholders are
required to act on any of the following matters: (i) election of directors; (ii)
approval of an investment advisory agreement; (iii) approval of a distribution
agreement; and (iv) ratification of the selection of independent accountants.
Family Life purchased $1,000 worth of shares of each of the Natural
Resources Focus Fund and the American Balanced Fund on April 29, 1988 and
$1,999,000 worth of shares of each such Fund on May 27, 1988. Family Life also
provided the initial capitalization for each of the Company's other Funds other
than the Domestic Money Market, Global Strategy Focus, Basic Value Focus, World
Income Focus, Global Utility Focus and International Equity Focus Funds. MLLIC
purchased $100 worth of shares of each of the Domestic Money Market and Global
Strategy Focus Funds on February 6, 1992, $2,000,000 worth of shares of the
Domestic Money Market Fund on February 20, 1992, $2,000,000 worth of shares of
the Global Strategy Focus Fund on February 28, 1992 and $100 worth of shares of
each of the Basic Value Focus, World Income Focus, Global Utility Focus and
International Equity Focus Funds on June 28, 1993. MLLIC purchased, on July 1,
1993, $8,000,000 worth of shares of each of the World Income Focus Fund and
International Equity Focus Fund and $2,000,000 worth of shares of each of the
Basic Value Focus Fund and the Global Utility Focus Fund. It is anticipated that
MLLIC will purchase, on May 2, 1994, $8,000,000 worth of shares of the
Developing Capital Markets Focus Fund and $5,000,000 worth of shares of the
International Bond Fund, and, on May 16, 1994, $2,000,000 worth of shares of the
Intermediate Government Bond Fund. The organizational expenses of each of the
Company's Funds are paid by the Investment Adviser. The Investment Adviser is
reimbursed by MLLIC for all such expenses over a five-year period.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of the Company's assets, except that Chase Manhattan
Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245, acts as custodian
for assets of the Company's Developing Capital Markets Focus Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Financial Data Services, Inc. ('FDS'), which is a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., acts as the Company's transfer agent and is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts. FDS will receive an annual fee of
$5,000 per Fund and will be entitled to reimbursement of out-of-pocket expenses.
Prior to June 1, 1990, BONY was the Company's transfer agent.
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LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated April 29, 1994, which forms
a part of the Registration Statement, is incorporated by reference into this
Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund may invest in the
various types of marketable securities issued by or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, Federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or to
be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
The Domestic Money Market and Reserve Assets Funds may invest in depositary
institutions money instruments, such as certificates of deposit, including
variable rate certificates of deposit, bankers' acceptances, time deposits and
bank notes. Certificates of deposit are generally short-term, interest-bearing
negotiable certificates issued by commercial banks, savings banks or savings and
loan associations against funds deposited in the issuing institution. Variable
rate certificates of deposit are certificates of deposit on which the interest
rate is periodically adjusted prior to their stated maturity, usually at 30, 90
or 180 day intervals ('coupon dates'), based upon a specified market rate. As a
result of these adjustments, the interest rate on these obligations may be
increased or decreased periodically. Often, dealers selling variable rate
certificates of deposit to the Funds agree to repurchase such instruments, at
the Funds' option, at par on the coupon dates. The dealers' obligations to
repurchase these instruments are subject to conditions imposed by the various
dealers; such conditions typically are the continued credit standing of the
issuer and the existence of reasonably orderly market conditions. The Funds are
also able to sell variable rate certificates of deposit in the secondary market.
Variable rate certificates of deposit normally carry a higher interest rate than
comparable fixed rate certificates of deposit because variable rate certificates
of deposit generally have a longer stated maturity than comparable fixed rate
certificates of deposit. As a matter of policy, the Domestic Money Market Fund
will invest only in these types of instruments issued by U.S. issuers.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
The Reserve Assets Fund may invest in certificates of deposit and bankers'
acceptances issued by foreign branches or subsidiaries of U.S. banks
('Eurodollar' obligations) or U.S. branches or subsidiaries of foreign banks
('Yankeedollar' obligations). The Fund may invest only in Eurodollar obligations
which by their terms are general obligations of the U.S. parent bank and meet
the other criteria discussed below. Yankeedollar obligations in which the Fund
may invest must be issued by U.S. branches or subsidiaries of foreign banks
which are subject to state or Federal banking regulations in the U.S. and by
their terms must be general obligations of the foreign parent. In addition, the
Fund will limit its investments in Yankeedollar obligations to obligations
issued by banking institutions with more than $1 billion in assets.
The Reserve Assets Fund may also invest in U.S. dollar-denominated
obligations of foreign depository institutions and their foreign branches and
subsidiaries, such as certificates of deposit, bankers' acceptances, time
deposits and deposit notes. The obligations of such foreign branches and
subsidiaries may be the general obligation of the parent bank or may be limited
to the issuing branch or subsidiary by the terms of the specific
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obligation or by government regulation. Such investments will only be made if
determined to be of comparable quality to other investments permissible for the
Reserve Assets Fund. The Reserve Assets Fund will not invest more than 25% of
its total assets (taken at market value at the time of each investment) in these
obligations.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations by the Reserve Assets Fund, the
Domestic Money Market and Reserve Assets Funds may not invest in any bank money
instrument 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 $1 billion and its deposits are insured by the Federal
Deposit Insurance Corporation (the 'FDIC'); provided that this limitation shall
not prohibit the investment of up to 10% of the total assets of the Funds (taken
at market value at the time of each investment) in certificates of deposit
issued by banks and savings and loan associations with assets of less than $1
billion if the principal amount of each such certificate of deposit is fully
insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
The Domestic Money Market and Reserve Assets Funds may invest in commercial
paper (including variable amount master demand notes), which refers to
short-term, unsecured promissory notes issued by corporations, partnerships,
trusts and other entities to finance short-term credit needs and by trusts
issuing asset-backed commercial paper. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payees of such notes, whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. Because variable amount
master notes are direct lending arrangements between the lender and borrower, it
is not generally contemplated that such instruments will be traded and there is
no secondary market for the notes. Typically, agreements relating to such notes
provide that the lender may not sell or otherwise transfer the note without the
borrower's consent. Such notes provide that the interest rate on the amount
outstanding is adjusted periodically, typically on a daily basis, in accordance
with a stated short-term interest rate benchmark. Since the interest rate of a
variable amount master note is adjusted no less often than every 60 days and
since repayment of the note may be demanded at any time, the Investment Adviser
values such a note in accordance with the amortized cost basis described under
'Determination of Net Asset Value' in the Statement of Additional Information.
The Domestic Money Market and Reserve Assets Funds may also invest in
nonconvertible debt securities issued by entities or asset-backed nonconvertible
debt securities issued by trusts (e.g., bonds and debentures) with no more than
397 days (13 months) remaining to maturity at date of settlement. Short-term
debt securities with a remaining maturity of less than one year tend to become
extremely liquid and are traded as money market securities. For a discussion of
the ratings requirements of the Funds' portfolio securities, see 'Investment
Objectives and Policies of the Funds-Money Market Fund Portfolio Restrictions'
and 'Investment Objectives and Policies of the Funds-Domestic Money Market Fund'
in the Prospectus.
The Reserve Assets Fund may also invest in U.S. dollar-denominated
commercial paper and other short-term obligations issued by foreign entities.
Such investments are subject to quality standards similar to those applicable to
investments in comparable obligations of domestic issuers. Investments in
foreign entities in general involve the same risks as those described in the
Statement of Additional Information in connection with investments in
Eurodollar, Yankeedollar and foreign bank obligations.
REPURCHASE AGREEMENTS
Each of the Company's Funds may invest in securities subject to repurchase
agreements with any member bank of the Federal Reserve System or primary dealer
in U.S. Government securities. A repurchase agreement is an instrument under
which the purchaser (i.e., a Fund) acquires ownership of the obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. The underlying
securities will only consist of U.S. Government or government agency securities,
certificates of deposit, commercial paper or bankers' acceptances. Repurchase
agreements usually are for short periods, such as under one week. Repurchase
agreements are
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considered to be collateralized loans by the Domestic Money Market and Reserve
Assets Funds under the Investment Company Act of 1940, and the Funds will
require the seller to provide additional collateral if the market value of the
securities falls below the repurchase price any time during the term of the
repurchase agreement. If a repurchase agreement is construed to be a
collateralized loan, the underlying securities will not be considered to be
owned by the Funds but only to constitute collateral for the seller's obligation
to pay the repurchase price, and, in the event of a default by the seller
because of bankruptcy or otherwise, the Funds may suffer time delays and incur
costs or losses in connection with the disposition of the collateral. The
Investment Adviser evaluates the creditworthiness of dealers with which the
Funds enter into repurchase agreements, using guidelines established by the
Company's Board of Directors. The Domestic Money Market and Reserve Assets Funds
will not enter into repurchase agreements with maturities of more than 30 days.
Reverse Repurchase Agreements: The Domestic Money Market and Reserve
Assets Funds may enter into reverse repurchase agreements, which involve the
sale of money market securities held by the Funds, with an agreement to
repurchase the securities at an agreed upon price, date, and interest payment.
The Funds will use the proceeds of the reverse repurchase agreements to purchase
other money market securities either maturing, or under an agreement to resell,
at a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Funds will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the proceeds of the
transaction is greater than the interest expense of the reverse repurchase
transaction. A separate account of the applicable Fund will be established with
the Custodian consisting of cash or U.S. Government securities having a market
value at all times at least equal in value to the proceeds received on any sale
subject to repurchase plus accrued interest.
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as 'gilt-edge.' Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa--Bonds which are rated Baa are considered medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded both during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any period of time may be
small.
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Caa--Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other market shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
Options on Portfolio Securities. Each of the Quality Equity, Flexible
Strategy, Natural Resources Focus, American Balanced, Global Strategy Focus,
Basic Value Focus, World Income Focus, Global Utility Focus, International
Equity Focus, International Bond and Developing Capital Markets Focus Funds may
from time to time sell ('write') covered call options on its portfolio
securities in which it may invest and may engage in closing purchase
transactions with respect to such options. A covered call option is an option
where the Fund, in return for a premium, gives another party a right to buy
particular securities held by the Fund at a specified future date and at a price
set at the time of the contract. The principal reason for writing call options
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. By writing covered call options, a
Fund gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction. A closing purchase transaction cancels out the Fund's position as
the writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered call
options serve as a partial hedge against the price of the underlying security
declining. The Quality Equity Fund and the Basic Value Focus Fund may not write
covered call options on underlying securities exceeding 15% of the value of its
total assets.
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Each of the Natural Resources Focus, Global Strategy Focus, World Income
Focus, Global Utility Focus, International Equity Focus, International Bond and
Developing Capital Markets Focus Funds also may write put options, which give
the holder of the option the right to sell the underlying security to the Fund
at the stated exercise price. The Fund will receive a premium for writing a put
option which increases the Fund's return. A Fund will write only covered put
options which means that so long as the Fund is obligated as the writer of the
option, it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. A Fund may engage in closing transactions in order to terminate put
options that it has written.
The Natural Resources Focus, Global Strategy Focus, World Income Focus,
Global Utility Focus, International Equity Focus, International Bond and
Developing Capital Markets Focus Funds may purchase put options on portfolio
securities. In return for payment of a premium, the purchase of a put option
gives the holder thereof the right to sell the security underlying the option to
another party at a specified price until the put option is closed out, expires
or is exercised. Each Fund will only purchase put options to seek to reduce the
risk of a decline in value of the underlying security. The total return on the
security may be reduced by the amount of the premium paid for the option by the
Fund. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Each of the Funds may engage in options transactions on exchanges and in
the over-the-counter ('OTC') markets. In general, exchange traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See 'Over-the-Counter Options'
below for information as to restrictions on the use of OTC options.
Options on Stock Indices. The Natural Resources Focus, Global Strategy
Focus, World Income Focus, International Equity Focus, International Bond and
Developing Capital Markets Focus Funds may purchase and write call options and
put options on stock indices traded on a national securities exchange to seek to
reduce the general market risk of their securities or specific industry sectors
which the Fund invests in. Options on indices are similar to options on
securities except that, on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Funds may invest in index options based on a broad market index,
e.g., the S&P 500, or on a narrow index representing an industry or market
segment, e.g., the Amex Oil & Gas Index. The effectiveness of a hedge employing
stock index options will depend primarily on the degree of correlation between
movements in the value of the index underlying the option and in the portion of
the portfolio being hedged. For further discussion concerning such options, see
'Risk Factors in Options, Futures and Currency Transactions' below and the
Company's Statement of Additional Information.
Stock Index and Financial Futures Contracts. The Natural Resources Focus,
Global Strategy Focus, World Income Focus, International Equity Focus,
International Bond and Developing Capital Markets Focus Funds may purchase and
sell stock index futures contracts and financial futures contracts to hedge
their portfolios. The Funds may sell stock index futures contracts and financial
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Funds' securities portfolios that
might otherwise result. When the Funds are not fully invested in the securities
market and anticipate a significant market advance, they may purchase stock
index or financial futures in order to gain rapid market exposure that may in
part or entirely offset increases in the cost of securities that the Funds
intend to purchase. A stock index or
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financial futures contract is a bilateral agreement pursuant to which the Funds
will agree to buy or deliver at settlement an amount of cash equal to a dollar
multiplied by the difference between the value of a stock index or financial
instrument at the close of the last trading day of the contract and the price at
which the futures contract is originally entered into. The Funds may engage in
transactions in stock index futures contracts based on broad market indexes or
on indexes on industry or market segments. A Fund may effect transactions in
stock index futures contracts in connection with the equity securities in which
it invests and in financial futures contracts in connection with the debt
securities in which it invests. As with stock index options, the effectiveness
of the Funds' hedging strategies depend primarily upon the degree of correlation
between movements in the value of the securities subject to the hedge and the
index or securities underlying the futures contract. See 'Risk Factors in
Options, Futures and Currency Transactions' below.
Hedging Foreign Currency Risks. The Natural Resources Focus, Global
Strategy Focus, World Income Focus, Global Utility Focus, International Equity
Focus, International Bond and Developing Capital Markets Focus Funds are
authorized to deal in forward foreign exchange contracts between currencies of
the different countries in which they will invest, including multi-national
currency units, as a hedge against possible variations in the foreign exchange
rate between these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
(up to one year) and price at the time of the contract. The dealings of the
Funds in forward foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Funds accruing in connection with the purchase
and sale of their portfolio securities, the sale and redemption of shares of the
Funds or the payment of dividends and distributions by the Funds. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Funds
will not speculate in forward foreign exchange. Hedging against a decline in the
value of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value of the hedged
currency should rise. Moreover, it may not be possible for the Funds to hedge
against a devaluation that is so generally anticipated that the Funds are not
able to contract to sell the currency at a price above the devaluation level
they anticipate.
The Funds are also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency options provide
the holder thereof the right to buy or to sell a currency at a fixed price on or
before a future date. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Such transactions may be effected with respect to hedges
on non-U.S. dollar-denominated securities (including securities denominated in
multi-national currency units) owned by the Funds, sold by the Funds but not yet
delivered, or committed or anticipated to be purchased by the Funds. As an
illustration, the Funds may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese yen-denominated security.
In such circumstances, for example, the Funds may purchase a foreign currency
put option enabling them to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Funds may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a 'straddle'). By
selling such call option in this illustration, the Funds give up the opportunity
to profit without limit from increases in the relative value of the yen to the
dollar.
The Funds will not speculate in foreign currency options or futures.
Accordingly, the Funds will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which they own, the
expected acquisition price of securities which they have committed or anticipate
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Funds but not yet delivered, the proceeds
thereof in its denominated currency. Further, if a security with respect to
which a currency hedging transaction has been executed should subsequently
decrease in value, the Funds will direct their custodian to segregate liquid,
high-grade debt securities having a market value equal to such decrease in
value, less any initial or variation margin held in the account of their broker.
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As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
Options on Futures Contracts. The Natural Resources Focus, Global Strategy
Focus, World Income Focus, Global Utility Focus and International Equity Focus
Funds may also purchase and write call and put options on futures contracts in
connection with their hedging activities. Generally, these strategies are
utilized under the same market conditions (i.e., conditions relating to specific
types of investments) in which the Funds enter into futures transactions. The
Funds may purchase put options or write call options on futures contracts rather
than selling the underlying futures contract in anticipation of a decline in the
equities markets or in the value of a foreign currency. Similarly, the Funds may
purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from appreciation of equity securities or in the currency in which
securities which the Funds intend to purchase are denominated. Limitations on
transactions in options on futures contracts are described below.
Over-the-Counter Options. The Natural Resources Focus, Global Strategy
Focus, World Income Focus, Global Utility Focus, International Equity Focus,
International Bond and Developing Capital Markets Focus Funds may engage in
options transactions in the over-the-counter markets. In general,
over-the-counter ('OTC') options are two-party contracts with price and terms
negotiated by the buyer and seller, whereas exchange-traded options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options include put and call options on
individual securities, cash settlement options on groups of securities, and
options on currency. The Funds may engage in an OTC options transaction only if
they are permitted to enter into transactions in exchange-traded options of the
same general type. The Funds will engage in OTC options only with member banks
of the Federal Reserve System and primary dealers in U.S. Government securities
or their affiliates which have a capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Company require that each of the
Natural Resources Focus, Global Strategy Focus, World Income Focus, Global
Utility Focus, International Equity Focus, International Bond and Developing
Capital Markets Focus Funds' futures transactions constitute bona fide hedging
transactions or, with respect to non-hedging transactions, that the Fund not
enter into such transactions, if, immediately thereafter, the sum of the amount
of initial margin deposits on the respective Fund's existing non-hedging futures
positions and premiums paid for related options would exceed 5% of the market
value of the Fund's total assets.
When a Fund purchases a futures contract, a call option thereon or writes a
put option, an amount of cash and cash equivalents will be deposited in a
segregated account with the Company's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby insuring
that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission
which exempts the Company from certain provisions of the Investment Company Act
of 1940 in connection with transactions involving futures contracts and options
thereon.
Risk Factors in Options, Futures and Currency Transactions. A Fund's
ability to effectively hedge all or a portion of its portfolio of securities
through transactions in options on stock indexes, stock index futures and
financial futures depends on the degree to which price movements in the index
underlying the hedging instrument correlates with price movements in the
relevant portion of the securities portfolio. The securities portfolio will not
duplicate the components of the index. As a result, the correlation will not be
perfect. Consequently, a Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as the
underlying index or securities and that the Fund would experience a loss on one
position which is not completely offset by a gain on the other position. It is
also possible that there may be a negative correlation between the index or
securities underlying an option or futures contract in which a Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the securities and the hedging instrument. A Fund
will invest in a hedging instrument only if, in the judgment of the Investment
Adviser, there is expected to be a sufficient degree of correlation between
movements in the value of the
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instrument and movements in the value of the relevant portion of the portfolio
of securities for such hedge to be effective. There can be no assurance that the
judgment will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entail the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index or
currency. The anticipated spread between the prices may be distorted due to
differences in the nature of the markets, such as differences in margin and
maintenance requirements, the liquidity of such markets and the participation of
speculators in the futures market. However, the risk of imperfect correlation
generally tends to diminish as the maturity date of the futures contract or
termination date of the option approaches.
The Funds intend to enter into exchange-traded options and futures
transactions only if there appears to be a liquid secondary market for such
options or futures. However, there can be no assurance that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to close an
options or futures transaction. The inability to close options and futures
positions could have an adverse impact on a Fund's ability to effectively hedge
its portfolio. There is also the risk of loss by a Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom a Fund has an open
position in an option or futures contract.
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APRIL 29, 1994
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800
Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds (hereinafter referred to as the 'Funds' or
individually as a 'Fund'): Merrill Lynch Domestic Money Market Fund, Merrill
Lynch Reserve Assets Fund, Merrill Lynch Prime Bond Fund, Merrill Lynch High
Current Income Fund, Merrill Lynch Quality Equity Fund, Merrill Lynch Equity
Growth Fund, Merrill Lynch Flexible Strategy Fund, Merrill Lynch Natural
Resources Focus Fund, Merrill Lynch American Balanced Fund, Merrill Lynch Global
Strategy Focus Fund, Merrill Lynch Basic Value Focus Fund, Merrill Lynch World
Income Focus Fund, Merrill Lynch Global Utility Focus Fund, Merrill Lynch
International Equity Focus Fund, Merrill Lynch Developing Capital Markets Focus
Fund, Merrill Lynch International Bond Fund and Merrill Lynch Intermediate
Government Bond Fund. A separate class of Common Stock is issued for each Fund.
The shares of the Funds will be sold to Merrill Lynch Life Insurance
Company ('MLLIC') and ML Life Insurance Company of New York ('ML of New York')
and shares of certain of the Funds will be sold to Family Life Insurance Company
('Family Life') for their separate accounts ('Separate Accounts') to fund
benefits under variable annuity contracts issued by them (the 'Variable Annuity
Contracts'). Shares of the Funds sold only to MLLIC and ML of New York also will
be sold to MLLIC and ML of New York for certain of their other separate accounts
to fund variable life insurance contracts issued by them (such contracts,
together with the Variable Annuity Contracts are collectively referred to as the
'Contracts'). MLLIC, ML of New York and Family Life (collectively, the
'Insurance Companies') will redeem shares to the extent necessary to provide
benefits under the Contracts or for such other purposes as may be consistent
with the contracts. MLLIC and ML of New York are wholly-owned subsidiaries of
Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch
Asset Management, L.P. (the 'Investment Adviser').
------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION OF THE COMPANY IS NOT A PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE COMPANY (THE
'PROSPECTUS') DATED APRIL 29, 1994 WHICH HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND WHICH IS AVAILABLE UPON
REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY
AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Investment Objectives and Policies.............. 3
Investment Restrictions......................... 4
Management of the Company....................... 37
Investment Advisory Arrangements................ 39
Determination of Net Asset Value................ 42
Portfolio Transactions and Brokerage............ 43
Redemption of Shares............................ 45
Dividends, Distributions and Taxes.............. 45
Distribution Arrangements....................... 46
Performance Data................................ 46
Additional Information.......................... 48
Independent Auditor's Report.................... 49
Financial Statements............................ 50
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Funds are as follows: The Domestic Money
Market Fund seeks preservation of capital, liquidity and the highest possible
current income consistent with the foregoing objectives by investing in
short-term domestic money market securities. The Reserve Assets Fund seeks the
preservation of capital, liquidity and the highest possible current income
consistent with the foregoing objectives by investing in short-term money market
securities. The Prime Bond Fund seeks to attain as high a level of current
income as is consistent with prudent investment management, and capital
appreciation to the extent consistent with the foregoing objective, by investing
primarily in long-term corporate bonds rated A or better by either Moody's
Investors Service, Inc. ('Moody's') or Standard & Poor's Corporation ('Standard
& Poor's'). The High Current Income Fund seeks to attain as high a level of
current income as is consistent with prudent investment management, and capital
appreciation to the extent consistent with the foregoing objective, by investing
principally in fixed-income securities which are rated in the lower rating
categories of the established rating services or in unrated securities of
comparable quality. The Quality Equity Fund seeks to attain the highest total
investment return consistent with prudent risk through a fully managed
investment policy utilizing equity securities, primarily common stocks of
large-capitalization companies, as well as investment grade debt and convertible
securities. The Equity Growth Fund seeks to attain long-term capital growth by
investing primarily in common shares of small companies and emerging growth
companies regardless of size. The Flexible Strategy Fund seeks to achieve high
total investment return consistent with prudent risk by utilizing a flexible
investment strategy which permits the Fund to vary its investment emphasis among
equity securities, intermediate and long-term debt obligations and money market
securities of foreign and domestic issuers. While the Fund will generally
emphasize investment in common stocks of larger-capitalization issuers and in
investment grade debt obligations, the Fund may from time to time invest a
portion of its assets in small company and emerging growth company stocks when
consistent with the Fund's objective. The Natural Resources Focus Fund seeks to
attain long-term growth of capital and the protection of the purchasing power of
shareholders' capital by investing primarily in equity securities of domestic
and foreign companies with substantial natural resource assets. The American
Balanced Fund seeks a level of current income and a degree of stability of
principal not normally available from an investment solely in equity securities
and the opportunity for capital appreciation greater than normally available
from an investment solely in debt securities by investing in a balanced
portfolio of fixed income and equity securities. The Global Strategy Focus Fund
seeks high total investment return by investing primarily in a portfolio of
equity and fixed income securities of U.S. and foreign issuers. The Basic Value
Focus Fund seeks to attain capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value. The
World Income Focus Fund seeks to attain high current income by investing in a
global portfolio of fixed income securities donominated in various currencies,
including multinational currency units. The Fund may invest in United States and
foreign government and corporate fixed income securities, including high yield,
high risk, lower rated and unrated securities. The Global Utility Focus Fund
seeks to attain capital appreciation and current income through investment of at
least 65% of its total assets in equity and debt securities issued by domestic
and foreign companies which are, in the opinion of the Investment Adviser,
primarily engaged in the ownership or operation of facilities used to generate,
transmit or distribute electricity, telecommunications, gas or water. The
International Equity Focus Fund seeks to attain capital appreciation through
investment in securities, principally equities, of issuers in countries other
than the United States. The Developing Capital Markets Focus Fund seeks
long-term capital appreciation through investment in securities, principally
equities, of issuers in countries having smaller capital markets. The
International Bond Fund seeks high total investment return from investment in a
non-U.S. international portfolio of debt instruments denominated in various
currencies and multi-national currency units. The Intermediate Government Bond
Fund seeks the highest possible current income consistent
3
<PAGE>
with the protection of capital afforded by investing in intermediate-term debt
securities issued or guaranteed by the United States Government, its agencies or
instrumentalities.
Investors are referred to 'Investment Objectives and Policies of the Funds'
in the Prospectus for a more complete discussion of the investment objectives
and policies of the Company.
INVESTMENT RESTRICTIONS
The Company has adopted the following restrictions and policies relating to
the investment of assets of the Funds 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 Fund affected (which for
this purpose and under the Investment Company Act of 1940 means the lesser of
(i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares). A change in policy affecting only one Fund may be effected with the
approval of a majority of the outstanding shares of such Fund. The Company may
not issue senior securities.
RESTRICTIONS APPLICABLE TO THE DOMESTIC MONEY MARKET
The Domestic Money Market Fund may not purchase any security other than
money market and other securities described under 'Investment Objectives and
Policies of the Funds--Domestic Money Market Fund' in the Prospectus. In
addition, the Domestic Money Market Fund may not purchase securities of foreign
issuers (including Eurodollar and Yankeedollar obligations). In addition, the
Domestic Money Market Fund may not:
(1) invest more than 10% 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) except that up to 25% of the value of the Fund's total assets
may be invested without regard to such 10% limitation.
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combination thereof.
(7) make loans to other persons; provided that the Fund may purchase money
market securities or enter into repurchase agreements; lend securities owned or
held by it pursuant to (8) below; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the
4
<PAGE>
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The borrowing provisions shall not apply to reverse
repurchase agreements. Usually only 'leveraged' investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 25% of the Fund's total assets, taken at market value at the time
thereof. Although the Fund has the authority to mortgage, pledge or hypothecate
more than 10% of its total assets under this investment restriction (10), as a
matter of operating policy, the Fund will not mortgage, pledge or hypothecate in
excess of 10% of total net assets.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) purchase, either alone or together with any other Fund or Funds, more
than 10% of the outstanding securities of an issuer except that such restriction
does not apply to U.S. Government or government agency securities, bank money
instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or variable
amount master notes) with legal or contractual restrictions on resale or for
which no readily available market exists or in securities of issuers (other than
issuers of government agency securities) having a record, together with
predecessors, of less than three years of continuous operation if, regarding all
such securities, more than 10% of its total assets (taken at market value) would
be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more than
10% of the Fund's total assets (taken at market value at the time of each
investment) would be subject to repurchase agreements maturing in more than
seven days.
(15) enter into reverse repurchase agreements if, as a result thereof, the
Fund's obligations with respect to reverse repurchase agreements would exceed
one-third of the Fund's net assets (defined to be total assets, taken at market
value, less liabilities other than reverse repurchase agreements).
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular industry
(other than U.S. Government securities, government agency securities or bank
money instruments).
RESTRICTIONS APPLICABLE TO THE RESERVE ASSETS FUNDS
The Reserve Assets Fund may not purchase any security other than money
market and other securities described under 'Investment Objectives and Policies
of the Funds--Reserve Assets Fund' in the Prospectus. In addition, the Reserve
Assets Fund may not:
(1) invest more than 10% 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
5
<PAGE>
agreements with any one bank) except that up to 25% of the value of the Fund's
total assets may be invested without regard to such 10% limitation.
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may purchase money
market securities or enter into repurchase agreements; lend securities owned or
held by it pursuant to (8) below; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. The borrowing provisions shall not apply to reverse
repurchase agreements. Usually only 'leveraged' investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 25% of the Fund's total assets, taken at market value at the time
thereof. As a matter of operating policy, the Fund will not mortgage, pledge or
hypothecate in excess of 10% of total net assets.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) purchase, either alone or together with any other Fund or Funds, more
than 10% of the outstanding securities of an issuer except that such restriction
does not apply to U.S. Government or government agency securities, bank money
instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or variable
amount master notes) with legal or contractual restrictions on resale or for
which no readily available market exists or in securities of issuers (other
6
<PAGE>
than issuers of government agency securities) having a record, together with
predecessors, of less than three years of continuous operation if, regarding all
such securities, more than 5% of its total assets (taken at market value) would
be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more than
10% of the Fund's total assets (taken at market value at the time of each
investment) would be subject to repurchase agreements maturing in more than
seven days.
(15) enter into reverse repurchase agreements if, as a result thereof, the
Fund's obligations with respect to reverse repurchase agreements would exceed
one-third of the Fund's net assets (defined to be total assets, taken at market
value, less liabilities other than reverse repurchase agreements).
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular industry
(other than U.S. Government securities, government agency securities or bank
money instruments).
RESTRICTIONS APPLICABLE TO THE PRIME BOND FUND
The Prime Bond Fund may not:
(1) 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).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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 Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase obligations
in private placements, and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the
7
<PAGE>
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund 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 the Fund's total assets, taken at market value at the time
thereof.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers except that the Fund may
invest in securities of foreign issuers if at the time of acquisition no 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 the Prime Bond Fund 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 (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.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities. If through the appreciation of restricted securities or the
depreciation of unrestricted securities held by a Fund, more than 10% of the
assets of the Fund should be invested in restricted securities, the Fund will
consider appropriate steps to assure maximum flexibility.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(16) 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).
8
<PAGE>
(17) 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 Funds or with
individually managed accounts advised or sponsored by the Investment Adviser or
any of its affiliates to reduce brokerage commissions or otherwise to achieve
best overall execution).
(18) purchase, either alone or together with any other Fund or Funds, more
than either 10% (a) in principal amount of the outstanding securities of an
issuer, or (b) of the outstanding voting securities of an issuer except that
such restriction will not apply to U.S. Government or government agency
securities, bank money instruments or bank repurchase agreements.
RESTRICTIONS APPLICABLE HIGH CURRENT INCOME FUND
The High Current Income Fund may not:
(1) 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).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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 Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly-distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
9
<PAGE>
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund 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 the Fund's total assets, taken at market value at the time
thereof.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers; except that the High
Current Income Fund may invest in securities of foreign issuers if at the time
of acquisition no 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 the Fund 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 (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.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities. If through the appreciation of restricted securities or the
depreciation of unrestricted securities held by a Fund, more than 10% of the
assets of the Fund should be invested in restricted securities, the Fund will
consider appropriate steps to assure maximum flexibility.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(16) 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).
(17) 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 Funds or with
individually managed accounts advised or sponsored by the Investment Adviser or
any of its affiliates to reduce brokerage commissions or otherwise to achieve
best overall execution).
(18) purchase, either alone or together with any other Fund or Funds, more
than either 10% (a) in principal amount of the outstanding securities of an
issuer, or (b) of the outstanding voting securities of an issuer except
10
<PAGE>
that such restriction will not apply to U.S. Government or government agency
securities, bank money instruments or bank repurchase agreements.
RESTRICTIONS APPLICABLE TO THE QUALITY EQUITY FUND
The Quality Equity Fund, may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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 Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof, except
that the Fund may write covered call options.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly-distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposits,
bankers' acceptances and variable amount notes shall not be deemed the making of
a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned; and provided further that the Fund may
only make loans to New York Stock Exchange Member firms, other brokerage firms
having net capital of at least $10 million and financial institutions, such as
registered investment companies, banks and insurance companies, having at least
$10 million in capital and surplus.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value or, acquisition cost if it is lower, and then only from banks as a
temporary measure for extraordinary or emergency purposes. The Fund will not
purchase securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with
11
<PAGE>
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 15% of the Fund's total assets, taken at market
value at the time thereof (the deposit is escrow by the Fund of underlying
securities in connection with the writing of call options is not deemed to be a
pledge); although Fund has the authority to mortgage, pledge or hypothecate more
than 10% of its total assets under this investment restriction (10), as a matter
of operating policy, the Fund will not mortgage, pledge or hypothecate in excess
of 10% of total net assets.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers except that the Quality
Equity Fund may invest in securities of foreign issuers if at the time of
acquisition no more than 10% of its total assets, taken at market value at the
time of the investment, would be invested in such securities. 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.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is the securities.
(14) Quality Equity Fund may not invest in securities for which there are
legal or contractual restrictions on resale, and it may not invest in securities
for which there is no readily available market if at the time of acquisition
more than 5% of its total assets would be invested in such securities).
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(16) concentrate its investments in any particular industry; provided that
if it is deemed appropriate for the attainment of the Fund's investment
objectives, up to 25% of its total assets (taken at acquisition cost at the time
of each investment) may be invested in any one industry.
(17) invest, either alone or together with any other Fund or Funds, in
securities of any single issuer, if immediately after and as a result of such
investment, the Fund owns more than 10% of the outstanding securities, or more
than 10% of the outstanding voting securities, of such issuer.
(18) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.)
RESTRICTIONS APPLICABLE TO THE EQUITY GROWTH FUND
The Equity Growth Fund may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
12
<PAGE>
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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
the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls straddles, spreads or comhinations thereof.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly-distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating amy
not exceed the Fund's total assets, taken at market value at the time thereof.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of foreign issuers except that the Quality Equity
Fund may invest in securities of foreign issuers if at the time of acquisition
no more than 10% of its total assets, taken at (market value at the time of the
investment, would be invested in such securities. 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.
13
<PAGE>
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 5% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(17) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment more
than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(18) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.)
RESTRICTIONS APPLICABLE TO THE FLEXIBLE STRATEGY FUND
The Flexible Strategy Fund may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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 Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interest
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof, except
that the Fund may write covered call options.
14
<PAGE>
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly-distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed the making of a loan.
(8) lend it portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 15% of the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge);
although the Fund has the authority to mortgage, pledge or hypothecate more than
10% of its total assets under this investment restriction (10), as a matter of
operating policy, the Fund will not mortgage, pledge or hypothecate in excess of
10% of total net asset.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(13) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(14) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(15) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(16) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment more
than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(17) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.)
15
<PAGE>
RESTRICTIONS APPLICABLE TO THE NATURAL RESOURCES FOCUS FUND
The Natural Resources Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) 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
the Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of investors which invest or deal in any
of the above, and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts (as a matter of operating policy, however, the Fund at
present does not intend to engage in transactions in commodities or commodities
contracts, other than foreign currency, futures contracts and options on futures
contracts).
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(5) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(6) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (7) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(8) borrow amounts in excess of 10% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually, only 'leveraged' investment companies may borrow in
excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding. Interest paid on such borrowings
will reduce net income.
(9) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(7) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (7)
above, and then such mortgaging, pledging
16
<PAGE>
or hypothecating may not exceed 10% of the Fund's total assets, taken at market
value at the time thereof (the deposit in escrow by the Fund of underlying
securities in connection with the writing of call options is not deemed to be a
pledge).
(10) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(13) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(14) 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, except that when management anticipates significant economic,
political or financial instability, the Natural Resources Focus Fund may invest
more than 25% of its total assets in gold-related companies. In determining
compliance by the Natural Resources Focus Fund with its policy on investing in
the securities of issuers primarily engaged in the same industry, management
will rely on industrial classifications contained in Standard & Poor's Register
of Corporations, Directors and Executives.
RESTRICTIONS APPLICABLE TO THE AMERICAN BALANCED FUND
The American Balanced Fund may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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
the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof, except
that the Fund may write covered call options.
17
<PAGE>
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided that for purposes of
this restriction the acquisition of a portion of an issue of publicly-
distributed bonds, debentures of other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securlties in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 15 % of the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge);
although the Fund has the authority to mortgage, pledge or hypothecate more than
10% of its total assets under this investment restriction (10), as a matter of
operating policy, the Fund will not mortgage, pledge or hypothecate in excess of
10% of total net assets.
(11) act as a an underwriter of securities, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers. 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.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(17) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment
18
<PAGE>
more than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(18) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.)
RESTRICTIONS APPLICABLE TO THE GLOBAL STRATEGY FOCUS FUND
The Global Strategy Focus Fund, may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) 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 Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above, and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payment in connection
with transactions in options, forward currency contracts, futures contracts and
options on futures contracts.
(5) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(6) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (7) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances.
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(8) borrow amounts in excess of 10% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only 'leveraged' investment companies may borrow in
excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding. Interest paid on such borrowings
will reduce net income.
19
<PAGE>
(9) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(7) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (8)
above, and then such mortgaging, pledging or hypothecating may not exceed 15% of
the Fund's total assets, taken at market value at the time thereof (the deposit
in escrow by the Fund of underlying securities in connection with the writing of
call options is not deemed to be a pledge); although the Fund has the authority
to mortgage, pledge or hypothecate more than 10% of its total assets under this
investment restriction (9), as a matter of operating policy, the Fund will not
mortgage, pledge or hypothecate in excess of 10% of total assets.
(10) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(13) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(14) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(15) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment more
than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(16) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.)
RESTRICTIONS APPLICABLE TO THE BASIC VALUE FOCUS FUND
The Basic Value Focus Fund may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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,
20
<PAGE>
and only if immediately thereafter not more than 10% of such Fund's total
assets, taken at market value, would be invested in such securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof, except
that the Fund may write covered call options.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for the
purposes of this restriction the acquisition of a portion of an issue of
publicly-distributed bonds, debentures of other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund 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 the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge).
(11) act as a an underwriter of securities, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers except that the Basic
Value Focus Fund may invest in securities of foreign issuers if at the time of
acquisition no more than 10% of its total assets, taken at market value at the
time of the investment, would be invested in such securities. 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.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
21
<PAGE>
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 5% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(16) invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(including securities issued or guaranteed by the government of any one foreign
country, but excluding the U.S. Government, its agencies and instrumentalities).
RESTRICTIONS APPLICABLE TO THE WORLD INCOME FOCUS FUND
The World Income Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) 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
commissions, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
the Fund may invest in securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or interest therein,
and except further, that the Fund may engage in transactions in currency and
options thereon, forward currency contracts, futures contracts and options
thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(5) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(6) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (7) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
22
<PAGE>
(8) borrow amounts in excess of 20% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only 'leveraged' investment companies may borrow in
excess of 5 % of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding except that the Fund may purchase
securities if their outstanding borrowings do not exceed 5% of their total
assets. Interest paid on such borrowings will reduce net income.
(9) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on future contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(7) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (8)
above, and then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's total assets, taken at market value at the time thereof (the deposit
in escrow by the Fund of underlying securities in connection with the writing of
call options is not deemed to be a pledge).
(10) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(13) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(14) invest more than 25% of the assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(including securities issued or guaranteed by the government of any one foreign
country, but excluding the U.S. Government, its agencies and instrumentalities).
RESTRICTIONS APPLICABLE TO THE GLOBAL UTILITY FOCUS FUND
The Global Utility Focus Fund may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) 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
the Fund's total assets, taken at market value, would be invested in such
securities.
23
<PAGE>
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, cornmodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(6) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on tures contract).
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 10% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only 'leveraged' investment companies may borrow in
excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding, except that the Fund may purchase
securities if their outstanding borrowings do not exceed 5% of their total
assets. Interest paid on such borrowings will reduce net income.
(10) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on future contracts,
mortgage, pledge, hypothecate or or in any manner transfer (except as provided
in (8) above), as security for indebtedness, any securities owned or held by the
Fund 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
the Fund's total assets, taken at market value at the time thereof (the deposit
in escrow by the Fund of underlying securities in connection with the writing of
call options is not deemed to be a pledge).
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(13) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more
24
<PAGE>
than 10% of the total assets of the Fund taken at market value, would be
invested in the securities. However, the asset-backed securities which the Fund
has the option to put to the issuer or a stand-by bank or broker and receive the
principal amount or redemption price thereof less transaction costs on no more
than seven days' notice or when the Fund has the right to convert such
securities into a readily marketable security in which it could otherwise invest
upon not less than seven days' notice are not subject to this restriction.
(14) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(15) invest less than 65% of its total assets in equity and debt securities
issued by domestic and foreign companies in the utilities industries, except
during temporary defensive periods.
RESTRICTIONS APPLICABLE TO THE INTERNATIONAL EQUITY FOCUS FUND
The International Equity Focus Fund may not:
(1) 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 or, securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any one
bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities or 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
the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
developing program, commodities, commodity contracts or real estate, except that
the Fund may invest in securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or interest therein
and except further, that the Fund may engage in transactions in currency and
options thereon, forward currency contracts, futures contracts and options
thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(6) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly-distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
25
<PAGE>
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned.
(9) borrow amounts in excess of 10% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only 'leveraged' investment companies may borrow in
excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding, except that the Fund may purchase
securities if their outstanding borrowings do not exceed 5% of their total
assets. Interest paid on such borrowings will reduce net in come.
(10) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on future contracts,
mortgage, pledge, hypothecate or or in any manner transfer (except as provided
in (8) above), as security for indebtedness, any securities owned or held by the
Fund 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
the Fund's total assets, taken at market value at the time thereof (the deposit
in escrow by the Fund of underlying securities in connection with the writing of
call options is not deemed to be a pledge).
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested is such securities.
(13) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(14) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, Merrill Lynch Asset Management 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.
(15) invest more than 25% of the assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(including securities issued or guaranteed by the government of any one foreign
country, but excluding the U.S. Government, its agencies and instrumentalities).
RESTRICTIONS APPLICABLE TO THE DEVELOPING CAPITAL MARKETS FOCUS FUND
The Developing Capital Markets Focus Fund may not:
(1) Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
26
<PAGE>
(2) Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under the
laws of certain countries will not be deemed the making of investments for the
purpose of exercising control or management.
(3) Purchase securities of other investment companies, except to the extent
permitted by applicable law.
(4) Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may mvest in securities secured by real
estate or interests therein or issued by companies including real estate
investment trusts, which invest in real estate or interests therein.
(5) 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. The payment by the Fund of initial or variation margin
in connection with futures or related options transactions, if applicable, shall
not be considered the purchase of a security on margin.
(6) Make short sales of securities or maintain a short position.
(7) Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts shall not
be deemed to be the making of a loan, and except further that the Fund may lend
its portfolio securities as set forth in (8) below.
(8) Lend its portfolio securities in excess of 33 1/3% of its total assets,
taken at market value; provided that such loans may only be made in accordance
with the guidelines set forth below.
(9) Issue senior securities, borrow money or pledge its assets in excess of
20% of its total assets taken at market value (including the amount borrowed)
and then only from a bank as a temporary measure for extraordinary or emergency
purposes including to meet redemptions or to settle securities transactions.
Usually only 'leveraged' investment companies may borrow in excess of 5% of
their assets; however, the Fund will not borrow to increase income but only as a
temporary measure for extraordinary or emergency purposes including to meet
redemptions or to settle securities transactions which may otherwise require
untimely dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior commitments
or (b) to exercise subscription rights where outstanding borrowings have been
obtained exclusively for settlements of other securities transactions. (For the
purpose of this restriction, collateral arrangements with respect to the writing
of options, and, if applicable, futures contracts, options on futures contracts,
and collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither such arrangements nor the purchase
or sale of futures or related options are deemed to be the issuance of a senior
security.)
(10) Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are otherwise not readily marketable,
including repurchase agreements and purchase and sale contracts maturing in more
than seven days, if at the time of acquisition more than 15% of its net assets
would be invested in such securities.
(11) Underwrite securities of other issuers except insofar as the Fund
technically may be deemed and underwriter under the Securities Act of 1933, as
amended (the 'Securities Act'), in selling portfolio securities.
(12) Purchase or sell interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in securities issued by
companies that engage in oil, gas or other mineral exploration or development
activities.
27
<PAGE>
Additional investment restrictions adopted by the Company for the
Developing Capital Markets Focus Fund, which may be changed by the Board of
Directors, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of the
Fund's net assets; included within such limitation, but not to exceed 2% of the
Fund's net assets, are warrants which are not listed on the New York or American
Stock Exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value. (ii)
Purchase or sell commodities or commodity contracts, except that the Fund may
deal in forward foreign exchange between currencies of the different countries
in which it may invest and purchase and sell stock index and currency options,
stock index futures, financial futures and currency futures contracts and
related options on such futures. (iii) Invest in securities of corporate issuers
having a record, together with predecessors, of less than three years of
continuous operation, if more than 5% of its total assets, taken at market
value, would be invested in such securities. (iv) Write, purchase or sell puts,
calls, straddles, spreads or combinations thereof, except to the extent
described in the Fund's Prospectus and in this Statement of Additional
Information, as amended from time to time. (v) Purchase or retain the securities
of any issuer, if those individual officers and directors of the Fund, the
Manager 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 TO THE INTERNATIONAL BOND FUND
The International Bond Fund may not:
(1) Make investments for the purpose of exercising control or management.
(2) Purchase securities of other investment companies, except to the extent
permitted by applicable law.
(3) Purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
(4) Purchase or sell commodities or commodity contracts except that the
Fund may deal in forward foreign exchange between currencies in which its
portfolio securities are denominated and the Fund may purchase and sell interest
rate and currency options, futures contracts and related options.
(5) Invest more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of corporate issuers in any
particular industry.
(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, or make short sales of securities or maintain a short
position. (The deposit or payment by the Fund of initial or variation margin in
connection with futures or options transactions is not considered the purchase
of a security on margin.)
(7) Make loans to other persons (except as provided in (8) below), provided
that for purposes of this restriction the acquisition of a portion of publicly
distributed bonds, debentures, or other corporate debt securities and investment
in governmental and supranational obligations, short-term commercial paper,
certificates of deposit, bankers' acceptances and repurchase agreements shall
not be deemed to be the making of a loan.
(8) Lend its portfolio securities in excess of 33 1/3% of its total assets,
taken at market value, provided that such loans shall be made in accordance with
the guidelines set forth below.
28
<PAGE>
(9) Issue senior securities, borrow money or pledge its asset except that
the Fund may borrow from a bank as a temporary measure for extraordinary or
emergency purposes or to meet redemption in amounts not exceeding 10% (taken at
the market value) of its total assets and pledge its assets to secure such
borrowings. (For the purpose of this restriction, collateral arrangements with
respect to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge of assets and neither such arrangements nor
the purchase or sale of options, futures or related options are deemed to be the
issuance of a senior security.)
(10) Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable if,
regarding all such securities, more than 15% of its net assets, taken at market
value, would be invested in such securities.
(11) Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
(13) Invest in securities of corporate issuers having a record, together
with predecessors, of less than three years of continuous operation if more than
5% of its total assets, taken at market value, would be invested in such
securities.
The Directors have established the policy that the Fund will not purchase
or retain the securities of any issuer if those individual officers and Trustees
of the Company, the Investment Advisor or Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), each owning beneficially more than one-half of 1% of the
securities of each issuer, own in the aggregate more than 5% of the securities
of such issuer.
RESTRICTIONS APPLICABLE TO INTERMEDIATE GOVERNMENT BOND FUND
The Intermediate Government Bond Fund may not:
(1) Invest in any security which is not issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities which has a stated
maturity greater than fifteen years from the date of purchase.
(2) make investments for the purpose of exercising control over, or
management of, any issuer.
(3) Purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above, and the Fund may purchase and sell financial futures contracts and
related options.
(4) 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) or make short sales of securities or maintain a short
position. (The deposit or payment by the Fund of initial or variation margin in
connection with futures or options transactions is not considered the purchase
of a security on margin.)
(5) Make loans, except as provided in (6) 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.
(6) 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 above.
(7) 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.
29
<PAGE>
(8) Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (7) above (and then such
mortgaging, pledging or hypothecating may not exceed 10% of such Fund's total
assets taken at market value at the time thereof. (For the purpose of this
restriction, collateral arrangements with respect to the writing of options,
and, if applicable, futures contracts, options on futures contracts, and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither such arrangements nor the purchase
or sale of futures or related options are deemed to be the issuance of a senior
security.)
(9) Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(10) 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 or with individually managed
accounts advised or sponsored by the Investment Adviser or any of its affiliates
to reduce brokerage commissions or otherwise to achieve best overall execution.
(l1) Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, Merrill Lynch Asset Management or any
subsidiary thereof each owning beneficially more than 1/2 or 1% of the
securities of such issuer, own in the aggregate more than 5% of the securities
of such issuer.
The Directors have established a policy that the Fund will not invest in
financial futures or options thereon or write, purchase or sell puts, calls or
combinations thereof.
OVER-THE-COUNTER OPTIONS
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by a Fund, the market value of the underlying securities covered
by OTC call options currently outstanding which were sold by the Fund and margin
deposits on the Fund's existing OTC options on futures contracts exceeds 15% of
the total assets of the Fund, taken at market value, together with all other
assets of the Fund which are illiquid or are otherwise not readily marketable.
However, if an OTC option is sold by a Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities equal to the repurchase price less the
amount by which the option is 'in-the-money' (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is 'in-the-money'. This policy as to OTC options is not a fundamental
policy of any Fund and may be amended by the Directors of the Company without
the approval of the Company's shareholders. However, the Company will not change
or modify this policy prior to the change or modification by the Commission
staff of its position.
RESTRICTED SECURITIES
From time to time a Fund may invest in securities the disposition of which
is subject to legal restrictions, such as restrictions imposed by the Securities
Act of 1933 (the 'Securities Act') on the resale of securities acquired in
private placements. If registration of such securities under the Securities Act
is required, such registration may not be readily accomplished and if such
securities may be sold without registration, such resale may be permissible only
in limited quantities. In either event, a Fund may not be able to sell its
restricted securities at a time which, in the judgment of the Investment
Adviser, would be most opportune.
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Each of the Funds is subject to limitations on the amount of securities
which are illiquid, because of restrictions under the Securities Act or
otherwise, they may purchase. Each Fund may, however, purchase without regard to
that limitation securities that are not registered under the Securities Act, but
that can be offered and sold to 'qualified institutional buyers' under Rule 144A
under the Securities Act, provided that the Company'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 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.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
PORTFOLIO STRATEGIES
Liquidity. In order to assure that each Fund has sufficient liquidity, as a
matter of operating policy no Fund may invest more than 10% of its net assets,
except that the Developing Capital Markets Focus and International Bond Funds
may not invest more than 15% 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.
Lending of Portfolio Securities. Subject to any applicable investment
restriction above, each Fund may from time to time loan securities from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash, securities issued or guaranteed by the U.S. Government or, in the case
of the Domestic Money Market and Reserve Assets Fund, cash equivalents which
while the loan is outstanding will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. Such cash
collateral will be invested in short-term securities, the income from which will
increase the return to the Fund. The Fund 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 Fund may pay reasonable finders',
administrative and custodial fees to persons unaffiliated with the Fund in
connection with the arranging of such loans. The dividends, interest and other
distributions received by the Company 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
Company intends to lend portfolio securities only to the extent that such
activity does not jeopardize the Company's qualification as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
Forward Commitments. Securities may be purchased or sold on a delayed
delivery basis or may be purchased on a forward commitment basis by each of the
Company's Funds at fixed purchase terms with periods of up to 180 days between
the commitment and settlement dates. The purchase will be recorded on the date
the purchasing Fund enters into the commitment and the value of security will
thereafter be reflected in the calculation of the Fund's net asset value. The
value of the security on the delivery date may be more or less than its purchase
price. A separate account of the Fund will be established with The Bank of New
York (the 'Custodian') consisting of cash or liquid, high-grade debt obligations
having a market value at all times until the delivery date at least equal to the
amount of its commitments in connection with such delayed delivery and purchase
transactions. Although a Fund will generally enter into forward commitments with
the intention of
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acquiring securities for its portfolio, it may dispose of a commitment prior to
settlement if the Investment Adviser deems it appropriate to do so. There can,
of course, be no assurance that the judgment upon which these techniques are
based will be accurate or that such techniques when applied will be effective.
The Funds 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 Funds' in the Prospectus.
Eurodollar and Yankeedollar Obligations. The Reserve Assets Fund may invest
in obligations issued by foreign branches or subsidiaries of U.S. banks
('Eurodollar' obligations), by U.S. branches or subsidiaries of foreign banks
('Yankeedollar' obligations), or by foreign depository institutions and their
foreign branches and subsidiaries ('foreign bank obligations'). Investment in
such obligations may involve different risks from the risks of investing in
obligations of U.S. banks. 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
depository institutions and their foreign branches and subsidiaries, and 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 foreign depository
institution, branch or subsidiary, or a U.S. branch or subsidiary of a foreign
bank, than about a U.S. bank, and such institutions 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 and foreign bank
obligations may be held outside of the United States, and a Fund may be subject
to the risks associated with the holding of such property overseas. Eurodollar
and foreign bank obligations of the Fund held overseas will be held by foreign
branches of the Custodian for the Fund or by other U.S. or foreign banks under
subcustodian arrangements complying with the requirements of the Investment
Company Act of 1940.
The Investment Adviser will consider the above factors in making
investments in Eurodollar, Yankeedollar and foreign bank obligations and will
not knowingly purchase obligations which, at the time of purchase, are subject
to exchange controls or withholding taxes. Generally, the Reserve Assets Fund
will limit its Yankeedollar investments to obligations of banks organized in
Canada, France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom
and other western industrialized nations.
Standby Commitment Agreements. The High Current Income Fund, Global Utility
Focus Fund, International Equity Focus Fund, and Developing Capital Markets
Focus Fund may from time to time enter into standby commitment agreements. Such
agreements commit a Fund, for a stated period of time, to purchase a stated
amount of a fixed income security which may be issued and sold to the Fund at
the option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement the Fund 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 Fund has committed to purchase. A Fund 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 Fund. A
Fund will not enter into a standby commitment with a remaining term in excess of
45 days and will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with the
value of portfolio securities subject to legal restrictions on resale, will not
exceed 10% of its assets taken at the time of acquisition of such commitment or
security. A Fund will at all times maintain a segregated account with its
custodian of cash or liquid, high-grade debt obligations in an amount equal to
the purchase price of the securities underlying the commitment.
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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, a Fund
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 a Fund'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.
Asset-Based Securities. As described in the Prospectus, the Natural
Resources Focus Fund may invest in debt securities, preferred stocks or
convertible securities, the principal amount, redemption terms or conversion
terms of which are related to the market price of some natural resource asset
such as gold bullion. These securities are referred to as 'asset-based
securities.'
The Fund will not acquire asset-based securities for which no established
secondary trading market exists if at the time of acquisition more than 5% of
its total assets are invested in securities which are not readily marketable.
The Fund may invest in asset-based securities without limit when it has the
option to put such securities to the issuer or a stand-by bank or broker and
received the principal amount or redemption price thereof less transaction costs
on no more than seven days' notice or when the Fund has the right to convert
such securities into a readily marketable security in which it could otherwise
invest upon not less than seven days' notice.
The asset-based securities in which the Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal) rates.
The Fund's holdings of such securities therefore may not generate appreciable
current income, and the return from such securities primarily will be from any
profit on the sale, maturity or conversion thereof at a time when the price of
the related asset is higher than it was when the Fund purchased such securities.
Writing of Covered Options. The Quality Equity Fund, Flexible Strategy
Fund, Natural Resources Focus Fund, American Balanced Fund, Global Strategy
Focus Fund, Basic Value Focus Fund, World Income Focus Fund, Global Utility
Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus
Fund and International Bond Fund may from time to time write covered call
options on their portfolio securities. A covered call option is an option where
the Fund owns the underlying securities. By writing a covered call option, the
Fund, in return for the premium income realized from the sale of the option, may
give up the opportunity to profit from a price increase in the underlying
security above the option exercise price. In addition, the Fund will not be able
to sell the underlying security until the option expires or is exercised or the
Fund effects a closing purchase transaction as described below. If the option
expires unexercised, or is closed out at a profit, the Fund realizes a gain
(short-term capital gain for Federal income tax purposes) on the option which
may offset all or a part of a decline in the market price of the underlying
security during the option period. The Quality Equity Fund and the Basic Value
Focus Fund may not write options on underlying securities exceeding 15% of the
value of their total assets.
Each of the Natural Resources Focus, Global Strategy Focus, World Income
Focus, Global Utility Focus, International Equity Focus, International Bond and
Developing Capital Markets Focus Funds also may write put options, which give
the holder of the option the right to sell the underlying security to the Fund
at the stated exercise price. The Fund will receive a premium for writing a put
option which increases the Fund's return. A Fund will write only covered put
options which means that so long as the Fund is obligated as the writer of the
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option, it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. A Fund may engage in closing transactions in order to terminate put
options that it has written.
Exchange-traded options are issued by The Options Clearing Corporation (the
'Clearing Corporation') and are currently traded on the Chicago Board Options
Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange, and Midwest Stock Exchange. An Option gives the purchaser of an option
the right to buy, and obligates the writer (seller) to sell, the underlying
security at the exercise price during the option period. The maximum term of an
option is nine months. For writing an option, the Funds receive a premium, which
is the price of such option on the Exchange on which it is traded. The exercise
price of the option may be below, equal to or above the current market value of
the underlying security at the time the option was written.
A Fund may terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
The cost of such closing purchase transaction may be greater than the premium
received upon the original option, in which case a Fund will have incurred a
loss in the transaction. An option may be closed out only on an exchange which
provides a secondary market for an option of the same series and there is no
assurance that a secondary market will exist for any particular option at any
specific time. In the event a Fund is unable to effect a closing purchase
transaction, it will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the Fund will be subject to the risk of market decline in the
underlying security during such period. A Fund will write an exchange-traded
option on a particular security only if management believes that a secondary
market will exist on an exchange for options of the same series which will
permit the Fund to make a closing purchase transaction in order to close out its
position.
Writing options involves risks of possible unforeseen events which can be
disruptive to the option markets or could result in the institution of certain
procedures including restriction of certain types of orders.
Purchasing Options. The Natural Resources Focus, Global Strategy Focus,
World Income Focus, Global Utility Focus, International Equity Focus, Developing
Capital Markets Focus and International Bond Funds, each may purchase put
options in connection with its hedging activities. By buying a put, these Funds
have the right to sell the underlying securities at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put expires. Prior to its expiration, a put option may be
sold in a closing sale transaction and profit or loss from the sale will depend
on whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options. The Natural Resources Focus, Global Strategy Focus,
World Income Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds may purchase and write exchange-traded
call options and put options on stock indexes for the purpose of hedging the
Funds' investment
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portfolios. As stated in the Prospectus, the effectiveness of this hedging
technique will depend upon the extent to which price movements in the portion of
the Funds' investment portfolio being hedged correlate with price movements of
the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or sale of an
option on an index depends upon movements in the level of prices in the stock
market generally or in an industry or market segment rather than movements in
the price of a particular stock. Accordingly, successful use by the Funds of
options on indexes will be subject to the Investment Adviser's ability to
correctly predict movements in the direction of the stock market generally or of
a particular industry or market segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Stock Index and Financial Futures. The Natural Resources Focus, Global
Strategy Focus, World Income Focus, Global Utility Focus, International Equity
Focus, Developing Capital Markets Focus and International Bond Funds will only
engage in transactions in stock index or financial futures to hedge its
investment portfolios. The Funds may sell stock index or financial futures
contracts in anticipation of or during a market decline in an endeavor to offset
the decrease in market value of the Funds' securities portfolio that would
otherwise result from a market decline. When the Funds are not fully invested in
the securities market and anticipate a significant market advance, they may
purchase stock index or financial futures in order to gain rapid market exposure
that may in part or entirely offset increases in the cost of the securities that
the Funds intend to purchase. No purchase of stock index or financial futures
will be made, however, unless the Funds intend to purchase securities in
approximately the amount of the market value of the stocks represented by the
stock index or financial futures purchased and the Funds have identified the
cash or cash equivalents needed to make such a purchase. An amount of cash and
cash equivalents will be deposited in a segregated account with the Company's
Custodian so that the amount so segregated, plus the initial and variation
margin held in the account of its broker, will collateralize the Funds'
positions in stock index or financial futures.
Forward Foreign Exchange Transactions. The Natural Resources Focus, Global
Strategy Focus, World Income Focus, Global Utility Focus, International Equity
Focus, Developing Capital Markets Focus and International Bond Funds are
authorized to deal in forward foreign exchange between currencies of the
different countries in which they will invest and multinational currency units
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date (up to one
year) and price at the time of the contract. A Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the purchase or
sale of one forward foreign currency for another currency with respect to
portfolio security positions denominated or quoted in such foreign currency to
offset the effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of such currency relative to the U.S. dollar. In this
situation, the Fund also may, for example, enter into a forward contract to sell
or purchase a different foreign currency for a fixed U.S. dollar amount where it
is believed that the U.S. dollar value of the currency to be sold or bought
pursuant to the forward contract will fall or rise, as the case may be, whenever
there is a decline or increase, respectively, in the U.S. dollar value of the
currency in which portfolio securities of the Fund are denominated (this
practice being referred to as a 'cross-hedge'). A Fund will not speculate in
forward foreign exchange. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such transactions also preclude
the opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be
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possible for a Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
Call Options on Futures Contracts. A call option on a futures contract
provides the purchaser with the right, but not the obligation, to enter into a
'long' position in the underlying futures contract at any time up to the
expiration of the option. The purchase of an option on a futures contract
presents more limited risk than purchasing the underlying futures contract.
Depending on the price of the option compared to either the futures contract
upon which it is based, or the underlying securities or currency, exercise of
the option may or may not be less risky than ownership of the futures contract
or underlying securities or currency. Like the purchase of a futures contract,
the National Resources Focus, Global Strategy Focus, World Income Focus, Global
Utility Focus, International Equity Focus, Developing Capital Markets Focus and
International Bond Funds will purchase a call option on a futures contract to
hedge against the appreciation of securities resulting from a market advance or
appreciation of securities denominated in foreign currencies resulting from
strengthening of the currency which the Fund intends to purchase.
The writing of a call option on a futures contract may constitute a partial
hedge against a decline in the equities market or drop in the value of a foreign
currency, if the futures price at expiration is below the exercise price of the
option. In such event, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's security investments or investments denominated in
foreign currencies. Conversely, if the futures price is above the exercise price
at any point prior to expiration, the option may be exercised and the Fund would
be required to enter into the underlying futures contract at an unfavorable
price.
Put Options on Futures Contracts. A put option on a futures contract
provides the purchaser with the right, but not the obligation, to enter into a
'short' position in the futures contract at any time up to the expiration of the
option. The Natural Resources Focus, Global Strategy Focus, World Income Focus,
Global Utility Focus, International Equity Focus, Developing Capital Markets
Focus and International Bond Funds will purchase a put option on a futures
contract to hedge its securities against the risk of a decline in the equities
markets or drop in the value of a foreign currency.
The writing of a put option on a futures contract may constitute a partial
hedge against increasing prices of portfolio securities or in value of foreign
currencies which the Fund intends to purchase, if the futures price at
expiration is higher than the exercise price. In such event, the Fund will
retain the full amount of the option premium, which provides a partial hedge
against any increase in the price of the securities which the Fund intends to
purchase. Conversely, if the futures price is below the exercise price at any
point prior to expiration, the option may be exercised and the Fund would be
required to enter into the underlying futures contract at an unfavorable price.
Risk Factors in Transactions in Futures and Options Thereon. The Natural
Resources Focus, Global Strategy Focus, World Income Focus, Global Utility
Focus, International Equity Focus, Developing Capital Markets Focus and
International Bond Funds may purchase futures contracts or purchase call or
write put options thereon to hedge against a possible increase in the price of
securities before the Fund is able to invest its cash in such securities. In
such instances, it is possible that the market may instead decline. If the Fund
does not then invest in such securities because of concern as to possible
further market decline or for other reasons, the Fund may realize a loss on the
futures or option contract that is not offset by a reduction in the price of
securities purchased.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of stock index
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and currency contracts solely for hedging purposes, however, any losses incurred
in connection therewith should, if the hedging strategy is successful, be offset
in whole or in part by increases in the value of securities held by the Fund or
decreases in the price of securities the Fund intends to acquire.
The anticipated offsetting movements between the price of the futures or
option contracts and the hedged security may be distorted due to differences in
the nature of the markets, such as differences in initial and variation margin
requirements, the liquidity of such markets and the participation of speculators
in such markets.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transactions
costs. In order to profit from an option purchased, however, it may be necessary
to exercise the option and to liquidate the underlying futures contract, subject
to the risks of the availability of a liquid offset market. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased. The writer of an option on
a futures contract is subject to the risks of commodity futures trading,
including the requirement of variation margin payments, as well as the
additional risk that movements in the price of the option may not correlate with
movements in the price of the underlying security or futures contract.
The trading of futures contracts and options thereon also is subject to
certain market risks, such as trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of a brokerage
firm or clearing corporation or other disruptions of normal trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
MANAGEMENT OF THE COMPANY
The directors and executive officers of the Company and their principal
occupations for at least the last five years and the public companies for which
they serve as directors are set forth below. Unless otherwise noted, the address
of each executive officer and director is P.O. Box 9011, Princeton, New Jersey
08543-9011.
ARTHUR ZEIKEL--President and Director(1)(2)--President of the Investment
Adviser since 1977 and Chief Investment Officer and Director of the Investment
Adviser since 1976; President, Director and Chief Investment Officer of Fund
Asset Management, L.P. ('FAM') since 1977; Director of Merrill Lynch Funds
Distributor, Inc.; Executive Vice President of Merrill Lynch & Co., Inc. and of
Merrill Lynch, Pierce, Fenner & Smith Incorporated since 1990.
WALTER MINTZ--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982.
MELVIN R. SEIDEN--Director(2)--780 Third Avenue, New York, New York 10017.
President of Silbanc Properties, Ltd. (real estate, consulting and investments)
since 1987; Chairman and President of Seiden & de Cuevas, Inc. (private
investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD--Director(2)--24 Federal Street, Boston, Massachusetts
02110. Principal of Fernwood Associates (financial consultants); Director,
Hitchiner Manufacturing Company.
JOE GRILLS--Director(2)--183 Soundview Lane, New Canaan, Connecticut 06840.
Investment Management Advisor; Director of the Duke Management Company and a
member of the Executive Committee; Member of the Investment Advisory Committee
of the State of New York Common Fund; Director of the University of Chicago
Graduate School of Business New York Association; formerly, Assistant Treasurer
of International Business Machines Corporation ('IBM') and Chief Investment
Officer of the IBM Retirement Funds from 1986 until 1993.
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HARRY WOOLF--Director(2)--The Institute for Advanced Study, Olden Lane,
Princeton, New Jersey 08540. Professor and former Director of The Institute for
Advanced Study (private institution devoted to the encouragement, support and
patronage of learning) since 1976; Director, Alex. Brown Cash Reserve Fund, Flag
Investors Fund and Westmark International (medical equipment manufacturing and
marketing).
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Investment Adviser and FAM since 1983 and Director since 1991; President and
Director of Merrill Lynch Funds Distributor, Inc. (the 'Distributor') since
1986; President of Princeton Administrators, Inc. since 1988; and Director of
Financial Data Services, Inc. since 1985.
BERNARD J. DURNIN--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser since 1981.
N. JOHN HEWITT--Senior Vice President(1)(2)--Senior Vice President of MLAM
and FAM since 1980.
JOSEPH T. MONAGLE, JR.--Senior Vice President(1)(2)--Senior Vice President
of MLAM since 1990; Vice President of MLAM from 1978 to 1990.
CHRISTOPHER G. AYOUB--Vice President(1)(2)--Vice President of MLAM since
1985; Assistant Vice President from 1984 to 1985 and an employee since 1982.
DONALD C. BURKE--Vice President(1)(2)--Vice President of MLAM since 1990;
accountant, Deloitte & Touche from 1982 to 1990.
DENIS B. CUMMINGS--Vice President(1)(2)--Vice President of MLAM since 1978.
JOEL HEYMSFELD--Vice President(1)(2)--Vice President of MLAM since 1978.
VINCENT T. LATHBURY, III--Vice President(1)(2)--Vice President of MLAM and
FAM and Portfolio Manager of MLAM and FAM since 1982.
FREDRIC LUTCHER--Vice President(1)(2)--Vice President of MLAM since 1989
and Portfolio Manager since 1989; Senior Vice President, Lazard Freres Asset
Management, Inc. from 1988 to 1989; Director, E. F. Hutton Capital Management,
Inc. from 1981 to 1988.
JAY C. HARBECK--Vice President(1)(2)--Vice President of MLAM since 1986.
ALDONA A. SCHWARTZ--Vice President(1)(2)--Vice President of MLAM since 1991
and an employee of the Investment Adviser since 1986.
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
MLAM and FAM since 1984; Treasurer of the Distributor since 1984 and Vice
President since 1981; and Senior Vice President and Treasurer of Princeton
Administrators, Inc. since 1988.
MICHAEL J. HENNEWINKEL--Secretary(1)(2)--Vice President of MLAM since 1985
and attorney associated with MLAM and FAM since 1982.
- ------------------
(1) Interested person, as defined in the Investment Company Act of 1940, of the
Company.
(2) Mr. Zeikel is a director or trustee and officer, Messrs. Mintz, Seiden,
Swensrud and Woolf are directors, trustees or members of the advisory board,
and Messrs. Glenn, Durnin, Hewitt, Monagle, Ayoub, Cummings, Heymsfeld,
Kenney, Lathbury, Lutcher, Harbeck, Richard and Hennewinkel and Ms. Schwartz
are officers, of certain other investment companies for which the Investment
Adviser, MLAM or FAM acts as investment adviser.
38
<PAGE>
Mr. Zeikel and the officers of the Company owned on February 28, 1994 in
the aggregate less than 1% of the outstanding Common Stock of Merrill Lynch &
Co., Inc. The Company has an Audit Committee consisting of all of the directors
of the Company who are not interested persons of the Company.
Pursuant to the terms of the Investment Advisory Agreements, the Investment
Adviser pays all compensation of officers and employees of the Company as well
as the fees of all directors of the Company who are affiliated persons of
Merrill Lynch & Co., Inc. or its subsidiaries. The fees payable by the Company
to non-interested directors are $5,500 per year plus $1,500 per quarterly
meeting of the Board of Directors attended, $3,000 per year for serving on the
Audit Committee of the Board of Directors plus $250 per meeting of the Audit
Committee attended if such meeting is held on a day other than a day on which
the Board of Directors meets, and reimbursement of out-of-pocket expenses. For
the year ended December 31, 1993, such fees and expenses aggregated $35,923.
INVESTMENT ADVISORY ARRANGEMENTS
The Company has entered into seven separate investment advisory agreements
(the 'Investment Advisory Agreements') relating to the Funds with the Investment
Adviser, which is 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 Investment Adviser and FAM currently act
as the investment adviser to over 110 other registered investment companies.
The principal executive officers and directors of the Investment Adviser
are Arthur Zeikel, President and Director; Terry K. Glenn, Executive Vice
President and Director; Robert W. Crook, Senior Vice President; Bernard J.
Durnin, Senior Vice President; Vincent R. Giordano, Senior Vice President;
Norman R. Harvey, Senior Vice President; N. John Hewitt, Senior Vice President;
Philip L. Kirstein, Senior Vice President, General Counsel and Secretary; Ronald
M. Kloss, Senior Vice President; Stephen M. M. Miller, Senior Vice President;
Joseph T. Monagle, Senior Vice President; Gerald M. Richard, Senior Vice
President and Treasurer; Richard L. Rufener, Senior Vice President; Ronald L.
Welburn, Senior Vice President; and Anthony Wiseman, Senior Vice President.
Securities held by any Fund 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 Fund 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. As compensation for its services to the Company and its
Funds, the Investment Adviser receives a fee from the Company at the end of each
month at an annual rate of 0.75% of the average daily net assets of the Equity
Growth Fund, 0.65% of the average daily net assets of each of the Flexible
Strategy Fund, Natural Resources Focus Fund and Global Strategy Focus Fund,
0.55% of the average daily net assets of the American Balanced Fund, 0.50% of
the average daily net assets of the Domestic Money Market Fund, 0.60% of the
average daily net assets of the Basic Value Focus Fund, 0.60% of the average
daily net assets of the World Income Focus Fund, 0.60% of the average daily net
assets of the Global Utility Focus Fund, 0.75% of the average daily net assets
of the International Equity Focus Fund, 1.00% of the average daily net assets of
the Developing Capital Markets Focus Fund, 0.60% of the average daily net assets
of the Global Bond Focus Fund and 0.50% of
39
<PAGE>
the average daily net assets of the Intermediate Government Bond Fund, and at
the following annual rates with respect to the other Funds:
RESERVE ASSETS FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<CAPTION>
ADVISORY
FEE
-----------
<S> <C>
Not exceeding $500 million........................................................... 0.500%
In excess of $500 million but not exceeding $750 million............................. 0.425%
In excess of $750 million but not exceeding $1 billion............................... 0.375%
In excess of $1 billion but not exceeding $1.5 billion............................... 0.350%
In excess of $1.5 billion but not exceeding $2 billion............................... 0.325%
In excess of $2 billion but not exceeding $2.5 billion............................... 0.300%
In excess of $2.5 billion............................................................ 0.275%
</TABLE>
QUALITY EQUITY FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<S> <C>
Not exceeding $250 million........................................................... 0.500%
In excess of $250 million but not exceeding $300 million............................. 0.450%
In excess of $300 million but not exceeding $400 million............................. 0.425%
In excess of $400 million............................................................ 0.400%
</TABLE>
PRIME BOND FUND AND HIGH CURRENT INCOME FUND
Portion of aggregate average daily value of net assets of both Funds:
<TABLE>
<CAPTION>
ADVISORY FEE
----------------------------
HIGH CURRENT BOND
INCOME PRIME
FUND FUND
--------------- -----------
<S> <C> <C>
Not exceeding $250 million..................................... 0.55% 0.50%
In excess of $250 million but not more than $500 million....... 0.50% 0.45%
In excess of $500 million but not more than $750 million....... 0.45% 0.40%
In excess of $750 million...................................... 0.40% 0.35%
</TABLE>
As the last table shows, the advisory fee rates for the Prime Bond Fund and
the High Current Income Fund are subject to reduction to the extent that the
aggregate average daily net assets of those Funds exceeds $250 million. The
reductions will be applicable to each Fund regardless of size on a 'uniform
percentage' basis. Determination of the portion of the net assets of each such
Fund to which a reduced rate is applicable is made by multiplying the net assets
of that Fund by the 'uniform percentage,' which is derived by dividing the
amount of the portion of the aggregate assets of both Funds to which such rate
applies by the total amount of such aggregate assets. There can be no assurance,
however, that any of the Funds will reach a net asset level at which a reduced
advisory fee rate would be applicable.
The Investment Advisory Agreements require the Investment Adviser to
reimburse each Fund (up to the amount of the advisory fee earned by the
Investment Adviser with respect to such Fund) if and to the extent that in any
fiscal year the operating expenses of the Fund exceed the most restrictive
expense limitation then in effect under any state securities law or the
published regulations thereunder. At present the most restrictive expense
limitation requires the Investment Adviser to reimburse expenses (excluding
interest, taxes, brokerage fees and commissions and extraordinary charges such
as litigation costs) which exceed 2.5% of each Fund's first $30
40
<PAGE>
million of average daily net assets, 2.0% of its average daily net assets in
excess of $30 million but less than $100 million, and 1.5% of its average daily
net assets in excess of $100 million. It should be noted that because the Funds'
shares are sold only to the Insurance Companies, the shares are not required to
be registered under state 'blue sky' or securities laws. The Investment Adviser
believes, however, that the most restrictive expense limitations imposed by
state securities laws or published regulations thereunder are an appropriate
standard.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') entered
into two reimbursement agreements, dated April 30, 1985 and February 11, 1992
(the 'Reimbursement Agreements'), that provide that the expenses paid by each
Fund (excluding interest, taxes, brokerage fees and commissions and
extraordinary charges such as litigation costs) will be limited to 1.25% of its
average net assets. Any expenses in excess of this percentage will be reimbursed
to the Fund by the Investment Adviser which, in turn, will be reimbursed by
MLLA. The Reimbursement Agreements may be amended or terminated by the parties
thereto upon prior written notice to the Company. For the fiscal year ended
December 31, 1991, the Investment Adviser earned fees of $1,114,890 and
reimbursed $3,077 for the Equity Growth Fund and $1,467 for the National
Resources Focus Fund. For the fiscal year ended December 31, 1992, the
Investment Adviser earned fees of $1,592,890 and reimbursed $83,713 for the
Domestic Money Market Fund, $6,125 for the Global Strategy Focus Fund and $730
for the Natural Resources Focus Fund. For the fiscal year ended December 31,
1993, the Investment Adviser earned fees of $5,421,039 from the Company and
reimbursed $246,351 for the Domestic Money Market Fund. The Investment Adviser
was reimbursed by MLLA for those amounts.
The Investment Advisory Agreements relating to the Company's Funds, unless
earlier terminated as described below, will continue in effect from year to year
if approved annually (a) by the Board of Directors of the Company or by a
majority of the outstanding shares of the respective Funds, and (b) by a
majority of the directors who are not parties to such contracts or interested
persons (as defined in the Investment Company Act of 1940) of any such party.
The Board of Directors of the Company approved the continuation of the
Investment Advisory Agreements relating to all Funds, other than the Basic Value
Focus, World Income Focus, Global Utility Focus and International Equity Focus
Funds, at a meeting held on April 14, 1993. The Board of Directors of the
Company approved the Investment Advisory Agreement for the Basic Value Focus,
World Income Focus, Global Utility Focus and International Equity Focus Funds at
a meeting held on June 14, 1993. The Board of Directors of the Company approved
the Investment Advisory Agreement for the Developing Capital Markets Focus,
International Bond and Intermediate Government Bond Funds at a meeting held on
April 13, 1994. The Investment Advisory Agreements are 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 respective Funds.
Payment of Expenses. The Investment Advisory Agreements obligate the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Company connected with investment and economic research, trading and investment
management of the Funds, as well as the fees of all directors of the Company who
are affiliated persons of Merrill Lynch & Co., Inc. or any of its subsidiaries.
Each Fund will pay all other expenses incurred in its operation, including a
portion of the Company's general administrative expenses allocated on the basis
of the Fund's asset size. Expenses that will be borne directly by the Funds
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 Fund. Expenses which will be
allocated on the basis of size of the respective Funds include directors' fees,
legal expenses, state franchise taxes, auditing services, costs of printing
proxies and stock certificates, Securities and Exchange Commission fees,
accounting costs and other expenses properly payable by the Company and
allocable on the basis of size of the respective Funds. Accounting services are
provided for the Company by the Investment Adviser, and the Company reimburses
the Investment Adviser
41
<PAGE>
for its costs in connection with such services. For the year ended December 31,
1993, the amount of such reimbursement was $397,373. Depending upon the nature
of the lawsuit, litigation costs may be directly applicable to the Funds or
allocated on the basis of the size of the respective Funds. The Board of
Directors has determined that this is an appropriate method of allocation of
expenses.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus, since the net investment income of the
Domestic Money Market and Reserve Assets Funds (including realized gains and
losses on its portfolio securities) is declared as a dividend each time the net
income of the Funds are determined (see 'Dividends, Distributions and Taxes'),
the net asset value per share of the Funds normally remains at $1.00 per share
immediately after each such determination and dividend declaration. The Board of
Directors of the Company expects that the Domestic Money Market and Reserve
Assets Funds will have a positive net income at the time of each determination.
If for any reason the net income of either Fund is a negative amount (i.e., net
realized and unrealized losses and expenses exceed interest income), that Fund
will reduce the number of its outstanding shares. This reduction will be
effected by having MLLIC and Family Life from the Separate Account
proportionately contribute to the capital of the Fund the necessary shares that
represent the amount of the excess upon such determination. It is anticipated
that MLLIC and Family Life will agree to such contribution in these
circumstances. Any such contribution will be treated as a negative dividend for
purposes of the Net Investment Factor under the Contracts described in the
Prospectus for the Contracts. See 'Dividends, Distributions and Taxes' for a
discussion of the tax effect of such a reduction. This procedure will permit the
net asset value per share of the Domestic Money Market and Reserve Assets Funds
to be maintained at a constant value of $1.00 per share.
If in the view of the Board of Directors of the Company it is inadvisable
to continue the practice of maintaining the net asset value of the Domestic
Money Market and Reserve Assets Funds at $1.00 per share, the Board of Directors
of the Company reserves the right to alter the procedure. The Company will
notify MLLIC and Family Life of any such alteration.
Each of the International Equity Focus Fund, Global Utility Focus Fund,
World Income Focus Fund, Developing Capital Markets Focus Fund, and
International Bond Fund may invest a substantial portion of its assets in
foreign securities which are traded on days on which such Fund's net asset value
is not computed. On any such day, shares of such a Fund may not be purchased or
redeemed since shares of a Fund may only be purchased or redeemed on days on
which the Fund's net asset value is computed.
As set forth in the Prospectus, securities held by the Domestic Money
Market and Reserve Assets Funds 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 Domestic Money Market and Reserve Assets Funds
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 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 either
Fund 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.
42
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
If the securities in which a particular Fund of the Company invests are
traded primarily in the over-the-counter market, where possible, the Fund 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 occasions, securities may be purchased directly from the issuer. Bonds and
money market securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. The cost of executing
portfolio securities transactions of each Fund will primarily consist of
brokerage commissions or underwriter or dealer spreads. Under the Investment
Company Act of 1940, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of the
Company'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 Company, 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 the Company's
dealer in connection with such transactions except pursuant to exemptive orders
from the Securities and Exchange Commission, such as the one described below.
However, affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis, subject to the
Company's policy of obtaining best price and execution. The Company 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 of 1940.
The Securities and Exchange Commission has issued an exemptive order
permitting the Company to conduct principal transactions with respect to the
Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S.
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 Funds available from GSI and MMI are equal to or
better than those available from other sources. GSI and MMI have informed the
Company that they will in no way, at any time, attempt to influence or control
the activities of the Company 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 Company 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 Company would be required to seek an 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 Company
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 Company will take such steps as may be necessary to effect
recapture, including the filing of applications for exemption under the
Investment Company Act of 1940, if the Directors should determine that recapture
is in the best interests of the Company or otherwise required by developments in
the law.
While the Investment Adviser seeks to obtain the most favorable net results
in effecting transactions in the Funds' portfolio securities, dealers who
provide supplemental investment research of the Investment Adviser may receive
orders for transactions by the Funds. Such supplemental research services
ordinarily consist of assessments and analysis of the business or prospects of a
company, industry or economic sector. If, in the judgment of the Investment
Adviser, a particular Fund or Funds will be benefited by such supplemental
research services, the Investment Adviser is authorized to pay spreads or
commissions to brokers or dealers furnishing such services which are in excess
of spreads or commissions which another broker or dealer may charge for the same
transaction. Information so received will be in addition to and not in lieu of
the services required to be
43
<PAGE>
performed by the Investment Adviser under the Investment Advisory Agreements.
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 year ended December
31, 1993, the Company paid brokerage commissions of $2,210,358, of which
$158,442 was paid to Merrill Lynch. For the year ended December 31, 1992, the
Company paid brokerage commissions of $360,157, of which $26,647 was paid to
Merrill Lynch and $308,601 was paid to brokers who furnished such services to
the Investment Adviser in connection with a total of approximately $25.4 million
in transactions. For the year ended December 31, 1991, the Company paid
brokerage commissions of $190,699, of which $14,718 was paid to Merrill Lynch
and $175,981 was paid to brokers who furnished such services to the Investment
Adviser in connection with a total of approximately $2.1 million in
transactions.
PORTFOLIO TURNOVER
Each Fund has a different expected rate of portfolio turnover; however,
rate of portfolio turnover will not be a limiting factor when management of the
Company deems it appropriate to purchase or sell securities for a Fund. Because
of the short-term nature of the securities in which the Domestic Money Market
and Reserve Assets Funds will invest, and because such Funds' investments will
be constantly changing in response to market conditions, no portfolio turnover
rate may be accurately predicted for the Domestic Money Market and Reserve
Assets Funds.
The Company expects that the annual portfolio turnover rate for the Prime
Bond Fund should not generally exceed 100%, although in any particular year
market conditions could result in portfolio activity of the Fund at a greater or
lesser rate than anticipated. During 1990, volatility in the fixed-income
markets contributed to an increase in portfolio activity. For the year ended
December 31, 1993, the portfolio turnover rate for the Prime Bond Fund was
approximately 115.26%.
The Company expects that, because of the nature of the High Current Income
Fund, its annual portfolio turnover rate generally will be higher than 100%. In
any particular year, however, market conditions could result in portfolio
activity of the Fund at a lesser, or at an even greater, rate than anticipated.
For the year ended December 31, 1993, the portfolio turnover rate for the High
Current Income Fund was approximately 35.67%.
The Company expects that the annual portfolio turnover rate for the Quality
Equity Fund should not generally exceed 100%, although in any particular year
market conditions could result in portfolio activity of the Fund at a greater or
lesser rate than anticipated. For the year ended December 31, 1993, the
portfolio turnover rate for the Quality Equity Fund was approximately 88.25%.
While it is the policy of the Equity Growth Fund generally not to engage in
trading for short-term gains, management will effect portfolio transactions
without regard to holding period if, in its judgment, such transactions are
advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. The Fund anticipates that its annual turnover rate should not exceed
50%, but the turnover rate will not be a limiting factor when management deems
portfolio changes appropriate. For the year ended December 31, 1993, the
portfolio turnover rate for the Equity Growth Fund was approximately 131.75%.
The Company expects that the annual portfolio turnover rate for the
Flexible Strategy Fund should not generally exceed 100%. For the year ended
December 31, 1993, the portfolio turnover rate for the Flexible Strategy Fund
was 56.42%.
The Company expects that the annual portfolio turnover rate for each of the
Natural Resources Focus Fund, the American Balanced Fund and the Global Strategy
Focus Fund should not generally exceed 100%,
44
<PAGE>
respectively, although in any particular year market conditions could result in
portfolio activity at a greater or lesser rate than anticipated. For the year
ended December 31, 1993, the portfolio turnover rates for the Natural Resources
Focus Fund, the American Balanced Fund and the Global Strategy Focus Fund were
58.44%, 12.55% and 17.07%, respectively.
The Company expects that the annual portfolio turnover rate for each of the
Basic Value Focus Fund, Global Utility Focus Fund and International Equity Focus
Fund should not generally exceed 100%. For the year ended December 31, 1993, the
portfolio turnover rates were 30.86%, 1.72% and 17.39%, respectively.
The Company expects that the annual portfolio turnover rate for the World
Income Focus Fund should not generally exceed 200%. For the year ended December
31, 1993, the portfolio turnover rate was 54.80%.
The Company expects that the annual portfolio turnover rate for each of the
Developing Capital Markets Focus Fund, International Bond Fund and Intermediate
Government Bond Fund should not generally exceed 100%, 150% and 150%,
respectively.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Securities and Exchange Commission as a result of which disposal of portfolio
securities or determination of the net asset value of each Fund 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 Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to 'Dividends, Distributions and Taxes' in the
Prospectus.
FEDERAL INCOME TAXES
Under the Internal Revenue Code of 1986, as amended (the 'Code'), each Fund
of the Company will be treated as a separate corporation for Federal income tax
purposes and, thus, each Fund 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 Funds. Each
Fund intends to continue to qualify as a regulated investment company under
certain provisions of the Code. Under such provisions, a Fund 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 Fund must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest and gains from the sale or other disposition of securities and derive
less than 30% of its gross income in each taxable year from the gains (without
deduction for losses) from the sale or other disposition of stocks, securities
and certain options, futures or forward contracts held for less than three
months. In addition, the Code requires that each Fund meet certain
diversification requirements, including the requirement that not more than 25%
of the value of a Fund's total assets be invested in the securities (other than
U.S. Government securities or the securities of other regulated investment
companies) of any one issuer. Each of the Company's Funds, including the Natural
Resources Focus Fund, intends to comply with such requirement.
45
<PAGE>
On occasion, some amount of the distributions of the Domestic Money Market
Fund or the Reserve Assets Fund for a fiscal year may constitute a return of
capital, in which case such amount would be applied against and reduce the
Separate Account's tax basis in shares of such Fund. If such amount were to
exceed the Separate Account's tax basis for shares of the Domestic Money Market
Fund or the Reserve Assets Fund, the excess would be treated as gain from the
sale or exchange of such shares.
On occasion the net income of the Domestic Money Market Fund or the Reserve
Assets Fund may be a negative amount as a result of a net decline in the value
of the portfolio securities of the Fund which is in excess of the interest
earned. Consequently, the Fund will reduce the number of its outstanding shares
to reflect the negative net income. The adjustment may result in gross income to
MLLIC, ML of New York and Family Life in excess of the net dividend credited to
MLLIC, ML of New York and Family Life for a period. In such a case, MLLIC's, ML
of New York's and Family Life's basis in the shares of the Domestic Money Market
Fund or the Reserve Assets Fund may be adjusted to reflect the difference
between taxable income and net dividends actually distributed. Such difference
may be realized as a capital loss when the shares are liquidated.
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 Company has entered into a distribution agreement (the 'Distribution
Agreement') with Merrill Lynch Funds Distributor, Inc. (the 'Distributor') with
respect to the sale of the Company's shares to the Distributor for resale to
Insurance Companies' 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 continuation of the
Distribution Agreement was approved by the Company's Board of Directors at a
meeting held on April 14, 1993 and will continue in effect until June 30, 1994.
The Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreements described above.
PERFORMANCE DATA
From time to time the average annual total return and other total return
data, as well as yield, of one or more of the Company's Funds may be included in
advertisements or information furnished to present or prospective Contract
owners. Total return and yield figures are based on the Fund'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 Reserve Assets Fund 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
46
<PAGE>
at the beginning of the base period to obtain the base period return, and
multiplying the base period return by 365 and then dividing by seven. Under this
calculation, the yield does not reflect realized and unrealized gains and losses
on portfolio securities. The Fund may also include its yield in advertisements,
calculated in the same manner as set forth above but including realized and
unrealized gains and losses. 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 total return information for the shares
of each of the Company's Funds, other than the Reserve Assets Fund, Domestic
Money Market Fund, Developing Capital Markets Focus Fund, International Bond
Fund and Intermediate Government Bond Fund. The total return quotations may be
of limited use for comparative purposes because they do not reflect charges
imposed at the Separate Account level which, if included, would decrease total
return.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD
----------------- -----------------
<S> <C> <C>
PRIME BOND FUND:
One Year Ended December 31, 1993........................................... 12.02% $1,120
Five Years Ended December 31, 1993......................................... 11.17 1,698
Ten Years Ended December 31, 1993.......................................... 11.18 2,885
HIGH CURRENT INCOME FUND:
One Year Ended December 31, 1993........................................... 17.84 1,178
Five Years Ended December 31, 1993......................................... 14.68 1,983
Ten Years Ended December 31, 1993.......................................... 13.39 3,515
QUALITY EQUITY FUND:
One Year Ended December 31, 1993........................................... 14.57 1,146
Five Years Ended December 31, 1993......................................... 15.05 2,016
Ten Years Ended December 31, 1993.......................................... 14.70 3,940
EQUITY GROWTH FUND:
One Year Ended December 31, 1993........................................... 17.78 1,178
Five Years Ended December 31, 1993......................................... 12.39 1,793
Ten Years Ended December 31, 1993.......................................... 6.64 1,902
FLEXIBLE STRATEGY FUND:
One Year Ended December 31, 1993........................................... 15.80% 1,158
Five Years Ended December 31, 1993......................................... 13.72 1,902
Inception* Through December 31, 1993....................................... 10.92 2,216
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD
----------------- -----------------
NATURAL RESOURCES FOCUS FUND:
<S> <C> <C>
One Year Ended December 31, 1993........................................... 10.47 1,105
Five Years Ended December 31, 1993......................................... 4.71 1,259
Inception* Through December 31, 1993....................................... 3.40 1,206
AMERICAN BALANCED FUND:
One Year Ended December 31, 1993........................................... 13.49 1,135
Five Years Ended December 31, 1993......................................... 11.59 1,731
Inception* Through December 31, 1993....................................... 11.11 1,802
GLOBAL STRATEGY FOCUS FUND:
One Year Ended December 31, 1993........................................... 21.03 1,210
Inception* Through December 31, 1993....................................... 12.49 1,242
BASIC VALUE FOCUS FUND:
Inception* Through December 31, 1993....................................... 9.50 1,095
WORLD INCOME FOCUS FUND:
Inception* Through December 31, 1993....................................... 5.90 1,059
GLOBAL UTILITY FOCUS FUND:
Inception* Through December 31, 1993....................................... 6.85 1,069
INTERNATIONAL EQUITY FOCUS FUND:
Inception* Through December 31, 1993....................................... 10.30 1,103
</TABLE>
- ------------------
* Inception for Flexible Strategy Fund is May 1, 1986; Natural Resources Focus
Fund is June 1, 1988; American Balanced Fund is June 1, 1988; and Global
Strategy Focus Fund is February 28, 1992; Basic Value Focus Fund is July 1,
1993; World Income Focus Fund is July 1, 1993; Global Utility Focus Fund is
July 1, 1993 and International Equity Focus Fund is July 1, 1993; The
Developing Capital Markets Focus Fund, International Bond Fund and
Intermediate Government Bond Fund had not commenced operations at December 31,
1993.
ADDITIONAL INFORMATION
Under a separate agreement Merrill Lynch has granted the Company 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 Company at any time, or to grant the use
of such name to any other company, and the Company 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.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of American Balanced, Domestic Money Market,
Equity Growth, Flexible Strategy, Global Strategy Focus, High Current Income,
Natural Resources Focus, Prime Bond, Quality Equity, Reserve Assets, Basic Value
Focus, World Income Focus, Global Utility Focus and International Equity Focus
Funds of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1993, the
related statements of operations for the period then ended and changes in net
assets for each of the periods in the two-year period then ended, and the
financial highlights for each of the periods presented. These financial
statements and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1993 by correspondence with the custodian and brokers, or other alternative
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and supplementary financial
information present fairly, in all material respects, the financial positions of
American Balanced, Domestic Money Market, Equity Growth, Flexible Strategy,
Global Strategy Focus, High Current Income, Natural Resources Focus, Prime Bond,
Quality Equity, and Reserve Assets, Basic Value Focus, World Income Focus,
Global Utility Focus and International Equity Focus Funds of Merrill Lynch
Variable Series Funds, Inc. as of December 31, 1993, the results of their
operations, the changes in their net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Princeton, New Jersey
February 18, 1994
49
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
INDUSTRIES HELD COMMON STOCKS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
AEROSPACE 32,000 United Technologies Corp............. $ 1,722,120 $ 1,984,000 1.7%
- -------------------------------------------------------------------------------------------------------------------------
AIRLINES 28,500+ AMR Corp............................. 1,876,975 1,909,500 1.6
- -------------------------------------------------------------------------------------------------------------------------
BANKING 28,000 Morgan (J. P.) & Co.................. 1,884,577 1,942,500 1.7
- -------------------------------------------------------------------------------------------------------------------------
BUILDING--RELATED 47,700 Stanley Works Co..................... 1,970,379 2,122,650 1.8
- -------------------------------------------------------------------------------------------------------------------------
CHEMICALS 52,400 Nalco Chemical Co.................... 1,730,335 1,965,000 1.7
- -------------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 24,600 Hewlett-Packard Co................... 1,654,024 1,943,400 1.7
- -------------------------------------------------------------------------------------------------------------------------
DRUGS & HOSPITAL 33,000 Bristol-Myers Squibb Co.............. 1,930,617 1,918,125 1.7
SUPPLIES
- -------------------------------------------------------------------------------------------------------------------------
FOOD 86,870 Archer-Daniels-Midland Co............ 2,000,658 1,976,292 1.7
- -------------------------------------------------------------------------------------------------------------------------
HEALTH MAINTENANCE 111,400+ Humana Inc........................... 957,129 1,963,425 1.7
ORGANIZATIONS
- -------------------------------------------------------------------------------------------------------------------------
MACHINERY 47,700 Ingersoll-Rand Co.................... 1,538,715 1,824,525 1.6
74,100 Morrison Knudsen Corp................ 1,702,527 1,861,763 1.6
------------ ------------ ----------
3,241,242 3,686,288 3.2
- -------------------------------------------------------------------------------------------------------------------------
MERCHANDISING 47,500 May Department Stores Co............. 1,722,656 1,870,313 1.6
- -------------------------------------------------------------------------------------------------------------------------
METALS 27,700 Aluminum Co. of America.............. 1,902,193 1,921,687 1.7
- -------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS-- 70,900 Keystone International, Inc.......... 1,838,872 1,940,888 1.7
MANUFACTURING
- -------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 46,900 Consolidated Natural Gas Co.......... 2,215,910 2,204,300 1.9
- -------------------------------------------------------------------------------------------------------------------------
OFFICE RELATED 42,800 Pitney-Bowes, Inc.................... 1,616,246 1,770,850 1.5
- -------------------------------------------------------------------------------------------------------------------------
OIL & RELATED 95,300 Dresser Industries, Inc.............. 2,004,443 1,977,475 1.7
70,500 Phillips Petroleum Co................ 2,096,314 2,044,500 1.8
------------ ------------ ----------
4,100,757 4,021,975 3.5
- -------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 28,400 Eastman Kodak Co..................... 1,430,804 1,590,400 1.4
- -------------------------------------------------------------------------------------------------------------------------
PRINT/PUBLISHING 32,200 Gannett Co., Inc..................... 1,571,211 1,843,450 1.6
- -------------------------------------------------------------------------------------------------------------------------
RETAIL STORES 85,900 K mart Corp.......................... 1,946,759 1,825,375 1.6
- -------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 76,000+ Teradyne, Inc........................ 1,487,451 2,109,000 1.8
PRODUCTION EQUIPMENT
- -------------------------------------------------------------------------------------------------------------------------
SERVICES 68,000 Kelly Services, Inc.................. 1,781,000 1,878,500 1.6
- -------------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS 102,792 Wheelabrator Technologies Inc........ 1,748,874 1,824,558 1.6
- -------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 34,800 American Telephone & Telegraph Co.... 1,852,700 1,827,000 1.6
30,600 Bell Atlantic Corp................... 1,661,964 1,805,400 1.6
60,500 Comsat Corp.......................... 1,722,000 1,799,875 1.5
------------ ------------ ----------
5,236,664 5,432,275 4.7
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 94,000+ California Energy Co. Inc............ 1,686,121 1,739,000 1.5
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS.................. 49,253,574 53,383,751 46.2
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE (NOTE PERCENT OF
AMOUNT US GOVERNMENT OBLIGATIONS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
US TREASURY NOTES US Treasury Notes:
$ 1,250,000 6.375% due 1/15/2000................. $ 1,277,148 $ 1,313,662 1.1%
12,450,000 5.50% due 4/15/2000.................. 12,578,024 12,558,813 10.9
700,000 7.75% due 2/15/2001.................. 706,094 796,684 0.7
1,400,000 8.00% due 5/15/2001.................. 1,387,922 1,602,118 1.4
200,000 7.875% due 8/15/2001................. 204,031 227,686 0.2
1,300,000 7.50% due 11/15/2001................. 1,315,492 1,450,709 1.2
900,000 7.50% due 5/15/2002.................. 955,500 1,007,154 0.9
3,500,000 6.375% due 8/15/2002................. 3,455,779 3,650,920 3.2
12,550,000 6.25% due 2/15/2003.................. 12,863,703 12,965,656 11.2
6,350,000 5.75% due 8/15/2003.................. 6,441,133 6,330,125 5.5
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS...... 41,184,826 41,903,527 36.3
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 3,566,000 General Electric Capital Corp.,
3.220% due 1/03/1994............... 3,565,043 3,565,043 3.1
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Bills:
DISCOUNT NOTES* 1,000,000 3.055% due 2/03/1994................. 997,115 994,661 0.9
5,000,000 3.06% due 2/03/1994.................. 4,985,550 4,973,305 4.3
1,000,000 3.065% due 2/03/1994................. 997,105 994,661 0.9
1,000,000 3.08% due 2/03/1994.................. 997,091 994,661 0.9
1,000,000 3.01% due 3/10/1994.................. 994,231 994,289 0.8
4,000,000 3.04% due 3/10/1994.................. 3,976,655 3,977,153 3.4
------------ ------------ ----------
12,947,747 12,928,730 11.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES.......... 16,512,790 16,493,773 14.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.................... $106,951,190 111,781,051 96.8
------------
------------
OTHER ASSETS LESS LIABILITIES........ 3,638,869 3.2
------------ ----------
NET ASSETS........................... $115,419,920 100.0%
------------ ----------
------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
+ Non-income producing security.
* Commercial Paper and US Government Discount Notes are traded on a discount
basis, the interest rates shown are the discount rates paid at the time of
purchase by the Fund.
See Notes to Financial Statements.
51
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
DISCOUNT FROM BOOK VALUE
- ----------------------------------------------------------------------------------------------------------------------------
METALS 40,000 ASARCO Inc............................. $ 773,693 $ 915,000 1.9%
COMPUTERS 14,000 +Digital Equipment Corp................. 562,722 479,500 1.0
PACKAGING 55,000 Federal Paper Board Co., Inc........... 1,170,668 1,168,750 2.5
OIL & GAS PRODUCERS 80,000 +Gerrity Oil & Gas Corp................. 1,127,238 930,000 2.0
INSURANCE 100,000 Greater N. Y. Savings Bank............. 708,612 725,000 1.5
BANKING & FINANCIAL 70,000 +Peoples Heritage Financial Group, Inc.. 757,318 831,250 1.8
TEXTILE & APPAREL 60,000 +Texfi Industries, Inc.................. 265,250 240,000 0.5
OIL--INTEGRATED 60,000 Total Petroleum N.A., Ltd.............. 579,312 667,500 1.4
INSURANCE 10,000 Travelers Corp......................... 326,690 311,250 0.7
------------ ------------ ----------
6,271,503 6,268,250 13.3
- ----------------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
- ----------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 91,100 +ADT Ltd................................ 805,189 819,900 1.7
AUTOMOBILES 50,000 +Agency Rent-A-Car, Inc................. 513,750 662,500 1.4
BANKING 30,000 BankAmerica Corp....................... 1,327,975 1,391,250 3.0
RETAIL STORES 34,300 +Bon-Ton Stores, Inc.................... 222,590 274,400 0.6
HOUSING 75,000 +Castle & Cooke Homes, Inc.............. 993,370 1,012,500 2.1
AUTOMOBILES 20,000 General Motors Corp.................... 905,765 1,097,500 2.3
RETAIL 10,000 Liz Claiborne Inc...................... 226,864 227,500 0.5
TECHNOLOGY 130,000 +Micronics Computers, Inc............... 745,040 780,000 1.7
INSURANCE 40,000 PartnerRe Holdings Ltd................. 826,750 860,000 1.8
AUTO PARTS 70,000 Purolator Products Co.................. 1,206,910 1,225,000 2.6
BROADCAST--MEDIA 30,000 U.S. Shoe Corp......................... 298,650 450,000 1.0
ENERGY 50,000 Valero Energy Corp..................... 1,124,015 1,056,250 2.2
------------ ------------ ----------
9,196,868 9,856,800 20.9
- ----------------------------------------------------------------------------------------------------------------------------
ABOVE-AVERAGE YIELD
- ----------------------------------------------------------------------------------------------------------------------------
FOODS 60,000 Borden, Inc............................ 951,390 1,020,000 2.2
PHARMACEUTICALS 15,000 Bristol-Myers Squibb Co................ 874,595 871,875 1.8
REAL ESTATE 60,000 Camden Property Trust Inc.............. 1,461,025 1,515,000 3.2
INVESTMENT TRUST
PHOTOGRAPHY 30,000 Eastman Kodak Co....................... 1,765,150 1,680,000 3.6
MERCHANDISING 35,000 K mart Corp............................ 819,725 743,750 1.6
OIL/DOMESTIC 60,000 Occidental Petroleum Corp.............. 1,122,705 1,027,500 2.2
TOBACCO 20,000 Philip Morris Cos. Inc................. 998,850 1,115,000 2.4
------------ ------------ ----------
7,993,440 7,973,125 17.0
- ----------------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS
- ----------------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 198,200 +Applied Bioscience International, Inc.. 916,926 1,015,775 2.2
PAPER PRODUCTS 36,000 Chesapeake Corp........................ 715,332 918,000 1.9
DIVERSIFIED COMPANIES 30,000 Cyprus Minerals Co..................... 736,448 776,250 1.6
STEEL 60,000 Geneva Steel Co. (Class A)............. 879,456 1,020,000 2.2
OIL SERVICES 15,000 Halliburton Co......................... 454,650 478,125 1.0
COMPUTER SERVICES 15,000 International Business Machines 683,550 847,500 1.8
Corp...................................
PHARMACEUTICALS 40,000 Merck & Co., Inc....................... 1,305,200 1,375,000 2.9
TECHNOLOGY 70,000 +Network Systems Corp................... 581,400 586,250 1.2
</TABLE>
52
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS
(CONCLUDED)
- ----------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 20,000 Northern Telecom Ltd................... $ 513,700 $ 617,500 1.3%
METALS 15,000 +Reynolds Metals Co..................... 688,560 680,625 1.4
HEALTH CARE 42,500 Salick Health Care, Inc................ 599,645 695,938 1.5
ENERGY 100,000 +Varco International Inc................ 568,294 600,000 1.3
------------ ------------ ----------
8,643,161 9,610,963 20.3
- ----------------------------------------------------------------------------------------------------------------------------
32,104,972 33,709,138 71.5
TOTAL COMMON STOCKS....................
- ----------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT ISSUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $ 1,500,000 Ciesco L.P., 3.20% due 1/05/1994....... 1,499,333 1,499,333 3.2
1,856,000 General Electric Capital Corp., 1,855,502 1,855,502 3.9
3.22% due 1/03/1994...................
New Jersey Economic Development
Authority:
3,000,000 3.15% due 1/11/1994................... 2,997,112 2,997,112 6.4
2,000,000 3.11% due 1/25/1994................... 1,995,681 1,995,681 4.2
2,000,000 Preferred Receivables Funding Corp., 1,997,720 1,997,720 4.2
3.42% due 1/12/1994...................
------------ ------------ ----------
10,345,348 10,345,348 21.9
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 2,000,000 Federal National Mortgage Association,
OBLIGATIONS-- 3.13% due 1/13/1994...................
DISCOUNT 1,997,739 1,997,739 4.2
- ----------------------------------------------------------------------------------------------------------------------------
12,343,087 12,343,087 26.1
TOTAL SHORT-TERM SECURITIES............
- ----------------------------------------------------------------------------------------------------------------------------
$ 44,448,059 46,052,225 97.6
TOTAL INVESTMENTS......................
------------
------------
1,155,038 2.4
OTHER ASSETS LESS LIABILITIES..........
------------ ----------
$ 47,207,263 100.0%
NET ASSETS.............................
------------ ----------
------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
+ Non-income producing security.
* Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
See Notes to Financial Statements.
53
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
BANK NOTES--5.9% $ 4,000,000 FNB of Chicago............................. 3.35% 1/31/94 $ 3,999,986
3,000,000 FNB of Chicago............................. 3.55 5/25/94 3,001,710
2,000,000 Nationsbank North Carolina................. 3.65 6/21/94 2,001,332
1,000,000 PNC Bank, N.A.............................. 3.80 4/29/94 1,000,618
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES
(COST--$10,002,652)................................................ 10,003,646
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL 329,000 ABN-AMRO N.A. Finance, Inc................. 3.26 1/24/94 328,265
PAPER*--61.6% 988,000 ABN-AMRO N.A. Finance, Inc................. 3.32 1/24/94 985,793
5,000,000 Abbey National N.A. Corp................... 3.21 3/21/94 4,964,444
3,000,000 American Express Credit Corp............... 3.22 1/10/94 2,997,250
4,000,000 Apreco, Inc................................ 3.35 2/25/94 3,979,342
3,000,000 Apreco, Inc................................ 3.28 3/11/94 2,981,333
1,000,000 Arco Coal Australia, Inc................... 3.33 2/07/94 996,443
2,000,000 Bank One Diversified Services Inc.......... 3.40 1/13/94 1,997,544
5,000,000 Bankers Trust N.Y. Corp.................... 3.21 3/16/94 4,966,667
4,500,000 Beta Finance Inc........................... 3.375 2/22/94 4,478,005
1,000,000 CIT Group Holdings, Inc.................... 3.25 1/07/94 999,358
1,400,000 CIT Group Holdings, Inc.................... 3.30 3/01/94 1,392,183
3,000,000 CIT Group Holdings, Inc.................... 3.28 4/15/94 2,971,563
1,500,000 CIT Group Holdings, Inc.................... 3.24 4/18/94 1,485,375
4,000,000 CSW Credit, Inc............................ 3.25 2/14/94 3,983,400
275,000 CXC Inc.................................... 3.40 1/18/94 274,544
1,973,000 CXC Inc.................................... 3.23 2/01/94 1,967,335
1,000,000 Ciesco L.P................................. 3.35 2/01/94 997,022
2,000,000 Ciesco L.P................................. 3.35 2/08/94 1,992,742
2,000,000 Ciesco L.P................................. 3.20 3/10/94 1,987,733
2,893,000 Ciesco L.P................................. 3.20 3/11/94 2,874,999
3,000,000 Corporate Asset Funding Co., Inc........... 3.25 2/18/94 2,986,729
4,000,000 Ford Motor Credit Co....................... 3.20 1/27/94 3,989,950
2,000,000 General Electric Capital Corp.............. 3.21 1/31/94 1,994,231
873,000 General Electric Capital Corp.............. 3.35 3/23/94 866,637
3,000,000 Goldman Sachs Group L.P.................... 3.22 1/14/94 2,996,150
2,000,000 Goldman Sachs Group L.P.................... 3.36 2/07/94 1,992,886
2,000,000 Hertz Funding Corp......................... 3.34 2/11/94 1,992,137
5,000,000 HYPO U.S. Finance, Inc..................... 3.28 3/11/94 4,968,889
600,000 MCA Funding Corp........................... 3.30 1/18/94 599,004
1,500,000 Nomura Holding America, Inc................ 3.40 1/24/94 1,496,650
5,000,000 Sanwa Business Credit Corp................. 3.25 2/24/94 4,974,639
1,582,000 Sanwa Business Credit Corp................. 3.20 2/28/94 1,573,392
1,519,000 Sanwa Business Credit Corp................. 3.23 3/22/94 1,508,063
5,617,000 Sheffield Receivables Corp................. 3.25 2/18/94 5,591,617
3,740,000 Student Loan Corp.......................... 3.33 1/31/94 3,729,276
7,000,000 Svenska Handelsbanken, Inc................. 3.25 1/05/94 6,996,792
</TABLE>
54
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $ 4,257,000 Transamerica Finance Corp.................. 3.27% 2/04/94 $ 4,243,466
(CONCLUDED) 3,000,000 Transamerica Finance Corp.................. 3.36 2/22/94 2,985,337
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST--$105,087,255)............................................... 105,087,185
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE 500,000 Associates Corp. of North America.......... 9.00 1/15/94 501,414
NOTES--1.8% 2,370,000 Associates Corp. of North America.......... 12.50 9/15/94 2,512,200
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES
(COST--$3,017,067)................................................. 3,013,614
- -------------------------------------------------------------------------------------------------------------------------
MASTER NOTES+--1.2% 2,000,000 Goldman Sachs Group L.P.+.................. 3.33 3/01/94 2,000,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES
(COST--$2,000,000)................................................. 2,000,000
- -------------------------------------------------------------------------------------------------------------------------
MEDIUM-TERM 3,000,000 General Electric Capital Corp.............. 3.29 5/18/94 2,998,500
NOTES--2.3% 1,000,000 General Electric Capital Corp.............. 3.50 8/25/94 999,600
- -------------------------------------------------------------------------------------------------------------------------
TOTAL MEDIUM-TERM NOTES
(COST--$3,999,277)................................................. 3,998,100
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 1,783,000 Federal Home Loan Mortgage Corporation..... 3.12 1/24/94 1,779,220
AGENCY OBLIGATIONS-- 172,000 Federal Home Loan Mortgage Corporation..... 3.35 5/20/94 169,853
DISCOUNT*--6.0% 133,000 Federal Home Loan Mortgage Corporation..... 3.47 7/28/94 130,460
560,000 Federal National Mortgage Association...... 3.23 5/12/94 553,409
365,000 Federal National Mortgage Association...... 3.28 6/30/94 359,036
275,000 Federal National Mortgage Association...... 3.39 7/15/94 270,074
155,000 Federal National Mortgage Association...... 3.34 9/22/94 151,121
4,000,000 Federal National Mortgage Association...... 3.43 9/29/94 3,897,244
55,000 Federal National Mortgage Association...... 3.55 10/13/94 53,497
3,000,000 United States Treasury Bills............... 3.245 6/23/94 2,953,600
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--DISCOUNT (COST--$10,315,567).......................... 10,317,514
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 2,500,000 Federal Home Loan Bank+.................... 3.15 5/20/94 2,497,403
AGENCY OBLIGATIONS-- 3,000,000 Federal Home Loan Bank+.................... 3.43 12/28/95 3,000,000
NON-DISCOUNT*-- 10,000,000 Federal Home Loan Mortgage Association+.... 3.36 9/01/95 9,996,770
21.0% 2,000,000 Federal National Mortgage Association+..... 3.33 5/13/96 2,000,000
2,000,000 Federal National Mortgage Association+..... 3.33 8/13/96 2,000,000
2,000,000 Federal National Mortgage Association+..... 3.45 5/19/97 2,000,000
2,000,000 Federal National Mortgage Association+..... 3.50 5/14/98 2,000,000
3,500,000 Student Loan Marketing Association+........ 3.51 12/30/94 3,508,159
2,000,000 Student Loan Marketing Association+........ 3.44 3/03/97 2,000,736
1,000,000 United States Treasury Notes............... 5.375 2/28/94 1,003,627
250,000 United States Treasury Notes............... 5.125 5/31/94 251,875
250,000 United States Treasury Notes............... 5.00 6/30/94 252,031
1,000,000 United States Treasury Notes............... 3.875 3/31/95 1,000,312
1,500,000 United States Treasury Notes............... 3.875 4/30/95 1,500,000
1,000,000 United States Treasury Notes............... 4.125 6/30/95 1,002,500
</TABLE>
55
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & $ 500,000 United States Treasury Notes............... 4.25 % 7/31/95 $ 501,406
AGENCY OBLIGATIONS-- 750,000 United States Treasury Notes............... 3.875 8/31/95 747,890
NON-DISCOUNT* 500,000 United States Treasury Notes............... 4.25 12/31/95 500,156
(CONCLUDED)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--NON-DISCOUNT (COST--$35,758,372)...................... 35,762,865
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$170,180,190)--99.8%...................... 170,182,924
OTHER ASSETS LESS LIABILITIES--0.2%................................ 348,429
------------
NET ASSETS--100.0%................................................. $170,531,353
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund. Other securities bear interest at the rates
shown, payable at fixed dates or upon maturity. The interest rates on variable
rate securities are adjusted periodically based upon appropriate indexes. The
interest rates shown are the rates in effect at December 31, 1993.
+ Variable Rate Notes.
See Notes to Financial Statements.
56
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION 29,000 SkyWest Inc............................ $ 558,750 $ 996,875 1.0%
- ----------------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 50,000 +Automotive Industries Inc.............. 1,091,625 1,462,500 1.5
- ----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 60,000 +TBC Corp............................... 757,500 735,000 0.7
- ----------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE 40,000 Monro Muffler Brake Inc................ 564,375 650,000 0.7
- ----------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 20,000 Reynolds & Reynolds Co. (Class A)...... 809,271 912,500 0.9
- ----------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 50,000 +BancTec, Inc........................... 867,125 1,193,750 1.2
50,000 Merisel, Inc........................... 834,375 912,500 0.9
------------ ------------ ----------
1,701,500 2,106,250 2.1
- ----------------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 62,000 Metatec Corp. (Class A)................ 670,500 914,500 0.9
- ----------------------------------------------------------------------------------------------------------------------------
COMPUTERS & 32,000 Adaptec Inc............................ 859,000 1,274,000 1.3
PERIPHERALS
- ----------------------------------------------------------------------------------------------------------------------------
CONSUMER--GOODS 65,000 Oshkosh B Gosh Inc. (Class A).......... 1,250,000 1,283,750 1.3
- ----------------------------------------------------------------------------------------------------------------------------
CONSUMER--MISCELLANEOUS 45,000 Toro Co................................ 886,575 1,260,000 1.3
- ----------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 30,000 IEC Electronics Corp................... 358,750 397,500 0.4
120,000 +Willcox & Gibbs, Inc................... 617,266 930,000 0.9
------------ ------------ ----------
976,016 1,327,500 1.3
- ----------------------------------------------------------------------------------------------------------------------------
ELECTRONIC/INSTRUMENTS 70,000 +BMC Industries Inc..................... 961,524 1,478,750 1.5
110,000 Checkmate Electronics Inc.............. 1,041,875 1,045,000 1.1
35,000 DOVatron International Inc............. 596,438 949,375 1.0
40,000 Electronics For Imaging Inc............ 765,000 660,000 0.7
65,000 Exide Electronics Group Inc............ 1,200,000 1,218,750 1.2
40,000 +Kent Electronics Corp.................. 816,041 1,140,000 1.2
108,000 Methode Electronics Inc. (Class A)..... 1,056,455 1,566,000 1.6
------------ ------------ ----------
6,437,333 8,057,875 8.3
- ----------------------------------------------------------------------------------------------------------------------------
ELECTRONICS 45,000 Vishay Intertechnology Inc............. 1,467,780 1,580,625 1.6
- ----------------------------------------------------------------------------------------------------------------------------
ENERGY-RELATED 40,000 Magma Power Co., Inc................... 1,333,876 1,395,000 1.4
- ----------------------------------------------------------------------------------------------------------------------------
ENGINEERING & 40,000 Butler Manufacturing Co................ 691,000 1,075,000 1.1
CONSTRUCTION
- ----------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL 25,000 Donaldson Co........................... 756,777 1,106,250 1.1
60,000 IMCO Recycling Inc..................... 791,697 720,000 0.7
------------ ------------ ----------
1,548,474 1,826,250 1.8
- ----------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 45,000 TETRA Technologies Inc................. 751,250 871,875 0.9
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 35,000 CMAC Investment Corp................... 1,016,387 971,250 1.0
75,000 First Financial Corp................... 1,087,188 1,246,875 1.3
50,000 First State Bancorp.................... 548,750 581,250 0.6
85,000 Southwest Securities Group, Inc........ 1,042,500 966,875 1.0
------------ ------------ ----------
3,694,825 3,766,250 3.9
- ----------------------------------------------------------------------------------------------------------------------------
FOOD DISTRIBUTION 46,300 Performance Food Group Co.............. 759,450 1,134,350 1.1
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
FOODS 70,000 J & J Snack Food Corp.................. $ 1,141,625 $ 1,443,750 1.5%
- ----------------------------------------------------------------------------------------------------------------------------
GAMING 40,000 Players International Inc.............. 941,875 982,500 1.0
35,000 Sodak Gaming Inc....................... 1,088,750 1,032,500 1.0
------------ ------------ ----------
2,030,625 2,015,000 2.0
- ----------------------------------------------------------------------------------------------------------------------------
GOLD 75,000 Echo Bay Mines Ltd..................... 987,325 965,625 1.0
- ----------------------------------------------------------------------------------------------------------------------------
HEALTH CARE-- 47,000 Sybron Corp............................ 1,176,235 1,504,000 1.5
PRODUCTS & SERVICES
- ----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL 91,500 Medalist Industries Inc................ 1,195,687 1,383,938 1.4
- ----------------------------------------------------------------------------------------------------------------------------
INSURANCE 64,000 Gainsco Inc............................ 779,583 584,000 0.6
50,000 Life USA Holding Inc................... 964,375 937,500 0.9
------------ ------------ ----------
1,743,958 1,521,500 1.5
- ----------------------------------------------------------------------------------------------------------------------------
LEASING 50,000 Rollins Truck Leasing Corp............. 809,888 956,250 1.0
- ----------------------------------------------------------------------------------------------------------------------------
MACHINERY 62,000 Duriron Co., Inc....................... 1,429,875 1,433,750 1.4
35,000 Electroglas Inc........................ 731,250 866,250 0.9
75,000 Thermo Fibertek Inc.................... 1,045,450 1,190,625 1.2
------------ ------------ ----------
3,206,575 3,490,625 3.5
- ----------------------------------------------------------------------------------------------------------------------------
MANUFACTURED HOUSING 60,000...... Redman Industries Inc.................. 946,062 1,237,500 1.3
- ----------------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 75,000 Clintrials, Inc........................ 739,376 937,500 0.9
50,000 Renal Treatment Centers Inc............ 600,000 1,037,500 1.0
50,000 Sun Healthcare Group Inc............... 601,500 837,500 0.8
70,000 Wellcare Management Group Inc.......... 1,130,314 1,662,500 1.7
------------ ------------ ----------
3,071,190 4,475,000 4.4
- ----------------------------------------------------------------------------------------------------------------------------
MEDICAL SUPPLIES 40,000 Sullivan Dental Products, Inc.......... 620,000 685,000 0.7
- ----------------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 30,000 Cordis Corp............................ 1,003,125 1,481,250 1.5
40,000 Dentsply International Inc............. 1,527,500 1,755,000 1.8
------------ ------------ ----------
2,530,625 3,236,250 3.3
- ----------------------------------------------------------------------------------------------------------------------------
MERCHANDISING 50,000 Grow Biz International Inc............. 663,776 875,000 0.9
- ----------------------------------------------------------------------------------------------------------------------------
METALS 53,000 Material Sciences Corp................. 1,107,365 1,212,375 1.2
- ----------------------------------------------------------------------------------------------------------------------------
METALS & BASIC 30,000 Harsco Corp............................ 1,219,587 1,218,750 1.2
MATERIALS
- ----------------------------------------------------------------------------------------------------------------------------
OFFICE--RELATED 30,000 Miller (Herman) Inc.................... 658,125 916,875 0.9
- ----------------------------------------------------------------------------------------------------------------------------
OIL & GAS 125,000 Lomak Petroleum Inc.................... 915,625 921,875 0.9
60,000 Parker & Parsley Development
Partners.............................. 1,380,798 1,485,000 1.5
------------ ------------ ----------
2,296,423 2,406,875 2.4
- ----------------------------------------------------------------------------------------------------------------------------
OIL SERVICE 65,000 Hornbeck Offshore Service Inc.......... 1,177,625 950,625 1.0
60,000 Sundowner Offshore Services............ 843,951 780,000 0.8
------------ ------------ ----------
2,021,576 1,730,625 1.8
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
PRINTING 55,000 Merrill Corp........................... $ 1,103,738 $ 1,485,000 1.5%
- ----------------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 30,000 Banta Corp............................. 983,750 1,083,750 1.1
100,000 International Imaging Materials Inc.... 1,598,749 2,000,000 2.0
------------ ------------ ----------
2,582,499 3,083,750 3.1
- ----------------------------------------------------------------------------------------------------------------------------
RETAIL 100,000 Goody's Family Clothing Inc............ 1,396,250 1,237,500 1.3
52,500 Haverty Furniture Companies Inc........ 673,750 899,063 0.9
------------ ------------ ----------
2,070,000 2,136,563 2.2
- ----------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 50,000 Discovery Zone Inc..................... 1,168,750 1,062,500 1.1
15,000 MicroAge Inc........................... 318,375 577,500 0.6
50,000 Shoe Carnival Inc...................... 837,500 612,500 0.6
------------ ------------ ----------
2,324,625 2,252,500 2.3
- ----------------------------------------------------------------------------------------------------------------------------
RETAIL TRADE 25,000 Fingerhut Companies Inc................ 714,000 703,125 0.7
- ----------------------------------------------------------------------------------------------------------------------------
SAVINGS & LOAN 50,000 Coast Savings & Loan Association....... 792,125 712,500 0.7
ASSOCIATIONS
- ----------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 85,000 Aetrium Inc............................ 878,751 871,250 0.9
EQUIPMENT
- ----------------------------------------------------------------------------------------------------------------------------
SHIPPING 50,000 +Kirby Corp............................ 896,850 1,068,750 1.1
- ----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 50,000 LSI Logic Corp......................... 787,752 800,000 0.8
30,000 Storage Technology Corp................ 868,050 948,750 1.0
50,000 Ultratech Stepper Inc.................. 830,625 925,000 0.9
------------ ------------ ----------
2,486,427 2,673,750 2.7
- ----------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 80,000 Communications Central Inc............. 960,000 1,070,000 1.1
61,100 Peoples Telephone Co................... 604,651 603,362 0.6
13,000 Pittencrieff Communications Inc........ 187,000 315,250 0.3
90,000 SpecTran Corp.......................... 1,053,122 1,023,750 1.0
------------ ------------ ----------
2,804,773 3,012,362 3.0
- ----------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 80,000 Cellstar Corp.......................... 920,000 1,360,000 1.4
EQUIPMENT
- ----------------------------------------------------------------------------------------------------------------------------
TEXTILES 86,000 Worldtex Inc........................... 509,646 451,500 0.5
- ----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 47,000 Greyhound Lines Inc.................... 814,858 540,500 0.5
- ----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 40,000 Johnstown America Industries, Inc...... 687,500 965,000 1.0
SERVICES
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS.................... 73,821,539 85,221,588 86.2
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
INDUSTRY AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $ 4,184,000 General Electric Capital Corp., 3.00%
due 1/03/1994......................... $ 4,182,877 $ 4,182,877 4.2%
3,000,000 Morgan Stanley Group Inc., 3.25%
due 1/14/1994......................... 2,996,208 2,996,208 3.0
2,000,000 Penney (J.C.) Co., 3.25% due
1/27/1994............................. 1,995,125 1,995,125 2.0
4,500,000 Schering-Plough Corp., 3.20%
due 1/24/1994......................... 4,490,400 4,490,400 4.5
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES............ 13,664,610 13,664,610 13.7
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS...................... $ 87,486,149 98,886,198 99.9
------------
------------
OTHER ASSETS LESS LIABILITIES.......... 90,226 0.1
------------ ----------
NET ASSETS............................. $ 98,976,424 100.0%
------------ ----------
------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
* Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
60
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
INDUSTRIES HELD US STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
AEROSPACE 35,000 AlliedSignal Inc................. $ 2,374,243 $ 2,765,000 1.4%
- -------------------------------------------------------------------------------------------------------------------------
APPAREL 51,500 Phillips-Van Heusen Corp......... 1,356,596 1,931,250 1.0
- -------------------------------------------------------------------------------------------------------------------------
APPLIANCES 120,000 Singer Co. N.V................... 3,614,607 4,485,000 2.3
150,000 Sunbeam-Oster.................... 3,055,575 3,300,000 1.7
------------ ------------ ----------
6,670,182 7,785,000 4.0
- -------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE 65,000 Ford Motor Co.................... 3,677,850 4,192,500 2.2
- -------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE & EQUIPMENT 75,000 Cooper Tire & Rubber Co.......... 1,477,729 1,875,000 1.0
- -------------------------------------------------------------------------------------------------------------------------
BANKING 40,000 +Banco Rio de la Plata S.A.
(ADR) (a)....................... 1,278,562 1,575,000 0.8
55,000 Bank of New York, Inc............ 2,648,375 3,135,000 1.6
65,000 +Bank of New York, Inc.
(Warrants)(b)................... 485,312 682,500 0.3
------------ ------------ ----------
4,412,249 5,392,500 2.7
- -------------------------------------------------------------------------------------------------------------------------
BEVERAGES 10,000 PanAmerican Beverage, Inc.
(Class A)...................... 322,807 382,500 0.2
15,000 PepsiCo Inc...................... 596,344 613,125 0.3
------------ ------------ ----------
919,151 995,625 0.5
- -------------------------------------------------------------------------------------------------------------------------
CHEMICALS 30,000 PPG Industries, Inc.............. 2,131,584 2,276,250 1.2
35,000 Rohm and Haas.................... 1,977,095 2,082,500 1.1
------------ ------------ ----------
4,108,679 4,358,750 2.3
- -------------------------------------------------------------------------------------------------------------------------
COMMUNICATION 32,000 Tellabs, Inc..................... 972,036 1,504,000 0.8
EQUIPMENT
- -------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 62,367 LDDS Communication............... 2,660,824 3,024,800 1.6
15,000 Sprint Corp...................... 556,050 521,250 0.3
------------ ------------ ----------
3,216,874 3,546,050 1.9
- -------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 40,000 Computer Sciences Corp........... 3,508,763 3,980,000 2.0
100,000 General Motors Corp. (Class E)... 2,944,585 2,925,000 1.5
------------ ------------ ----------
6,453,348 6,905,000 3.5
- -------------------------------------------------------------------------------------------------------------------------
CONTAINERS 80,000 Crown Cork & Seal Co., Inc....... 2,173,307 3,350,000 1.7
- -------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 55,000 Emerson Electric Co.............. 3,151,393 3,313,750 1.7
- -------------------------------------------------------------------------------------------------------------------------
ELECTRONICS 50,000 Perkin-Elmer Corp................ 1,847,668 1,925,000 1.0
70,000 Solectron Corp................... 1,411,567 1,986,250 1.0
------------ ------------ ----------
3,259,235 3,911,250 2.0
- -------------------------------------------------------------------------------------------------------------------------
ENGINEERING & 50,000 Thermo Electron Corp............. 2,020,650 2,100,000 1.1
CONSTRUCTION
- -------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 225,000 Wheelabrator Technologies Inc.... 3,579,011 3,993,750 2.0
- -------------------------------------------------------------------------------------------------------------------------
FERTILIZERS 12,000 IMC Fertilizer Group, Inc........ 558,348 544,500 0.3
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
INDUSTRIES HELD US STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 49,000 Willamette Industries, Inc....... $ 1,854,798 $ 2,437,750 1.2%
- -------------------------------------------------------------------------------------------------------------------------
HEALTHCARE-- 125,000 +Humana Corp...................... 2,100,084 2,203,125 1.1
PRODUCTS/SERVICES 15,000 Johnson & Johnson Co............. 599,666 671,250 0.3
------------ ------------ ----------
2,699,750 2,874,375 1.4
- -------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 60,000 Procter & Gamble................. 3,292,754 3,420,000 1.8
- -------------------------------------------------------------------------------------------------------------------------
INSURANCE 30,000 America International Group
Inc............................ 2,641,542 2,632,500 1.3
20,000 Capital Holding Corp............. 821,259 742,500 0.4
------------ ------------ ----------
3,462,801 3,375,000 1.7
- -------------------------------------------------------------------------------------------------------------------------
MEDICAL 44,000 Physician Corp................... 786,250 1,094,500 0.6
15,000 Vivra Inc........................ 278,914 346,875 0.2
------------ ------------ ----------
1,065,164 1,441,375 0.8
- -------------------------------------------------------------------------------------------------------------------------
MEDIA/PUBLISHING 50,000 News Corp. Ltd. (ADR)(a)......... 2,617,345 2,637,500 1.4
- -------------------------------------------------------------------------------------------------------------------------
MERCHANDISING 27,500 Heilig-Meyers Co................. 465,055 1,072,500 0.5
- -------------------------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 15,234 Pacific Dunlop Ltd............... 55,601 55,832 0.0
- -------------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 67,000 Danka Business Systems
PLC (ADR)(a)................... 1,874,782 2,650,688 1.4
- -------------------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING 40,000 Union Camp Corp.................. 1,919,332 1,905,000 1.0
- -------------------------------------------------------------------------------------------------------------------------
PETROLEUM-- 65,000 Phillips Petroleum Co............ 2,046,532 1,885,000 1.0
DOMESTIC
- -------------------------------------------------------------------------------------------------------------------------
PETROLEUM-- 45,000 British Petroleum PLC............ 2,305,178 2,880,000 1.5
INTERNATIONAL 15,000 Chevron Oil Corp................. 1,314,133 1,306,875 0.7
30,000 Mobil Oil Corp................... 2,303,502 2,370,000 1.2
------------ ------------ ----------
5,922,813 6,556,875 3.4
- -------------------------------------------------------------------------------------------------------------------------
PUBLISHING 40,000 Gannett Co., Inc................. 2,129,343 2,290,000 1.2
- -------------------------------------------------------------------------------------------------------------------------
RAILROADS 10,000 CSX Corp......................... 851,775 810,000 0.4
25,000 Southern Pacific Rail Corp....... 480,690 493,750 0.3
------------ ------------ ----------
1,332,465 1,303,750 0.7
- -------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 12,000 Motorola, Inc.................... 1,003,033 1,108,500 0.6
- -------------------------------------------------------------------------------------------------------------------------
SERVICES 15,000 Block (H&R), Inc................. 545,801 611,250 0.3
45,000 Huntingdon International Holdings
PLC (ADR)(a)................... 461,978 410,625 0.2
12,500 Kelly Services, Inc. (Class A)... 361,324 345,312 0.2
------------ ------------ ----------
1,369,103 1,367,187 0.7
- -------------------------------------------------------------------------------------------------------------------------
SMALLER GROWTH 20,000 Bandag, Inc. (Class A)........... 1,088,927 1,035,000 0.5
4,700 Bandag, Inc...................... 252,630 260,262 0.1
------------ ------------ ----------
1,341,557 1,295,262 0.6
- -------------------------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 20,000 Microsoft Corp................... 1,616,500 1,612,500 0.8
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
INDUSTRIES HELD US STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 13,100 ALC Communications Corp.......... $ 334,050 $ 376,625 0.2%
120,000 MCI Communications Corp.......... 3,351,698 3,382,500 1.7
------------ ------------ ----------
3,685,748 3,759,125 1.9
- -------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 70,000 ADC Telecommunications Inc....... 1,876,416 2,493,750 1.3
EQUIPMENT 32,000 Antec Corp....................... 754,074 784,000 0.4
35,000 DSC Communications Corp.......... 1,843,006 2,150,312 1.1
8,000 Picturetel Corp.................. 145,636 149,000 0.1
------------ ------------ ----------
4,619,132 5,577,062 2.9
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 100,000 California Energy, Inc........... 1,837,585 1,850,000 0.9
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCK & WARRANTS........ 96,592,074 108,939,206 56.0
- -------------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS & WARRANTS
- -------------------------------------------------------------------------------------------------------------------------
ARGENTINA 7,360 Banco de Galicia y Buenos Aires
S.A. (ADR)(a)(2)............... 139,200 295,780 0.1
115,000 Telecom Argentina Stet S.A.
(16)........................... 549,904 723,647 0.4
------------ ------------ ----------
689,104 1,019,427 0.5
- -------------------------------------------------------------------------------------------------------------------------
AUSTRALIA 15,000 Coles Meyer, Ltd.
(Warrants)(b)(15).............. 44,571 32,272 0.0
16,917 National Australia Bank
Ltd.(2)........................ 105,508 141,453 0.1
------------ ------------ ----------
150,079 173,725 0.1
- -------------------------------------------------------------------------------------------------------------------------
CANADA 15,000 Hudson Bay Co.(15)............... 451,080 447,508 0.2
50,000 International Semi-Tech
Microelectronics Receipts Inc.
(5)(d)......................... 331,795 283,233 0.1
60,000 Magna International Inc. (Class
A)(1).......................... 2,647,900 2,985,000 1.5
------------ ------------ ----------
3,430,775 3,715,741 1.8
- -------------------------------------------------------------------------------------------------------------------------
CHILE 15,900 Distribuidora Chilectra
Metropolitana S.A.
(ADR)(a)(4)++.................. 415,283 652,854 0.3
- -------------------------------------------------------------------------------------------------------------------------
FRANCE 643 Compagnie Generale des Eaux
(Ordinary)(5).................. 240,370 317,750 0.2
- -------------------------------------------------------------------------------------------------------------------------
GERMANY 400 Mannesman AG(11)................. 68,658 97,210 0.0
- -------------------------------------------------------------------------------------------------------------------------
HONG KONG 6,000 Cheung Kong Holdings Ltd.(14).... 21,616 36,709 0.0
258,907 Dairy Farms International
Holdings Ltd.(7)............... 399,176 516,272 0.3
35,000 Henderson Land Development Co.,
Ltd.(14)....................... 110,593 258,319 0.1
263,000 Hutchison Whampoa, Ltd.(12)...... 495,611 1,311,084 0.7
200,000 Johnson Electric Holdings
Ltd.(5)........................ 408,481 512,754 0.3
80,500 Swire Pacific, Ltd. (Class
A)(12)......................... 308,125 724,427 0.4
------------ ------------ ----------
1,743,602 3,359,565 1.8
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
COUNTRY HELD FOREIGN STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
MEXICO 205,200 +Cifra, S.A. de C.V.(15).......... $ 196,740 $ 615,930 0.3%
50,000 Consorcio G Grupo Dino S.A. de
C.V.
(ADR)(a)(2).................... 922,018 1,393,750 0.7
70,000 Empresas ICA Sociedad
Controladora, S.A. de C.V.
(ADR)(a)(4).................... 1,398,296 1,977,500 1.0
115,000 Grupo Carso, S.A. de C.V.
(ADR)(a)(12)++................. 1,270,567 2,501,250 1.3
25,000 Grupo Financiero Serfin S.A. de
C.V. (ADR)(a)(2)............... 615,413 737,500 0.4
45,000 Telefonos de Mexico, S.A. de C.V.
(Telmex) (ADR)(a)(16).......... 2,281,902 3,037,500 1.6
100,000 Telefonos de Mexico, S.A. de C.V.
(Telmex) (Class A)(16)......... 215,208 336,554 0.2
311,500 Telefonos de Mexico, S.A. de C.V.
(Telmex) (Class L)(16)......... 579,168 1,048,366 0.5
------------ ------------ ----------
7,479,312 11,648,350 6.0
- -------------------------------------------------------------------------------------------------------------------------
NETHERLANDS 15,844 Aegon N.V.(10)................... 567,718 860,821 0.4
31,500 Royal Dutch Petroleum Co., N.V.
(ADR)(a)(6).................... 2,962,142 3,287,812 1.7
------------ ------------ ----------
3,529,860 4,148,633 2.1
- -------------------------------------------------------------------------------------------------------------------------
PORTUGAL 3,040 Banco Comercial Portuges(2)...... 38,256 45,746 0.0
40,000 Banco Comercial Portuges (New)
(ADR)(a)(2).................... 559,100 610,000 0.3
25,000 Espirito Santo Financial Holdings
S.A. (ADR)(a)(2)............... 725,712 881,250 0.4
------------ ------------ ----------
1,323,068 1,536,996 0.7
- -------------------------------------------------------------------------------------------------------------------------
SPAIN 12,000 Empresa Nacional de Electricidad
S.A. (ADR)(a)(4)............... 260,496 570,000 0.3
10,000 Repsol S.A.(13).................. 277,603 311,080 0.2
------------ ------------ ----------
538,099 881,080 0.5
- -------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 26,065 British Petroleum PLC(13)........ 131,040 138,687 0.1
150,000 Hong Kong Land Holdings,
Ltd.(14)....................... 291,839 532,177 0.3
58,700 HSBC Holdings PLC(2)............. 401,456 874,077 0.4
31,300 Reuters Holdings PLC
(ADR)(a)(3).................... 2,101,244 2,472,700 1.3
------------ ------------ ----------
2,925,579 4,017,641 2.1
- -------------------------------------------------------------------------------------------------------------------------
VENEZUELA 39,500 +Siderurgica Venezolana SIVENSA
S.A.I.C.A.-S.A.C.A.
(Warrants)(b)(9)++............. 56,525 5,530 0.0
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS &
WARRANTS....................... 22,590,314 31,574,502 16.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
FACE VALUE OF NET
INDUSTRIES AMOUNT* CORPORATE & FOREIGN BONDS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES $ 1,000,000 Ford Motor Credit Corp., 7.125%
due 12/01/1997................. $ 995,000 $ 1,059,301 0.5%
1,000,000 International Business Machines
Corp., 6.375%
due 6/15/2000.................. 1,000,000 1,016,784 0.5
------------ ------------ ----------
1,995,000 2,076,085 1.0
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--AUSTRALIA A$ 425,000 Queensland Treasury Corp.
Global Notes, 8.00%
due 7/14/1999(8)............... 313,607 308,806 0.2
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA C$ 750,000 Government of Canada, 7.25%
due 6/01/2003(8)............... 555,467 593,467 0.3
5,000,000 Hydro-Electric Quebec, 6.35%
due 1/15/2002(6)............... 5,000,000 4,921,875 2.5
------------ ------------ ----------
5,555,467 5,515,342 2.8
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--FRANCE Ffr 3,250,000 French "OAT", 8.50%
due 4/25/2003(8)............... 653,879 661,058 0.3
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--ITALY Lit 950,000,000 Buoni Poliennali del Tesoro
(BTPS), 12.00% due
1/01/1998(8)................... 623,358 617,587 0.3
500,000 Republic of Italy, 8.75%
due 2/08/2001(8)............... 537,305 568,126 0.3
------------ ------------ ----------
1,160,663 1,185,713 0.6
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--MEXICO Mxp 3,564,470 Mexican Cetes, 12.60%(e)
due 9/07/1995(8)............... 948,988 964,301 0.5
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--NETHERLANDS Nlg 500,000 Aegon N.V., 7.00%
due 9/15/2001(8)............... 652,486 740,000 0.4
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--SPAIN Pta 90,000,000 Spanish Government, 10.50%
due 10/30/2003(8).............. 773,823 728,242 0.4
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--SWEDEN Skr 3,500,000 Government of Sweden, 10.75%
due 1/23/1997(8)............... 486,204 470,757 0.2
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN--UNITED KINGDOM L 625,000 U.K. Treasury Gilt, 7.25%
due 3/30/1998(8)............... 942,775 981,918 0.5
- -------------------------------------------------------------------------------------------------------------------------
TOBACCO $ 500,000 Phillip Morris Corp. Inc., 9.25%
due 12/01/1997................. 499,150 564,527 0.3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE & FOREIGN BONDS.. 13,982,042 14,196,749 7.2
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL AGENCY Federal National Mortgage Association:
OBLIGATIONS 7,500,000 FHG-16PH, 6.75%
due 4/25/2021................ 7,617,188 7,485,938 3.8
2,000,000 Series 93D, 5.85%
due 2/25/2006................ 1,996,250 1,971,250 1.0
------------ ------------ ----------
9,613,438 9,457,188 4.8
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE US GOVERNMENT & AGENCY VALUE (NOTE PERCENT OF
INDUSTRIES AMOUNT* OBLIGATIONS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED Government National Mortgage
SECURITIES Association:
1,600,477 9.00% due 11/15/2019(c).......... $ 1,585,954 $ 1,712,011 0.9 %
824,029 9.00% due 11/15/2019(c).......... 818,364 881,454 0.5
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & US Treasury Notes:
AGENCY OBLIGATIONS 1,000,000 8.625% due 8/15/1997............. 1,027,344 1,125,156 0.6
850,000 7.50% due 11/15/2001............. 853,320 948,414 0.5
3,000,000 6.25% due 2/15/2003.............. 3,103,594 3,099,375 1.6
3,000,000 US Treasury Bond, 7.125%
due 2/15/2023.................. 3,169,219 3,245,157 1.7
3,000,000 US Treasury STRIPS++, 5.795%
due 5/15/2000(e)............... 2,098,883 2,123,970 1.1
------------ ------------ ----------
10,252,360 10,542,072 5.5
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS...................... 22,270,116 22,592,725 11.7
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
FACE VALUE OF NET
INDUSTRY AMOUNT* SHORT-TERM SECURITIES COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $ 3,000,000 American Telephone & Telegraph
Co.
(AT&T), 3.29%
due 1/04/1994.................. $ 2,999,178 $ 2,999,177 1.5%
2,000,000 Ciesco L.P., 3.18%
due 2/01/1994.................. 1,994,523 1,994,523 1.0
3,435,000 General Electric Capital Corp.,
3.22% due 1/03/1994............ 3,434,386 3,434,386 1.8
5,000,000 Sanwa Business Corp., 3.20%
due 1/25/1994.................. 4,989,333 4,989,333 2.6
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES...... 13,417,420 13,417,419 6.9
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS................ $168,851,966 190,720,601 97.9
------------
------------
OTHER ASSETS LESS LIABILITIES.... 4,055,915 2.1
------------ ----------
NET ASSETS....................... $194,776,516 100.0%
------------ ----------
------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
(a) American Depositary Receipts (ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(c) US Government Agency Mortgage-Backed Obligations are subject to principal
paydowns as a result of prepayments or refinancings of the underlying
mortgage investments. As a result, the average life may be substantially
less than the original maturity.
(d) Receipts evidence payment by the Fund of 40% of the purchase price of
International Semi-Tech Microelectronics, Inc. The Fund is obligated to pay
the remaining 60%, approximately $498,000 over the next two years.
(e) Represents the yield-to-maturity on this zero coupon issue.
* Denominated in US dollars unless otherwise indicated.
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
++ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $3,160,000, representing 1.6% of net
assets.
Corresponding industry groups for foreign securities:
(1) Automotive (10) Insurance
(2) Banking (11) Machinery
(3) Business Services (12) Multi-Industry
(4) Electric Utilities (13) Petroleum
(5) Electronics (14) Real Estate
(6) Energy (15) Retail Stores
(7) Food Chains (16) Telecommunications
(8) Government Entities
(9) Health and Personal
Care
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Distribuidora Chilectra Metropolitana S.A. (ADR)....................... 2/13/92 $ 415,283 $ 652,854
Grupo Carso, S.A. de C.V. (ADR)........................................ 9/24/91 1,270,567 2,501,250
Siderurgica Venezolana SIVENSA S.A.I.C.A.-S.A.C.A. (Warrants).......... 2/13/92 56,525 5,530
- ----------------------------------------------------------------------------------------------------------------------
TOTAL.................................................................. $1,742,375 $3,159,634
---------- ----------
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
++ Separate Trading of Registered Interest and Principal of Securities
(STRIPS).
See Notes to Financial Statements.
67
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
INDUSTRY HELD US STOCKS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
AEROSPACE 23,500 United Technologies Corp....... $ 1,335,387 $ 1,457,000 0.5%
- ----------------------------------------------------------------------------------------------------------------------------
AIRLINES 22,000 +AMR Corp...................... 1,466,263 1,474,000 0.5
- ----------------------------------------------------------------------------------------------------------------------------
ALUMINUM 18,100 Aluminum Co. of America........ 1,262,536 1,255,688 0.5
- ----------------------------------------------------------------------------------------------------------------------------
BANKING 19,900 Morgan (J.P.) & Co............. 1,420,000 1,380,563 0.5
- ----------------------------------------------------------------------------------------------------------------------------
CHEMICALS 39,500 Nalco Chemical Co.............. 1,372,693 1,481,250 0.5
- ----------------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 16,400 Hewlett-Packard Co............. 1,197,290 1,295,600 0.5
- ----------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 56,100 Grand Metropolitan PLC
(Sponsored) (ADR)*........... 1,462,676 1,549,763 0.6
- ----------------------------------------------------------------------------------------------------------------------------
FOODS 54,381 Archer-Daniels-Midland Co...... 1,243,105 1,237,168 0.5
- ----------------------------------------------------------------------------------------------------------------------------
HARDWARE/PRODUCTS 35,700 Stanley Works Co............... 1,483,509 1,588,650 0.6
- ----------------------------------------------------------------------------------------------------------------------------
MACHINERY 36,900 Ingersoll-Rand Co.............. 1,300,234 1,411,425 0.5
53,800 Morrison Knudsen Corp.......... 1,285,583 1,351,725 0.5
------------- ------------- ----------
2,585,817 2,763,150 1.0
- ----------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS 40,000 Kelly Services, Inc. (Class
A)........................... 1,102,500 1,105,000 0.4
- ----------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS 47,200 Keystone International, Inc.... 1,233,722 1,292,100 0.5
CAPITAL GOODS
- ----------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 74,000 Westcoast Energy Inc........... 1,199,590 1,221,000 0.5
- ----------------------------------------------------------------------------------------------------------------------------
OFFICE--RELATED 31,500 Pitney Bowes, Inc.............. 1,239,729 1,303,312 0.5
- ----------------------------------------------------------------------------------------------------------------------------
OIL SERVICE 77,900 Dresser Industries, Inc........ 1,685,325 1,616,425 0.6
24,200 Schlumberger Ltd............... 1,522,423 1,430,825 0.5
------------- ------------- ----------
3,207,748 3,047,250 1.1
- ----------------------------------------------------------------------------------------------------------------------------
PETROLEUM 46,700 Phillips Petroleum Co.......... 1,396,735 1,354,300 0.5
- ----------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 50,000 Abbott Laboratories............ 1,358,227 1,475,000 0.5
23,800 Bristol-Myers Squibb Co........ 1,400,865 1,383,375 0.5
------------- ------------- ----------
2,759,092 2,858,375 1.0
- ----------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHIC 20,200 Eastman Kodak Co............... 1,096,178 1,131,200 0.4
- ----------------------------------------------------------------------------------------------------------------------------
PRINTING/PUBLISHING 21,800 Gannett Co., Inc............... 1,079,334 1,248,050 0.5
- ----------------------------------------------------------------------------------------------------------------------------
RETAIL STORES 62,900 K mart Corp.................... 1,416,070 1,336,625 0.5
32,600 May Department Stores Co....... 1,290,202 1,283,625 0.5
------------- ------------- ----------
2,706,272 2,620,250 1.0
- ----------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 49,000 +Teradyne Inc.................. 1,140,755 1,359,750 0.5
PRODUCTION EQUIPMENT
- ----------------------------------------------------------------------------------------------------------------------------
SMALLER CAPITALIZATION 42,000 Comsat Corp.(a)................ 1,222,587 1,249,500 0.5
- ----------------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS 76,800 Wheelabrator Technologies,
Inc.......................... 1,317,755 1,363,200 0.5
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
INDUSTRY HELD US STOCKS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 22,100 American Telephone & Telegraph
Co........................... $ 1,265,039 $ 1,160,250 0.4%
23,300 Bell Atlantic Corp............. 1,365,642 1,374,700 0.5
------------- ------------- ----------
2,630,681 2,534,950 0.9
- ----------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 54,000 +California Energy Co., Inc..... 973,666 999,000 0.4
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS................ 39,135,620 40,170,069 14.9
- ----------------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS & WARRANTS
- ----------------------------------------------------------------------------------------------------------------------------
ARGENTINA 42,800 Banco de Galicia S.A.
(ADR)*(1).................... 1,049,975 1,720,025 0.6
47,000 +Banco Frances del Rio de la
Plata S.A. (Class A)(1)....... 1,420,597 1,850,625 0.7
------------- ------------- ----------
2,470,572 3,570,650 1.3
- ----------------------------------------------------------------------------------------------------------------------------
AUSTRALIA 401,000 CSR Ltd. Ordinary(17).......... 1,188,354 1,328,134 0.5
171,000 National Bank of
Australia(1)................. 1,243,148 1,429,831 0.5
377,600 Pacific Dunlop, Ltd.(17)....... 1,219,150 1,383,896 0.5
------------- ------------- ----------
3,650,652 4,141,861 1.5
- ----------------------------------------------------------------------------------------------------------------------------
BRAZIL 137,600 Aracruz Celulose S.A.
(ADR)*(20)................... 1,314,143 1,806,000 0.7
- ----------------------------------------------------------------------------------------------------------------------------
CANADA 82,100 Canadian Pacific Ltd.(17)...... 1,294,667 1,334,125 0.5
37,000 Imperial Oil Ltd.(5)........... 1,347,223 1,250,566 0.5
44,400 Northern Telecommunications,
Ltd.(27)..................... 1,181,567 1,370,850 0.5
105,000 Thomson Corp.(24).............. 1,306,964 1,288,708 0.5
------------- ------------- ----------
5,130,421 5,244,249 2.0
- ----------------------------------------------------------------------------------------------------------------------------
FRANCE 11,400 Alactel Alsthom(4)............. 1,408,181 1,622,790 0.6
15,100 Compagnie de Saint
Gobain(15)................... 1,490,945 1,501,065 0.6
3,200 +Compagnie Generale des
Eaux(30)...................... 1,373,440 1,581,336 0.6
130 +Compagnie Generale des Eaux
(Rights)(30).................. -- 4,545 0.0
21,766 Schneider S.A.(7).............. 1,386,094 1,622,791 0.6
1,966 Schneider S.A.
(Warrants)(b)(7)............. 16,313 24,995 0.0
26,300 TOTAL S.A. (21)................ 1,348,914 1,434,828 0.5
------------- ------------- ----------
7,023,887 7,792,350 2.9
- ----------------------------------------------------------------------------------------------------------------------------
GERMANY 6,250 Mannesmann AG(14).............. 1,165,504 1,518,910 0.6
5,950 Preussag AG(17)................ 1,473,941 1,481,938 0.5
4,700 RWE AG (Rheinisch
Westfalisches)(29)........... 1,234,359 1,446,362 0.5
3,150 Siemens AG(8).................. 1,277,995 1,444,996 0.5
10,100 Thyssen AG (Ordinary) (14)..... 1,322,824 1,600,546 0.6
------------- ------------- ----------
6,474,623 7,492,752 2.7
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
COUNTRY HELD FOREIGN STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
HONG KONG 236,400 China Light & Power Co.,
Ltd.(29)..................... $ 1,097,227 $ 1,729,457 0.6%
340,000 Hutchison Whampoa, Ltd.(12).... 1,191,669 1,694,937 0.6
182,000 Swire Pacific, Ltd. (Class
A)(16)....................... 909,716 1,637,835 0.6
------------- ------------- ----------
3,198,612 5,062,229 1.8
- ----------------------------------------------------------------------------------------------------------------------------
ITALY 410,000 Daniel & Co.(14)............... 1,430,488 1,384,807 0.5
430,000 Italclementi S.p.A.(2)......... 1,449,431 1,542,425 0.6
915,000 Stet Savings Telecom(27)....... 1,683,468 1,849,806 0.7
------------- ------------- ----------
4,563,387 4,777,038 1.8
- ----------------------------------------------------------------------------------------------------------------------------
JAPAN 119,000 Asahi Glass Co., Ltd.(2)....... 1,344,440 1,129,679 0.4
28,000 Bandai Co.(28)................. 985,433 1,055,705 0.4
98,000 Canon, Inc.(8)................. 1,276,837 1,351,603 0.5
92,000 Dai Nippon Printing Co.,
Ltd.(24)..................... 1,395,217 1,310,048 0.5
88,000 Daiwa House Industries,
Ltd.(12)..................... 1,299,429 1,182,160 0.4
56,000 Fuji Photo Film Co.,
Ltd.(23)..................... 1,328,598 1,238,761 0.5
205,000 Hitachi Cable, Ltd.(4)......... 1,501,758 1,325,542 0.5
26,000 Ito-Yokado Co., Ltd.(25)....... 1,173,699 1,187,534 0.4
131,000 Kamigumi Co.(26)............... 1,553,445 1,384,381 0.5
58,000 Kandenko Co. Ltd.(2)........... 1,374,145 1,111,589 0.4
47,000 Kansai Electric Power
Co.(30)...................... 1,329,800 1,178,578 0.4
132,000 Maeda Corp.(2)................. 1,283,398 1,182,160 0.4
267,000 Makino Milling Machine
Co.(14)...................... 1,649,966 1,243,418 0.5
78,000 Makita Electric Works,
Ltd.(8)...................... 1,273,092 1,362,171 0.5
106,000 Matsushita Electric Industries,
Ltd.(8)...................... 1,359,367 1,414,472 0.5
221,000 Mitsubishi Heavy Industry,
Ltd.(4)...................... 1,328,964 1,217,222 0.5
20,000 Nintendo Ltd.(8)............... 1,648,723 1,286,047 0.5
210,000 Nippon Fire and Marine
Insurance Co., Ltd.(13)...... 1,435,241 1,352,230 0.5
214,000 Nippon Oil Co., Ltd.(21)....... 1,473,852 1,253,412 0.5
175,000 Okumura Corp.(2)............... 1,355,961 1,352,543 0.5
134,000 Sekisui Chemical Co.,
Ltd.(5)...................... 1,324,144 1,200,072 0.4
95,000 Sharp Corp.(8)................. 1,319,123 1,293,212 0.5
49,000 Shikoku Electric Power
Co.(29)...................... 1,326,068 1,176,070 0.4
40,000 Tokyo Electric Power Co.,
Inc.(29)..................... 1,248,014 1,103,349 0.4
76,000 Tokyo Style Co.(6)............. 1,309,440 1,095,827 0.4
75,000 Toto Ltd.(2)................... 1,418,884 1,229,178 0.5
50,000 Toyo Seikan Kaisha Corp.(19)... 1,397,919 1,253,806 0.5
66,000 Yamazaki Banking Ltd.(1)....... 1,252,559 1,270,822 0.5
------------- ------------- ----------
37,967,516 34,741,591 12.9
- ----------------------------------------------------------------------------------------------------------------------------
MEXICO 55,500 Cementos Mexicanos, S.A. de
C.V. (Class B)(4)............ 1,055,969 1,655,169 0.6
499,000 +Cifra S.A. de C.V. (Class
C)(25)........................ 1,076,840 1,497,804 0.6
60,000 Consorcio G Grupo Dina S.A. de
C.V. (ADR)*(3)............... 1,157,338 1,672,500 0.6
</TABLE>
70
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
COUNTRY HELD FOREIGN STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
MEXICO 50,000 Empresas ICA Sociedad
(CONCLUDED) Controladora, S.A. de C.V.
(ADR)*(30)................... $ 1,141,552 $ 1,412,500 0.5 %
24,600 Telefonos de Mexico, S.A. de
C.V. (Telmex) (ADR)*(27)..... 1,260,088 1,660,500 0.6
------------- ------------- ----------
5,691,787 7,898,473 2.9
- ----------------------------------------------------------------------------------------------------------------------------
NETHERLANDS 466 ABN Amro Holdings N.V.(1)...... 15,383 17,159 0.0
38,600 ABN Amro Holdings N.V.(1)...... 1,305,021 1,421,310 0.5
14,000 Royal Dutch Petroleum Co.
N.V. (ADR)*(21)................ 1,361,397 1,461,250 0.5
17,900 Ver Ner Utigevers(24).......... 1,236,673 1,601,210 0.6
------------- ------------- ----------
3,918,474 4,500,929 1.6
- ----------------------------------------------------------------------------------------------------------------------------
NORWAY 16,200 Hafslund Nycomed, Inc.
(ADR)*(22)................... 328,622 269,325 0.1
87,200 Hafslund Nycomed, Inc. (Class
B)(22)....................... 1,534,353 1,458,581 0.5
34,200 Kvaerner, Inc. (Class B)(16)... 1,234,012 1,657,153 0.6
------------- ------------- ----------
3,096,987 3,385,059 1.2
- ----------------------------------------------------------------------------------------------------------------------------
PORTUGAL 89,200 Banco Comercial Portuges
(ADR)*(1). .................. 1,151,795 1,360,300 0.5
- ----------------------------------------------------------------------------------------------------------------------------
SINGAPORE 153,000 Jurong Shipyard Ltd.(2)........ 1,105,918 1,379,664 0.5
1,175,000 Neptune Orient Lines
Ltd.(26)..................... 1,250,889 2,170,243 0.8
530,000 Sime Darby (ADR)*(25).......... 1,130,772 1,486,165 0.6
------------- ------------- ----------
3,487,579 5,036,072 1.9
- ----------------------------------------------------------------------------------------------------------------------------
SPAIN 48,400 Repsol S.A. (Sponsored)
(ADR)*(21)................... 1,325,504 1,494,350 0.6
38,700 Telefonica Nacional de Espana
S.A.
(ADR)*(27)................... 1,340,946 1,509,300 0.6
------------- ------------- ----------
2,666,450 3,003,650 1.2
- ----------------------------------------------------------------------------------------------------------------------------
SWEDEN 102,000 SKF AB 'B' Free(16)............ 1,390,487 1,650,367 0.6
- ----------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 2,100 BBC Brown Boveri & Cie(16)..... 1,292,692 1,533,176 0.6
2,640 Holderbank Financiere Glarus
AG(4)........................ 1,317,434 1,650,555 0.6
310 Roche Holdings, Ltd.(22)....... 1,044,564 1,315,025 0.5
2,890 Sulzer Gebrueder AG(14)........ 1,457,695 1,637,829 0.6
390 Sulzer Gebrueder AG
(Warrants)(b)(14)............ -- 2,097 0.0
------------- ------------- ----------
5,112,385 6,138,682 2.3
- ----------------------------------------------------------------------------------------------------------------------------
THAILAND 90,000 Bangkok Bank Co. Ltd.(1)....... 696,775 888,367 0.3
120,000 +M.D.X. Corp., Ltd.(33)........ 686,720 958,872 0.4
------------- ------------- ----------
1,383,495 1,847,239 0.7
- ----------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 125,600 Allied Lyons PLC(9)............ 1,116,657 1,265,115 0.5
283,000 British Gas PLC(18)............ 1,344,449 1,426,314 0.5
</TABLE>
71
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (NOTE PERCENT OF
COUNTRY HELD FOREIGN STOCKS & WARRANTS COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 23,400 British Petroleum PLC
(CONCLUDED) (ADR)*(21)...................... $ 1,330,220 $ 1,497,600 0.6%
195,000 British Telecommunications
PLC(3)....................... 1,293,218 1,360,351 0.5
285,000 General Electric PLC(7)........ 1,430,390 1,436,394 0.5
194,000 GKN PLC(3)..................... 1,405,238 1,513,945 0.6
347,000 Hanson PLC(6).................. 1,316,828 1,374,481 0.5
552,000 Hillsdown Holdings PLC(6)...... 1,285,749 1,280,894 0.5
127,000 Imperial Chemical Industries
PLC(5)....................... 1,440,295 1,499,771 0.6
437,000 Lucas Industries PLC(3)........ 985,970 1,240,101 0.5
------------- ------------- ----------
12,949,014 13,894,966 5.3
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS &
WARRANTS..................... 112,642,266 123,344,457 45.8
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
COUNTRY AMOUNT** FOREIGN BONDS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
AUSTRALIA A $ 1,625,000 Queensland Treasury Corp.,
8.00% due 7/14/1999(1)....... 1,165,025 1,180,729 0.4
3,500,000 Queensland Treasury Corp.,
8.00% due 5/14/2003(1)....... 2,520,859 2,554,977 0.9
------------- ------------- ----------
3,685,884 3,735,706 1.3
- ----------------------------------------------------------------------------------------------------------------------------
CANADA C $ 7,800,000 Government of Canada, 7.25% due
6/01/2003(1)................. 6,102,682 6,172,056 2.3
- ----------------------------------------------------------------------------------------------------------------------------
FRANCE Ffr 2,000,000 French Government "OAT", 8.125%
due 5/25/1999(1)............. 386,664 384,595 0.1
8,880,000 French Government "OAT", 8.50%
due 4/25/2003(1)............. 1,773,338 1,806,215 0.7
------------- ------------- ----------
2,160,002 2,190,810 0.8
- ----------------------------------------------------------------------------------------------------------------------------
ITALY Lit 1,000,000,000 Buoni Poliennali del Tesoro,
11.50% due 3/01/1998(1)...... 663,339 639,382 0.2
3,100,000,000 Buoni Poliennali del Tesoro,
12.00% due 1/01/1998(1)...... 2,119,044 2,015,283 0.7
------------- ------------- ----------
2,782,383 2,654,665 0.9
- ----------------------------------------------------------------------------------------------------------------------------
SWEDEN Government of Sweden(1):
Skr 6,000,000 11.00% due 1/21/1999........... 854,936 856,925 0.3
9,500,000 10.75% due 1/23/1997........... 1,303,345 1,277,768 0.5
------------- ------------- ----------
2,158,281 2,134,693 0.8
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
COUNTRY AMOUNT** FOREIGN BONDS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM UK Gilt,
L 2,190,000 7.25% due 3/30/1998(11)........ $ 3,400,346 $ 3,440,639 1.3 %
75,000 9.75% due 8/27/2002(11)........ 149,409 136,657 0.1
------------- ------------- ----------
3,549,755 3,577,296 1.4
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS............ 20,438,987 20,465,226 7.5
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Notes:
OBLIGATIONS $ 13,275,000 5.50% due 4/15/2000............ 13,476,063 13,391,156 5.0
500,000 6.375% due 1/15/2000........... 510,859 525,391 0.2
300,000 7.875% due 8/15/2001........... 304,953 341,531 0.1
700,000 7.50% due 11/15/2001........... 714,297 781,047 0.3
1,400,000 6.375% due 8/15/2002........... 1,383,906 1,460,157 0.5
7,175,000 6.25% due 2/15/2003............ 7,371,895 7,412,672 2.7
8,000,000 5.75% due 8/15/2003............ 8,168,984 7,973,752 3.0
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS.................. 31,930,957 31,885,706 11.8
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE (NOTE PERCENT OF
AMOUNT** SHORT-TERM SECURITIES COST 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER*** $ 10,000,000 Bank One Diversified Services, 3.20%
due 1/28/1994...................... $ 9,976,000 $ 9,976,000 3.7%
10,000,000 Ciesco L.P., 3.20%
due 2/10/1994...................... 9,964,444 9,964,444 3.7
9,460,000 General Electric Capital Corp., 3.22%
due 1/03/1994...................... 9,458,308 9,458,308 3.5
4,000,000 Hertz Funding Corp., 3.25%
due 1/12/1994...................... 3,996,028 3,996,028 1.5
6,000,000 PHH Corp., 3.35%
due 1/10/1994...................... 5,994,975 5,994,975 2.2
6,100,000 Xerox Credit Corp., 3.35%
due 1/14/1994...................... 6,092,621 6,092,621 2.3
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES.......... 45,482,376 45,482,376 16.9
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.................... $ 249,630,206 261,347,834 96.9
-------------
-------------
OTHER ASSETS LESS LIABILITIES........ 8,279,347 3.1
------------- ----------
NET ASSETS........................... $ 269,627,181 100.0%
------------- ----------
------------- ----------
</TABLE>
- --------------------------------------------------------------------------------
* American Depositary Receipt (ADR).
** Denominated in US dollars unless otherwise indicated.
*** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) Formerly Communications Satellite Corp.
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
+ Non-income producing security.
Corresponding industry groups for foreign stocks and
bonds:
(1) Banking (17) Multi-Industry
(2) Building & (18) Natural Gas
Construction (19) Packaging
(3) Business & Public (20) Paper
Service (21) Petroleum
(4) Capital Goods (22) Pharmaceutical
(5) Chemicals (23) Photography
(6) Diversified (24) Printing & Publishing
(7) Electrical Equipment (25) Retail Stores
(8) Electronics (26) Shipping
(9) Food (27) Telecommunications
(10) Government Bonds (28) Toys
(11) Government Agencies (29) Utilities
(12) Housing (30) Utilities--Electric
(13) Insurance (31) Advertising
(14) Machinery (32) Trucking
(15) Miscellaneous (33) Real Estate
(16) Miscellaneous Capital
Goods
See Notes to Financial Statements.
74
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRIES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ARGENTINA TELECOMMUNICATIONS 900 +Central Costanera S.A..... $ 21,600 $ 27,418 0.0%
21,600 +Telecom Argentina Stet,
S.A. (ADR)*.............. 924,319 1,360,800 1.3
19,000 +Telefonica de Argentina
S.A. (ADR)*.............. 940,801 1,396,500 1.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
ARGENTINA............... 1,866,720 2,784,718 2.6
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA UTILITIES--GAS 342,049 Australian Gas & Light
Co., Ltd................ 947,000 1,044,669 1.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRALIA............... 947,000 1,044,669 1.0
- ------------------------------------------------------------------------------------------------------------------------
AUSTRIA UTILITIES 4,300 Energie Versorgung
Niederoesterreich AG
(EVN)................... 460,213 552,051 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRIA................. 460,213 552,051 0.5
- ------------------------------------------------------------------------------------------------------------------------
CANADA TELECOMMUNICATIONS 2,400 BC Telecom, Inc........... 43,814 45,997 0.0
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 53,100 Transcanada Pipeline Co.,
Ltd..................... 825,380 816,413 0.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
CANADA.................. 869,194 862,410 0.8
- ------------------------------------------------------------------------------------------------------------------------
CHILE TELECOMMUNICATIONS 14,400 Compania de Telefonos de
Chile, S.A. (ADR)*...... 1,254,995 1,467,000 1.4
--------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 29,700 +Distribuidora Chilectra
Metropolitana, S.A.
(ADR)*................... 872,213 1,219,482 1.2
37,500 Enersis S.A. (ADR)*....... 799,661 881,250 0.8
------------ ------------ ----------
1,671,874 2,100,732 2.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
CHILE................... 2,926,869 3,567,732 3.4
- ------------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--ELECTRIC 3,537 +Compagnie Generale des
Eaux (Ord.).............. 1,608,201 1,747,870 1.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
FRANCE.................. 1,608,201 1,747,870 1.7
- ------------------------------------------------------------------------------------------------------------------------
HONG KONG TELECOMMUNICATIONS 894,000 Hong Kong
Telecommunications Ltd.
PLC..................... 1,646,544 1,886,857 1.8
--------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 538,200 China Light & Power Co.,
Ltd..................... 3,285,897 3,937,369 3.8
253,500 Hong Kong Electric
Holdings, Ltd........... 681,517 1,058,575 1.0
------------ ------------ ----------
3,967,414 4,995,944 4.8
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 329,000 The Hong Kong & China Gas
Co. Ltd................. 755,615 954,241 0.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
HONG KONG............... 6,369,573 7,837,042 7.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRIES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ITALY TELECOMMUNICATIONS 694,900 Societa Finanziara
Telefonica S.p.A.
(STET).................. $ 1,415,223 $ 1,404,842 1.3%
652,600 Societa Italiana Esercizio
Telecom S.p.A. (SIP).... 1,415,407 1,369,205 1.3
------------ ------------ ----------
2,830,630 2,774,047 2.6
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 453,400 Italgas Torino............ 1,362,668 1,309,449 1.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
ITALY................... 4,193,298 4,083,496 3.9
- ------------------------------------------------------------------------------------------------------------------------
MALAYSIA TELECOMMUNICATIONS 139,000 Telekom Malaysia BHD...... 962,438 1,140,910 1.1
--------------------------------------------------------------------------------------------------------
UTILITIES 148,000 Tenaga Nasional BHD....... 738,712 1,060,873 1.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
MALAYSIA................ 1,701,150 2,201,783 2.1
- ------------------------------------------------------------------------------------------------------------------------
MEXICO TELECOMMUNICATIONS 25,000 Telefonos de Mexico S.A.
de C.V. (Telemex)
(ADR)*.................. 1,481,566 1,687,500 1.6
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
MEXICO.................. 1,481,566 1,687,500 1.6
- ------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TELECOMMUNICATIONS 31,800 Telecom Corporation of New
Zealand Ltd. (ADR)*..... 1,442,105 1,609,875 1.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN NEW
ZEALAND................. 1,442,105 1,609,875 1.5
- ------------------------------------------------------------------------------------------------------------------------
PHILIPPINES TELECOMMUNICATIONS 18,800 Philippine Long Distance
Telephone Co. (ADR)*.... 1,057,611 1,525,150 1.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
PHILIPPINES............. 1,057,611 1,525,150 1.5
- ------------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 23,200 Telefonica de Espana S.A.
(ADR)*.................. 844,184 904,800 0.9
--------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 36,400 Empresa Nacional de
Electricidad, S.A.
(ADR)* (Endesa)......... 1,634,684 1,729,000 1.7
136,900 Iberdrola I S.A........... 861,792 980,933 0.9
------------ ------------ ----------
2,496,476 2,709,933 2.6
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
SPAIN................... 3,340,660 3,614,733 3.5
- ------------------------------------------------------------------------------------------------------------------------
THAILAND TELECOMMUNICATIONS 2,000 +TelecomAsia Corp. Public
Co., Ltd. (ADR).......... 43,740 106,500 0.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
THAILAND................ 43,740 106,500 0.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRIES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED TELECOMMUNICATIONS 10,000 British Telecommunications
KINGDOM PLC (ADR)*.............. $ 741,450 $ 711,250 0.7%
57,000 British Telecommunications
PLC (Ordinary).......... 406,712 397,641 0.4
248,140 British Telecommunications
PLC (Part Pay).......... 735,211 792,182 0.8
11,000 Vodafone Group PLC
(ADR)*.................. 980,210 981,750 0.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED KINGDOM.......... 2,863,583 2,882,823 2.8
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES TELECOMMUNICATIONS 42,800 American Telephone &
Telegraph Co............ 2,405,105 2,247,000 2.1
13,400 Ameritech Corp............ 1,097,333 1,028,450 1.0
18,800 Bell Atlantic Corp........ 1,145,785 1,109,200 1.1
19,700 BellSouth Corp............ 1,149,084 1,140,138 1.1
31,500 GTE Corp.................. 1,170,878 1,102,500 1.1
40,100 MCI Communications
Corp.................... 1,072,528 1,130,319 1.1
25,000 NYNEX Corp................ 1,122,519 1,003,125 1.0
21,400 Pacific Telesis Group..... 1,160,333 1,155,600 1.1
26,300 Southwestern Bell Corp.... 1,118,830 1,091,450 1.0
39,900 US West, Inc.............. 1,863,861 1,830,412 1.7
------------ ------------ ----------
13,306,256 12,838,194 12.3
--------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 45,600 Allegheny Power System,
Inc....................... 1,237,676 1,208,400 1.2
20,500 Boston Edison Co.......... 650,444 609,875 0.6
38,300 Central & SouthWest
Corp.................... 1,237,363 1,158,575 1.1
18,300 Consolidated Edison Co. of
N.Y..................... 669,290 587,888 0.6
14,500 Detroit Edison Co......... 512,573 435,000 0.4
26,400 Dominion Resources,
Inc..................... 1,242,516 1,197,900 1.1
36,000 Duke Power Co............. 1,534,156 1,525,500 1.5
17,300 Entergy Corp.............. 671,377 622,800 0.6
39,200 General Public Utilities
Corp.................... 1,252,521 1,210,300 1.2
44,100 Houston Industries,
Inc..................... 2,115,495 2,100,262 2.0
23,900 Long Island Lighting
Co...................... 668,586 582,562 0.6
18,700 New York State Electric &
Gas Corp................ 667,501 575,025 0.5
37,000 NIPSCO Industries, Inc.... 1,226,985 1,216,375 1.2
24,300 Northeast Utilities Co.... 665,976 577,125 0.5
53,800 PacifiCorp................ 1,068,916 1,035,650 1.0
22,307 Pennsylvania Power & Light
Co...................... 673,784 602,289 0.6
39,800 Philadelphia Electric
Co...................... 1,234,908 1,203,950 1.1
46,300 PSI Resources, Inc........ 1,202,688 1,226,950 1.1
36,000 Public Service Co. of
Colorado................ 1,101,146 1,156,500 1.1
22,900 Rochester Gas & Electric
Corp.................... 670,864 601,125 0.6
</TABLE>
77
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRIES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES UTILITIES--ELECTRIC 26,000 SCEcorp................... $ 586,637 $ 520,000 0.5%
(CONCLUDED) (CONCLUDED)
26,600 Southern Co............... 1,192,679 1,173,725 1.1
14,000 Texas Utilities Co........ 670,007 605,500 0.6
34,600 Western Resources Co...... 1,226,601 1,206,675 1.2
------------ ------------ ----------
23,980,689 22,939,951 22.0
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 33,000 The Brooklyn Union Gas
Co...................... 855,855 903,375 0.9
28,000 The Coastal Corp.......... 761,928 787,500 0.8
18,000 Consolidated Natural
Gas Co.................. 898,489 846,000 0.8
29,800 El Paso Natural Gas Co.... 1,110,642 1,072,800 1.0
48,700 Enron Corp................ 1,621,393 1,412,300 1.3
11,000 New Jersey Resources
Corp.................... 312,335 284,625 0.3
31,100 NICOR Inc................. 886,928 870,800 0.9
30,500 Questar Corp.............. 1,157,336 1,006,500 1.0
40,200 Sonat, Inc................ 1,300,425 1,160,775 1.1
11,900 Washington Gas Light
Co...................... 524,002 490,875 0.5
45,600 Williams Co., Inc......... 1,299,178 1,111,500 1.1
------------ ------------ ----------
10,728,511 9,947,050 9.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED STATES........... 48,015,456 45,725,195 44.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMON STOCKS........... 79,206,939 81,833,547 78.5
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT FIXED-INCOME SECURITIES
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA TELECOMMUNICATIONS $1,040,000 Telstra Corp. Ltd., 6.50%
due 7/31/2003........... 1,084,062 1,039,896 1.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
SECURITIES IN
AUSTRALIA............... 1,084,062 1,039,896 1.0
- ------------------------------------------------------------------------------------------------------------------------
KOREA ELECTRIC 1,000,000 Korea Electric Power
Corp., 6.375%
due 12/01/2020.......... 985,510 968,258 0.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
SECURITIES IN KOREA..... 985,510 968,258 0.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FIXED-INCOME
SECURITIES.............. 2,069,572 2,008,154 1.9
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
COUNTRY AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES COMMERCIAL PAPER** $3,500,000 BASF Corp., 3.23%
(CONCLUDED) due 1/11/1994........... $ 3,496,546 $ 3,496,546 3.3%
3,500,000 Cooper Industries, Inc.,
3.20%
due 1/14/1994........... 3,495,644 3,495,644 3.3
2,000,000 Corporate Bond Asset
Fund, 3.20%
due 1/28/1994........... 1,995,022 1,995,022 1.9
4,000,000 Delaware Funding
Corp., 3.23%
due 1/10/1994........... 3,996,411 3,996,411 3.8
823,000 General Electric Capital
Corp., 3.22%
due 1/03/1994........... 822,779 822,779 0.8
3,000,000 Hertz Funding Corp., 3.35%
due 1/10/1994........... 2,997,208 2,997,208 2.9
3,500,000 K mart Corp., 3.30%
due 1/18/1994........... 3,494,225 3,494,225 3.3
2,000,000 Metlife Funding Inc.,
3.30% due 1/04/1994..... 1,999,267 1,999,267 1.9
3,500,000 PHH Corp., 3.25%
due 1/20/1994........... 3,493,681 3,493,681 3.3
3,500,000 Sara Lee Corp., 3.30%
due 1/04/1994........... 3,498,717 3,498,717 3.3
------------ ------------ ----------
29,289,500 29,289,500 27.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES... 29,289,500 29,289,500 27.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS......... $110,566,011 113,131,201 108.2
------------
------------
LIABILITIES IN EXCESS OF
OTHER ASSETS............ (8,613,888) (8.2)
------------ ----------
NET ASSETS................ $104,517,313 100.0%
------------ ----------
------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
* American Depositary Receipt (ADR).
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $4,111,000, representing 3.9% of net
assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Central Costranera S.A......................................... 12/17/93 $ 21,600 $ 27,418
Distribuidora Chilectra Metropolitana, S.A. (ADR).............. 8/06/93-12/21/93 872,213 1,219,482
Telecom Argentina Stet, S.A. (ADR)............................. 10/05/93-12/22/93 924,319 1,360,800
TelecomAsia Corp., Public Co., Ltd............................. 11/15/93 43,740 106,500
Telefonica de Argentina S.A. (ADR)............................. 7/02/93-12/22/93 940,801 1,396,500
- ----------------------------------------------------------------------------------------------------------------------
TOTAL.......................................................... $2,802,673 $4,110,700
---------- ----------
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
79
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
AIRLINES--4.3% Delta Air Lines Inc.:
BB+ Baa3 $ 1,000,000 9.300% due 1/02/2010............... $ 987,700 $ 999,148
BB+ Baa3 500,000 10.50% due 4/30/2016............... 506,875 536,110
United Air Lines, Inc.:
BB+ Baa1 1,000,000 9.35% due 4/07/2016................ 1,016,260 1,060,000
BB+ Baa1 995,000 9.21% due 1/21/2017................ 991,938 1,003,487
USAir, Inc.:
B+ Ba3 450,000 10.00% due 7/01/2003............... 450,000 432,000
BB+ Ba2 1,000,000 9.82% due 1/01/2013................ 1,010,000 985,000
BB+ Ba2 2,000,000 10.375% due 3/01/2013.............. 2,000,000 2,001,926
------------ ------------
6,962,773 7,017,671
- -----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE B- B2 500,000 Exide Corp., 10.75%
PARTS--0.3% due 12/15/2002.................... 518,750 547,500
- -----------------------------------------------------------------------------------------------------------------------------
BROADCASTING & B B2 250,000 Century Communications, Inc.,
PUBLISHING--5.0% 11.875% due 10/15/2003............ 250,000 287,500
BB- Ba2 1,000,000 Continental Cablevision Inc., 9.50%
due 8/01/2013..................... 1,000,000 1,120,000
BB- Ba3 750,000 Heritage Media Services Inc., 11.00%
due 6/15/2002..................... 789,062 830,625
BB- Ba2 250,000 K-III Communications Corp., 10.625%
due 5/01/2002..................... 250,000 272,500
B B3 500,000 The Katz Corp., 12.75%
due 11/15/2002.................... 510,625 556,250
CCC+ B3 1,500,000 SCI Television Inc., 11.00%
due 6/30/2005..................... 1,557,500 1,560,000
B+ B3 2,000,000 Sinclair Broadcasting Group, Inc.,
10.00%
due 12/15/2003.................... 2,000,000 2,055,000
BB- B1 1,500,000 World Color Press Inc., 9.125%
due 3/15/2003..................... 1,511,250 1,556,250
------------ ------------
7,868,437 8,238,125
- -----------------------------------------------------------------------------------------------------------------------------
BUILDING & B B1 250,000 K Hovnanian Enterprises Inc.,
CONSTRUCTION--1.0% 11.250%
due 4/15/2002..................... 247,812 273,437
BB+ Ba2 250,000 Ryland Group Inc., 10.50%
due 7/15/2002..................... 246,260 265,000
B+ Ba3 1,000,000 U.S. Home Corp., 9.75%
due 6/15/2003..................... 1,000,000 1,032,500
------------ ------------
1,494,072 1,570,937
- -----------------------------------------------------------------------------------------------------------------------------
BUILDING B+ B3 1,500,000 Pacific Lumber Co., 10.50%
MATERIALS--1.0% due 3/01/2003..................... 1,527,813 1,556,250
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
BUILDING American Standard Inc.:
PRODUCTS--2.4% B Ba3 $ 250,000 9.875% due 6/01/2001.............. $ 250,000 $ 262,812
B+ Ba3 750,000 9.25% due 12/01/2016.............. 755,625 778,125
B Ba3 1,250,000 Inter-City Products Corp.,
9.75% due 3/01/2000............... 1,221,250 1,253,125
B+ B1 500,000 National Gypsum Co., 10.00%
due 7/01/2003..................... 500,938 507,500
USG Corp.:
B+ B2 250,000 10.25% due 12/15/2002............. 251,563 257,500
B- B3 1,000,000 8.75% due 3/01/2017............... 904,375 925,000
------------ ------------
3,883,751 3,984,062
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--1.0% B+ B1 1,660,000 Essex Group, Inc., 10.00%
due 5/01/2003..................... 1,668,925 1,674,525
- -----------------------------------------------------------------------------------------------------------------------------
CELLULAR B- B3 1,500,000 Dial Page Inc., 12.25%
TELEPHONES--1.0% due 2/15/2000..................... 1,586,125 1,672,500
- -----------------------------------------------------------------------------------------------------------------------------
CHEMICALS--3.4% B B2 1,250,000 Agricultural Minerals Co., L.P.,
10.75% due 9/30/2003.............. 1,250,000 1,318,750
B+ Ba3 1,735,000 G-I Holdings, Inc., 11.38%
due 10/01/1998+................... 1,025,835 1,113,653
B+ B2 2,500,000 Harris Chemical Corp., 10.25%
due 7/15/2001*.................... 2,013,696 2,146,875
B- B3 1,750,000 Indespec Chemical Corp., 11.50%
due 12/01/2003*+.................. 1,005,309 1,023,750
------------ ------------
5,294,840 5,603,028
- -----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS-- B- B3 1,650,000 Panamsat L.P., 11.38%
0.7% due 8/01/2003*.................... 971,469 1,105,500
- -----------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES-- B Caa 317,000 Collins & Aikman Group, Inc., 7.50%
8.5% due 1/31/2005..................... 273,790 312,641
Coltec Industries, Inc.:
B+ Ba2 845,000 9.75% due 4/01/2000............... 895,700 903,094
B+ B1 750,000 10.25% due 4/01/2002.............. 796,250 808,125
Foamex L.P.:
B+ B1 450,000 11.25% due 10/01/2002............. 458,875 492,750
BB- B1 750,000 9.50% due 6/01/2000............... 732,187 787,500
NR NR 500,000 Gillette Holdings Inc., 12.25%
due 6/30/2002..................... 515,000 547,500
Interco Inc.:
B+ Ba3 1,750,000 10.00% due 6/01/2001.............. 1,770,000 1,780,625
B B2 1,000,000 9.00% due 6/01/2004............... 973,906 1,002,500
B- B3 1,500,000 Interlake Corp., 12.125%
due 3/01/2002..................... 1,537,500 1,518,750
B+ B3 3,000,000 Jordan Industries Inc., 10.375%
due 8/01/2003..................... 2,993,000 3,060,000
NR NR 150,000 MacAndrews & Forbes Group, Inc.,
13.00%
due 3/01/1999..................... 128,373 150,937
BB- Ba3 250,000 Reeves Industries, Inc., 11.00%
due 7/15/2002..................... 248,190 271,250
BB B2 750,000 Sequa Corp., 9.625%
due 10/15/1999.................... 740,625 787,500
</TABLE>
81
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES BB- Ba3 $ 1,500,000 Sherritt Gordon Ltd, 9.75%
(CONCLUDED) due 4/01/2003....................... $ 1,503,438 $ 1,515,000
------------ ------------
13,566,834 13,938,172
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER NR NR 1,250,000 Coleman Holdings Inc., 11.09%
PRODUCTS--3.6% due 5/27/1998+.................... 778,440 809,375
Formica Corp.:
NR NR 750,000 13.06% due 10/01/2001*+........... 673,711 708,750
NR NR 750,000 13.125% due 9/15/2005+............ 750,000 761,719
NR NR 500,000 Liggett Group, Inc., 11.50%
due 2/01/1999..................... 451,760 370,000
B- B3 3,000,000 Revlon Worldwide Corp., 14.84%
due 3/15/1998*.................... 1,670,677 1,545,000
B+ B1 1,520,000 Sealy Corp., 9.50%
due 5/01/2003..................... 1,548,425 1,592,200
------------ ------------
5,873,013 5,787,044
- -----------------------------------------------------------------------------------------------------------------------------
CONTAINERS--4.0% B B2 1,000,000 Anchor Glass Container Corp., 9.875%
due 12/15/2008.................... 1,000,000 1,025,000
B+ B3 250,000 IVEX Packaging Corp., 12.50%
due 12/15/2002.................... 248,247 272,500
BB Ba3 750,000 Owens-Illinois, Inc., 11.00%
due 12/01/2003.................... 855,938 864,375
B+ Ba3 250,000 Plastic Containers, Inc., 10.75%
due 4/01/2001..................... 251,875 264,375
B- B3 2,660,000 Silgan Holdings, Inc., 13.00%
due 6/15/1996*.................... 2,042,513 2,061,500
B+ B1 1,000,000 Stone Consolidated Corp., 10.25%
due 12/15/2000.................... 1,000,000 1,010,000
B+ Ba3 1,000,000 Sweetheart Cup Co., 9.625%
due 9/01/2000..................... 1,000,000 1,055,000
------------ ------------
6,398,573 6,552,750
- -----------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE B- B1 1,750,000 Employee Benefit Plans, Inc., 6.75%
BONDS++--1.8% due 7/31/2006(1).................. 1,194,325 1,262,188
B- B3 200,000 MEDIQ Inc., 7.25%
due 6/01/2006(1).................. 138,000 173,500
B B2 1,200,000 OHM Corp., 8.00%
due 10/01/2006(2)................. 1,070,500 1,177,500
B+ B2 250,000 UNC Inc., 7.50%
due 3/31/2006(3).................. 145,625 238,125
------------ ------------
2,548,450 2,851,313
- -----------------------------------------------------------------------------------------------------------------------------
ENERGY--9.8% Clark Oil & Refining Corp.:
BB+ Ba2 250,000 9.50% due 9/15/2004............... 240,937 263,750
B+ B- 4,000,000 11.00% due 2/15/2000*............. 2,140,102 2,205,000
NR NR 1,500,000 Consolidated Hydro, Inc., 11.80%
due 7/15/2003*+................... 868,918 892,500
CC Caa 230,000 Empire, Inc., 9.00%
due 12/31/2007.................... 124,025 201,250
B B2 2,000,000 Ferrell Gas Companies, Inc., 11.625%
due 12/15/2003.................... 2,140,420 2,177,500
B+ B1 600,000 Global Marine Inc., 12.75%
due 12/15/1999.................... 616,625 669,000
</TABLE>
82
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ENERGY BB B1 $ 1,080,000 Gulf Canada Resources, Ltd., 9.00%
(CONCLUDED) due 8/15/1999..................... $ 1,023,700 $ 1,072,372
BB B1 250,000 Maxus Energy Corp., 11.50%
due 11/15/2015.................... 246,563 263,750
C Caa 177,000 National Propane Corp., 13.125%
due 3/01/1999..................... 139,334 176,115
BB- Ba3 1,000,000 Noble Drilling Corp., 9.25%
due 10/01/2003.................... 1,000,000 1,035,000
BBB- Ba2 200,000 Oryx Energy Co., 10.375%
due 9/15/2018..................... 198,494 215,500
BB- Ba2 250,000 Rowan Companies, Inc., 11.875%
due 12/01/2001.................... 257,500 279,375
BB- Ba3 2,500,000 Seagull Energy Corp., 8.625%
due 8/01/2005..................... 2,493,750 2,500,000
CCC+ Caa 250,000 Tesoro Petroleum Corp., 12.75%
due 3/15/2001..................... 228,413 250,313
BB- B1 1,750,000 Trans Texas Gas Corp., 10.50%
due 9/01/2000..................... 1,766,875 1,846,250
B+ B1 2,000,000 Triton Energy Corp., 12.816%*
due 11/01/1997.................... 1,368,257 1,400,000
B+ B1 500,000 Western Co. of North America,
12.875%
due 12/01/2002.................... 513,753 595,000
------------ ------------
15,367,666 16,042,675
- -----------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--2.7% B- B3 500,000 AMC Entertainment, Inc., 12.625%
due 8/01/2002..................... 509,742 571,250
B+ B1 250,000 Cinemark, USA, Inc., 12.00%
due 6/01/2002..................... 250,000 280,000
CCC+ B3 260,000 Fair Lanes Inc., 11.875%
due 8/15/1997..................... 261,300 183,300
B B3 1,865,000 Marvel Holdings, Inc., 11.47%
due 4/15/1998*.................... 1,166,533 1,226,238
NR Caa 1,000,000 New World Pictures, 12.25%
due 9/15/1998..................... 967,250 1,015,000
B+ B2 1,415,000 SPI Holdings, Inc., 11.50%
due 10/01/2001*................... 1,023,178 1,103,700
------------ ------------
4,178,003 4,379,488
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL--2.4% BB Ba1 1,500,000 Lomas Mortgage USA, 10.25%
due 10/01/2002.................... 1,561,250 1,582,500
CCC+ B2 250,000 Pioneer Finance Corp., 13.50%
due 12/01/1998.................... 264,063 263,750
BB- B1 2,000,000 Reliance Group Holdings Inc., 9.75%
due 11/15/2003.................... 2,000,000 2,065,000
------------ ------------
3,825,313 3,911,250
- -----------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--4.1% B- B3 400,000 Farm Fresh Inc., 7.50%
due 3/01/2010..................... 208,000 266,000
BB- Ba3 1,000,000 Del Monte Corp., 10.00%
due 5/01/2003+.................... 1,002,500 990,000
B+ B2 500,000 Grand Union Co., 12.25%
due 7/15/2002..................... 498,750 526,250
BB- Ba3 250,000 P&C Food Markets, Inc., 11.50%
due 10/15/2001.................... 260,156 279,688
</TABLE>
83
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
FOOD & B B2 $ 1,000,000 Penn Traffic Co., 9.625%
BEVERAGE due 4/15/2005..................... $ 1,013,760 $ 1,042,500
(CONCLUDED) B- B2 1,500,000 Pueblo Xtra, 9.50%
due 8/01/2003..................... 1,504,375 1,522,500
B+ B1 1,000,000 Royal Crown Corp., 9.75%
due 8/01/2000..................... 1,000,000 1,030,000
B B2 1,000,000 Specialty Foods Corp., 10.25%
due 8/15/2001..................... 1,000,000 1,047,500
------------ ------------
6,487,541 6,704,438
- -----------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES--2.0% B- B1 750,000 Abbey Healthcare Group Inc., 9.50%
due 11/01/2002.................... 750,000 769,687
BB- Ba2 500,000 American International Group, Inc.,
11.25%
due 6/01/2015..................... 525,625 532,500
B+ B1 250,000 Continental Medical Systems Inc.,
10.875%
due 8/15/2002..................... 248,125 259,375
B+ B1 250,000 Continental Medsystems, Inc.,
10.375%
due 4/01/2003..................... 249,687 255,000
Epic Properties, Inc.:
NR NR 500,000 11.375% due 7/15/2001............. 532,500 560,000
NR NR 98,235 11.50% due 7/15/2001.............. 97,744 110,515
B+ B1 250,000 Healthtrust Inc., 10.75%
due 5/01/2002..................... 255,625 280,625
B+ B1 250,000 MEDIQ/PRN Life Support Services,
Inc., 11.125% due 7/01/1999....... 250,625 263,750
B- B3 200,000 The Multicare Companies Inc., 12.50%
due 7/01/2002..................... 194,841 225,000
------------ ------------
3,104,772 3,256,452
- -----------------------------------------------------------------------------------------------------------------------------
HIGH CCC+ B3 250,000 ANACOMP, Inc., 15.00%
TECHNOLOGY--0.3% due 11/01/2000.................... 240,000 288,750
B- B2 250,000 ComputerVision Corp., 10.875%
due 8/15/1997..................... 250,625 230,000
------------ ------------
490,625 518,750
- -----------------------------------------------------------------------------------------------------------------------------
HOTELS--0.6% B- B3 1,000,000 Red Roof Inn, 9.625%
due 12/15/2003+................... 1,000,000 1,012,500
- -----------------------------------------------------------------------------------------------------------------------------
HOTELS & B B2 1,000,000 Aztar Corp., 11.00%
CASINOS--4.4% due 10/01/2002.................... 1,016,250 1,020,000
B+ B2 1,000,000 GNS Mirage Finance Corp., 9.25%
due 3/15/2003..................... 989,687 1,047,500
NR NR 158,000 Goldriver Hotel & Casino
Finance Corp., 11.375%
due 8/31/1999..................... 222,801 128,770
BB- Ba3 2,500,000 Showboat Inc., 9.25%
due 5/01/2008..................... 2,528,750 2,562,500
NR Caa 484,000 Trump Castle Funding, Inc., 9.50%
due 8/15/1998(a).................. 346,210 401,417
</TABLE>
84
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
HOTELS & B B3 $ 1,500,000 Trump Plaza Funding, Inc., 10.875%
CASINOS due 6/15/2001..................... $ 1,487,965 $ 1,507,500
(CONCLUDED) NR Caa 533,279 Trump Taj Mahal Funding, Inc.,
11.35%
due 11/15/1999(a)................. 401,034 501,323
------------ ------------
6,992,697 7,169,010
- -----------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS--2.8% B B2 2,000,000 Coca-Cola Bottling Co., 9.00%
due 11/15/2003.................... 2,000,000 2,005,000
BB Ba3 1,000,000 Methanex Corp., 8.875%
due 11/15/2001.................... 992,980 1,035,000
B+ B2 1,500,000 Navistar Financial Co., 8.875%
due 11/15/1998.................... 1,500,000 1,518,750
------------ ------------
4,492,980 4,558,750
- -----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL BB- B2 2,000,000 ADT Operations, 9.25%
SERVICES--3.0% due 8/01/2003..................... 2,010,000 2,060,000
Bell & Howell Co.:
B- B3 500,000 10.75% due 10/01/2002............. 507,500 548,750
B- B3 1,000,000 11.50% due 3/01/2005*............. 501,447 555,000
B+ B2 750,000 Blount, Inc., 9.00%
due 6/15/2003..................... 750,000 778,125
NR NR 583,200 DYN Corp., 16.00%
due 6/30/2003(a).................. 586,005 588,776
NA Caa 355,900 Thermadyne Industry, Inc., 15.00%
due 5/01/1999(a).................. 354,342 371,965
------------ ------------
4,709,294 4,902,616
- -----------------------------------------------------------------------------------------------------------------------------
METALS & MINING--1.7% B- B2 1,000,000 Kaiser Aluminum Corp., 12.75%
due 2/01/2003..................... 1,003,750 1,007,500
B- B3 3,000,000 Maxxam Group, Inc., 12.25%
due 8/01/2003*.................... 1,697,537 1,717,500
------------ ------------
2,701,287 2,725,000
- -----------------------------------------------------------------------------------------------------------------------------
PAPER--3.6% Container Corp. of America:
B B3 1,000,000 14.00% due 12/01/2001............. 1,110,000 1,118,750
B+ B2 1,000,000 9.75% due 4/01/2003............... 1,015,000 1,037,500
B+ B1 250,000 Fort Howard Corp., 9.25%
due 3/15/2001..................... 250,000 257,187
B B3 500,000 Gaylord Container Corp., 11.50%
due 5/15/2001..................... 500,000 535,000
B B1 1,250,000 Riverwood International Corp.,
11.25%
due 6/15/2002..................... 1,340,313 1,368,750
Stone Container Corp.:
B- B2 250,000 10.75% due 6/15/1997.............. 240,000 231,563
B B1 1,000,000 12.625% due 7/15/1998............. 1,000,000 1,030,000
B B1 250,000 11.875% due 12/01/1998............ 249,375 254,375
------------ ------------
5,704,688 5,833,125
- -----------------------------------------------------------------------------------------------------------------------------
PAPER & B- Caa 2,000,000 Ivex Holdings Inc., 13.25%
PACKAGING--0.6% due 3/15/2005*.................... 964,800 1,010,000
- -----------------------------------------------------------------------------------------------------------------------------
POLLUTION B B1 163,000 International Technology Inc.,
CONTROL--0.1% 9.375%
due 7/01/1996..................... 148,330 163,815
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
RAILROADS--0.8% B+ Ba3 $ 1,250,000 Southern Pacific Rail Co., 9.375%
due 8/15/2005..................... $ 1,250,000 $ 1,337,500
- -----------------------------------------------------------------------------------------------------------------------------
RESTAURANTS--2.6% B- B2 1,000,000 Flagstar Corp., 11.375%
due 9/15/2003..................... 1,000,000 1,035,000
Foodmaker, Inc.:
B B2 1,500,000 9.75% due 6/01/2002............... 1,502,812 1,526,250
B+ Ba3 1,750,000 9.75% due 11/01/2003.............. 1,722,700 1,723,750
------------ ------------
4,225,512 4,285,000
- -----------------------------------------------------------------------------------------------------------------------------
RETAIL B+ B2 250,000 Bradlees, Inc., 11.00%
SPECIALTY--2.1% due 8/01/2002..................... 255,312 269,687
B- B3 1,500,000 Pamida Holdings, Inc., 11.75%
due 3/15/2003..................... 1,502,188 1,533,750
Specialty Retailer Services Inc.:
B+ B1 500,000 10.00% due 8/15/2000.............. 500,000 512,500
B- B3 1,000,000 11.00% due 8/15/2003+............. 1,000,000 1,030,000
------------ ------------
3,257,500 3,345,937
- -----------------------------------------------------------------------------------------------------------------------------
STEEL--1.3% B+ B1 2,000,000 WCI Steel, Inc., 10.50%
due 3/01/2002..................... 2,000,000 2,080,000
- -----------------------------------------------------------------------------------------------------------------------------
TEXTILES--1.5% CCC- Caa 2,500,000 J.P. Stevens & Co., 9.00%
due 3/01/2017..................... 2,376,750 2,512,500
- -----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION B+ B1 217,000 ACF Industries, Inc., 11.60%
SERVICES--0.6% due 5/15/2000..................... 207,235 218,085
BB Ba2 750,000 Eletson Holdings Inc., 9.25%
due 11/15/2003.................... 750,000 763,125
------------ ------------
957,235 981,210
- -----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.7% BB- B1 1,500,000 International Shipholding Corp.,
9.00%
due 7/01/2003..................... 1,498,750 1,533,750
B+ Ba3 1,250,000 Viking Star Shipping Co., 9.625%
due 7/15/2003+.................... 1,252,813 1,289,063
------------ ------------
2,751,563 2,822,813
- -----------------------------------------------------------------------------------------------------------------------------
UTILITIES--3.7% BB+ Ba1 1,500,000 CTC Mansfield Funding, 11.125%
due 9/30/2016..................... 1,612,500 1,626,142
Midland Cogeneration Venture L.P.:
BB Ba2 928,692 10.33% due 7/23/2002+............. 958,875 958,810
B B1 250,000 11.75% due 7/23/2005(a)........... 250,000 271,299
Texas New Mexico:
BB Ba3 1,750,000 9.25% due 9/15/2000............... 1,750,000 1,831,478
B+ B2 250,000 10.75% due 9/15/2003.............. 255,000 264,856
Tucson Electric Power Co.:
NR NR 570,386 (Series B), 10.21067%
due 1/01/2009+(a)................. 529,034 550,067
NR NR 500,000 (Series C), 10.73239%
due 1/01/2013+(a)................. 461,050 488,125
------------ ------------
5,816,459 5,990,777
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CORPORATE BONDS--90.4%............ 142,966,840 147,642,983
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRIES HELD PREFERRED STOCKS COST (NOTE 1A)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
BROADCASTING & PUBLISHING--0.3% 9,100 K-III Communications Corp........... $ 249,113 $ 250,819
2,639 K-III Communications Corp.(a)....... 270,778 266,531
------------ ------------
519,891 517,350
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.0% 222 Southmark Corp. (Series A)++........ 79,876 1,110
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PREFERRED STOCKS--0.3%............ 599,767 518,460
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
- -----------------------------------------------------------------------------------------------------------------------------
DEFENSE--0.0% 78 +Empire of Carolina, Inc.++.......... 4,056 507
- -----------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0% 4,900 Petrolane Inc....................... 56,963 47,163
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.1% 4,384 Southmark Corp...................... 130,874 0
- -----------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--0.1% 4,060 Doskocil Companies, Inc............. 238,230 44,406
7,063 RJR Holdings Corp................... 68,864 45,027
------------ ------------
307,094 89,433
- -----------------------------------------------------------------------------------------------------------------------------
HOTELS & CASINOS--0.0% 1,095 Buckhead Corp. of America+.......... 2,738 2,738
2,500 Goldriver Hotel & Casino Finance
Corp.............................. 18,603 10,156
500 Trump Taj Mahal Holding Corp. (Class
A)................................ 250 11,375
------------ ------------
21,591 24,269
- -----------------------------------------------------------------------------------------------------------------------------
PAPER--0.0% 5,280 Gaylord Container Corp. (Class A)... 14,190 24,090
- -----------------------------------------------------------------------------------------------------------------------------
STEEL--0.0% 1,259 LTV Corp............................ 141,540 20,301
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMON STOCKS--0.2%............... 676,308 205,763
- -----------------------------------------------------------------------------------------------------------------------------
TRUSTS, WARRANTS & RIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0% 833 UGI Corp. (Warrants)(b)++........... 3,644 937
- -----------------------------------------------------------------------------------------------------------------------------
HIGH TECHNOLOGY--0.0% 7,588 +Anacomp, Inc. (Warrants)(b)++....... 10,000 19,918
- -----------------------------------------------------------------------------------------------------------------------------
HOTEL--0.0% 250 +Goldriver Hotel & Casino Finance
Corp. (Liquidating Trust)++........ 6,000 4,282
- -----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--0.0% 95 Thermadyne Industries, Inc.
(Warrants)(b)++................... 945 413
- -----------------------------------------------------------------------------------------------------------------------------
PAPER--0.1% 28,046 Gaylord Container Corp.
(Warrants)(b)++................... 59,598 101,667
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TRUSTS,
WARRANTS & RIGHTS--0.1%........... 80,187 127,217
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY $ 3,000,000 Federal Home Loan, 3.17%
OBLIGATIONS--DISCOUNT--1.8% due 1/10/1994................... $ 2,997,359 $ 2,997,359
- -----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER**--5.0% 5,153,000 General Electric Capital Corp.,
3.22%
due 1/03/1994................... 5,151,617 5,151,617
3,000,000 Goldman Sachs Group L.P., 3.40%
due 1/21/1994................... 2,994,050 2,994,050
------------- -------------
8,145,667 8,145,667
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--6.8%................ 11,143,026 11,143,026
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.7%.......... $ 155,466,128 159,637,449
-------------
-------------
OTHER ASSETS LESS
LIABILITIES--2.3%............... 3,790,723
-------------
NET ASSETS--100.0%................ $ 163,428,172
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
* Represents the yield to maturity at time of purchase.
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay interest/dividend in
additional face/shares.
(b) Warrants entitle the portfolio to purchase a predetermined number of shares
of common stock/face amount of bonds. The purchase price and number of
shares/face amount are subject to adjustment under certain conditions until
the expiration date.
+ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $11,656,000, representing 7.1% of
net assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1A)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Anacomp, Inc. (Warrants).................................... 10/23/1990 10,000 19,918
Buckhead Corp. of America (Common Stock).................... 12/29/1992 2,738 2,738
Coleman Holdings Inc., 11.09% due 5/27/1998................. 10/07/1993 778,440 809,375
Consolidated Hydro, Inc., 11.80% due 7/15/2003.............. 7/08/1993 868,918 892,500
Del Monte Corp., 10.00% due 5/01/2003....................... 4/22/93-7/26/1993 1,002,500 990,000
Empire of Carolina, Inc. (common stock)..................... 3/22/1989 4,056 507
Formica Corp., 13.06% due 10/01/2001........................ 6/30/1993 673,711 708,750
Formica Corp., 13.125% due 9/15/2005........................ 9/17/1993 750,000 761,719
G-I Holdings, Inc., 11.38% due 10/01/1998................... 9/28/1993 1,025,835 1,113,653
Goldriver Hotel & Casino Finance Corp. (Liquidating 8/31/1992 6,000 4,282
Trust)....................................................
Indespec Chemical Corp., 11.50% due 12/01/2003.............. 11/19/1993 1,005,309 1,023,750
Midland Cogeneration Venture L.P., 10.33% due 7/23/2002..... 6/10/93 958,875 958,810
Red Roof Inn, 9.625% due 12/15/2003......................... 12/08/1993 1,000,000 1,012,500
Stone Container Corp., 12.625% due 7/15/1998................ 6/24/93 1,000,000 1,030,000
Tucson Electric Co. (Series B) 10.2106% due 1/01/2009....... 6/16/1993 529,034 550,067
Tucson Electric Co. (Series C) 10.73239% due 1/01/2013...... 3/01/1993 461,050 488,125
Viking Star Shipping Co., 9.625% due 7/15/2003.............. 7/08/93-9/09/1993 1,252,813 1,289,063
- -----------------------------------------------------------------------------------------------------------------------
TOTAL....................................................... $ 11,329,279 $ 11,655,757
------------ ------------
------------ ------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
++ Corresponding industry groups for convertible bonds:
(1) Healthcare
(2) Waste Management
(3) Conglomerates
Ratings of Issuers shown here have not been audited by Deloitte & Touche.
See Notes to Financial Statements.
88
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
FACE STOCKS, BONDS, VALUE PERCENT OF
LATIN AMERICA INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 22,000 Telecommunicacoes
Brasileiras S.A. Telebras
PN (Preferred)
(ADR)(a)+................. $ 739,050 $ 739,750 1.0%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
BRAZILIAN STOCKS.......... 739,050 739,750 1.0
- ------------------------------------------------------------------------------------------------------------------------
CHILE MISCELLANEOUS 1,000 Enersis S.A. (ADR)(a)....... 18,000 23,500 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CHILEAN STOCKS............ 18,000 23,500 0.0
- ------------------------------------------------------------------------------------------------------------------------
MEXICO BANKING 21,000 Servicios Financieros
Quadrum S.A. de C.V.
(ADR)(a)+................. 480,375 675,938 0.9
--------------------------------------------------------------------------------------------------------
BEVERAGES 135,000 Fomento Economico Mexicano
S.A. de C.V. (Femsa)
(ADR)(a)+................. 794,324 890,325 1.2
--------------------------------------------------------------------------------------------------------
BUILDING & 2,500 Cementos Mexicanos, S.A. de
CONSTRUCTION C.V. (Class B) (ADR)(a)... 100,000 147,500 0.2
25,500 Cementos Mexicanos, S.A. de
C.V. (Series B)
(Cemex)................... 692,998 760,483 1.0
----------- ----------- ----------
792,998 907,983 1.2
--------------------------------------------------------------------------------------------------------
DIVERSIFIED 100,000 Grupo Carso, S.A. de C.V.
Series A.................. 1,026,924 1,091,787 1.4
--------------------------------------------------------------------------------------------------------
MISCELLANEOUS 62,500 Elecktra 'L' Shares......... 511,892 555,556 0.7
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 11,800 Telefonos de Mexico, S.A. de
C.V. (Telmex) (ADR)(a).... 650,108 796,500 1.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICAN
STOCKS.................... 4,256,621 4,918,089 6.4
- ------------------------------------------------------------------------------------------------------------------------
PANAMA BEVERAGES 2,560 Panamerican Beverages, Inc.
(ADR)(a).................. 82,617 97,920 0.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PANAMANIAN STOCKS......... 82,617 97,920 0.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICA............. 5,096,288 5,779,259 7.6
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
FACE STOCKS, BONDS, VALUE PERCENT OF
PACIFIC BASIN INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA ENGINEERING & 230,800 Australia National
CONSTRUCTION Industries, Ltd.
(Ordinary)................ $ 296,137 $ 324,253 0.4%
--------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 162,000 Burns Philp & Co., Ltd.
(Ordinary)................ 477,965 525,558 0.7
52,852 Coca-Cola Amatil, Ltd.
(Ordinary)................ 321,089 412,513 0.5
170,000 Goodman Fielder Wattie...... 193,004 190,375 0.2
----------- ----------- ----------
992,058 1,128,446 1.4
--------------------------------------------------------------------------------------------------------
INSURANCE 113,523 GIO Australia Holdings
Ltd....................... 221,504 263,504 0.3
--------------------------------------------------------------------------------------------------------
PROPERTY 32,000 Lend Lease Corp............. 372,709 384,416 0.5
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 48,062 The Australian Gas & Light
Co. (Ordinary)............ 121,398 146,789 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIAN STOCKS......... 2,003,806 2,247,408 2.8
- ------------------------------------------------------------------------------------------------------------------------
HONG KONG BANKING 388,000 J.C.G. Holdings Ltd......... 300,147 311,485 0.4
654,000 Winton Holdings Ltd......... 250,162 228,642 0.3
----------- ----------- ----------
550,309 540,127 0.7
--------------------------------------------------------------------------------------------------------
DIVERSIFIED 185,000 Citic Pacific Ltd.
(Ordinary)................ 475,097 610,838 0.8
--------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 1,060,000 Sun Kung Kai & Co., Ltd.
(Ordinary)................ 593,942 857,827 1.1
--------------------------------------------------------------------------------------------------------
FOODS 1,326,000 C.P. Pokphand Co., Ltd.
(Ordinary)................ 499,958 583,763 0.8
--------------------------------------------------------------------------------------------------------
PROPERTY 243,000 Hang Lung Development Co.,
Ltd. (Ordinary)........... 393,365 594,678 0.8
390,000 Hopewell Holdings, Ltd...... 335,770 510,035 0.7
----------- ----------- ----------
729,135 1,104,713 1.5
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 253,000 Hong Kong Telecommunications
Ltd. (Ordinary)........... 432,236 533,976 0.7
--------------------------------------------------------------------------------------------------------
UTILITIES 2,932 Consolidated Electric Power
Ltd. (Ordinary)........... 4,745 5,087 0.0
175,000 The Hong Kong and China Gas
Co., Ltd. (Ordinary)...... 379,583 507,575 0.7
----------- ----------- ----------
384,328 512,662 0.7
--------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 148,800 China Light & Power Co.,
Ltd. (Ordinary)........... 735,003 1,088,593 1.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HONG KONG STOCKS.......... 4,400,008 5,832,499 7.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
PACIFIC HELD/
BASIN FACE STOCKS, BONDS, VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
JAPAN AUTOMOBILES 65,000 Suzuki Motor Co.
(Ordinary)................ $ 564,404 $ 611,231 0.8%
--------------------------------------------------------------------------------------------------------
BEVERAGES 9,000 Chukyo Coca-Cola Bottling
Co., Ltd. (Ordinary)...... 126,675 100,752 0.1
10,000 Hokkaido Coca-Cola Bottling
Co., Ltd. (Ordinary)...... 166,311 137,919 0.2
11,000 Kinki Coca-Cola Bottling
Co., Ltd. (Ordinary)...... 201,084 180,279 0.2
12,000 Mikuni Coca-Cola Bottling
Co., Ltd.................. 222,547 184,847 0.2
11,000 Sanyo Coca-Cola Bottling
Co., Ltd.................. 181,958 157,621 0.2
----------- ----------- ----------
898,575 761,418 0.9
--------------------------------------------------------------------------------------------------------
CAPITAL GOODS 142,000 Mitsubishi Heavy Industries,
Ltd....................... 903,477 782,106 1.0
--------------------------------------------------------------------------------------------------------
CONSUMER--ELECTRONICS 56,000 Matsushita Electric
Industrial Co., Ltd....... 746,797 747,268 1.0
1,800 Nintendo Co., Ltd........... 167,380 115,744 0.2
----------- ----------- ----------
914,177 863,012 1.2
--------------------------------------------------------------------------------------------------------
CONSTRUCTION/HOUSING 37,000 Sanki Engineering Co.,
Ltd....................... 534,028 394,322 0.5
--------------------------------------------------------------------------------------------------------
ELECTRICAL 15,000 Chudenko Corp. (Ordinary)... 576,519 470,177 0.6
CONSTRUCTION 15,000 Taihei Dengyo Kaisha,
Ltd....................... 370,758 323,751 0.4
----------- ----------- ----------
947,277 793,928 1.0
--------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 14,000 Murata Manufacturing
Co., Ltd.................. 449,523 480,208 0.6
51,000 Sumitomo Electric Industries
Ltd....................... 635,263 593,767 0.8
23,000 The Nippon Signal Co.,
Ltd....................... 347,016 278,076 0.4
----------- ----------- ----------
1,431,802 1,352,051 1.8
--------------------------------------------------------------------------------------------------------
INSURANCE 77,000 Dai-Tokyo Fire & Marine
Insurance Co., Ltd........ 600,583 498,576 0.7
63,000 Fuji Fire & Marine Insurance
Co., Ltd.................. 438,102 335,707 0.4
76,000 Koa Fire & Marine Insurance
Co., Ltd.................. 535,648 426,079 0.6
98,000 Nichido Fire & Marine
Insurance Co., Ltd........ 769,213 561,705 0.7
41,000 Sumitomo Marine & Fire
Insurance Co., Ltd........ 366,544 323,858 0.4
64,000 Tokio Marine & Fire
Insurance Co., Ltd.
(Ordinary)................ 793,046 699,266 0.9
----------- ----------- ----------
3,503,136 2,845,191 3.7
--------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 61,000 Canon, Inc. (Ordinary)...... 832,516 841,304 1.1
--------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
PACIFIC HELD/
BASIN FACE STOCKS, BONDS, VALUE PERCENT OF
(CONCLUDED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
JAPAN PACKAGING 29,000 Toyo Seikan Kaisha, Ltd.
(CONCLUDED) (Ordinary).................. $ 838,658 $ 727,208 0.9 %
--------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 36,000 Sankyo Co., Ltd.
PRESCRIPTION (Ordinary)................ 935,269 712,520 0.9
--------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 22,000 Taisho Pharmaceutical Co.,
Ltd. (Ordinary)........... 459,150 423,607 0.6
--------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 20,000 Fuji Photo Film Co., Ltd.... 487,545 442,414 0.6
--------------------------------------------------------------------------------------------------------
RETAIL TRADE 16,000 Ito Yokado Co., Ltd.
(Ordinary)................ 766,061 730,790 1.0
--------------------------------------------------------------------------------------------------------
STEEL 16,000 Maruichi Steel Tube, Ltd.
(Ordinary)................ 303,873 250,761 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
JAPANESE STOCKS........... 14,319,948 12,531,863 16.3
- ------------------------------------------------------------------------------------------------------------------------
MALAYSIA LEISURE 15,000 Genting BHD................. 138,632 208,914 0.3
70,000 Magnum Corp. BHD............ 142,789 207,985 0.3
----------- ----------- ----------
281,421 416,899 0.6
--------------------------------------------------------------------------------------------------------
STEEL 210,000 Maruichi Malaysia Steel Tube
BHD....................... 496,962 534,262 0.7
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 62,000 Telekom Malaysia BHD........ 503,306 508,895 0.7
50,000 Uniphone Telecommunications
BHD....................... 218,690 315,692 0.4
----------- ----------- ----------
721,996 824,587 1.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIAN STOCKS.......... 1,500,379 1,775,748 2.4
- ------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND FOREIGN GOVERNMENT $ 925,000 New Zealand Bill, 8.00%
OBLIGATIONS due 4/15/2004............. 598,473 600,296 0.8
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 25,000 Telecommunications Corp. New
Zealand Ltd. (ADR)(a)..... 1,117,263 1,265,625 1.6
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW
ZEALAND STOCKS & BONDS.... 1,715,736 1,865,921 2.4
- ------------------------------------------------------------------------------------------------------------------------
SINGAPORE BANKING 29,166 United Overseas Bank Ltd.
(Foreign Registered)...... 209,500 315,602 0.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SINGAPOREAN STOCKS........ 209,500 315,602 0.4
- ------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 67,600 Bangkok Bank Co., Ltd....... 594,571 667,262 0.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THAI STOCKS............... 594,571 667,262 0.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN............. 24,743,948 25,236,303 32.9
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
FACE STOCKS, BONDS, VALUE PERCENT OF
SOUTHEAST ASIA INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INDIA INSURANCE 11,800 Grasim Industries Ltd.
(ADR)(a).................. $ 200,851 $ 265,500 0.3%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDIAN STOCKS............. 200,851 265,500 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTHEAST ASIA............ 200,851 265,500 0.3
- ------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- ------------------------------------------------------------------------------------------------------------------------
AUSTRIA UTILITIES 2,371 Energie-Versorgung
Niederoesterreich AG...... 220,683 304,398 0.4
4,145 Verbund Oesterreichische
Elekrizitats AG........... 224,164 252,304 0.3
----------- ----------- ----------
444,847 556,702 0.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRIAN STOCKS........... 444,847 556,702 0.7
- ------------------------------------------------------------------------------------------------------------------------
BELGIUM BANKING 1,110 Generale de Banque S.A.
(Ordinary)................ 273,130 276,495 0.4
--------------------------------------------------------------------------------------------------------
CHEMICALS 500 Solvay Group (Ordinary)..... 193,772 204,584 0.3
--------------------------------------------------------------------------------------------------------
FOODS 6,000 GIB Group (Bearer).......... 211,854 258,771 0.3
--------------------------------------------------------------------------------------------------------
METAL & MINING 2,421 Union Miniere N.V........... 162,857 163,984 0.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
BELGIAN STOCKS............ 841,613 903,834 1.2
- ------------------------------------------------------------------------------------------------------------------------
DENMARK BANKING 3,140 Den Danske Bank AF
(Ordinary)................ 177,329 177,581 0.2
--------------------------------------------------------------------------------------------------------
FOREIGN Dkr 1,250,000 Danish Government Bond,
GOVERNMENT 7.00% due 12/15/2004...... 198,619 196,984 0.3
OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
DANISH STOCKS & BONDS..... 375,948 374,565 0.5
- ------------------------------------------------------------------------------------------------------------------------
FINLAND MINING 5,000 Outokumpu OY................ 54,883 59,055 0.1
--------------------------------------------------------------------------------------------------------
PAPER & 30,500 Enso-Gutzeit OY
(Registered).............. 201,133 193,285 0.3
FOREST PRODUCTS 7,250 Metsa Serla OY.............. 297,297 291,693 0.4
16,175 Repola OY S................. 251,155 251,652 0.3
----------- ----------- ----------
749,585 736,630 1.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FINNISH STOCKS............ 804,468 795,685 1.1
- ------------------------------------------------------------------------------------------------------------------------
FRANCE AUTOMOBILES 2,190 Peugeot S.A................. 243,781 291,753 0.4
--------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
WESTERN EUROPE FACE STOCKS, BONDS, VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
FRANCE BANKING 2,630 Compagnie Financiere de
(CONCLUDED) Paribas................... $ 223,993 $ 220,493 0.3%
3,400 Compagnie Financiere de
Suez...................... 194,401 205,150 0.3
1,650 Societe Generale de
Surveillance S.A. (Class
A) (Ordinary)............. 176,382 213,677 0.3
----------- ----------- ----------
594,776 639,320 0.9
--------------------------------------------------------------------------------------------------------
OIL--RELATED 2,500 Societe Nationale Elf
Aquitaine (Ordinary)...... 180,830 176,120 0.2
--------------------------------------------------------------------------------------------------------
PETROLEUM 3,500 Total S.A. (Class B)........ 176,839 190,947 0.3
--------------------------------------------------------------------------------------------------------
RETAIL TRADE 1,500 Pinault Printemps S.A....... 177,710 254,607 0.3
--------------------------------------------------------------------------------------------------------
UTILITIES 621 Compagnie Generale des
Eaux...................... 281,389 306,878 0.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FRENCH STOCKS............. 1,655,325 1,859,625 2.5
- ------------------------------------------------------------------------------------------------------------------------
GERMANY AUTOMOBILES 498 Bayerische Motorenwerke AG
(BMW) (Bearer)............ 171,887 206,820 0.3
591 Daimler-Benz AG............. 258,961 287,596 0.4
2,659 Volkswagen AG (Preferred
Warrants)(b).............. 239,121 244,717 0.3
750 Volkswagen AG (Preferred)... 140,599 157,032 0.2
----------- ----------- ----------
810,568 896,165 1.2
--------------------------------------------------------------------------------------------------------
BANKING 1,440 Deustche Bank AG
(Ordinary)................ 700,090 734,288 1.0
--------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 116 Hochtief AG................. 74,861 76,066 0.1
--------------------------------------------------------------------------------------------------------
CHEMICALS 1,726 BASF AG (Ordinary).......... 277,672 303,800 0.4
2,654 Bayer AG (Ordinary)......... 487,062 564,843 0.7
----------- ----------- ----------
764,734 868,643 1.1
--------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL CARE 911 Schering AG................. 543,830 602,093 0.8
--------------------------------------------------------------------------------------------------------
INSURANCE 600 Allianz AG Holding
(Warrants)(b)............. 23,070 37,964 0.1
--------------------------------------------------------------------------------------------------------
MACHINERY 7,650 Kloeckner Werke AG.......... 382,078 453,236 0.6
--------------------------------------------------------------------------------------------------------
METAL & MINING 1,948 Thyssen AG (Ordinary)....... 246,738 308,699 0.4
--------------------------------------------------------------------------------------------------------
UTILITIES 2,000 Veba (Warrants)(b).......... 113,000 200,748 0.3
584 Veba Vereinigte
Elektrizitaets & Bergwerks
AG (Ordinary)............. 137,526 175,351 0.2
----------- ----------- ----------
250,526 376,099 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GERMAN STOCKS &
WARRANTS.................. 3,796,495 4,353,253 5.8
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
94
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
WESTERN EUROPE FACE STOCKS, BONDS, VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
IRELAND BANKING 132,000 Bank of Ireland
(Ordinary)................ $ 538,778 $ 562,704 0.7%
--------------------------------------------------------------------------------------------------------
FOREIGN Iep 350,000 Irish Gilts, 9.25%
GOVERNMENT due 7/11/2003............. 595,056 591,390 0.8
OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
IRISH STOCKS & BONDS...... 1,133,834 1,154,094 1.5
- ------------------------------------------------------------------------------------------------------------------------
ITALY DIVERSIFIED 335,500 CIR NC Savings.............. 157,313 178,912 0.2
211,000 Compagnie Industrial Riunite
S.p.A. (CIR).............. 179,915 212,976 0.3
----------- ----------- ----------
337,228 391,888 0.5
--------------------------------------------------------------------------------------------------------
PAPER & 34,700 Cartiere Burgo S.p.A.
FOREST PRODUCTS (Ordinary)................ 175,909 196,362 0.3
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 261,720 Stet Savings Telecom........ 509,588 529,105 0.7
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 12,800 Italgas (Sud) S.p.A......... 35,600 36,967 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ITALIAN STOCKS............ 1,058,325 1,154,322 1.5
- ------------------------------------------------------------------------------------------------------------------------
NETHERLANDS BANKING 8,755 ABNAmro Bank (Ordinary)..... 314,833 322,372 0.4
--------------------------------------------------------------------------------------------------------
BEVERAGES 496 Heineken Holdings, N.V.
(Class A)................. 39,308 48,686 0.1
1,530 Heineken N.V................ 160,673 169,720 0.2
----------- ----------- ----------
199,981 218,406 0.3
--------------------------------------------------------------------------------------------------------
CHEMICALS 4,235 Akzo N.V. (Ordinary)........ 395,654 410,022 0.5
5,110 Dutch State Mining N.V.
(Ordinary)................ 269,387 280,526 0.4
----------- ----------- ----------
665,041 690,548 0.9
--------------------------------------------------------------------------------------------------------
INSURANCE 8,643 AEGON N.V. (Ordinary)....... 431,625 469,583 0.6
10,670 Amev N.V. (Ordinary)........ 438,161 472,562 0.6
10,191 Internationale Nederlanden
Groep N.V................. 418,061 487,560 0.6
----------- ----------- ----------
1,287,847 1,429,705 1.8
--------------------------------------------------------------------------------------------------------
PAPER & 16,175 Koninkljke KNP.............. 304,559 394,004 0.5
FOREST PRODUCTS
--------------------------------------------------------------------------------------------------------
RETAIL TRADE 512 De Boer Winkelbedr N.V...... 19,118 18,984 0.0
--------------------------------------------------------------------------------------------------------
TRANSPORTATION 19,470 KLM Royal Dutch Airlines.... 389,595 406,085 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
DUTCH STOCKS.............. 3,180,974 3,480,104 4.4
- ------------------------------------------------------------------------------------------------------------------------
PORTUGAL BANKING 17,400 Banco Comercial Portugues... 247,411 265,350 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGUESE STOCKS......... 247,411 265,350 0.3
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
WESTERN EUROPE FACE STOCKS, BONDS, VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING 2,215 Banco Popular Espanol
(Ordinary)................ $ 251,992 $ 247,900 0.3%
--------------------------------------------------------------------------------------------------------
OIL--RELATED 10,760 Repsol S.A.................. 304,591 334,722 0.4
--------------------------------------------------------------------------------------------------------
REAL ESTATE 307 Vallehermoso Inmobiliaria
S.A. (New)................ 3,760 5,955 0.0
1,840 Vallehermoso Inmobiliaria
S.A....................... 26,146 35,694 0.0
----------- ----------- ----------
29,906 41,649 0.0
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 39,710 Telefonica Nacional de
Espana S.A. (Ordinary).... 476,770 517,715 0.7
--------------------------------------------------------------------------------------------------------
UTILITIES 47,000 Fuerzas Electricas de
Cataluna, FECSA (Class
A)........................ 267,823 282,559 0.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SPANISH STOCKS............ 1,331,082 1,424,545 1.8
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN BUILDING RELATED 12,300 Svedala Industry............ 221,118 200,489 0.3
--------------------------------------------------------------------------------------------------------
FOREIGN Skr 700,000 Swedish Government Bond,
GOVERNMENT 10.25% due 5/05/2003...... 99,005 102,039 0.1
OBLIGATIONS
--------------------------------------------------------------------------------------------------------
METAL & MINING 23,040 Trelleborg AB (Class B)..... 163,109 220,912 0.3
--------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 20,050 Astra 'A' Fria.............. 401,920 456,578 0.6
PRESCRIPTION
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDISH
STOCKS & BONDS............ 885,152 980,018 1.3
- ------------------------------------------------------------------------------------------------------------------------
SWITZERLAND BANKING 1,194 SBV Schweitz Bankverein..... 388,403 382,080 0.5
--------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 543 Holderbank Financiere Glarus
AG (Bearer)............... 302,322 339,489 0.4
--------------------------------------------------------------------------------------------------------
CHEMICALS 744 Ciba-Geigy AG
(Registered).............. 367,871 450,151 0.6
--------------------------------------------------------------------------------------------------------
ELECTRICAL 1,211 BBC Brown Boveri & Cie...... 783,636 884,132 1.2
EQUIPMENT 212 Landis & Gyr AG
(Registered).............. 76,819 126,131 0.2
----------- ----------- ----------
860,455 1,010,263 1.4
--------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 536 Nestle AG (Registered)...... 410,920 462,311 0.6
--------------------------------------------------------------------------------------------------------
HEALTH/PERSONAL CARE 160 Roche Holding Genusschein
AG........................ 599,734 678,723 0.9
277 Sandoz AG (Registered)...... 640,518 777,462 1.0
----------- ----------- ----------
1,240,252 1,456,185 1.9
--------------------------------------------------------------------------------------------------------
</TABLE>
96
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
WESTERN EUROPE FACE STOCKS, BONDS, VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
SWITZERLAND INSURANCE 80 Baloise Holding Insurance... $ 103,904 $ 147,899 0.2%
(CONCLUDED) 842 Winterthur.................. 384,990 464,727 0.6
----------- ----------- ----------
488,894 612,626 0.8
--------------------------------------------------------------------------------------------------------
MACHINERY 182 Sulzer Gebrueder AG
(Registered).............. 92,856 103,144 0.1
--------------------------------------------------------------------------------------------------------
STEEL 1,850 Von Roll (Registered)....... 203,001 211,429 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWISS STOCKS.............. 4,354,974 5,027,678 6.6
- ------------------------------------------------------------------------------------------------------------------------
UNITED AEROSPACE 202,500 Rolls Royce PLC
KINGDOM (Ordinary)................ 483,323 486,354 0.6
--------------------------------------------------------------------------------------------------------
AIRLINES 40,500 British Airways PLC
(Ordinary)................ 230,579 269,665 0.4
--------------------------------------------------------------------------------------------------------
BANKING 29,000 Barclays Bank, Ltd.
(Ordinary)................ 225,156 272,174 0.4
40,000 National Westminster Bank
PLC (Ordinary)............ 310,089 365,362 0.5
----------- ----------- ----------
535,245 637,536 0.9
--------------------------------------------------------------------------------------------------------
BEVERAGES 99,500 Grand Metropolitan PLC
(Ordinary)................ 643,076 697,069 0.9
--------------------------------------------------------------------------------------------------------
BUILDING & 70,000 CRH PLC (Ordinary).......... 335,762 366,357 0.5
CONSTRUCTION
--------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 92,500 Tarmac PLC (Ordinary)....... 192,214 235,150 0.3
--------------------------------------------------------------------------------------------------------
CONSUMER--GOODS 25,000 Vendome Luxury Group
(Units)................... 134,600 142,812 0.2
--------------------------------------------------------------------------------------------------------
DIVERSIFIED 56,700 BTR PLC (Warrants)(b)....... 112,261 121,514 0.2
--------------------------------------------------------------------------------------------------------
ELECTRICAL 123,600 General Electric Co., Ltd.
EQUIPMENT PLC (Ordinary)............ 632,673 622,942 0.8
--------------------------------------------------------------------------------------------------------
FOODS 44,000 Argyll Group PLC
(Ordinary)................ 175,513 179,813 0.2
111,000 Tesco PLC (Ordinary)........ 328,445 351,084 0.5
----------- ----------- ----------
503,958 530,897 0.7
--------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 84,000 Tate & Lyle PLC
(Ordinary)................ 491,229 495,366 0.6
--------------------------------------------------------------------------------------------------------
INSURANCE 35,000 Commercial Union Assurance
Co. PLC (Ordinary)........ 332,852 334,693 0.4
--------------------------------------------------------------------------------------------------------
LEISURE & 28,000 The Rank Organisation PLC
ENTERTAINMENT (Ordinary)................ 334,626 404,736 0.5
22,500 Thorn EMI (Ordinary)........ 337,196 329,224 0.4
----------- ----------- ----------
671,822 733,960 0.9
--------------------------------------------------------------------------------------------------------
MEDIA/PUBLISHING 36,000 Pearson PLC (Ordinary)...... 310,943 321,908 0.4
135,000 WPP Group PLC............... 194,584 179,577 0.2
----------- ----------- ----------
505,527 501,485 0.6
--------------------------------------------------------------------------------------------------------
</TABLE>
97
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
HELD/
WESTERN EUROPE FACE STOCKS, BONDS, VALUE PERCENT OF
(CONCLUDED) INDUSTRIES AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED OIL--RELATED 49,000 British Petroleum Co.,
Ltd....................... $ 258,638 $ 260,719 0.3%
KINGDOM
(CONCLUDED) --------------------------------------------------------------------------------------------------
PHARMACEUTICALS 81,600 SmithKline Beecham 'A'...... 491,858 486,640 0.6
--------------------------------------------------------------------------------------------------------
RETAIL TRADE 39,000 Boots Co. PLC (Ordinary).... 310,146 344,699 0.4
62,600 Dixons Group PLC
(Ordinary)................ 253,377 261,840 0.3
249,300 Sears PLC................... 438,129 469,793 0.6
----------- ----------- ----------
1,001,652 1,076,332 1.3
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 70,000 British Telecommunications
PLC (Ordinary)............ 500,780 488,331 0.6
--------------------------------------------------------------------------------------------------------
UTILITIES--GAS 56,000 British Gas PLC
(Ordinary)................ 269,257 282,239 0.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
UNITED KINGDOM STOCKS..... 8,327,306 8,770,061 11.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN
EUROPE.................... 28,437,754 31,099,836 40.4
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
INDUSTRIES AMOUNT SHORT-TERM SECURITIES
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES US GOVERNMENT $ 10,000 Federal Farm Credit Bank,
AGENCY 3.15% due 1/24/1994....... 9,979 9,979 0.0
OBLIGATIONS 500,000 Federal Home Loan Bank,
3.18% due 1/18/1994....... 499,205 499,205 0.7
1,000,000 Federal Home Loan Mortgage
Association, 3.15%
due 1/11/1994............. 999,562 999,563 1.3
1,300,000 Federal National Mortgage
Association, 3.12%
due 1/27/1994............. 1,296,958 1,296,958 1.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN US
GOVERNMENT & AGENCY
OBLIGATIONS............... 2,805,704 2,805,705 3.7
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 2,357,000 General Electric Co., 3.22%
due 1/03/1994............. 2,356,368 2,356,368 3.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMERCIAL PAPER.......... 2,356,368 2,356,368 3.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
98
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED US GOVERNMENT US Treasury Bill:
STATES OBLIGATIONS $ 380,000 2.95% due 3/17/1994......... $ 377,633 $ 377,633 0.5 %
(CONCLUDED) 400,000 2.96% due 3/24/1994......... 397,270 397,270 0.5
175,000 3.00% due 3/17/1994......... 173,892 173,899 0.2
10,000 3.00% due 3/24/1994......... 9,931 9,931 0.0
30,000 3.011% due 3/24/1994........ 29,792 29,811 0.0
650,000 3.015% due 3/24/1994........ 645,482 645,519 0.8
4,000,000 3.025% due 3/10/1994........ 3,976,808 3,977,153 5.2
1,000,000 3.04% due 3/10/1994......... 994,164 994,288 1.3
200,000 3.06% due 3/17/1994......... 198,708 198,742 0.3
10,000 3.098% due 3/17/1994........ 9,937 9,937 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN US
GOVERNMENT OBLIGATIONS.... 6,813,617 6,814,183 8.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES..... 11,975,689 11,976,256 15.6
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS..................... $70,454,530 74,357,154 96.7
-----------
-----------
Put Options Written (Premium
Received--$118,850)**............... (221,740) (0.3)
Call Options Purchased
(Cost--$131,375)***................. 39,270 0.0
Unrealized Appreciation on Forward
Foreign Exchange Contracts++........ 529,800 0.7
Variation Margin on Stock Index
Futures Contracts++................. (14,358) --
Other Assets Less Liabilities......... 2,216,296 2.9
----------- ----------
NET ASSETS............................ $76,906,422 100.0%
----------- ----------
----------- ----------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipt (ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
+ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $2,306,000, representing 2.0% of net
assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Fomento Economico Mexicano S.A. de C.V. (Femsa) (Class B) 8/24/93 $ 794,324 $ 890,325
(ADR)........................................................
Servicios Financieros Quadrum S.A. de C.V. (ADR)............... 11/02/93 480,375 675,938
Telecommunicacoes Brasileiras S.A. Telebras PN (Preferred)..... 10/08/93 739,050 739,750
- ----------------------------------------------------------------------------------------------------------------------
TOTAL.......................................................... $2,013,749 $2,306,013
---------- ----------
---------- ----------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
99
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
++ Forward foreign exchange contracts as of December 31, 1993 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
FOREIGN CURRENCY PURCHASED DATE (DEPRECIATION)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
A$ 296,417........................................................................ January 1994 $ 2,125
Chf 1,454,600..................................................................... January 1994 (12,120)
- -------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$1,187,892)................................................ $ (9,995)
--------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY SOLD
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
A$ 4,698,148...................................................................... January 1994 $ 4,780
Bf 19,314,300..................................................................... January 1994 (3,466)
Chf 1,454,600..................................................................... January 1994 22,428
DM 6,857,200...................................................................... January 1994 58,668
Dkr 545,763....................................................................... January 1994 (309)
Pta 88,185,400.................................................................... January 1994 14,420
Fmk 1,750,485..................................................................... January 1994 (2,076)
Frf 11,581,448.................................................................... January 1994 (6,574)
Iep 149,095....................................................................... January 1994 407
Y 1,383,482,500................................................................... January 1994 428,478
Nlg 5,772,750..................................................................... January 1994 28,921
Skr 2,972,354..................................................................... January 1994 (5,882)
- -------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$25,260,000)............................................... 539,795
--------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS............... $529,800
--------------
--------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
**Put options written as of December 31, 1993 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SUBJECT PREMIUMS VALUE
TO PUT ISSUE RECEIVED (NOTES 1A & 1D)
<C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
$2,000,000 DM currency put option, strike price 1.7336, expiring 1/12/94......... $ (15,500) $ (4,460)
2,000,000 DM currency put option, strike price 1.805, expiring 4/13/94.......... (27,200) (28,600)
1,000,000 Nlg currency put option, strike price 2.012, expiring 4/13/94......... (14,050) (15,400)
8,000,000 Y currency put option, strike price 103.6, expiring 1/02/94........... (52,000) (169,600)
2,000,000 Nlg currency put option, strike price 1.835, expiring 1/12/94......... (10,100) (3,680)
- --------------------------------------------------------------------------------------------------------------------
TOTAL PUT OPTIONS WRITTEN............................................. $(118,850) $(221,740)
--------- ---------------
--------- ---------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
***Call Options purchased as of December 31, 1993 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
SUBJECT VALUE
TO PUT ISSUE COST (NOTES 1A & 1D)
<C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
$2,000,000 DM currency call option, strike price 1.675, expiring 4/13/94......... $ 27,200 $ 25,400
1,000,000 Nlg currency call option, strike price 1.895, expiring 4/13/94........ 14,050 12,500
2,000,000 Nlg currency call option, strike price 1.885, expiring 1/12/94........ 10,100 480
8,000,000 Y currency call option, strike price 109.5, expiring 1/12/94.......... 62,800 0
2,000,000 DM currency call option, strike price 1.675, expiring 1/12/94......... 15,500 20
500,000 Frf currency call option, strike price 5.84, expiring 1/12/94......... 1,725 870
- --------------------------------------------------------------------------------------------------------------------
TOTAL CALL OPTIONS PURCHASED.......................................... $ 131,375 $ 39,270
--------- ---------------
--------- ---------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
100
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
++Stock Index futures contracts sold as of December 31, 1993 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE DATE (NOTE 1E)
<C> <S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
17 LIFFE FTSE 100............................................................ March 1994 $2,152,042
97 Nikkei 225................................................................ March 1994 7,531,703
- -------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT
PRICE--$9,671,377)........................................................ $9,683,745
----------
----------
- -------------------------------------------------------------------------------------------------------------------
The market value of the pledged securities is $6,615,442.
</TABLE>
See Notes to Financial Statements.
101
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
SHARES VALUE (NOTE OF NET
INDUSTRY HELD COMMON STOCKS COST 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ALUMINUM 22,000 Alcan Aluminum Ltd........................... $ 460,790 $ 456,500 3.1%
7,500 Aluminum Co. of America...................... 480,958 520,313 3.5
11,700 Reynolds Metals Co........................... 550,233 530,888 3.6
----------- ----------- -------
1,491,981 1,507,701 10.2
- -------------------------------------------------------------------------------------------------------------------------
CHEMICALS 10,700 du Pont (E.I.) de Nemours & Co............... 534,988 516,275 3.5
- -------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 17,900 Norsk Hydro A.S. (ADR)*...................... 471,628 501,200 3.4
COMPANY
- -------------------------------------------------------------------------------------------------------------------------
ENGINEERING & 23,300 Dresser Industries, Inc...................... 486,528 483,475 3.3
CONSTRUCTION
- -------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 7,000 Georgia-Pacific Corp......................... 510,263 481,250 3.3
12,100 Weyerhaeuser Co.............................. 476,374 539,963 3.7
----------- ----------- -------
986,637 1,021,213 7.0
- -------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 11,100 Consolidated Natural Gas Co.................. 539,539 521,700 3.5
DISTRIBUTORS 4,800 Equitable Resources, Inc..................... 118,772 175,800 1.2
----------- ----------- -------
658,311 697,500 4.7
- -------------------------------------------------------------------------------------------------------------------------
NATURAL GAS PIPELINES 18,500 Coastal Corp................................. 493,653 520,313 3.5
4,000 Sonat, Inc................................... 78,255 115,500 0.8
----------- ----------- -------
571,908 635,813 4.3
- -------------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 38,500 Norcen Energy Corp........................... 600,603 466,812 3.2
- -------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 9,500 Amoco Corp................................... 499,683 502,312 3.4
14,300 Imperial Oil Ltd............................. 523,303 484,412 3.3
17,700 Phillips Petroleum Co........................ 517,938 513,300 3.5
----------- ----------- -------
1,540,924 1,500,024 10.2
- -------------------------------------------------------------------------------------------------------------------------
OIL--INTERNATIONAL 7,500 Exxon Corp................................... 461,040 472,500 3.2
4,700 Royal Dutch Petroleum Co. N.V. (ADR)*........ 398,449 490,562 3.3
----------- ----------- -------
859,489 963,062 6.5
- -------------------------------------------------------------------------------------------------------------------------
OIL SERVICE 71,500 +Parker Drilling Co........................... 482,452 393,250 2.7
64,400 Rowan Companies Inc.......................... 602,479 579,600 3.9
8,600 Schlumberger Ltd., Inc....................... 533,099 508,475 3.4
24,000 Tidewater Inc................................ 486,658 480,000 3.2
----------- ----------- -------
2,104,688 1,961,325 13.2
- -------------------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING 7,400 International Paper Co....................... 497,368 501,350 3.4
12,000.. Scott Paper Co............................... 479,340 493,500 3.3
12,200 Union Camp Corp.............................. 530,592 581,025 3.9
----------- ----------- -------
1,507,300 1,575,875 10.6
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
102
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
SHARES VALUE (NOTE OF NET
INDUSTRY HELD COMMON STOCKS COST 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS 33,100 +Destec Energy Inc............................ $ 562,620 $ 475,812 3.2%
- -------------------------------------------------------------------------------------------------------------------------
STEEL 21,000.. Allegheny Ludlum Corp........................ 493,494 501,375 3.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS.......................... 12,871,098 12,807,462 86.7
- -------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM INVESTMENTS
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $614,000 General Electric Capital Corp., 3.22%
due 1/03/1994.............................. 613,835 613,835 4.2
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 300,000 Federal Home Loan Mortgage Corp., 3.13%
AGENCY OBLIGATIONS** due 1/05/1994.............................. 299,870 299,870 2.0
185,000 Federal National Mortgage Association, 3.135%
due 1/10/1994.............................. 184,839 184,839 1.3
US Treasury Bill:
300,000 3.065% due 2/03/1994....................... 299,132 299,122 2.0
200,000 2.99% due 2/17/1994........................ 199,202 199,202 1.3
----------- ----------- -------
983,043 983,033 6.6
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS 1,596,878 1,596,868 10.8
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............................ $14,467,976 14,404,330 97.5
-----------
-----------
OTHER ASSETS LESS LIABILITIES................ 373,232 2.5
----------- -------
NET ASSETS................................... $14,777,562 100.0%
----------- -------
----------- -------
</TABLE>
- --------------------------------------------------------------------------------
* American Depositary Receipt (ADR).
** Certain US Government & Agency Obligations and Commercial Paper are traded
on a discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
103
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--11.4% A- Baa1 $ 3,000,000 Bank of New York, 6.50%
due 12/01/2003................. $ 2,986,875 $ 2,984,334
A- A3 1,000,000 Boatmen's Bancshares, Inc., 6.75%
due 3/15/2003.................. 999,800 1,018,209
BBB+ A3 3,000,000 First Interstate Bancorp, 11.00%
due 3/05/1998.................. 3,605,145 3,557,994
First Union Corp.:
A- A3 1,000,000 6.75% due 1/15/1998............ 997,070 1,040,335
A- A3 5,000,000 8.125% due 6/24/2002........... 5,541,690 5,555,910
Golden West Financial Corp.:
A- A3 2,000,000 9.15% due 5/23/1998............ 2,271,480 2,273,712
A- A3 1,500,000 7.875% due 1/15/2002........... 1,592,310 1,638,105
A- A3 2,000,000 8.375% due 4/15/2002........... 2,014,380 2,251,302
A- A3 1,000,000 Huntington National Bank, 7.625%
due 1/15/2003.................. 1,066,660 1,076,927
BBB+ A3 1,000,000 Meridian Bancorp., 6.625%
due 3/15/2003.................. 971,970 1,007,739
A- A3 4,500,000 NationsBank Corp., 6.875%
due 2/15/2005.................. 4,743,055 4,595,544
A A2 2,000,000 Norwest Corp., 6.625%
due 3/15/2003.................. 2,007,520 2,039,006
A- A3 2,000,000 Society National Bank, Inc.,
6.75%
due 6/15/2003.................. 2,032,760 2,046,500
U.S. Bancorp:
A- Baa1 3,000,000 8.125% due 5/15/2002........... 3,343,260 3,316,755
A- Baa1 1,500,000 7.00% due 3/15/2003............ 1,496,250 1,553,658
------------ ------------
35,670,225 35,956,030
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- Ford Motor Credit Corp.:
CAPTIVE--1.0% A A2 1,000,000 7.75% due 11/15/2002........... 1,040,130 1,093,898
A A2 1,000,000 7.50% due 1/15/2003............ 1,020,320 1,073,334
A A2 1,000,000 6.75% due 8/15/2008............ 994,150 994,072
------------ ------------
3,054,600 3,161,304
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- A+ A1 2,000,000 American General Finance Corp.,
CONSUMER--2.6% 8.50% due 8/15/1998............ 2,278,920 2,233,086
Associates Corp. of North
America:
AA- A1 1,500,000 8.80% due 8/01/1998............ 1,690,365 1,693,362
AA- A1 1,000,000 7.50% due 5/15/1999............ 1,097,300 1,079,667
A A2 3,000,000 Commercial Credit Co., 6.70%
due 8/01/1999.................. 3,022,580 3,117,876
------------ ------------
8,089,165 8,123,991
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- A A2 3,000,000 Bear Stearns Cos., Inc., 6.70%
OTHER--11.2% due 8/01/2003.................. 2,985,330 3,008,124
Dean Witter, Discover & Co.:
A A3 2,000,000 6.875% due 3/01/2003........... 2,045,720 2,048,390
A A3 3,000,000 6.50% due 11/01/2005........... 3,000,000 2,973,735
A A3 4,750,000 6.75% due 10/15/2013........... 4,691,575 4,503,147
A+ A2 2,000,000 Dillard Investment Co., 9.25%
due 2/01/2001.................. 2,354,230 2,389,524
</TABLE>
104
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- AAA Aaa $ 2,000,000 General Electric Capital Corp.,
OTHER 8.70%
due 2/15/2003.................. $ 2,422,100 $ 2,336,122
(CONCLUDED) Morgan Stanley Group, Inc.:
A+ A1 4,000,000 9.25% due 3/01/1998............ 4,606,111 4,529,008
A+ A1 3,000,000 8.875% due 10/15/2001.......... 3,454,480 3,460,989
A+ A1 2,000,000 7.00% due 10/01/2013........... 1,981,260 1,949,198
PaineWebber Group, Inc.:
BBB+ A3 1,000,000 6.25% due 6/15/1998............ 1,026,020 1,007,861
BBB+ A3 4,000,000 9.25% due 12/15/2001........... 4,670,870 4,627,952
A+ A3 1,900,000 Torchmark Corp., 9.625%
due 5/01/1998.................. 2,114,568 2,186,526
------------ ------------
35,352,264 35,020,576
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN*--8.3% A+ A2 6,000,000 CRA Finance Ltd., 7.125%
due 12/01/2013 (1)............. 5,965,200 5,906,796
Hydro-Quebec (2):
A+ A1 1,000,000 8.00% due 2/01/2013............ 1,121,260 1,081,096
A+ A1 3,000,000 8.40% due 1/15/2022............ 3,354,810 3,360,120
AAA Aaa 4,165,000 Japan Finance Corp. for Municipal
Enterprises, 8.70%
due 7/30/2001 (3).............. 4,754,072 4,858,352
A+ A1 1,175,000 Korea Development Bank Co., 7.90%
due 2/01/2002 (3).............. 1,282,700 1,267,756
A+ A1 4,000,000 Korea Electric Power Corp., 7.75%
due 4/01/2013 (2).............. 4,093,760 4,104,388
Metropolis of Tokyo (Japan):
AAA Aaa 250,000 9.25% due 11/08/2000 (4)....... 268,428 296,832
AAA Aaa 2,000,000 8.65% due 7/18/2001 (4)........ 2,288,720 2,319,932
A+ A1 1,500,000 Province of Manitoba (Canada),
8.80% due 1/15/2020 (4)........ 1,775,700 1,770,376
A+ A1 1,000,000 Province of Quebec (Canada),
7.50%
due 7/15/2002 (4).............. 1,076,020 1,069,346
------------ ------------
25,980,670 26,034,994
- --------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- AA- A1 2,500,000 Anheuser-Busch Cos., Inc., 8.75%
CONSUMER--8.4% due 12/01/1999................. 2,839,090 2,867,533
A+ A1 2,500,000 Bass America, Inc., 8.125%
due 3/31/2002.................. 2,668,930 2,769,375
Dillard Department Stores, Inc.:
A+ A2 2,000,000 7.375% due 6/15/1999........... 2,095,990 2,151,770
A+ A2 1,000,000 7.85% due 10/01/2012........... 1,033,960 1,082,836
Grand Metropolitan Investment
Corp.:
A+ A2 4,000,000 6.50% due 9/15/1999............ 4,054,400 4,133,152
A+ A2 1,000,000 8.625% due 8/15/2001........... 1,049,910 1,150,171
A+ A2 1,000,000 7.125% due 9/15/2004........... 1,027,490 1,055,163
A+ A2 1,750,000 9.00% due 8/15/2011............ 2,049,972 2,085,200
A A2 1,000,000 K mart Corp., 7.77%
due 7/02/2002(a)............... 1,000,000 1,075,660
A A1 1,000,000 PepsiCo, Inc., 6.125%
due 1/15/1998.................. 993,060 1,029,117
</TABLE>
105
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A A2 $ 1,000,000 Philip Morris Cos., Inc., 9.00%
CONSUMER-- due 1/01/2001.................. $ 1,043,370 $ 1,154,561
(CONCLUDED) Wal-Mart Stores, Inc.:
AA Aa1 2,500,000 8.625% due 4/01/2001........... 2,827,500 2,907,012
AA Aa1 3,000,000 6.50% due 6/01/2003............ 2,992,810 3,071,040
------------ ------------
25,676,482 26,532,590
- --------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- BP America Inc.:
ENERGY--6.0% AA- A1 1,000,000 9.50% due 1/01/1998............ 1,169,680 1,143,350
AA- A1 5,500,000 7.875% due 5/15/2002........... 5,972,510 6,078,914
Burlington Resources Inc.:
A- A3 1,000,000 9.625% due 6/15/2000........... 1,201,910 1,193,948
A- A3 3,000,000 8.50% due 10/01/2001........... 3,497,340 3,420,456
Texaco Capital Inc.:
A+ A1 1,500,000 9.00% due 12/15/1999........... 1,731,670 1,736,587
A+ A1 2,500,000 8.50% due 2/15/2003............ 2,925,310 2,876,125
A+ A1 1,000,000 8.875% due 9/01/2021........... 1,220,140 1,208,077
A+ A1 1,000,000 8.00% due 8/01/2032.............. 969,730 1,101,910
------------ ------------
18,688,290 18,759,367
- --------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A+ A1 2,000,000 Air Products & Chemicals Inc.,
6.25%
OTHER--13.1% due 6/15/2003.................. 1,982,700 2,001,500
AA- Aa2 2,000,000 Archer-Daniels-Midland Co., 6.25%
due 5/15/2003.................. 1,992,640 2,022,520
A- A3 2,000,000 Baxter International Inc., 8.125%
due 11/15/2001................. 2,105,970 2,221,062
A+ A1 3,000,000 Capital Cities/ABC, Inc., 8.875%
due 12/15/2000................. 3,454,220 3,509,088
A- Baa1 2,000,000 Carnival Cruise Lines, Inc.,
6.15%
due 10/01/2003................. 1,998,900 1,948,190
A A2 3,000,000 Communications Satellite Corp.,
8.125% due 4/01/2004........... 3,183,750 3,368,334
A A2 4,000,000 Equifax, Inc., 6.50%
due 6/15/2003.................. 3,999,320 4,022,136
A A3 5,000,000 First Data Corp., 6.625%
due 4/01/2003.................. 5,010,870 5,076,610
AA- Aa3 1,000,000 Gannett Co., Inc., 5.25%
due 3/01/1998.................. 996,820 999,268
AA Aa2 5,020,000 Kaiser Foundation Hospitals,
9.00%
due 11/01/2001................. 5,678,096 5,885,227
AA- Aa3 4,000,000 Walt Disney Co., 5.80%
due 10/27/2008................. 4,000,000 3,761,000
Weyerhaeuser Corp.:
A A2 3,000,000 7.50% due 3/01/2013............ 3,159,740 3,159,903
A A2 2,000,000 7.25% due 7/01/2013............ 2,141,860 2,058,326
A A3 1,000,000 Witco Corp., 6.60%
due 4/01/2003.................. 999,710 1,015,130
------------ ------------
40,704,596 41,048,294
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
106
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SUPRANATIONAL--6.0% Asian Development Bank:
AAA Aaa $ 1,000,000 10.75% due 6/01/1997........... $ 1,084,890 $ 1,176,623
AAA Aaa 3,000,000 6.50% due 9/21/2002............ 3,088,230 3,087,933
AAA Aaa 5,000,000 European Investment Bank, 9.125%
due 6/01/2002.................. 6,147,500 5,996,760
Inter-American Development Bank
Co.:
AAA Aaa 2,000,000 8.875% due 6/01/2009........... 2,481,700 2,464,838
AAA Aaa 4,000,000 8.50% due 3/15/2011............ 4,910,200 4,751,328
AAA Aaa 1,000,000 International Bank for
Reconstruction & Development,
12.375% due 10/15/2002......... 1,210,790 1,413,593
------------ ------------
18,923,310 18,891,075
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION Southwest Airlines, Inc.:
SERVICES--1.8% A- Baa1 2,000,000 9.40% due 7/01/2001............ 2,407,120 2,353,712
A- Baa1 2,000,000 8.75% due 10/15/2003........... 2,297,060 2,308,578
A- Baa1 1,000,000 7.875% due 9/01/2007........... 992,600 1,086,883
------------ ------------
5,696,780 5,749,173
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES-- GTE Corp.:
COMMUNICA- BBB+ A3 1,000,000 8.85% due 3/01/1998............ 1,143,360 1,118,230
TIONS--4.0% BBB+ A3 1,000,000 9.10% due 6/01/2003............ 1,221,680 1,181,977
Pacific Bell, Inc.:
AA- Aa3 4,000,000 8.70% due 6/15/2001............ 4,554,320 4,634,992
AA- Aa3 1,500,000 7.125% due 3/15/2026........... 1,532,790 1,504,561
Southwestern Bell
Telecommunications Corp.:
A+ A1 2,000,000 6.125% due 3/01/2000........... 2,010,000 2,033,124
A+ A1 2,000,000 7.00% due 7/01/2015............ 1,975,000 2,019,230
------------ ------------
12,437,150 12,492,114
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES-- A- A3 3,000,000 Georgia Power Co., 6.125%
ELECTRIC--2.2% due 9/01/1999.................. 2,892,720 3,048,123
A A1 1,000,000 Pacific Gas & Electric Co.,
7.875%
due 3/01/2002.................. 997,920 1,102,846
Pennsylvania Power & Light Co.:
A A2 1,000,000 7.75% due 5/01/2002............ 995,100 1,093,746
A A2 1,000,000 6.875% due 2/01/2003........... 1,014,350 1,035,025
A A2 500,000 Virginia Electric & Power Co.,
6.625%
due 4/01/2003.................. 499,450 512,868
------------ ------------
6,399,540 6,792,608
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS--2.0% Consolidated Natural Gas Co.:
AA- A1 3,000,000 8.75% due 6/01/1999............ 3,231,620 3,421,017
AA- A1 3,000,000 5.75% due 8/01/2003............ 3,002,550 2,902,176
------------ ------------
6,234,170 6,323,193
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES--
78.0%............................ 242,907,242 244,885,309
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
107
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S VALUE
INDUSTRIES RATING RATING FACE AMOUNT US GOVERNMENT OBLIGATIONS COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Notes & Bonds:
OBLIGATIONS--11.7% NR Aaa $ 4,000,000 8.25% due 7/15/1998............ $ 4,502,500 $ 4,502,480
NR Aaa 9,000,000 6.375% due 7/15/1999........... 9,681,563 9,458,370
NR Aaa 4,000,000 6.00% due 10/15/1999........... 4,144,375 4,129,960
NR Aaa 4,500,000 8.75% due 8/15/2000............ 5,356,113 5,312,790
NR Aaa 3,000,000 8.50% due 11/15/2000........... 3,530,625 3,507,180
NR Aaa 3,000,000 6.375% due 8/15/2002........... 3,135,938 3,129,360
NR Aaa 4,500,000 5.75% due 8/15/2003............ 4,670,312 4,485,915
NR Aaa 2,000,000 7.50% due 11/15/2016........... 2,219,480 2,221,240
------------ ------------
37,240,906 36,747,295
- --------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT
OBLIGATIONS--11.7%............... 37,240,906 36,747,295
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
COMMERCIAL 15,000,000 General Electric Capital Corp.,
PAPER**--4.8% 3.38% due 1/04/1994............ 14,994,367 14,994,367
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE 9,168,000 Carroll McEntee & McGinley, Inc.,
AGREEMENTS***-- purchased on 12/31/1993 to
2.9% yield 3.25% to 1/03/1994....... 9,168,000 9,168,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM
SECURITIES--7.7%............... 24,162,367 24,162,367
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.4%......... $304,310,515 305,794,971
------------
------------
OTHER ASSETS LESS
LIABILITIES--2.6%................ 8,296,493
------------
NET ASSETS--100%................. $314,091,464
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
(a) Medium-Term Note.
* Corresponding industry groups for foreign securities, which are denominated
in US dollars:
(1) Industrial Mining.
(2) Electric Utility.
(3) Financial Institution.
(4) Government Entity.
** Commercial Paper is traded on a discount basis and amortized to maturity.
The interest rate shown is the discount rate paid at the time of purchase by
the Fund.
*** Repurchase Agreements are fully collateralized by US Government Obligations.
Ratings of issues shown have not been audited by Deloitte & Touche.
See Notes to Financial Statements.
108
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
SHARES VALUE (NOTE OF NET
INDUSTRIES HELD COMMON STOCKS & WARRANTS COST 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AEROSPACE 90,000 Allied Signal Inc..................... $ 5,931,968 $ 7,110,000 2.3%
- ------------------------------------------------------------------------------------------------------------------------
APPAREL 110,000 Phillips-Van Heusen Corp.............. 3,066,754 4,125,000 1.3
- ------------------------------------------------------------------------------------------------------------------------
APPLIANCES 245,000 Singer Co., N.V....................... 7,897,329 9,156,875 3.0
392,000 Sunbeam-Oster......................... 8,017,244 8,624,000 2.8
------------ ------------ -------
15,914,573 17,780,875 5.8
- ------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 20,000 Consorcio D Grupo Dina S.A.
(ADR)(a)............................ 482,962 557,500 0.2
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES 150,000 Ford Motor Co......................... 8,093,805 9,675,000 3.1
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE 120,000 Magna International, Inc. (Class A)... 5,330,158 5,970,000 1.9
- ------------------------------------------------------------------------------------------------------------------------
BANKING 60,000 Bank of New York Co. (Warrants)(b).... 433,750 630,000 0.2
160,000 Bank of New York, Inc................. 7,904,505 9,120,000 3.0
------------ ------------ -------
8,338,255 9,750,000 3.2
- ------------------------------------------------------------------------------------------------------------------------
BEVERAGES 35,000 PepsiCo Inc........................... 1,391,470 1,430,625 0.5
13,500 Panamerican Beverages, Inc. (Class
A).................................. 438,013 516,375 0.2
------------ ------------ -------
1,829,483 1,947,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 50,000 PPG Industries, Inc................... 3,521,030 3,793,750 1.2
70,000 Rohm and Haas......................... 3,859,029 4,165,000 1.3
------------ ------------ -------
7,380,059 7,958,750 2.5
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATION 215,000 ADC Telecommunications Inc............ 6,295,827 7,659,375 2.5
EQUIPMENT 90,000 DSC Communications Corp............... 4,998,923 5,529,375 1.8
45,000 Motorola, Inc......................... 3,930,075 4,156,875 1.3
37,000 Picturetel Corp....................... 669,067 689,125 0.2
125,000 Tellabs, Inc.......................... 4,755,455 5,875,000 1.9
------------ ------------ -------
20,649,347 23,909,750 7.7
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 85,000 Computer Sciences Corp................ 6,859,844 8,457,500 2.7
300,000 General Motors Corp. (Class E)........ 8,878,108 8,775,000 2.8
------------ ------------ -------
15,737,952 17,232,500 5.5
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 140,000 Solectron Corp........................ 2,900,977 3,972,500 1.3
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 100,000 Emerson Electric Co................... 5,778,286 6,025,000 1.9
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC/INSTRUMENTS 80,000 Perkin-Elmer Corp..................... 2,878,887 3,080,000 1.0
- ------------------------------------------------------------------------------------------------------------------------
ENGINEERING & 135,500 Thermo Electron....................... 5,429,097 5,691,000 1.8
CONSTRUCTION
- ------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 460,000 Wheelabrator Technologies Inc......... 7,465,633 8,165,000 2.6
- ------------------------------------------------------------------------------------------------------------------------
FERTILIZER 25,000 IMC Fertilizer Group Inc.............. 1,060,593 1,134,375 0.4
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--ARGENTINA 50,000 +Banco Frances del Rio de la Plata
S.A.(2)............................. 1,563,880 1,968,750 0.6
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
109
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
SHARES VALUE (NOTE OF NET
INDUSTRIES HELD COMMON STOCKS & WARRANTS COST 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--MEXICO 25,000 Empresas ICA Sociedad Controladora,
S.A. de C.V. (ADR)(a)(4)............ $ 566,315 $ 706,250 0.2%
75,000 Grupo Financiero Serfin, S.A. de C.V.
(ADR)(a)(2)......................... 1,874,720 2,212,500 0.7
122,000 Telefonos de Mexico, S.A. de C.V.
(Telmex) (ADR)(a)(7)................ 6,019,253 8,235,000 2.7
------------ ------------ -------
8,460,288 11,153,750 3.6
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--NETHERLANDS 25,316 AEGON N.V. (ADR)(a)(3)................ 1,125,525 1,373,393 0.4
1,165,000 AEGON N.V. (ADR)(a)(3)................ 1,496,297 1,724,200 0.6
------------ ------------ -------
2,621,822 3,097,593 1.0
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--PORTUGAL 30,000 Espirito Santo Financial Holdings S.A.
(ADR)(a)(2)......................... 855,676 1,057,500 0.3
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--UNITED 75,000 British Petroleum PLC (ADR)(a)(6)..... 4,173,012 4,800,000 1.6
KINGDOM 40,000 Reuters Holdings PLC (ADR)(a)(1)...... 2,583,407 3,160,000 1.0
------------ ------------ -------
6,756,419 7,960,000 2.6
- ------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 102,500 Willamette Industries Inc............. 3,925,498 5,099,375 1.7
- ------------------------------------------------------------------------------------------------------------------------
HEALTH CARE 90,000 Vivra Inc............................. 1,646,529 2,081,250 0.7
- ------------------------------------------------------------------------------------------------------------------------
HEALTHCARE-- 306,600 +Humana Inc............................ 5,094,403 5,403,825 1.7
PRODUCTS/SERVICES 40,000 Johnson & Johnson Co.................. 1,600,252 1,790,000 0.6
------------ ------------ -------
6,694,655 7,193,825 2.3
- ------------------------------------------------------------------------------------------------------------------------
HOME FURNISHINGS 90,000 Heilig-Meyers Co...................... 1,593,336 3,510,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 130,000 Procter & Gamble...................... 6,748,835 7,410,000 2.4
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE 70,000 America International Group Inc....... 6,156,186 6,142,500 2.0
100,000 Capital Holding Corp.................. 4,035,123 3,712,500 1.2
------------ ------------ -------
10,191,309 9,855,000 3.2
- ------------------------------------------------------------------------------------------------------------------------
MEDICAL 240,000 Physician Corp........................ 4,708,447 5,970,000 1.9
- ------------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 200,000 Danka Business Systems PLC
(ADR)(a)(5)......................... 5,044,461 7,912,500 2.6
- ------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 50,000 Chevron Corp.......................... 4,388,825 4,356,250 1.4
60,000 Mobil Corp............................ 4,670,347 4,740,000 1.5
50,000 Royal Dutch Petroleum Co.
(ADR)(a)(6)......................... 4,870,500 5,218,750 1.7
------------ ------------ -------
13,929,672 14,315,000 4.6
- ------------------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING 200,000 Crown Cork & Seal Co., Inc............ 5,824,550 8,375,000 2.7
60,000 Union Camp Corp....................... 2,870,356 2,857,500 0.9
------------ ------------ -------
8,694,906 11,232,500 3.6
- ------------------------------------------------------------------------------------------------------------------------
PETROLEUM 165,000 Phillips Petroleum Co................. 4,733,030 4,785,000 1.5
- ------------------------------------------------------------------------------------------------------------------------
PRINTING/PUBLISHING 80,000 News Corp., Ltd. (ADR)(a)............. 4,300,065 4,220,000 1.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
110
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
SHARES VALUE (NOTE OF NET
INDUSTRIES HELD COMMON STOCKS & WARRANTS COST 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
RAILROADS 29,000 CSX Corp.............................. $ 2,458,253 $ 2,349,000 0.8%
50,000 Southern Pacific Rail Corp............ 959,750 987,500 0.3
------------ ------------ -------
3,418,003 3,336,500 1.1
- ------------------------------------------------------------------------------------------------------------------------
SERVICES 85,000 Block (H&R), Inc...................... 2,979,575 3,463,750 1.1
40,000 Kelly Services, Inc. (Class A)........ 1,137,039 1,105,000 0.4
12,000 Kelly Services, Inc. (Class B)........ 114,998 363,000 0.1
------------ ------------ -------
4,231,612 4,931,750 1.6
- ------------------------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 40,000 Microsoft Corp........................ 3,233,000 3,225,000 1.0
- ------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 35,000 ALC Communications Corp............... 991,049 1,006,250 0.3
150,000 LDDS Communications Inc............... 6,763,866 7,275,000 2.4
290,000 MCI Communications Corp............... 8,127,036 8,174,375 2.6
70,000 Sprint Corp........................... 2,557,650 2,432,500 0.8
------------ ------------ -------
18,439,601 18,888,125 6.1
- ------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 4,000 Antec Corp............................ 72,000 98,000 0.0
EQUIPMENT
- ------------------------------------------------------------------------------------------------------------------------
TIRES & RUBBER 10,000 Bandag, Inc........................... 426,702 553,750 0.2
50,000 Bandag, Inc. (Class A)................ 2,585,504 2,587,500 0.8
130,000 Cooper Tire & Rubber Co............... 2,713,790 3,250,000 1.1
------------ ------------ -------
5,725,996 6,391,250 2.1
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 294,000 California Energy Co., Inc............ 5,502,330 5,439,000 1.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS & WARRANTS........ 251,360,159 285,215,918 92.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
111
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
FACE VALUE (NOTE OF NET
AMOUNT SHORT-TERM SECURITIES COST 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $4,507,000 General Electric Capital Corp., 3.22%
due 1/03/1994....................... $ 4,505,791 $ 4,505,791 1.5%
4,500,000 Matterhorn Capital Corp., 3.20%
due 1/24/1994....................... 4,490,400 4,490,400 1.5
5,000,000 Paribas Finance Corp., 3.36%
due 1/04/1994....................... 4,998,133 4,998,133 1.6
3,000,000 PHH Corp., 3.25%
due 1/12/1994....................... 2,996,750 2,996,750 1.0
7,000,000 Preferred Receivable Funding, 3.30%
due 1/07/1994....................... 6,995,508 6,995,508 2.3
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT 2,380,000 Federal Home Loan Bank, 3.17%
OBLIGATIONS due 1/18/1994....................... 2,376,228 2,376,228 0.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES........... 26,362,810 26,362,810 8.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS..................... $277,722,969 311,578,728 100.7
------------
------------
LIABILITIES IN EXCESS OF OTHER
ASSETS.............................. (2,159,091) (0.7)
------------ -------
NET ASSETS............................ $309,419,637 100.0%
------------ -------
------------ -------
</TABLE>
- --------------------------------------------------------------------------------
(a) American Depositary Receipt (ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustments under certain conditions until the expiration date.
* Commercial Paper and certain US Government Obligations traded on a discount
basis; the interest rates shown are the discount rates paid at the time of
purchase by the Fund.
Corresponding industry groups for foreign securities:
(1) Business Services (5) Office Equipment
(2) Financial Services (6) Petroleum
(3) Insurance (7) Telecommunications
(4) Miscellaneous
See Notes to Financial Statements.
112
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
BANK NOTE--3.3% $ 1,000,000 FNB of Chicago............................... 3.35% 1/31/94 $ 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$1,000,000).................................. 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL 203,000 American Express Credit Corp................. 3.22 1/10/94 202,814
PAPER--49.1% 1,000,000 Arco Coal Australia, Inc..................... 3.33 2/07/94 996,443
1,235,000 Bass Finance (C.I.) Ltd...................... 3.28 3/11/94 1,227,315
500,000 CIT Group Holdings, Inc. (The)............... 3.30 3/01/94 497,208
588,000 CSW Credit, Inc.............................. 3.27 2/18/94 585,343
900,000 CSW Credit, Inc.............................. 3.25 2/25/94 895,352
60,000 CXC Inc...................................... 3.40 1/18/94 59,900
628,000 Central Hispano N.A. Capital Corp............ 3.23 1/10/94 627,424
1,302,000 Fisons U.S. Inc.............................. 3.22 1/12/94 1,300,568
1,000,000 Ford Motor Credit Co......................... 3.20 1/27/94 997,487
500,000 Goldman Sachs Group L.P...................... 3.36 2/07/94 498,221
1,300,000 Hanson Finance (UK) PLC...................... 3.21 1/24/94 1,297,097
1,000,000 Nomura Holding America Inc................... 3.40 1/24/94 997,767
1,388,000 Province of Quebec........................... 3.35 2/03/94 1,383,582
961,000 Sheffield Receivables Corp................... 3.25 2/18/94 956,657
1,301,000 Societe Generale North America, Inc.......... 3.35 3/01/94 1,293,736
1,000,000 Svenska Handlesbanken, Inc................... 3.25 1/05/94 999,542
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$14,816,867)........................... 14,816,456
- ----------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--3.3% 1,000,000 Goldman Sachs Group L.P...................... 3.33 3/01/94 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES--(COST--$1,000,000)............................ 1,000,000
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 50,000 Federal Farm Credit.......................... 3.59 11/17/94 48,440
AGENCY OBLIGATIONS-- 85,000 Federal Farm Credit.......................... 3.64 11/17/94 82,347
DISCOUNT--7.5% 54,000 Federal Home Loan Mortgage................... 3.22 1/18/94 53,914
60,000 Federal Home Loan Mortgage................... 3.22 1/25/94 59,867
128,000 Federal Home Loan Mortgage................... 3.39 5/09/94 126,528
70,000 Federal Home Loan Mortgage................... 3.47 7/28/94 68,663
303,000 Federal Home Loan Mortgage................... 3.50 7/28/94 297,213
78,000 Federal Home Loan Mortgage................... 3.55 7/28/94 76,510
125,000 Federal National Mortgage Association........ 3.24 2/24/94 124,415
50,000 Federal National Mortgage Association........ 3.30 3/07/94 49,710
30,000 Federal National Mortgage Association........ 3.21 4/01/94 29,758
20,000 Federal National Mortgage Association........ 3.22 4/01/94 19,839
125,000 Federal National Mortgage Association........ 3.275 6/06/94 123,228
95,000 Federal National Mortgage Association........ 3.39 6/07/94 93,645
90,000 Federal National Mortgage Association........ 3.38 7/19/94 88,355
50,000 Federal National Mortgage Association........ 3.46 8/22/94 48,914
25,000 Federal National Mortgage Association........ 3.46 8/23/94 24,455
45,000 Federal National Mortgage Association........ 3.51 9/20/94 43,882
120,000 Federal National Mortgage Association........ 3.34 9/22/94 116,997
50,000 Federal National Mortgage Association........ 3.37 9/22/94 48,749
</TABLE>
113
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 25,000 Federal National Mortgage Association........ 3.42 % 9/27/94 $ 24,363
AGENCY OBLIGATIONS-- 115,000 Federal National Mortgage Association........ 3.46 9/27/94 112,068
DISCOUNT (CONCLUDED) 20,000 Federal National Mortgage Association........ 3.49 9/27/94 19,490
45,000 Federal National Mortgage Association........ 3.50 9/30/94 43,840
45,000 Federal National Mortgage Association........ 3.42 10/11/94 43,779
90,000 Federal National Mortgage Association........ 3.52 10/13/94 87,540
240,000 Federal National Mortgage Association........ 3.53 10/13/94 233,441
55,000 Federal National Mortgage Association........ 3.55 10/13/94 53,497
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--DISCOUNT (COST--$2,242,107)............................. 2,243,447
- ----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 500,000 Federal Home Loan Bank+...................... 3.43 12/28/95 500,000
AGENCY OBLIGATIONS-- 2,000,000 Federal Home Loan Mortgage+.................. 3.36 9/01/95 1,999,240
NON-DISCOUNT--36.7% 1,000,000 Federal National Mortgage Association+....... 3.33 5/13/96 1,000,000
1,000,000 Federal National Mortgage Association+....... 3.45 5/19/97 1,000,000
1,000,000 Federal National Mortgage Association+....... 3.50 5/14/98 1,000,000
500,000 Student Loan Marketing Association+.......... 3.72 3/01/95 502,939
1,000,000 Student Loan Marketing Association+.......... 3.72 3/23/95 1,002,969
450,000 Student Loan Marketing Association+.......... 3.47 3/20/96 450,000
1,000,000 United States Treasury Notes................. 5.75 3/31/94 1,006,250
500,000 United States Treasury Notes................. 5.125 5/31/94 503,750
650,000 United States Treasury Notes................. 5.00 6/30/94 655,281
300,000 United States Treasury Notes................. 3.875 3/31/95 300,094
250,000 United States Treasury Notes................. 3.875 4/30/95 250,000
250,000 United States Treasury Notes................. 4.125 6/30/95 250,625
400,000 United States Treasury Notes................. 3.875 8/31/95 398,875
250,000 United States Treasury Notes................. 4.25 12/31/95 250,078
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--NON-DISCOUNT (COST--$11,063,854)........................ 11,070,101
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$30,122,927)--99.9%......................... 30,130,004
OTHER ASSETS LESS LIABILITIES--0.1%.................................. 37,901
------------
NET ASSETS--100.0%................................................... $ 30,167,905
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
* Bankers' Acceptances, Commercial Paper and certain US Government & Agency
Obligations are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund. Other securities bear
interest at the rates shown, payable at fixed dates or upon maturity. The
interest rates on variable rate securities are adjusted periodically based upon
appropriate indexes. The interest rates shown are the rates in effect at
December 31, 1993.
+ Variable Rate Note.
See Notes to Financial Statements.
114
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA
AND THE FACE VALUE PERCENT OF
CARIBBEAN INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ARGENTINA AUTOMOBILES $ 500,000 Compania Naviera Perez
Companc
S.A.C.F.I.M.F.A. S.A.,
8.375%
due 7/30/1998.......... $ 511,875 $ 508,750 1.01%
500,000 Sevel Argentina, S.A.,
8.50%
due 11/17/1996......... 505,625 510,625 1.01
--------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT 500,000 Republic of Argentina,
OBLIGATIONS 8.25%
due 8/02/2000.......... 506,250 514,687 1.01
--------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 500,000 Telecom Argentina
Stet--France Telecom,
S.A., 8.375%
due 10/18/2000......... 502,500 513,750 1.01
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN
ARGENTINA 2,026,250 2,047,812 4.04
- ------------------------------------------------------------------------------------------------------------------------
MEXICO RETAIL STORES 250,000 Controladora Comercial
Mexicana, S.A., 8.75%
due 4/21/1998.......... 263,125 264,375 0.52
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN MEXICO 263,125 264,375 0.52
- ------------------------------------------------------------------------------------------------------------------------
TRINIDAD FOREIGN GOVERNMENT 200,000 Republic of Trinidad and
& TOBAGO OBLIGATIONS Tobago, 11.50%
due 11/20/1997......... 214,750 217,500 0.43
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN TRINIDAD
& TOBAGO 214,750 217,500 0.43
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN LATIN
AMERICAN SECURITIES 2,504,125 2,529,687 4.99
- ------------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
- ------------------------------------------------------------------------------------------------------------------------
CANADA FOREIGN GOVERNMENT Canadian Government
OBLIGATIONS Bonds:
C$ 550,000 6.50% due 9/01/1998.... 431,789 428,763 0.84
2,000,000 7.50% due 12/01/2003... 1,581,135 1,606,495 3.17
----------- ----------- ----------
2,012,924 2,035,258 4.01
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN CANADA 2,012,924 2,035,258 4.01
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
115
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA FACE VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES AIR TRANSPORT US$ 250,000 Delta Air Lines, Inc.,
9.30% due 1/02/2010.... $ 246,925 $ 249,787 0.49%
USAir Inc.:
100,000 10.00% due 7/01/2003... 100,000 96,000 0.19
250,000 10.375% due 3/01/2013.. 250,000 250,241 0.49
100,000 United Air Pass-Through,
10.125% due
3/22/2015.............. 109,036 110,236 0.22
----------- ----------- ----------
705,961 706,264 1.39
--------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 100,000 Exide Corp., 10.75%
due 12/15/2002......... 107,500 109,500 0.22
--------------------------------------------------------------------------------------------------------
BROADCASTING & 250,000 Continental Cablevision
PUBLISHING Inc., 9.50%
due 8/01/2013.......... 250,000 280,000 0.55
500,000 SCI Television Inc.,
11.00% due 6/30/2005... 520,625 520,000 1.03
500,000 Sinclair Broadcasting
Group, Inc., 10.00%
due 12/15/2003......... 500,000 511,250 1.01
250,000 World Color Press Inc.,
9.125% due 3/15/2003... 250,625 259,375 0.51
----------- ----------- ----------
1,521,250 1,570,625 3.10
--------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 250,000 Inter-City Products
Corp., 9.75%
due 3/01/2000.......... 242,500 250,625 0.49
100,000 Pacific Lumber Co.,
10.50% due 3/01/2003... 102,500 103,750 0.21
350,000 USG Corp., 8.75%
due 3/01/2017.......... 323,125 323,750 0.64
----------- ----------- ----------
668,125 678,125 1.34
--------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 250,000 American Standard Inc.,
9.25% due 12/01/2016... 251,875 259,375 0.51
--------------------------------------------------------------------------------------------------------
CELLULAR TELEPHONES & 260,000 Dial Page, Inc., 12.25%
PAGING due 2/15/2000.......... 282,775 289,900 0.57
--------------------------------------------------------------------------------------------------------
CHEMICALS 435,000 G-I Holdings, Inc.,
9.65%* due
10/01/1998............. 257,198 279,216 0.55
500,000 Harris Chemical North
America Co., 9.42%*
due 7/15/2001.......... 402,739 429,375 0.85
250,000 Methanex Corp., 8.875%
due 11/15/2001......... 248,245 258,750 0.51
----------- ----------- ----------
908,182 967,341 1.91
--------------------------------------------------------------------------------------------------------
COMMUNICATIONS 175,000 Panamsat L.P., 10.12%*
due 8/01/2003.......... 103,035 117,250 0.23
--------------------------------------------------------------------------------------------------------
</TABLE>
116
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA FACE VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES CONGLOMERATES Coltec Industries:
(CONTINUED) US$ 150,000 9.75% due 11/01/1999... $ 159,000 $ 161,250 0.32 %
100,000 10.25% due 4/01/2002... 107,000 107,750 0.21
250,000 Foamex L.P., 9.50%
due 6/01/2000.......... 244,062 262,500 0.52
292,000 Interco. Inc., 10.00%
due 6/01/2001.......... 294,920 297,110 0.58
500,000 Interlake Corp., 12.125%
due 3/01/2002.......... 513,750 506,250 1.00
500,000 Jordan Industries, Inc. 10.375%
due 8/01/2003.......... 495,688 510,000 1.00
500,000 Sherritt Gordon, Ltd.,
9.75% due 4/01/2003.... 503,625 505,000 1.00
----------- ----------- ----------
2,318,045 2,349,860 4.63
--------------------------------------------------------------------------------------------------------
CONSUMER-PRODUCTS 500,000 ++Coleman Holdings Inc., 10.11%*
due 5/27/1998.......... 311,376 324,375 0.64
250,000 ++Formica Corp., 13.125%
due 9/15/2005.......... 250,000 253,906 0.50
925,000 Revlon Worldwide Corp., 16.61%*
due 3/15/1998.......... 516,725 476,375 0.94
250,000 Sealy Corp., 9.5%
due 5/01/2003.......... 256,750 261,875 0.51
----------- ----------- ----------
1,334,851 1,316,531 2.59
--------------------------------------------------------------------------------------------------------
CONTAINERS 250,000 Anchor Glass Container
Co., 9.875%
due 12/15/2008......... 250,000 256,250 0.51
500,000 Silgan Holdings, Inc.,
12.43%* due
6/15/1996.............. 386,521 387,500 0.76
250,000 Stone-Consolidated
Corp., 10.25%
due 12/15/2000......... 251,250 252,500 0.50
250,000 Sweetheart Cup Co.,
9.625% due 9/01/2000... 250,000 263,750 0.52
----------- ----------- ----------
1,137,771 1,160,000 2.29
--------------------------------------------------------------------------------------------------------
ENERGY 100,000 ++Clark Oil, 10.50%
due 12/01/2001......... 106,375 108,375 0.21
1,000,000 Clark R & M Holdings, Inc.,
9.9684%*
due 2/15/2000.......... 520,005 551,250 1.09
250,000 ++Consolidated-Hydro
Inc., 11.95%*
due 7/15/2003.......... 144,849 148,750 0.29
500,000 Ferrell Gas Inc., 11.625%
due 12/15/2003......... 543,250 544,375 1.07
250,000 Noble Drilling Corp.,
9.25% due 10/01/2003... 250,000 258,750 0.51
500,000 Seagull Energy Corp.,
8.625% due 8/01/2005... 499,688 500,000 0.99
</TABLE>
117
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA FACE VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES ENERGY (CONTINUED) US$ 250,000 Trans Texas Gas Corp., 10.50%
(CONTINUED) due 9/01/2000.......... $ 250,000 $ 263,750 0.52%
500,000 Triton Energy Corp.,
9.65%* due
11/01/1997............. 343,791 350,000 0.69
----------- ----------- ----------
2,657,958 2,725,250 5.37
--------------------------------------------------------------------------------------------------------
ENTERTAINMENT 500,000 Marvel Holdings, Inc.,
10.13%* due
4/15/1998.............. 312,570 328,750 0.65
100,000 New World Pictures Inc., 12.25%
due 9/15/1998.......... 97,315 101,500 0.20
350,000 SPI Holding Inc., 10.65%*
due 10/01/2001......... 253,083 273,000 0.54
----------- ----------- ----------
662,968 703,250 1.39
--------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 250,000 Penn Financial Corp.,
9.25% due 12/15/2003... 250,000 253,750 0.50
250,000 Reliance Group Holdings,
Inc.,
9.75% due 11/15/2003... 250,000 258,125 0.51
----------- ----------- ----------
500,000 511,875 1.01
--------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 250,000 Coca-Cola Bottling Co.,
9.0% due 11/15/2003.... 250,625 250,625 0.49
250,000 Del Monte Corp., 10.00%
due 5/01/2003.......... 251,250 247,500 0.49
350,000 Grand Union Co., 12.25%
due 7/15/2002.......... 362,250 368,375 0.72
300,000 Penn Traffic Co., 9.625%
due 4/15/2005.......... 309,000 312,750 0.62
250,000 PuebloXtra, 9.50%
due 8/01/2003.......... 250,938 253,750 0.50
250,000 Royal Crown Corp., 9.75%
due 8/01/2000.......... 250,000 257,500 0.51
250,000 Specialty Foods Corp.,
10.25% due 8/15/2001... 250,000 255,313 0.50
----------- ----------- ----------
1,924,063 1,945,813 3.83
--------------------------------------------------------------------------------------------------------
HOME BUILDING 250,000 Ryland Group, Inc.,
9.625% due 6/01/2004... 250,000 252,188 0.50
--------------------------------------------------------------------------------------------------------
HOTELS & CASINOS 250,000 Aztar Corp., 11.00%
due 10/01/2002......... 254,062 255,000 0.50
250,000 Mirage Resorts Inc.,
9.25% due 3/15/2003.... 248,750 261,875 0.52
500,000 Showboat Inc., 9.25%
due 5/01/2008.......... 506,250 512,500 1.01
500,000 Trump Plaza Associates, 10.875%
due 6/15/2001.......... 500,313 502,500 0.99
100,000 Trump Taj Mahal Funding,
Inc., 11.35%
due 11/15/1999(a)...... 93,575 98,664 0.20
----------- ----------- ----------
1,602,950 1,630,539 3.22
--------------------------------------------------------------------------------------------------------
</TABLE>
118
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA FACE VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES INDUSTRIAL SERVICES US$ 250,000 ADT Operations, 9.25%
(CONTINUED) due 8/01/2003.......... $ 251,687 $ 257,500 0.51%
300,000 Blount, Inc., 9.00%
due 6/15/2003.......... 300,500 311,250 0.61
----------- ----------- ----------
552,187 568,750 1.12
--------------------------------------------------------------------------------------------------------
METALS & MINING 250,000 Maxxam Group, Inc.,
12.48%* due
8/01/2003.............. 141,461 143,125 0.28
--------------------------------------------------------------------------------------------------------
PAPER 250,000 Container Corp.
of America, 9.75%
due 4/01/2003.......... 255,000 259,375 0.51
250,000 Riverwood International
Corp., 11.25%
due 6/15/2002.......... 274,813 273,750 0.54
100,000 Stone Container Group,
11.875%
due 12/01/1998......... 101,625 101,750 0.20
----------- ----------- ----------
631,438 634,875 1.25
--------------------------------------------------------------------------------------------------------
RAILROADS 250,000 Southern Pacific Rail
Co.,
9.375% due 8/15/2005... 250,000 267,500 0.53
--------------------------------------------------------------------------------------------------------
RESTAURANTS & FOOD 250,000 Flagstar Corp., 11.375%
SERVICES due 9/15/2003.......... 250,000 258,750 0.51
250,000 Foodmaker, Inc., 9.75%
due 6/01/2002.......... 251,250 254,375 0.50
----------- ----------- ----------
501,250 513,125 1.01
--------------------------------------------------------------------------------------------------------
RETAIL STORES 250,000 Pamida Holdings, Inc.,
11.75% due 3/15/2003... 247,500 255,625 0.51
150,000 Specialty Retailers Inc.,
10.00% due 8/15/2000... 149,625 153,750 0.30
100,000 ++Specialty Retailers
Inc., 11.00% due
8/15/2003.............. 100,000 103,000 0.20
----------- ----------- ----------
497,125 512,375 1.01
--------------------------------------------------------------------------------------------------------
STEEL 500,000 WCI Steel Inc., 10.50%
due 3/01/2002.......... 500,000 520,000 1.02
--------------------------------------------------------------------------------------------------------
TEXTILES 500,000 West Point Stevens Inc.,
9.375% due
12/15/2005............. 500,000 506,875 1.00
--------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 250,000 Eletson Holdings Inc.,
9.25% due 11/15/2003... 250,000 255,469 0.50
250,000 International Shipholding
Corp., 9.00%
due 7/01/2003.......... 249,750 255,625 0.50
250,000 Viking Star Shipping Co.,
9.625% due 7/15/2003... 250,938 257,813 0.51
----------- ----------- ----------
750,688 768,907 1.51
--------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 4,000,000 US Treasury Note, 5.75%
OBLIGATIONS due 8/15/2003.......... 3,983,125 3,986,876 7.86
--------------------------------------------------------------------------------------------------------
</TABLE>
119
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA FACE VALUE PERCENT OF
(CONCLUDED) INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES UTILITIES US$ 92,869 Midland Funding Corp. II,
(CONCLUDED) 10.33% due 7/23/2002... $ 96,816 $ 95,881 0.19%
250,000 Texas-New Mexico Power
Company, 9.25%
due 9/15/2000.......... 250,000 261,640 0.51
233,383 ++Tucson Electric Power Co.,
10.732%
due 1/01/2013.......... 223,464 227,840 0.45
----------- ----------- ----------
570,280 585,361 1.15
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE
UNITED STATES 25,814,863 26,303,916 51.84
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN NORTH
AMERICAN SECURITIES 27,827,787 28,339,174 55.85
- ------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA FOREIGN GOVERNMENT Australia Government
Bonds:
OBLIGATIONS--REGIONAL A$ 2,400,000 9.50% due 8/15/2003.... 1,931,468 1,948,792 3.84
& AGENCY 1,000,000 7.00% due 4/01/2004.... 659,662 693,767 1.37
----------- ----------- ----------
2,591,130 2,642,559 5.21
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN
AUSTRALIA 2,591,130 2,642,559 5.21
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN PACIFIC
BASIN SECURITIES 2,591,130 2,642,559 5.21
- ------------------------------------------------------------------------------------------------------------------------
WESTERN EUROPE
- ------------------------------------------------------------------------------------------------------------------------
DENMARK FOREIGN GOVERNMENT Denmark Government Bonds:
OBLIGATION
Dkr 2,000,000 9.00% due 11/15/2000... 344,014 343,746 0.67
8,000,000 7.00% due 12/15/2004... 1,283,497 1,261,874 2.49
----------- ----------- ----------
1,627,511 1,605,620 3.16
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN DENMARK 1,627,511 1,605,620 3.16
- ------------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN Lit 3,600,000,000 Buoni Poliennali del
Tesoro
GOVERNMENT (Italian Government Bonds
OBLIGATIONS 9.00% due 10/01/1998... 2,179,661 2,165,524 4.27
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN ITALY 2,179,661 2,165,524 4.27
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
120
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN EUROPE FACE VALUE PERCENT OF
(CONTINUED) INDUSTRIES AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
SPAIN FOREIGN GOVERNMENT Government of Spain:
OBLIGATIONS Pta 200,000,000 9.00%* due 2/28/1997... $ 1,432,931 $ 1,434,603 2.83 %
71,000,000 10.50% due 10/30/2003.. 608,038 574,750 1.13
----------- ----------- ----------
2,040,969 2,009,353 3.96
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN SPAIN 2,040,969 2,009,353 3.96
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN FOREIGN GOVERNMENT Skr 9,500,000 SBAB, 12.50%
OBLIGATIONS--REGIONAL due 1/23/1997.......... 1,308,032 1,311,482 2.59
& AGENCY 15,000,000 Government of Sweden,
10.250% due
5/05/2003.............. 2,161,107 2,187,904 4.31
----------- ----------- ----------
3,469,139 3,499,386 6.90
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN SWEDEN 3,469,139 3,499,386 6.90
- ------------------------------------------------------------------------------------------------------------------------
UNITED FOREIGN GOVERNMENT United Kingdom Gilt:
KINGDOM OBLIGATIONS L 800,000 7.75% due 9/08/2006.... 1,273,065 1,330,385 2.62
250,000 8.00% due 6/10/2003.... 390,145 419,671 0.83
700,000 8.00% due 9/27/2013.... 1,137,043 1,215,493 2.39
----------- ----------- ----------
2,800,253 2,965,549 5.84
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE
UNITED KINGDOM 2,800,253 2,965,549 5.84
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN WESTERN
EUROPEAN SECURITIES 12,117,533 12,245,432 24.13
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM
SECURITIES ISSUE
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER+ US$ 819,000 General Electric Capital
Corp., 3.22%
due 1/03/1994.......... 818,853 818,853 1.62
1,000,000 Goldman Sachs & Co.,
3.35%
due 1/10/1994.......... 999,163 999,163 1.97
1,200,000 PepsiCo., Inc., 3.30%
due 1/14/1994.......... 1,198,570 1,198,570 2.36
----------- ----------- ----------
3,016,586 3,016,586 5.95
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
121
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & US$ 1,100,000 Federal Home
AGENCY OBLIGATIONS Loan Bank, 3.120%
due 2/03/1994.......... $ 1,096,854 $ 1,096,854 2.16%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 4,113,440 4,113,440 8.11
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $49,154,015 49,867,831 98.29
-----------
-----------
UNREALIZED APPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS** 9,831 0.02
OTHER ASSETS LESS LIABILITIES 857,786 1.69
----------- ----------
NET ASSETS $50,737,448 100.00%
----------- ----------
----------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Each $1,000 face amount contains one non-detachable share of Taj Mahal
Holding Corp.'s Class B redeemable Common Stock.
+ Commercial Paper and certain US Government & Agency Obligations are
traded on a discount basis; the interest rates shown are the discount
rates paid at the time of purchase by the Fund.
* Represents the yield to maturity.
122
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1993 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
** Forward foreign exchange contracts as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION
EXPIRATION DATE (DEPRECIATION)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY PURCHASED
- -------------------------------------------------------------------------------------------------------------------
DM 3,467,664 January 1994 $ (32,428)
Dkr 6,835,300 January 1994 5,218
Fmk 6,510,328 January 1994 (2,818)
Lit 1,939,020,000 January 1994 3,064
NZ$ 2,524,249 January 1994 14,085
- -------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$6,674,504) $ (12,879)
- -------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- -------------------------------------------------------------------------------------------------------------------
A$ 3,560,305 January 1994 (4,234)
C$ 2,686,665 January 1994 (5,720)
DM 2,693,329 January 1994 23,356
Dkr 8,697,222 January 1994 4,571
Fmk 5,999,380 January 1994 (8,986)
L 169,400 January 1994 1,877
Lit 3,954,989,758 January 1994 37,803
Pta 113,569,246 January 1994 25,171
NZ$ 1,089,839 January 1994 (12,915)
Skr 30,430,608 January 1994 (38,213)
- -------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$15,928,966) $ 22,710
- -------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE
CONTRACTS--NET $ 9,831
----------
----------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $1,217,000, representing 2.39% of
net assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1A)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Clark Oil Co., 10.50% due 12/01/2001........................... 9/01/1993 $ 106,375 $ 108,375
Coleman Holdings Inc., 10.11% due 5/27/1998.................... 10/07/1993 311,376 324,375
Consolidated-Hydro Inc., 11.95% due 7/15/2003.................. 7/08/1993 144,849 148,750
Formica Corp., 13.125% due 9/15/2005........................... 9/17/1993 250,000 253,906
Speciality Retail Services Inc., 11.00% due 8/15/2003.......... 11/05/1993 149,625 153,750
Tucson Electric Power Co., 10.732% due 7/01/2013............... 8/03/1993 223,464 227,840
- ----------------------------------------------------------------------------------------------------------------------
TOTAL.......................................................... $1,185,689 $1,216,996
---------- ----------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
123
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC DOMESTIC
AMERICAN VALUE MONEY EQUITY
BALANCED FOCUS MARKET GROWTH
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a)......................... $111,781,051 $ 46,052,225 $170,182,924 $ 98,886,198
Cash..................................................... 14,486 -- 5,390 81,004
Interest receivable...................................... 757,630 -- 439,143 --
Dividends receivable..................................... 72,540 80,539 -- 18,820
Receivable for securities sold........................... -- -- -- --
Receivable for capital shares sold....................... 2,909,239 2,822,719 -- 2,602,952
Receivable from investment adviser (Note 2).............. -- -- 20,578 --
Deferred organization expenses (Note 1f)................. -- 3,600 4,020 --
Prepaid registration fees and other assets (Note 1f)..... 1,272 -- 9,983 1,287
Foreign cash............................................. -- -- -- --
------------ ------------ ------------ ------------
Total assets........................................... 115,536,218 48,959,083 170,662,038 101,590,261
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed...................... 20,650 -- -- 65,966
Payable for securities purchased......................... -- 1,709,155 -- 2,442,812
Payable to investment adviser (Note 2)................... 50,752 20,560 68,595 57,740
Accrued expenses and other liabilities................... 44,896 22,105 62,090 47,319
------------ ------------ ------------ ------------
Total liabilities...................................... 116,298 1,751,820 130,685 2,613,837
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................... $115,419,920 $ 47,207,263 $170,531,353 $ 98,976,424
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+........................... $ 819,974 $ 431,308 $ 17,052,862 $ 472,106
Paid-in capital in excess of par......................... 108,108,763 45,102,816 153,475,757 86,208,596
Undistributed (overdistributed) investment income--net... 1,279,064 153,585 -- --
Undistributed (accumulated) realized capital gains
(losses) and foreign currency transactions--net (Note
5)..................................................... 382,258 (84,612) -- 895,673
Unrealized appreciation/depreciation on investments and
foreign currency transactions--net..................... 4,829,861 1,604,166 2,734 11,400,049
------------ ------------ ------------ ------------
NET ASSETS............................................... $115,419,920 $ 47,207,263 $170,531,353 $ 98,976,424
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING............................... 8,199,743 4,313,085 170,528,619 4,721,063
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE.................................................. $ 14.08 $ 10.95 $ 1.00 $ 20.96
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
* Identified cost........................................ $106,951,190 $ 44,448,059 $170,180,190 $ 87,486,149
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
+ Authorized shares...................................... 100,000,000 100,000,000 100,000,000 100,000,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
124
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL GLOBAL HIGH
FLEXIBLE STRATEGY UTILITY CURRENT
STRATEGY FOCUS FOCUS INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a)......................... $190,720,601 $261,347,834 $113,131,201 $159,637,449
Cash..................................................... -- 21,132 11,335 10,518
Interest receivable...................................... 505,549 1,134,757 32,831 3,141,802
Dividends receivable..................................... 88,186 271,486 227,326 --
Receivable for securities sold........................... 3,052,707 4,725 -- --
Receivable for capital shares sold....................... 3,323,319 7,557,095 3,338,787 3,302,657
Receivable from investment adviser (Note 2).............. -- -- -- --
Deferred organization expenses (Note 1f)................. -- 4,020 5,002 --
Prepaid registration fees and other assets (Note 1f)..... 9,919 690 -- 18,844
Foreign cash............................................. -- -- -- --
------------ ------------ ------------ ------------
Total assets........................................... 197,700,281 270,341,739 116,746,482 166,111,270
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed...................... 162,370 700 -- 39,814
Payable for securities purchased......................... 2,412,620 469,904 12,128,755 2,470,980
Payable to investment adviser (Note 2)................... 94,873 136,563 48,240 72,339
Accrued expenses and other liabilities................... 253,902 107,391 52,174 99,965
------------ ------------ ------------ ------------
Total liabilities...................................... 2,923,765 714,558 12,229,169 2,683,098
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................... $194,776,516 $269,627,181 $104,517,313 $163,428,172
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+........................... $ 1,202,747 $ 2,215,515 $ 980,477 $ 1,355,661
Paid-in capital in excess of par......................... 163,437,304 252,693,893 100,371,469 156,922,503
Undistributed (overdistributed) investment income--net... 1,585,213 1,762,959 558,583 1,096,476
Undistributed (accumulated) realized capital gains
(losses) and foreign currency transactions--net (Note
5)..................................................... 6,688,557 1,249,740 34,110 (117,789)
Unrealized appreciation/depreciation on investments and
foreign currency transactions--net..................... 21,862,695 11,705,074 2,572,674 4,171,321
------------ ------------ ------------ ------------
NET ASSETS............................................... $194,776,516 $269,627,181 $104,517,313 $163,428,172
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING............................... 12,027,465 22,155,153 9,804,762 13,556,613
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE.................................................. $ 16.19 $ 12.17 $ 10.66 $ 12.06
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
* Identified cost........................................ $168,851,966 $249,630,206 $110,566,011 $155,466,128
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
+ Authorized shares...................................... 100,000,000 100,000,000 100,000,000 100,000,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
125
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL
INTERNATIONAL RESOURCES PRIME QUALITY
EQUITY FOCUS FOCUS BOND EQUITY
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a)......................... $ 74,357,154 $ 14,404,330 $305,794,971 $311,578,728
Call options purchased, at value (Cost--$131,375) (Notes
1a & 1e)............................................... 39,270 -- -- --
Unrealized appreciation on forward foreign exchange
contracts--net (Note 1h)............................... 529,800 -- -- --
Cash..................................................... 35,175 3,783 311 316,427
Interest receivable...................................... 6,240 -- 5,021,705 23,906
Dividends receivable..................................... 32,853 10,317 -- 169,031
Receivable for securities sold........................... 598,025 -- 1,044,280 2,439,313
Receivable for capital shares sold....................... 3,409,641 381,601 5,387,619 5,158,667
Receivable from investment adviser (Note 2).............. -- -- -- --
Prepaid registration fees and other assets (Note 1f)..... -- 268 9,205 5,147
Foreign cash............................................. 693,271 -- -- --
Deferred organization expenses (Note 1f)................. 6,245 -- -- --
Option receivable........................................ 41,250 -- -- --
Forward exchange contract (Note 1c)...................... 107,840 -- -- --
------------ ------------ ------------ ------------
Total assets........................................... 79,856,764 14,800,299 317,258,091 319,691,219
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Put options written, at value (premiums
received--$118,500) (Notes 1a & 1c).................... 221,740 -- -- --
Payable for capital shares redeemed...................... -- 563 55,575 128,230
Payable for securities purchased......................... 2,567,462 -- 2,856,852 9,910,287
Payable to investment adviser (Note 2)................... 42,260 8,007 129,057 122,695
Variation margin on stock index futures contracts (Note
1i).................................................... 14,358 -- -- --
Accrued expenses and other liabilities................... 43,922 14,167 125,143 110,370
Option purchase.......................................... 41,250 -- -- --
Forward exchange contract (Note 1h)...................... 19,350 -- -- --
------------ ------------ ------------ ------------
Total liabilities...................................... 2,950,342 22,737 3,166,627 10,271,582
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................... $ 76,906,422 $ 14,777,562 $314,091,464 $309,419,637
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+........................... $ 697,249 $ 136,573 $ 2,484,213 $ 1,066,357
Paid-in capital in excess of par......................... 71,655,499 14,671,581 304,396,890 266,831,740
Undistributed (overdistributed) investment income--net... 53,487 82,634 1,534,560 1,111,383
Undistributed (accumulated) realized capital gains
(losses) and foreign currency transactions--net (Note
5)..................................................... 115,051 (49,560) 4,191,345 6,554,398
Unrealized appreciation/depreciation on investments and
foreign currency transactions--net..................... 4,385,136 (63,666) 1,484,456 33,855,759
------------ ------------ ------------ ------------
NET ASSETS............................................... $ 76,906,422 $ 14,777,562 $314,091,464 $309,419,637
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING............................... 6,972,495 1,365,728 24,842,132 10,663,572
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE.................................................. $ 11.03 $ 10.82 $ 12.64 $ 29.02
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
* Identified cost........................................ $ 70,454,530 $ 14,467,976 $304,310,515 $277,722,969
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
+ Authorized shares...................................... 100,000,000 100,000,000 100,000,000 100,000,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
126
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a)...................................................... $ 30,130,004 $ 49,867,831
Unrealized appreciation on forward foreign exchange contracts (Note 1h)............... -- 9,831
Cash.................................................................................. 5,628 --
Interest receivable................................................................... 63,907 1,032,484
Dividends receivable.................................................................. -- --
Receivable for securities sold........................................................ -- --
Receivable for capital shares sold.................................................... -- 2,073,604
Receivable from investment adviser (Note 2)........................................... -- --
Deferred organization expenses (Note 1f).............................................. -- --
Prepaid registration fees and other assets (Note 1f).................................. 2,196 7,099
Foreign cash.......................................................................... -- --
------------ ------------
Total assets........................................................................ 30,201,735 52,990,849
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed................................................... -- --
Payable for securities purchased...................................................... -- 1,669,440
Payable to investment adviser (Note 2)................................................ 12,798 23,536
Accrued expenses and other liabilities................................................ 21,032 560,425
------------ ------------
Total liabilities................................................................... 33,830 2,253,401
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................................................ $ 30,167,905 $ 50,737,448
------------ ------------
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+........................................................ $ 3,016,083 $ 488,857
Paid-in capital in excess of par...................................................... 27,144,745 49,094,430
Undistributed (overdistributed) investment income--net................................ -- 257,069
Undistributed (accumulated) realized capital gains (losses)
and foreign currency transactions--net.............................................. -- 176,781
Unrealized appreciation/depreciation on investments and foreign
currency transactions--net.......................................................... 7,077 720,311
------------ ------------
NET ASSETS............................................................................ $ 30,167,905 $ 50,737,448
------------ ------------
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING............................................................ 30,160,829 4,888,571
------------ ------------
------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE.............................. $ 1.00 $ 10.38
------------ ------------
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
* Identified cost..................................................................... $ 30,122,927 $ 49,154,015
------------ ------------
------------ ------------
+ Authorized shares................................................................... 700,000,000 100,000,000
------------ ------------
------------ ------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
127
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC DOMESTIC
AMERICAN VALUE MONEY EQUITY
BALANCED FOCUS MARKET GROWTH
FUND FUND+ FUND FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*................................ $1,665,280 $ 74,035 $3,090,335 $ 222,025
Dividends*................................................... 649,751 157,366 -- 252,221
Other income................................................. -- -- -- --
---------- ---------- ---------- -----------
Total income................................................. 2,315,031 231,401 3,090,335 474,246
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................ 326,591 54,569 462,020 393,786
Transfer agent fees (Note 2)................................. 6,746 2,554 5,168 7,845
Custodian fees............................................... 21,426 8,063 9,750 27,826
Professional fees............................................ 12,276 391 16,391 9,525
Registration fees (Note 1f).................................. 25,510 9,003 43,828 19,665
Directors' fees and expenses................................. 2,149 53 2,700 2,992
Accounting services (Note 2)................................. 19,697 2,645 38,498 35,714
Pricing services............................................. -- -- -- --
Amortization of organization expenses (Note 1f).............. -- 400 -- --
Other........................................................ 1,927 138 3,361 1,789
---------- ---------- ---------- -----------
Total expenses before reimbursement.......................... 416,322 77,816 581,716 499,142
Reimbursement of expenses (Note 2)........................... -- -- (246,351) --
---------- ---------- ---------- -----------
Total expenses--net of reimbursement......................... 416,322 77,816 335,365 499,142
---------- ---------- ---------- -----------
Investment income (loss)--net................................ 1,898,709 153,585 2,754,970 (24,896)
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1E & 3):
Realized gain (loss) on investments--net..................... 381,401 (84,612) 41,187 3,639,264
Realized gain (loss) on foreign currency transactions--net... -- -- -- --
Change in unrealized appreciation/depreciation on
investments--net........................................... 3,571,478 1,604,166 (1,652) 7,724,322
Change in unrealized appreciation/depreciation on currency
transactions--net.......................................... -- -- -- --
---------- ---------- ---------- -----------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net......................... 3,952,879 1,519,554 39,535 11,363,586
---------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................. $5,851,588 $1,673,139 $2,794,505 $11,338,690
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------
* Net of withholding tax..................................... $ -- $ 712 $ -- $ 370
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Fund commenced operations on July 1, 1993.
See Notes to Financial Statements.
128
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL GLOBAL HIGH
FLEXIBLE STRATEGY UTILITY CURRENT
STRATEGY FOCUS FOCUS INCOME
FUND FUND FUND+ FUND
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*............................. $ 2,373,016 $ 1,747,217 $ 307,737 $ 7,404,967
Dividends*................................................ 1,403,692 1,199,987 581,834 52,902
Other income.............................................. 13,604 -- -- 3,162
----------- ----------- ---------- -----------
Total income.............................................. 3,790,312 2,947,204 889,571 7,461,031
----------- ----------- ---------- -----------
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................... 803,592 582,082 142,995 439,699
Transfer agent fees (Note 2).............................. 7,841 5,840 2,653 7,411
Custodian fees............................................ 50,668 89,850 25,126 26,730
Professional fees......................................... 21,558 12,508 1,379 10,342
Registration fees (Note 1f)............................... 32,546 53,895 28,706 30,644
Directors' fees and expenses.............................. 6,679 1,580 134 2,347
Accounting services (Note 2).............................. 58,069 31,561 9,227 50,406
Pricing services.......................................... 6,355 7,439 1,210 2,108
Amortization of organization expenses (Note 1f)........... -- 1,340 435 --
Other..................................................... 5,626 1,485 215 2,136
----------- ----------- ---------- -----------
Total expenses before reimbursement....................... 992,934 787,580 212,080 571,823
Reimbursement of expenses (Note 2)........................ -- -- -- --
----------- ----------- ---------- -----------
Total expenses--net of reimbursement...................... 992,934 787,580 212,080 571,823
----------- ----------- ---------- -----------
Investment income (loss)--net............................. 2,797,378 2,159,624 677,491 6,889,208
----------- ----------- ---------- -----------
- -----------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1E & 3):
Realized gain (loss) on investments--net.................. 6,460,171 1,230,629 33,513 615,071
Realized gain (loss) on foreign currency
transactions--net....................................... 238,214 34,587 597 --
Change in unrealized appreciation/depreciation on
investments--net........................................ 11,288,425 11,704,702 2,565,190 4,541,949
Change in unrealized appreciation/depreciation on currency
transactions--net....................................... (5,532) (10,236) 7,484 --
----------- ----------- ---------- -----------
Total realized and unrealized gain (loss) on investments
and foreign currency transactions--net.................. 17,981,278 12,959,682 2,606,784 5,157,020
----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS.............................................. $20,778,656 $15,119,306 $3,284,275 $12,046,228
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
- -----------------------------------------------------------------------------------------------------------------------
* Net of withholding tax.................................. $ 54,406 $ 124,209 $ 18,294 $ --
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Fund commenced operations on July 1, 1993.
See Notes to Financial Statements.
129
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL NATURAL
EQUITY RESOURCES PRIME QUALITY
FOCUS FOCUS BOND EQUITY
FUND+ FUND FUND FUND
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*................................ $ 132,598 $ 28,031 $11,866,781 $ 665,734
Dividends*................................................... 124,532 198,183 -- 2,281,319
Other income................................................. -- -- 108,833 --
---------- -------- ----------- -----------
Total income................................................. 257,130 226,214 11,975,614 2,947,053
---------- -------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................ 133,754 59,420 918,563 874,617
Transfer agent fees (Note 2)................................. 2,569 6,880 10,265 7,475
Custodian fees............................................... 43,366 12,643 33,099 31,890
Professional fees............................................ 1,011 4,339 34,485 31,658
Registration fees (Note 1f).................................. 16,806 2,491 70,039 60,423
Directors' fees and expenses................................. 118 379 7,148 7,328
Accounting services (Note 2)................................. 5,079 16,397 40,300 57,796
Pricing services............................................. 100 -- 41,374 --
Amortization of organization expenses (Note 1f).............. 700 -- -- --
Other........................................................ 140 768 5,849 5,734
---------- -------- ----------- -----------
Total expenses before reimbursement.......................... 203,643 103,317 1,161,122 1,076,921
Reimbursement of expenses (Note 2)........................... -- -- -- --
---------- -------- ----------- -----------
Total expenses--net of reimbursement......................... 203,643 103,317 1,161,122 1,076,921
---------- -------- ----------- -----------
Investment income (loss)--net................................ 53,487 122,897 10,814,492 1,870,132
---------- -------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1E & 3):
Realized gain (loss) on investments--net..................... (176,770) 64,649 4,199,723 6,568,052
Realized gain (loss) on foreign currency transactions--net... 291,821 42 -- (8)
Change in unrealized appreciation/depreciation on
investments--net........................................... 4,048,621 (85,110) 200,559 20,450,896
Change in unrealized appreciation/depreciation on currency
transactions--net.......................................... 336,515 (24) -- --
---------- -------- ----------- -----------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net......................... 4,500,187 (20,443) 4,400,282 27,018,940
---------- -------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................. $4,553,674 $102,454 $15,214,774 $28,889,072
---------- -------- ----------- -----------
---------- -------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------
* Net of withholding tax..................................... $ 13,838 $ 5,359 $ -- $ 40,626
---------- -------- ----------- -----------
---------- -------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Fund commenced operations on July 1, 1993.
See Notes to Financial Statements.
130
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND+
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*............................................................. $953,880 $1,041,858
Dividends*................................................................................ -- --
Other income.............................................................................. -- --
-------- ----------
Total income.............................................................................. 953,880 1,041,858
-------- ----------
- --------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................................................... 141,301 88,050
Transfer agent fees (Note 2).............................................................. 7,154 2,575
Custodian fees............................................................................ 7,950 16,568
Professional fees......................................................................... 7,986 665
Registration fees (Note 1f)............................................................... 994 11,505
Directors' fees and expenses.............................................................. 2,210 106
Accounting services (Note 2).............................................................. 27,119 4,865
Amortization of organization expenses (Note 1f)........................................... -- 789
Pricing services.......................................................................... -- 12,114
Other..................................................................................... 1,717 133
-------- ----------
Total expenses before reimbursement....................................................... 196,431 137,370
Reimbursement of expenses (Note 2)........................................................ -- --
-------- ----------
Total expenses--net of reimbursement...................................................... 196,431 137,370
-------- ----------
Investment income (loss)--net............................................................. 757,449 904,488
-------- ----------
- --------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1E & 3):
Realized gain (loss) on investments--net.................................................. 15,302 101,414
Realized gain (loss) on foreign currency transactions--net................................ -- 75,366
Change in unrealized appreciation/depreciation on investments--net........................ (173) 713,816
Change in unrealized appreciation/depreciation on currency transactions--net.............. -- 6,495
-------- ----------
Total realized and unrealized gain (loss) on investments and foreign currency
transactions--net....................................................................... 15,129 897,091
-------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................... $772,578 $1,801,579
-------- ----------
-------- ----------
- --------------------------------------------------------------------------------------------------------------------
* Net of withholding tax.................................................................. $ -- $ 11,636
-------- ----------
-------- ----------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Fund commenced operations on July 1, 1993.
See Notes to Financial Statements.
131
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
-----------------------------
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1993 1992
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net.............................................................. $ 1,898,709 $ 551,068
Realized gain on investments and foreign currency transactions--net................. 381,401 228,607
Change in unrealized appreciation/depreciation on investments--net.................. 3,571,478 415,741
------------ -----------
Net increase in net assets resulting from operations................................ 5,851,588 1,195,416
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net.............................................................. (975,251) (342,416)
Realized and unrealized gain on investments--net.................................... (227,751) (185,720)
------------ -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders...................................................................... (1,203,002) (528,136)
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions.................. 85,853,104 16,314,371
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets........................................................ 90,501,690 16,981,651
Beginning of period................................................................. 24,918,230 7,936,579
------------ -----------
End of period*...................................................................... $115,419,920 $24,918,230
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.............................................. $ 1,279,064 $ 355,606
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
132
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
-------------------------------
FOR THE PERIOD JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSETS: DECEMBER 31, 1993
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net.............................................................. $ 153,585
Realized gain (loss) on investments and foreign currency transactions--net.......... (84,612)
Change in unrealized appreciation/depreciation on investments--net.................. 1,604,166
-------------
Net increase in net assets resulting from operations................................ 1,673,139
-------------
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net.............................................................. --
Realized and unrealized gain on investments--net.................................... --
-------------
Net decrease in net assets resulting from dividends and distributions to
shareholders...................................................................... --
-------------
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions.................. 43,534,024
-------------
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets........................................................ 45,207,163
Beginning of period................................................................. 2,000,100
-------------
End of period*...................................................................... $47,207,263
-------------
-------------
- ----------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.............................................. $ 153,585
-------------
-------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
133
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
DOMESTIC MONEY ----------------------------
MARKET FUND
- ------------------------------------------- FOR THE YEAR ENDED DECEMBER
FOR THE YEAR FOR THE PERIOD 31,
ENDED FEBRUARY 20, 1992+ ----------------------------
DECEMBER 31, 1993 TO DECEMBER 31, 1992 1993 1992
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
$ 2,754,970 $ 507,987 $ (24,896) $ 5,872
41,187 16,865 3,639,264 (391,529)
(1,652) 4,386 7,724,322 983,789
- ----------------- -------------------- ----------- -----------
2,794,505 529,238 11,338,690 598,132
- ----------------- -------------------- ----------- -----------
- ---------------------------------------------------------------------------------
(2,754,970) (507,987) (5,834) (47,447)
(41,187) (16,865) -- --
- ----------------- -------------------- ----------- -----------
(2,796,157) (524,852) (5,834) (47,447)
- ----------------- -------------------- ----------- -----------
- ---------------------------------------------------------------------------------
129,405,088 39,123,431 64,476,432 11,298,272
- ----------------- -------------------- ----------- -----------
- ---------------------------------------------------------------------------------
129,403,436 39,127,817 75,809,289 11,848,957
41,127,917 2,000,100 23,167,135 11,318,178
- ----------------- -------------------- ----------- -----------
$ 170,531,353 $ 41,127,917 $98,976,424 $23,167,135
- ----------------- -------------------- ----------- -----------
- ----------------- -------------------- ----------- -----------
- ---------------------------------------------------------------------------------
$ -- $ -- $ -- $ --
- ----------------- -------------------- ----------- -----------
- ----------------- -------------------- ----------- -----------
- ---------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
134
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
-----------------------------
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1993 1992
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net.............................................................. $ 2,797,378 $ 1,666,621
Realized gain (loss) on investments and foreign currency transactions--net.......... 6,698,385 2,290,915
Change in unrealized appreciation/depreciation on investments--net.................. 11,288,425 (488,639)
Change in unrealized appreciation/depreciation on currency transactions--net........ (5,532) (3,631)
------------ -----------
Net increase in net assets resulting from operations................................ 20,778,656 3,465,266
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net.............................................................. (1,224,834) (2,438,767)
Realized and unrealized gain on investments--net.................................... (235,661) (3,175,999)
------------ -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders...................................................................... (1,460,495) (5,614,766)
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions.................. 92,909,143 29,477,979
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets........................................................ 112,227,304 27,328,479
Beginning of period................................................................. 82,549,212 55,220,733
------------ -----------
End of period*...................................................................... $194,776,516 $82,549,212
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.............................................. $ 1,585,213 $ 9,152
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
135
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
- ------------------------------------------- GLOBAL UTILITY FOCUS FUND
FOR THE YEAR FOR THE PERIOD -------------------------------
ENDED FEBRUARY 28, 1992+ FOR THE PERIOD JULY 1, 1993+ TO
DECEMBER 31, 1993 TO DECEMBER 31, 1992 DECEMBER 31, 1993
<S> <C> <C>
- ------------------------------------------------------------------------------------
$ 2,159,624 $ 164,192 $ 677,491
1,265,216 (15,476) 34,110
11,704,702 12,926 2,565,190
(10,236) (2,318) 7,484
- ----------------- -------------------- ---------------
15,119,306 159,324 3,284,275
- ----------------- -------------------- ---------------
- ------------------------------------------------------------------------------------
(531,339) (29,518) (118,908)
-- -- --
- ----------------- -------------------- ---------------
(531,339) (29,518) (118,908)
- ----------------- -------------------- ---------------
- ------------------------------------------------------------------------------------
239,511,867 13,397,441 99,351,846
- ----------------- -------------------- ---------------
- ------------------------------------------------------------------------------------
254,099,834 13,527,247 102,517,213
15,527,347 2,000,100 2,000,100
- ----------------- -------------------- ---------------
$ 269,627,181 $ 15,527,347 $ 104,517,313
- ----------------- -------------------- ---------------
- ----------------- -------------------- ---------------
- ------------------------------------------------------------------------------------
$ 1,762,959 $ 134,674 $ 558,583
- ----------------- -------------------- ---------------
- ----------------- -------------------- ---------------
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
136
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
-----------------------------
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1993 1992
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net.............................................................. $ 6,889,208 $ 1,671,914
Realized gain (loss) on investments and foreign currency transactions--net.......... 615,071 120,708
Change in unrealized appreciation/depreciation on investments--net.................. 4,541,949 760,863
Change in unrealized appreciation/depreciation on currency transactions--net........ -- --
------------ -----------
Net increase in net assets resulting from operations................................ 12,046,228 2,553,485
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net.............................................................. (6,035,740) (1,522,781)
Realized and unrealized gain on investments--net.................................... -- --
------------ -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders...................................................................... (6,035,740) (1,522,781)
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions.................. 131,074,555 15,663,036
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets........................................................ 137,085,043 16,693,740
Beginning of period................................................................. 26,343,129 9,649,389
------------ -----------
End of period*...................................................................... $163,428,172 $26,343,129
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.............................................. $ 1,096,476 $ 243,004
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
137
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS
FUND
---------------------------
INTERNATIONAL EQUITY FOCUS FUND FOR THE YEAR ENDED
- ------------------------------- DECEMBER 31,
FOR THE PERIOD JULY 1, 1993+ TO ---------------------------
DECEMBER 31, 1993 1993 1992
<S> <C> <C>
- --------------------------------------------------------------------
$ 53,487 $ 122,897 $ 71,479
115,051 64,691 (110,450)
4,048,621 (85,110) 81,927
336,515 (24) 4
------------- ----------- ----------
4,553,674 102,454 42,960
------------- ----------- ----------
- --------------------------------------------------------------------
-- (40,449) (106,437)
-- -- (19,447)
------------- ----------- ----------
-- (40,449) (125,884)
------------- ----------- ----------
- --------------------------------------------------------------------
64,352,648 10,571,877 1,142,825
------------- ----------- ----------
- --------------------------------------------------------------------
68,906,322 10,633,882 1,060,001
8,000,100 4,143,680 3,083,679
------------- ----------- ----------
$76,906,422 $14,777,562 $4,143,680
------------- ----------- ----------
------------- ----------- ----------
- --------------------------------------------------------------------
$ 53,487 $ 82,634 $ 186
------------- ----------- ----------
------------- ----------- ----------
- --------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
138
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME BOND FUND
-----------------------------
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1993 1992
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net.............................................................. $ 10,814,492 $ 3,773,379
Realized gain (loss) on investments and foreign currency transactions--net.......... 4,199,723 1,133,106
Change in unrealized appreciation/depreciation on investments--net.................. 200,559 (935,353)
Change in unrealized appreciation/depreciation on currency transactions--net........ -- --
------------ -----------
Net increase in net assets resulting from operations................................ 15,214,774 3,971,132
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net.............................................................. (9,710,533) (3,604,131)
Realized and unrealized gain on investments--net.................................... (752,637) --
------------ -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders...................................................................... (10,463,170) (3,604,131)
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share transactions....... 224,530,037 44,700,280
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets............................................. 229,281,641 45,067,281
Beginning of period................................................................. 84,809,823 39,742,542
------------ -----------
End of period*...................................................................... $314,091,464 $84,809,823
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net.............................................. $ 1,534,560 $ 430,601
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
139
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUALITY EQUITY FUND RESERVE ASSETS FUND
- ----------------------------- ----------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED WORLD INCOME FOCUS FUND
DECEMBER 31, DECEMBER 31, -------------------------------
- ----------------------------- ---------------------------- FOR THE PERIOD JULY 1, 1993+ TO
1993 1992 1993 1992 DECEMBER 31, 1993
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 1,870,132 $ 1,015,610 $ 757,449 $ 940,130 $ 904,488
6,568,044 2,097,924 15,302 45,971 176,780
20,450,896 202,444 (173) (25,438) 713,816
-- -- -- -- 6,495
- ------------ ----------- ----------- ----------- -------------
28,889,072 3,315,978 772,578 960,663 1,801,579
- ------------ ----------- ----------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------
(758,750) (1,554,668) (757,449) (940,130) (647,419)
(236,123) (2,663,160) (15,302) (13,284) --
- ------------ ----------- ----------- ----------- -------------
(994,873) (4,217,828) (772,751) (953,414) (647,419)
- ------------ ----------- ----------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------
193,548,727 33,873,740 3,400,720 (7,602,390) 41,583,188
- ------------ ----------- ----------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------
221,442,926 32,971,890 3,400,547 (7,595,141) 42,737,348
87,976,711 55,004,821 26,767,358 34,362,499 8,000,100
- ------------ ----------- ----------- ----------- -------------
$309,419,637 $87,976,711 $30,167,905 $26,767,358 $50,737,448
- ------------ ----------- ----------- ----------- -------------
- ------------ ----------- ----------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------
$ 1,111,383 $ (106,252) $ -- $ -- $ 257,069
- ------------ ----------- ----------- ----------- -------------
- ------------ ----------- ----------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
140
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN -------------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL
STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period.......................... $ 12.85 $ 12.82 $ 11.26 $ 11.74 $ 10.41
--------- -------- -------- -------- --------
Investment income--net....................................... .32 .31 .47 .47 .44
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net......................... 1.37 .37 1.76 (.35) 1.40
--------- -------- -------- -------- --------
Total from investment operations............................. 1.69 .68 2.23 .12 1.84
--------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net..................................... (.34) (.37) (.49) (.46) (.50)
Realized gain on investments--net.......................... (.12) (.28) (.18) (.14) (.01)
--------- -------- -------- -------- --------
Total dividends and distributions............................ (.46) (.65) (.67) (.60) (.51)
--------- -------- -------- -------- --------
Net asset value, end of period............................... $ 14.08 $ 12.85 $ 12.82 $ 11.26 $ 11.74
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share........................... 13.49% 5.72% 20.65% 1.22% 18.11%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... .70% .97% 1.20% 1.25% 1.25%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Expenses..................................................... .70% .97% 1.20% 1.50% 2.29%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Investment income (loss)--net................................ 3.20% 3.71% 4.16% 4.71% 4.71%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Investment income--net, and realized gain (loss) on
investments--net........................................... -- -- -- -- --
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $ 115,420 $ 24,918 $ 7,937 $ 5,675 $ 3,854
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Portfolio turnover........................................... 12.55% 36.34% 50.82% 23.52% 37.60%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
141
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL
STATEMENTS.
INCREASE (DECREASE) IN NET ASSET VALUE: BASIC VALUE
FOCUS FUND DOMESTIC MONEY MARKET FUND
-------------------- -----------------------------------------
FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
JULY 1, 1993+ ENDED FEBRUARY 28, 1992+
TO DECEMBER 31, 1993 DECEMBER 31, 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period............... $ 10.00 $ 1.00 $ 1.00
-------- ----------------- --------
Investment income--net............................ .04 .0302 .0302
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net.......... .91 .0005 .0013
-------- ----------------- --------
Total from investment operations.................. .95 .0307 .0315
-------- ----------------- --------
Less dividends and distributions:
Investment income--net.......................... -- (.0302) (.0302)
Realized gain on investments--net............... -- (.0005) (.0010)
-------- ----------------- --------
Total dividends and distributions................. -- (.0307) (.0312)
-------- ----------------- --------
Net asset value, end of period.................... $ 10.95 $ 1.00 $ 1.00
-------- ----------------- --------
-------- ----------------- --------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................ 9.50%++ 3.10 3.16%++
-------- ----------------- --------
-------- ----------------- --------
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................... .86%* .36% .32%*
-------- ----------------- --------
-------- ----------------- --------
Expenses.......................................... .86%* .63% .88%*
-------- ----------------- --------
-------- ----------------- --------
Investment income (loss)--net..................... 1.69%* -- --
-------- ----------------- --------
-------- ----------------- --------
Investment income--net, and realized gain (loss)
on investments--net............................. --* 3.03% 3.48%*
-------- ----------------- --------
-------- ----------------- --------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $ 47,207 $ 170,531 $ 41,128
-------- ----------------- --------
-------- ----------------- --------
Portfolio turnover................................ 30.86% -- --
-------- ----------------- --------
-------- ----------------- --------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
142
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN ------------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993++ 1992++ 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period........................... $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75
-------- -------- -------- -------- --------
Investment income--net........................................ (.01) .01 .09 .05 (.07)
Realized and unrealized gain (loss) on investments--net....... 3.17 (.10) 5.91 (1.77) 2.02
-------- -------- -------- -------- --------
Total from investment operations.............................. 3.16 (.09) 6.00 (1.72) 1.95
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net...................................... -- (.07) (.02) -- --
Realized gain on investments--net........................... -- -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions............................. -- (.07) (.02) -- --
-------- -------- -------- -------- --------
Net asset value, end of period................................ $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share............................ 17.78% (0.53%) 50.10% (12.55%) 16.60%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................ .96% 1.18% 1.25% 1.25% 1.25%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Expenses...................................................... .96% 1.18% 1.28% 1.47% 1.53%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Investment income (loss)--net................................. (.05%) .04% .51% .14% (.68%)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Investment income--net, and realized gain (loss) on
investments--net............................................ -- -- -- -- --
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................... $ 98,976 $ 23,167 $ 11,318 $ 6,851 $ 6,811
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Portfolio turnover............................................ 131.75% 98.64% 79.10% 135.24% 100.49%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
++ Based on average number of shares outstanding during the year.
See Notes to Financial Statements.
143
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN -------------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL
STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period.......................... $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84
--------- -------- -------- -------- --------
Investment income--net....................................... .28 .33 .47 .65 .48
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net......................... 1.94 .25 2.52 (.08) 1.67
--------- -------- -------- -------- --------
Total from investment operations............................. 2.22 .58 2.99 .57 2.15
--------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net..................................... (.15) (.54) (.66) (.46) (.55)
Realized gain on investments--net.......................... (.03) (.68) (.09) -- --
--------- -------- -------- -------- --------
Total dividends and distributions............................ (.18) (1.22) (.75) (.46) (.55)
--------- -------- -------- -------- --------
Net asset value, end of period............................... $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share........................... 15.80% 4.25% 24.98% 4.81% 20.29%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... .80% .90% .96% 1.08% 1.19%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Expenses..................................................... .80% .90% .96% 1.08% 1.19%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Investment income--net....................................... 2.26% 2.62% 3.51% 5.19% 3.94%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Investment income--net, and realized gain (loss) on
investments--net........................................... -- -- -- -- --
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $ 194,777 $82,549 $ 55,221 $ 47,428 $47,837
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Portfolio turnover........................................... 56.42% 55.25% 67.13% 52.95% 83.31%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
144
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN
DERIVED FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS.
INCREASE (DECREASE) IN NET ASSET VALUE: GLOBAL STRATEGY FOCUS GLOBAL UTILITY FOCUS
FUND FUND
----------------------------------------- --------------------
FOR THE YEAR FOR THE PERIOD FOR THE PERIOD
ENDED FEBRUARY 28, 1992+ JULY 1, 1993+
DECEMBER 31, 1993 TO DECEMBER 31, 1992 TO DECEMBER 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period......... $ 10.22 $ 10.00 $ 10.00
----------------- -------- ----------
Investment income--net...................... .07 .13 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net......................... 1.96 .13 .64
----------------- -------- ----------
Total from investment operations............ 2.03 .26 .68
----------------- -------- ----------
Less dividends and distributions:
Investment income--net.................... (.08) (.04) (.02)
Realized gain on investments--net......... -- -- --
----------------- -------- ----------
Total dividends and distributions........... (.08) (.04) (.02)
----------------- -------- ----------
Net asset value, end of period.............. $ 12.17 $ 10.22 $ 10.66
----------------- -------- ----------
----------------- -------- ----------
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 21.03% 2.62%++ 6.85%++
----------------- -------- ----------
----------------- -------- ----------
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............. .88% 1.25%* .89%*
----------------- -------- ----------
----------------- -------- ----------
Expenses.................................... .88% 1.35%* .89%*
----------------- -------- ----------
----------------- -------- ----------
Investment income--net...................... 2.41% 2.66%* 2.84%*
----------------- -------- ----------
----------------- -------- ----------
Investment income--net, and realized gain
(loss) on investments--net................ -- -- --
----------------- -------- ----------
----------------- -------- ----------
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $ 269,627 $15,527 $104,517
----------------- -------- ----------
----------------- -------- ----------
Portfolio turnover.......................... 17.07% 14.47% 1.72%
----------------- -------- ----------
----------------- -------- ----------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
145
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN --------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period........................... $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85
--------- -------- ------ ------ -------
Investment income--net........................................ .95 1.07 1.19 1.40 1.29
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................. .95 .90 2.10 (2.08) (.64)
--------- -------- ------ ------ -------
Total from investment operations.............................. 1.90 1.97 3.29 (.68) .65
--------- -------- ------ ------ -------
Less dividends and distributions:
Investment income--net...................................... (.97) (1.07) (1.20) (1.39) (1.29)
Realized gain on investments--net........................... -- -- -- -- --
--------- -------- ------ ------ -------
Total dividends and distributions............................. (.97) (1.07) (1.20) (1.39) (1.29)
--------- -------- ------ ------ -------
Net asset value, end of period................................ $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share............................ 17.84% 20.05% 43.00% (7.63%) 6.14%
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................ .72% .89% 1.10% 1.15% 1.22%
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
Expenses...................................................... .72% .89% 1.10% 1.15% 1.22%
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
Investment income--net........................................ 8.62% 10.06% 12.49% 14.52% 11.98%
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
Investment income--net, and realized gain (loss) on
investments--net............................................ -- -- -- -- --
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................... $ 163,428 $26,343 $9,649 $8,106 $12,942
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
Portfolio turnover............................................ 35.67% 28.21% 51.54% 26.43% 53.52%
--------- -------- ------ ------ -------
--------- -------- ------ ------ -------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
146
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOCUS FUND
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ----------------------------
FOR THE PERIOD JULY 1, 1993+
INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31, 1993
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period................................................... $ 10.00
--------
Investment income--net................................................................ .01
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net................................................................... 1.02
--------
Total from investment operations...................................................... 1.03
--------
Less dividends and distributions:
Investment income--net.............................................................. --
Realized gain on investments--net................................................... --
--------
Total dividends and distributions..................................................... --
--------
Net asset value, end of period........................................................ $ 11.03
--------
--------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................................... 10.30%++
--------
--------
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................................ 1.14%*
--------
--------
Expenses.............................................................................. 1.14%*
--------
--------
Investment income (loss)--net......................................................... 0.30%*
--------
--------
Investment income--net, and realized gain (loss) on investments--net.................. -- %
--------
--------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................................. $ 76,906
--------
--------
Portfolio turnover.................................................................... 17.39%
--------
--------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
147
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM ------------------------------------------------------------
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period........................... $ 9.84 $ 10.06 $ 10.17 $ 11.09 $ 9.58
-------- -------- -------- -------- --------
Investment income--net........................................ .11 .18 .25 .22 .24
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................. .92 (.05) (.11) (.90) 1.49
-------- -------- -------- -------- --------
Total from investment operations.............................. 1.03 .13 .14 (.68) 1.73
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net...................................... (.05) (.29) (.25) (.24) (.22)
Realized gain on investments--net........................... -- (.06) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions............................. (.05) (.35) (.25) (.24) (.22)
-------- -------- -------- -------- --------
Net asset value, end of period................................ $ 10.82 $ 9.84 $ 10.06 $ 10.17 $ 11.09
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share............................ 10.47% 1.36% 1.36% (6.21%) 18.23%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................ 1.13% 1.25% 1.25% 1.25% 1.25%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Expenses...................................................... 1.13% 1.27% 1.30% 1.38% 1.74%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Investment income--net........................................ 1.34% 2.00% 2.31% 2.26% 2.26%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Investment income--net, and realized gain (loss) on
investments--net............................................ -- % -- % -- % -- % -- %
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................... $ 14,778 $ 4,144 $ 3,084 $ 3,247 $ 2,704
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Portfolio turnover............................................ 58.44% 22.88% 31.38% 27.61% 93.97%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
148
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME BOND FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN --------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL
STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period......................... $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81
-------- ------- ------- ------- -------
Investment income--net...................................... .70 .79 .90 .88 .90
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ .71 .04 .84 (.12) .48
-------- ------- ------- ------- -------
Total from investment operations............................ 1.41 .83 1.74 .76 1.38
-------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net.................................... (.70) (.81) (.90) (.87) (.90)
Realized gain on investments--net......................... (.11) -- -- -- --
-------- ------- ------- ------- -------
Total dividends and distributions........................... (.81) (.81) (.90) (.87) (.90)
-------- ------- ------- ------- -------
Net asset value, end of period.............................. $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.......................... 12.02% 7.27% 16.41% 7.13% 13.29%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............................. .63% .78% .78% 1.06% 1.16%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Expenses.................................................... .63% .78% .78% 1.06% 1.16%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Investment income--net...................................... 5.86% 6.76% 7.94% 8.01% 8.12%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $314,091 $84,810 $39,743 $34,655 $29,593
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Portfolio turnover.......................................... 115.26% 82.74% 152.18% 155.17% 144.52%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
149
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN ---------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL
STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period........................ $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94
--------- ------- ------- ------- -------
Investment income--net..................................... .24 .34 .43 .47 .50
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... 3.46 .32 5.75 (.38) 4.96
--------- ------- ------- ------- -------
Total from investment operations........................... 3.70 .66 6.18 .09 5.46
--------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................... (.12) (.58) (.50) (.41) (.52)
Realized gain on investments--net........................ (.04) (.95) (1.05) (.84) --
--------- ------- ------- ------- -------
Total dividends and distributions.......................... (.16) (1.53) (1.55) (1.25) (.52)
--------- ------- ------- ------- -------
Net asset value, end of period............................. $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share......................... 14.57% 2.69% 30.18% 0.66% 30.77%
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................. .62% .74% .79% .94% 1.05%
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Expenses................................................... .62% .74% .79% .94% 1.05%
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Investment income--net..................................... 1.07% 1.54% 1.87% 2.36% 2.58%
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................... $ 309,420 $87,977 $55,005 $39,470 $31,467
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Portfolio turnover......................................... 88.25% 62.54% 55.83% 69.05% 44.23%
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
150
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN -------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Investment income--net........................................ .0268 .0320 .0546 .0730 .0822
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................. .0005 .0007 .0014 .0019 .0012
------- ------- ------- ------- -------
Total from investment operations.............................. .0273 .0327 .0560 .0749 .0834
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net...................................... (.0268) (.0320) (.0546) (.0730) (.0822)
Realized gain on investments--net........................... (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+
------- ------- ------- ------- -------
Total dividends and distributions............................. (.0273) (.0325) (.0560) (.0749) (.0834)
------- ------- ------- ------- -------
Net asset value, end of period................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share............................ 2.77% 3.29% 5.68% 7.65% 8.62%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................................... .70% .79% .79% .97% 1.03%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Investment income--net, and realized gain (loss) on
investments--net............................................ 2.73% 3.36% 5.64%+ 7.46%+ 8.34%+
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................... $30,168 $26,767 $34,362 $35,871 $29,311
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Includes unrealized gain (loss). (See Note 1g.)
See Notes to Financial Statements.
151
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN WORLD INCOME FOCUS FUND
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. -------------------------------
FOR THE PERIOD JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1993
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period................................................. $ 10.00
--------
Investment income--net.............................................................. .25
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net................................................................. .33
--------
Total from investment operations.................................................... .58
--------
Less dividends and distributions:
Investment income--net............................................................ (.20)
Realized gain on investments--net................................................. --
--------
Total dividends and distributions................................................... (.20)
--------
Net asset value, end of period...................................................... $ 10.38
--------
--------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.................................................. 5.90%++
--------
--------
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...................................................... .94%*
--------
--------
Expenses............................................................................ .94%*
--------
--------
Investment income (loss)--net....................................................... 6.20%*
--------
--------
Investment income--net, and realized gain (loss) on investments--net................ -- %
--------
--------
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................................ $50,737
--------
--------
Portfolio turnover.................................................................. 54.80%
--------
--------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
152
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which is comprised of fourteen separate funds
offering fourteen separate classes of shares to the Merrill Lynch Life Insurance
Company, ML Life Insurance Company of New York (indirect wholly-owned
subsidiaries of Merrill Lynch & Co., Inc.), and Family Life Insurance Company
(an insurance company not affiliated with Merrill Lynch & Co., Inc.) separate
accounts to fund benefits under certain variable annuity contracts. Each Fund is
classified as "diversified", as defined in the Investment Company Act of 1940,
except for Natural Resources Focus Fund and the Global Strategy Focus Fund, each
of which is classified as "non-diversified." The following is a summary of
significant accounting policies followed by the Funds.
(a) Valuation of investments--Money market securities maturing more than sixty
days after the valuation date are valued at the most recent bid price or yield
equivalent as obtained from dealers that make markets in the securities. When
such securities are valued with sixty days or less to maturity, the difference
between the valuation existing on the sixty-first day before maturity and
maturity value is amortized on a straight-line basis to maturity. Investments
maturing within sixty days from their date of acquisition are valued at
amortized cost which approximates market.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the mean between
the bid and asked prices or yield equivalent as obtained from one or more
dealers that make markets in such securities. Portfolio securities which are
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market, and it is expected
that for debt securities this ordinarily will be the over-the-counter market.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Company.
Options which are traded on exchanges are valued at the last bid price in the
case of options purchased and last asked price in the case of options written.
Financial future contracts are valued at settlement price at the close of the
applicable exchange.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) receivables or payables expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(c) Options--Flexible Strategy, Quality Equity, Natural Resources Focus,
American Balanced, Global Strategy Focus, Basic Value Focus, World Income Focus,
Global Utility Focus, and International Equity Focus Funds may write covered
call options and purchase put options. When these Funds write an option, an
amount equal to the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked to
market to reflect the current market value of the option written.
When a written call option is exercised, the related premium received is added
to the proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction is less than or greater than the premiums
received or paid).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment
153
<PAGE>
- --------------------------------------------------------------------------------
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required. Under the
applicable foreign tax law, a withholding tax may be imposed on interest,
dividends and capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the funds are informed of the ex-dividend date. Interest
income (including amortization of premium and discount) is recognized on the
accrual basis. Realized gains and losses on security transactions are determined
on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Funds
are recorded on the ex-dividend dates. This method maintains the Funds' current
valuation of investment policy (see Note 1a). However, unrealized appreciation
or depreciation will not be included in the daily dividend to shareholders.
Dividends are declared from the total of net investment income and net realized
gain or loss on investments.
(h) Foreign exchange contracts--The Funds are authorized to enter into forward
foreign exchange contracts as a hedge against either specific transactions or
portfolio positions. Such contracts are not entered on the Funds' records.
However, the effect on operations is recorded from the date the Funds enter into
such contracts. Premium or discount is amortized over the life of the contracts.
(i) Reclassifications--Certain 1992 amounts have been reclassified to conform
to the 1993 presentation.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management ("MLAM"). MLAM is the name under which Merrill Lynch Investment
Management, Inc. ("MLIM") does business. MLIM is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. MLAM is responsible for the management
of the Company's portfolios and provided the necessary personnel, facilities,
equipment and certain other services necessary to the operations of the Funds.
Effective January 1, 1994, the investment advisory business of MLAM was
reorganized from a corporation to a limited partnership. The general partner of
MLAM is Princeton Services, Inc., an indirect wholly-owned subsidiary of Merrill
Lynch & Co. The limited partners are Merrill Lynch & Co. and MLIM.
For such services, the Company pays a monthly fee based upon the average
daily value of each Fund's net assets at the following annual rates: American
Balanced Fund, 0.55% of the average daily net assets of the Fund; Basic Value
Focus Fund, 0.60% of average daily net assets of the Fund; Domestic Money Market
Fund, 0.50% of the average daily net assets of the Fund; Equity Growth Fund,
0.75% of the average daily net assets of the Fund; Flexible Strategy Fund, 0.65%
of the average daily net assets of the Fund; Global Strategy Focus Fund, 0.65%
of the average daily net assets of the Fund; Global Utility Focus, 0.60% of the
average daily net assets of the Fund; High Current Income Fund, 0.55% of the
Fund's average daily net assets not exceeding $250 million, and at reduced rates
for average daily net assets in excess of $250 million; International Equity
Focus, 0.75% of average daily net assets of the Fund; Natural Resources Focus
Fund, 0.65% of the average daily net assets of the Fund; Prime Bond Fund, 0.50%
of the Fund's average daily net assets not exceeding $250 million, and at
reduced rates for average daily net assets in excess of $250 million; Quality
Equity Fund, 0.50% of the Fund's average daily net assets not exceeding $250
million, and at reduced rates for average daily net assets in excess of $250
million; and Reserve
154
<PAGE>
- --------------------------------------------------------------------------------
Assets Fund, 0.50% of the Fund's average daily net assets not exceeding $500
million, and at reduced rates for average daily net assets in excess of $500
million; and World Income Focus, 0.60% of average daily net assets of the Fund.
The Investment Advisory Agreement obligates MLAM to reimburse the Company, if
in any year the aggregate ordinary operating expenses of any Fund exceed the
most restrictive expense limitations then in effect under any state securities
law or the regulations thereunder. Under the most restrictive state regulations
presently in effect, the Investment Advisor would be required to reimburse each
Fund for advisory fees received by it from the Fund, to the extent that such
Fund's aggregate ordinary operating expenses (excluding interest, taxes,
brokerage fees and commissions, and extraordinary items) exceed in any fiscal
year 2.5% of each Fund's first $30 million of average daily net assets, 2.0% of
the Fund's average daily net assets in excess of $30 million but less tan $100
million, and 1.5% of average daily net assets in excess of $100 million. In
addition, the Investment Adviser, MLAM, and Merrill Lynch Life Agency, Inc.
("MLLA") have entered into an agreement which limits the operating expenses paid
by each Fund to 1.25% of its average daily net assets. Any expenses in excess of
1.25% of average daily net assets will be reimbursed to the Fund by the
Investment Adviser which, in turn, will be reimbursed by MLLA.
For Domestic Money Market Fund, for the year ended December 31, 1993, MLAM has
voluntarily agreed to waive $246,351 of its advisory fee.
Merrill Lynch, Pierce, Fenner & Smith Inc. (MLPF&S), an affiliate of MLIM,
earned commissions on the execution of portfolio security transactions
aggregating $3,860 in the American Balanced Fund, $3,173 in the Basic Value
Focus Fund, $5,610 in the Equity Growth Fund, $17,295 in the Flexible Strategy
Fund, $59,256 in the Global Strategy Focus Fund, $11,815 in the Global Utility
Focus Fund, $8,520 in International Equity Focus Fund, $1,725 in the Natural
Resources Focus Fund and $47,188 in the Quality Equity Fund.
Accounting services are provided to the Fund by MLAM at cost.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of Merrill
Lynch & Co., Inc., is the Fund's transfer agent.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, FDS, Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary
of MLIM, which is the Fund's distributor, and/or Merrill Lynch & Co., Inc.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities and
maturities, for the year ended December 31, 1993, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
- ----------------------------------------------------------------
American Balanced Fund............. $ 76,476,739 $ 6,568,473
Basic Value Focus Fund............. 36,468,837 4,292,258
Equity Growth Fund................. 114,186,789 60,092,866
Flexible Strategy Fund............. 172,795,711 91,376,748
Global Strategy Focus Fund......... 202,555,937 13,232,386
Global Utility Focus Fund.......... 81,894,944 581,737
High Current Income Fund........... 145,426,639 26,253,324
International Equity Focus Fund.... 62,933,311 4,642,661
Natural Resources Focus Fund....... 13,643,916 4,676,701
Prime Bond Fund.................... 398,007,600 196,929,420
Quality Equity Fund................ 312,484,148 137,688,316
World Income Focus Fund............ 57,608,250 12,668,475
- ----------------------------------------------------------------
</TABLE>
Transactions in written call and put options for the year ended December 31,
1993, were as follows:
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
- ----------------------------------------------------------------
NUMBER OF PREMIUMS
CALL OPTIONS WRITTEN SHARES COVERED RECEIVED
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding call options written
at beginning of year............ -- --
Options written.................. 40 $ 8,326
Options expired.................. (25) (5,824)
Options exercised................ (15) (2,502)
-------------- ------------
Outstanding call options written
at end of year.................. -- $ --
-------------- ------------
-------------- ------------
- ----------------------------------------------------------------
</TABLE>
155
<PAGE>
- --------------------------------------------------------------------------------
Transactions in written call and put options for the period ended December 31,
1993, were as follows:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- ----------------------------------------------------------------
NUMBER OF PREMIUMS
PUT OPTIONS WRITTEN SHARES COVERED RECEIVED
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding put options written
at beginning of period.......... -- --
Options written.................. $ 15,000,000 $ 118,850
-------------- ------------
Outstanding put options written
at end of period................ $ 15,000,000 $ 118,850
-------------- ------------
-------------- ------------
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
- ----------------------------------------------------------------
NUMBER OF PREMIUMS
CALL OPTIONS WRITTEN SHARES COVERED RECEIVED
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding options written at
beginning of year............... -- --
Options written.................. 8,500 $ 17,816
Options expired.................. (5,500) (12,812)
Options exercised................ (3,000) (5,004)
-------------- ------------
Outstanding options written at
end of year..................... -- $ --
-------------- ------------
-------------- ------------
- ----------------------------------------------------------------
</TABLE>
Transactions in call options purchased for the period ended December 31, 1993,
were as follows:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- ----------------------------------------------------------------
NUMBER OF PREMIUMS
CALL OPTIONS PURCHASED SHARES COVERED COST
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding call options
purchased at beginning of
period.......................... -- --
Options purchased................ $ 19,500,000 $ 145,575
Options expired.................. (4,000,000) (14,200)
-------------- ------------
Outstanding call options
purchased at end of period...... $ 15,500,000 $ 131,375
-------------- ------------
-------------- ------------
- ----------------------------------------------------------------
</TABLE>
At December 31, 1993 net unrealized appreciation/depreciation and aggregate
cost for Federal income tax purposes were as follows:
- -------------------------------------------------------
<TABLE>
<CAPTION>
BASIC DOMESTIC
AMERICAN VALUE MONEY EQUITY
BALANCED FOCUS MARKET GROWTH
FUND FUND FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Appreciated
securities........ $ 5,253,985 $ 2,261,984 $ 14,174 $ 13,263,368
Depreciated
securities........ (424,124 ) (657,818) (11,440) (1,863,319)
------------- ------------ ------------ ------------
Net unrealized
appreciation/
depreciation...... $ 4,829,861 $ 1,604,166 $ 2,734 $ 11,400,049
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
Cost for Federal
income tax
purposes*......... $106,951,190 $ 44,448,059 $170,180,190 $ 87,486,149
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
GLOBAL GLOBAL HIGH
FLEXIBLE STRATEGY UTILITY CURRENT
STRATEGY FOCUS FOCUS INCOME
FUND FUND FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Appreciated
securities........ $ 22,800,480 $ 16,477,099 $ 5,285,411 $ 5,234,018
Depreciated
securities........ (931,845 ) (4,759,471) (2,720,221) (1,062,697)
------------- ------------ ------------ ------------
Net unrealized
appreciation/
depreciation...... $ 21,868,635 $ 11,717,628 $ 2,565,190 $ 4,171,321
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
Cost for Federal
income tax
purposes*......... $168,851,966 $249,630,206 $110,566,011 $155,466,128
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INTERNATIONAL NATURAL
EQUITY RESOURCES PRIME
FOCUS FOCUS BOND
FUND FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Appreciated
securities..................... $ 5,927,605 $ 436,107 $ 3,982,785
Depreciated
securities..................... (2,024,981) (499,753) (2,505,829)
------------ ------------ ------------
Net unrealized appreciation/
depreciation................... $ (3,902,624) $ (63,646) $ 1,476,956
------------ ------------ ------------
------------ ------------ ------------
Cost for Federal income tax
purposes*...................... $ 70,454,530 $ 14,467,976 $304,318,015
------------ ------------ ------------
------------ ------------ ------------
- -------------------------------------------------------------------------------
</TABLE>
156
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD
QUALITY RESERVE INCOME
EQUITY ASSETS FOCUS
FUND FUND FUND
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Appreciated securities.......... $ 34,758,443 $ 9,647 $ 847,505
Depreciated securities.......... (902,684) (2,570) (133,689)
------------ ------------ ------------
Net unrealized
appreciation/depreciation...... $ 33,855,759 $ 7,077 $ 713,816
------------ ------------ ------------
------------ ------------ ------------
Cost for Federal income tax
purposes*...................... $277,722,969 $ 30,122,927 $ 49,154,015
------------ ------------ ------------
------------ ------------ ------------
- ----------------------------------------------------------------------------
</TABLE>
*Net of premiums received on options written.
At December 31, 1993, net realized and unrealized gains (losses) were as
follows:
- -------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMERICAN BALANCED FUND BASIC VALUE FOCUS FUND
---------------------- ----------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments.......... $ 381,896 $4,848,878 $ (84,592) $1,604,166
Short-term investments......... (495) (19,017) (20) --
--------- ---------- --------- ----------
$ 381,401 $4,829,861 $ (84,612) $1,604,166
--------- ---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DOMESTIC MONEY MARKET
FUND EQUITY GROWTH FUND
----------------------- --------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments...... -- -- $ 3,639,259 $ 11,400,049
Short-term investments..... $ 41,187 $ 2,734 5 --
Options written............ -- -- -- --
Foreign currency
transactions.............. -- -- -- --
--------- ----------- ----------- ------------
$ 41,187 $ 2,734 $ 3,639,264 $ 11,400,049
--------- ----------- ----------- ------------
--------- ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
FLEXIBLE STRATEGY FUND GLOBAL STRATEGY FOCUS FUND
--------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments... $ 6,476,703 $ 21,868,635 $ 1,230,629 $ 11,717,628
Short-term
investments............ (1,272) -- -- --
Foreign currency
transactions........... 238,214 (5,939) 34,587 (12,554)
Financial Futures
Contracts.............. (15,260) -- -- --
------------ ------------ ------------ ------------
$ 6,698,385 $ 21,862,695 $ 1,265,216 $ 11,705,074
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND HIGH CURRENT INCOME FUND
--------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments... $ 33,546 $ 2,565,190 $ 615,232 $ 4,171,321
Short-term
investments............ (33) -- (161) --
Options written......... -- -- -- --
Foreign currency
transactions........... 597 7,484 -- --
------------ ------------ ------------ ------------
$ 34,110 $ 2,572,674 $ 615,071 $ 4,171,321
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS NATURAL RESOURCES FOCUS
FUND FUND
--------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments... $ 188,191 $ 3,902,056 $ 64,514 $ (63,636)
Short-term
investments............ (287) 568 135 (10)
Options written......... (14,200) (102,890) -- --
Financial Futures
Contracts.............. (364,674) 145,997 -- --
Options purchased....... -- (92,105) -- --
Foreign currency
transactions........... 306,021 531,510 42 (20)
------------ ------------ ------------ ------------
$ 115,051 4,385,136 $ 64,691 $ (63,666)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PRIME BOND FUND QUALITY EQUITY FUND
--------------------------- ---------------------------
Realized Realized Unrealized
Gains Unrealized Gains Gains
(Losses) Gains (Losses) (Losses)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments.... $ 4,199,757 $ 1,484,456 $ 6,567,931 $ 33,855,759
Short-term investments... (34) -- 121 --
Options written.......... -- -- -- --
Foreign currency
transactions............ -- -- (8) --
------------ ------------ ------------ ------------
$ 4,199,723 $ 1,484,456 $ 6,568,044 $ 33,855,759
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
RESERVE ASSETS FUND WORLD INCOME FOCUS FUND
----------------------- --------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments......... -- -- $ 101,797 $ 713,816
Short-term investments........ $ 15,302 $ 7,077 (383) --
Options written............... -- -- -- --
Foreign currency
transactions................. -- -- 75,366 6,495
--------- ----------- ----------- ------------
$ 15,302 $ 7,077 $ 176,780 $ 720,311
--------- ----------- ----------- ------------
--------- ----------- ----------- ------------
- ------------------------------------------------------------------------------------
</TABLE>
157
<PAGE>
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
AMERICAN BALANCED FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 6,659,885 $ 91,353,359
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 92,618 1,203,002
------------- -------------
Total issued..................... 6,752,503 92,556,361
Shares redeemed.................. (491,212) (6,703,257)
------------- -------------
Net increase..................... 6,261,291 $ 85,853,104
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 1,367,773 $ 16,923,962
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 43,421 528,136
------------- -------------
Total issued..................... 1,411,194 17,452,098
Shares redeemed.................. (91,625) (1,137,727)
------------- -------------
Net increase..................... 1,319,569 $ 16,314,371
------------- -------------
------------- -------------
</TABLE>
BASIC VALUE FOCUS FUND
<TABLE>
<CAPTION>
For the Period July 1, 1993+ Dollar
to December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 4,316,053 $ 47,688,307
Shares issued to shareholders in
reinvestment of dividends and
distributions................... -- --
------------- -------------
Total issued..................... 4,316,053 47,688,307
Shares redeemed.................. (202,978) (2,154,283)
------------- -------------
Net increase..................... 4,113,075 $ 45,534,024
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
+ Prior to July 1, 1993 (commencement of operations), the Fund issued 200,010
shares to MLAM for $2,000,100.
DOMESTIC MONEY MARKET FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 371,125,144 $ 371,125,144
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 2,796,153 2,796,153
------------- -------------
Total issued..................... 373,921,297 373,921,297
Shares redeemed.................. (244,516,209) (244,516,209)
------------- -------------
Net increase..................... 129,405,088 $ 129,405,088
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Period February 20, 1992+ Dollar
to December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 77,059,988 $ 77,059,988
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 522,668 522,668
------------- -------------
Total issued..................... 77,582,656 77,582,656
Shares redeemed.................. (38,459,225) (38,459,225)
------------- -------------
Net increase..................... 39,123,431 $ 39,123,431
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
+ Prior to February 20, 1992 (commencement of operations), the Company issued
2,000,100 shares to MLAM for $2,000,100.
EQUITY GROWTH FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 3,715,936 $ 69,928,165
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 330 5,834
------------- -------------
Total issued..................... 3,716,266 69,933,999
Shares redeemed.................. (296,830) (5,457,567)
------------- -------------
Net increase..................... 3,419,436 $ 64,476,432
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 888,271 $ 14,836,367
Shares issued to shareholders in
reinvestment of dividends....... 2,518 47,447
------------- -------------
Total issued..................... 890,789 14,883,814
Shares redeemed.................. (219,409) (3,585,542)
------------- -------------
Net increase..................... 671,380 $ 11,298,272
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
158
<PAGE>
- --------------------------------------------------------------------------------
FLEXIBLE STRATEGY FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 6,911,886 103,761,462
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 100,932 1,460,495
------------- -------------
Total issued..................... 7,012,818 105,221,957
Shares redeemed.................. (820,921) (12,310,730)
------------- -------------
Net increase..................... 6,191,897 $ 92,909,143
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 2,252,323 $ 31,668,961
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 402,362 5,614,766
------------- -------------
Total issued..................... 2,654,685 37,283,727
Shares redeemed.................. (553,710) (7,805,748)
------------- -------------
Net increase..................... 2,100,975 $ 29,477,979
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
GLOBAL STRATEGY FOCUS FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 20,813,811 $ 241,520,508
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 35,643 394,216
------------- -------------
Total issued..................... 20,849,454 241,914,724
Shares redeemed.................. (213,171) (2,402,857)
------------- -------------
Net increase..................... 20,636,283 $ 239,511,867
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Period February 28, 1992+ Dollar
to December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 1,321,900 $ 13,428,045
Shares issued to shareholders in
reinvestment of dividends....... 2,888 29,518
------------- -------------
Total issued..................... 1,324,788 13,457,563
Shares redeemed.................. (5,928) (60,122)
------------- -------------
Net increase..................... 1,318,860 $ 13,397,441
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
+ Prior to February 28, 1992 (commencement of operations), the Company sold
200,010 shares to MLAM for $2,000,100.
GLOBAL UTILITY FOCUS FUND
<TABLE>
<CAPTION>
For the Period July 1, 1993+ Dollar
to December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 9,794,562 $ 101,325,529
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 11,422 118,908
------------- -------------
Total issued..................... 9,805,984 101,444,437
Shares redeemed.................. (201,232) (2,092,591)
------------- -------------
Net increase..................... 9,604,752 $ 99,351,846
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
+ Prior to July 1, 1993 (commencement of operations), the Company sold 200,010
shares to MLAM for $2,000,100.
HIGH CURRENT INCOME FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 11,096,856 $ 130,007,224
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 517,507 6,035,740
------------- -------------
Total issued..................... 11,614,363 136,042,964
Shares redeemed.................. (424,381) (4,968,409)
------------- -------------
Net increase..................... 11,189,982 $ 131,074,555
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 1,655,403 $ 18,211,484
Shares issued to shareholders in
reinvestment of dividends....... 139,646 1,522,781
------------- -------------
Total issued..................... 1,795,049 19,734,265
Shares redeemed.................. (371,472) (4,071,229)
------------- -------------
Net increase..................... 1,423,577 $ 15,663,036
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
INTERNATIONAL EQUITY FOCUS FUND
<TABLE>
<CAPTION>
For the Period July 1, 1993+ Dollar
to December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 6,976,839 $ 72,732,083
Shares issued to shareholders in
reinvestment of dividends and
distributions................... -- --
------------- -------------
Total issued..................... 6,976,839 72,732,083
Shares redeemed.................. (804,344) (8,379,435)
------------- -------------
Net increase..................... 6,172,495 $ 64,352,648
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
+ Prior to July 1, 1993 (commencement of operations), the Company sold 800,010
shares to MLAM for $8,000,100.
159
<PAGE>
- --------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 1,268,742 $ 13,999,275
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 3,674 40,449
------------- -------------
Total issued..................... 1,272,416 14,039,724
Shares redeemed.................. (327,587) (3,584,398)
------------- -------------
Net increase..................... 944,829 $ 10,571,877
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 169,193 $ 1,683,526
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 13,009 125,884
------------- -------------
Total issued..................... 182,202 1,809,410
Shares redeemed.................. (67,934) (666,485)
------------- -------------
Net increase..................... 114,268 $ 1,142,925
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
PRIME BOND FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 18,166,471 $ 229,284,947
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 835,307 10,463,170
------------- -------------
Total issued..................... 19,001,778 239,748,117
Shares redeemed.................. (1,205,821) (15,218,080)
------------- -------------
Net increase..................... 17,795,957 $ 224,530,037
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 4,282,632 $ 51,080,851
Shares issued to shareholders in
reinvestment of dividends....... 303,832 3,604,131
------------- -------------
Total issued..................... 4,586,464 54,684,982
Shares redeemed.................. (847,635) (9,984,702)
------------- -------------
Net increase..................... 3,738,829 $ 44,700,280
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
QUALITY EQUITY FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 7,584,386 $ 204,488,643
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 38,501 99,487
------------- -------------
Total issued..................... 7,622,887 204,588,130
Shares redeemed.................. (412,554) (11,039,403)
------------- -------------
Net increase..................... 7,210,333 $ 193,548,727
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 1,635,715 $ 40,556,147
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 168,257 4,217,827
------------- -------------
Total issued..................... 1,803,972 44,773,974
Shares redeemed.................. (437,956) (10,900,234)
------------- -------------
Net increase..................... 1,366,016 $ 33,873,740
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
RESERVE ASSETS FUND
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 18,903,263 $ 18,903,263
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 772,770 772,770
------------- -------------
Total issued..................... 19,676,033 19,676,033
Shares redeemed.................. (16,275,313) (16,275,313)
------------- -------------
Net increase..................... 3,400,720 $ 3,400,720
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1992 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 8,149,134 $ 8,149,134
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 953,406 953,406
------------- -------------
Total issued..................... 9,102,540 9,102,540
Shares redeemed.................. (16,704,930) (16,704,930)
------------- -------------
Net decrease..................... (7,602,390) $ (7,602,390)
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
160
<PAGE>
- --------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND
<TABLE>
<CAPTION>
For the Period July 1, 1993+ Dollar
to December 31, 1993 Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold...................... 4,880,334 $ 49,656,106
Shares issued to shareholders in
reinvestment of dividends and
distributions................... 63,693 647,784
------------- -------------
Total issued..................... 4,944,037 50,303,890
Shares redeemed.................. (855,476) (8,720,702)
------------- -------------
Net increase..................... 4,088,561 $ 41,583,188
------------- -------------
------------- -------------
- --------------------------------------------------------------------
</TABLE>
+ Prior to July 1, 1993 (commencement of operations), the Fund issued 800,010
shares to MLAM for $8,000,100.
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1993, the Fund had capital loss carryforwards of approximately
$52,000 in the Basic Value Focus Fund, all of which expires in 2001, $119,000 in
the High Current Income Fund, all of which expires in 1999 and $48,000 in the
Natural Resources Focus Fund, all of which expires in 2000. These will be
available to offset like amount of any future taxable gains.
6. LOANED SECURITIES:
At December 31, 1993, the Prime Bond Fund held U.S. Treasury bonds having an
aggregate value of approximately $4,742,000 as collateral for portfolio
securities loaned having a market value of approximately $4,486,000.
7. COMMITMENTS:
At December 31, 1993, the Global Utility Focus Fund had entered into forward
exchange contracts under which it agreed to purchase various foreign currencies
with values of approximately $2,955,000 and International Equity Focus $87,000,
and sold various foreign currencies with value of approximately $298,000.
8. SUBSEQUENT EVENTS:
On January 3, 1994, the Board of Directors declared ordinary income dividends
and a capital gains distributions per share to shareholders of record as of
December 31, 1993 as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Ordinary Capital
Fund Income-net Gains
- -----------------------------------------------------------------
<S> <C> <C>
American Balanced Fund (2).......... $0.182570 $0.020055
Basic Value Focus Fund (2).......... 0.036210 --
Equity Growth Fund (2).............. -- 0.189770
Flexible Strategy Fund (2).......... 0.301396 0.386555
Global Strategy Focus Fund (2)...... 0.125658 0.010581
Global Utility Focus Fund (2)....... 0.060742 --
High Current Income Fund (1)........ -- --
International Equity Focus Fund
(2)................................ 0.154109 --
Natural Resources Focus Fund (2).... 0.061468 --
Prime Bond Fund (1)................. 0.128691 0.040576
Quality Equity Fund (2)............. 0.423812 0.354436
World Income Focus Fund (1)......... 0.043089 --
</TABLE>
- ------------
(1) Payable on 1/03/1994.
(2) Payable on 1/10/1994.
161
<PAGE>
PROSPECTUS
APRIL 29, 1994
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds. Shares of six of the funds are offered
hereby (hereinafter referred to as the 'Funds' or individually as a 'Fund'). A
separate class of common stock ('Common Stock') is issued for each Fund.
The shares of the Funds will be sold to Merrill Lynch Life Insurance Company
('MLLIC') and ML Life Insurance Company of New York ('ML of New York') for
certain separate accounts ('Separate Accounts') to fund benefits under variable
life insurance contracts ('Variable Life Contracts') issued by MLLIC and ML of
New York. Shares of the Funds, as well as shares of other funds, are sold,
through a separate Prospectus, to MLLIC, ML of New York and another insurance
company (the 'Insurance Companies') to fund variable annuity contracts issued by
the Insurance Companies (such contracts, together with Variable Life Contracts,
are collectively referred to as the 'Contracts'). The Insurance Companies will
redeem shares to the extent necessary to provide benefits under the respective
Contracts or for such other purposes as may be consistent with the respective
Contracts. MLLIC and ML of New York are wholly-owned subsidiaries of Merrill
Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset
Management, L.P. (the 'Investment Adviser'). The investment objectives of the
Funds offered hereby, each of whose name is preceded by 'Merrill Lynch', are as
follows:
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income
by investing in securities, primarily equities that management of the Fund
believes are undervalued and therefore represent basic investment value.
WORLD INCOME FOCUS FUND. High current income by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units. The Fund may invest in United States
and foreign government and corporate fixed income securities, including high
yield, high risk, lower rated and unrated securities.
GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation through
investment in securities, principally equities of issuers in countries other
than the United States.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation
by investing in securities, principally equities, of issuers in countries
having smaller capital markets.
INTERNATIONAL BOND FUND. High total investment return by investing in a
non-U.S. international portfolio of debt instruments denominated in various
currencies and multi-national currency units.
There can be no assurance that the objectives of any Fund will be realized.
See 'Investment Objectives and Policies of the Funds,' page 6.
THE WORLD INCOME FOCUS FUND AND DEVELOPING CAPITAL MARKETS FOCUS FUND INVEST
OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS 'JUNK BONDS'), WHICH
INVOLVE SPECIAL RISKS. SEE 'INVESTMENT OBJECTIVES AND POLICIES OF THE
FUNDS--RISKS OF HIGH YIELD SECURITIES.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY
THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 29, 1994, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET
FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Highlights....................................................................................... 4
The Insurance Companies.................................................................................... 6
Investment Objectives and Policies of the Funds............................................................ 6
Directors.................................................................................................. 26
Investment Adviser......................................................................................... 28
Portfolio Transactions and Brokerage....................................................................... 30
Purchase of Shares......................................................................................... 30
Redemption of Shares....................................................................................... 30
Dividends, Distributions and Taxes......................................................................... 30
Performance Data........................................................................................... 32
Additional Information..................................................................................... 32
Appendix A................................................................................................. A-1
</TABLE>
2
<PAGE>
[This page intentionally left blank]
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Funds, other than the Developing Capital Markets Focus
and International Bond Funds, which had not commenced operations on December 31,
1993. The table has been audited by Deloitte & Touche, independent auditors, in
connection with their annual audits of the Company's financial statements.
Financial statements for the year ended December 31, 1993 and the independent
auditors' report thereon appear in the Statement of Additional Information. The
information in the following table should be read in conjunction with the
financial statements.
<TABLE>
<CAPTION>
GLOBAL
UTILITY FOCUS
FUND
BASIC VALUE -----------------
FOCUS FUND FOR THE
----------------- PERIOD
The following per share data and ratios have been derived from information provided in FOR THE PERIOD JULY 1,
the financial statements. JULY 1, 1993+ TO 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1993 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................................... $ 10.00 $ 10.00
------ -----------------
Investment income--net................................................................... .04 .04
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net....................................................................... .91 .64
------ -----------------
Total from investment operations......................................................... .95 .68
------ -----------------
Less dividends and distributions:
Investment income--net................................................................ -- (.02)
Realized gain on investments--net..................................................... -- --
------ -----------------
Total dividends and distributions........................................................ -- (.02)
------ -----------------
Net asset value, end of period........................................................... $ 10.95 $ 10.66
------ -----------------
------ -----------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................................................... 9.50%++ 6.85%++
------ -----------------
------ -----------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................................... .86%* .89%*
------ -----------------
------ -----------------
Expenses................................................................................. .86%* .89%*
------ -----------------
------ -----------------
Investment income--net................................................................... 1.69%* 2.84%*
------ -----------------
------ -----------------
Investment income--net, and realized gain (loss) on investments--net..................... --* --
------ -----------------
------ -----------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................. $47,207 $ 104,517
------ -----------------
------ -----------------
Portfolio turnover....................................................................... 30.86% 1.72%
------ -----------------
------ -----------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The Basic Value Focus Fund and the Global Utility Focus Fund commenced
operations on July 1, 1993.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
4
<PAGE>
<TABLE>
<CAPTION>
WORLD
INCOME
INTERNATIONAL FOCUS FUND
EQUITY FOCUS -----------------
FUND FOR THE
----------------- PERIOD
The following per share data and ratios have been derived from information provided in FOR THE PERIOD JULY 1,
the financial statements. JULY 1, 1993+ TO 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1993 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................................... $ 10.00 $ 10.00
------ -----------------
Investment income--net................................................................... .01 .25
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net....................................................................... 1.02 .33
------ -----------------
Total from investment operations......................................................... 1.03 .58
------ -----------------
Less dividends and distributions:
Investment income--net................................................................ -- (.20)
Realized gain on investments--net..................................................... -- --
------ -----------------
Total dividends and distributions........................................................ -- (.20)
------ -----------------
Net asset value, end of period........................................................... $ 11.03 $ 10.38
------ -----------------
------ -----------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................................................... 10.30%++ 5.90%++
------ -----------------
------ -----------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................................... 1.14%* .94%*
------ -----------------
------ -----------------
Expenses................................................................................. 1.14%* .94%*
------ -----------------
------ -----------------
Investment income--net................................................................... 0.30%* 6.20%*
------ -----------------
------ -----------------
Investment income--net, and realized gain (loss) on investments--net..................... -- --
------ -----------------
------ -----------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................. $76,906 $ 50,737
------ -----------------
------ -----------------
Portfolio turnover....................................................................... 17.39% 54.80%
------ -----------------
------ -----------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ The International Equity Focus and the World Income Focus Funds commenced
operations on July 1, 1993.
++ Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
5
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in six Funds to certain separate
accounts (the 'Separate Accounts') of MLLIC and ML of New York to fund benefits
under Variable Life Contracts. Those six Funds are: the Basic Value Focus Fund,
World Income Focus Fund, Global Utility Focus Fund, International Equity Focus
Fund, Developing Capital Markets Focus Fund andInternational Bond Fund. Through
a separate Prospectus, the Company offers shares in all of its funds to certain
other separate accounts of the Insurance Companies to fund benefits under
variable annuity contracts issued by them.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only in
the Contract. The Contract is described in the Prospectus for each Contract.
That Prospectus describes the relationship between increases or decreases in the
net asset value of shares of a Fund, and any distributions on such shares, and
the benefits provided under a Contract. The Prospectus for the Contracts also
describes various fees payable to the Insurance Companies and charges to the
Separate Accounts made by the Insurance Companies with respect to the Contracts.
Since shares of the Funds will be sold only to the Insurance Companies for the
Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus
refer to the Insurance Companies. MLLIC and ML of New York are wholly-owned
subsidiaries of Merrill Lynch & Co., Inc. ('Merrill Lynch & Co.'), as is the
Investment Adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company offered hereby has a different investment
objective which it pursues through separate investment policies as described
below. The differences in objectives and policies among the Funds can be
expected to affect the return of each Fund and the degree of market and
financial risk to which each Fund is subject. Each Fund is classified as
'diversified,' as defined in the Investment Company Act of 1940, except for the
World Income Focus Fund, Developing Capital Markets Focus Fund and International
Bond Fund, each of which is classified as 'non-diversified.' The investment
objectives and classification of each Fund may not be changed without the
approval of the holders of a majority of the outstanding shares of each Fund
affected. The investment objectives and policies of each Fund are discussed
below.
Fixed Income Security Ratings. No Fund other than the World Income Focus
Fund and Developing Capital Markets Focus Fund invests in fixed-income
securities which are rated below investment grade (i.e., securities rated Ba or
below by Moody's Investors Service, Inc. ('Moody's') or BB or below by Standard
& Poor's Corporation ('Standard & Poor's')). However, securities purchased by a
Fund may subsequently be downgraded. Such securities may continue to be held and
will be sold only if, in the judgment of the Investment Adviser, it is
advantageous to do so. Securities in the lowest category of investment grade
debt securities may have speculative characteristics which may lead to weakened
capacity to pay interest and principal during periods of adverse economic
conditions. See Appendix A for a fuller description of corporate bond ratings.
6
<PAGE>
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a discount, either from book value or historical
price-earnings ratios, or seem capable of recovering from temporarily out of
favor considerations. Particular emphasis is placed on securities which provide
an above-average dividend return and sell at a below-average price-earnings
ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates and
depress prices of securities in unfavorable climates. Based on this premise,
management believes that favorable changes in market prices are more likely to
begin when securities are out of favor, earnings are depressed, price-earnings
ratios are relatively low, investment expectations are limited, and there is no
real general interest in the particular security or industry involved. On the
other hand, management believes that negative developments are more likely to
occur when investment expectations are generally high, stock prices are
advancing or have advanced rapidly, price-earnings ratios have been inflated,
and the industry or issue continues to gain new investment acceptance on an
accelerated basis. In other words, management believes that market prices of
securities with relatively high price-earnings ratios are more susceptible to
unexpected adverse developments while securities with relatively low
price-earnings ratios are more favorably positioned to benefit from favorable,
but generally unanticipated, events. This investment policy departs from
traditional philosophy. Management of the Fund believes that the market risk
involved in this policy is moderated somewhat by an emphasis on securities with
above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation of
the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities and
utilize covered call options with respect to portfolio securities as described
below and in the Statement of Additional Information. It reserves the right as a
defensive measure to hold other types of securities, including Government and
money market securities, repurchase agreements or cash, in such proportions as,
in the opinion of management, prevailing market or economic conditions warrant.
The Fund may invest up to 10% of its total assets, taken at market value at the
time of acquisition, in the securities of foreign issuers.
WORLD INCOME FOCUS FUND
The investment objective of the World Income Focus Fund is to seek to
provide shareholders with high current income by investing in a global portfolio
of fixed income securities denominated in various currencies, including
multi-national currency units. The Fund may invest in United States and foreign
government and corporate fixed income securities, including high yield, high
risk securities (commonly known as 'junk bonds'). The Fund will, under normal
conditions, invest at least 90% of its total assets in such fixed income
securities and may invest up to 100% of its total assets in lower rated, high
yield, high risk securities. In pursuing its investment objective, the Fund will
allocate its investments among different types of fixed income securities
denominated in
7
<PAGE>
various currencies based upon the Investment Adviser's analysis of the yield,
maturity and currency considerations affecting such securities. Investing on an
international basis involves special considerations. See 'Other Portfolio
Strategies--Foreign Securities' below. The Fund should be considered as a
long-term investment and a vehicle for diversification and not as a balanced
investment program.
The Fund may purchase fixed income securities issued by United States or
foreign corporations or financial institutions, including debt securities of all
types and maturities, convertible securities and preferred stocks. The Fund also
may purchase securities issued or guaranteed by United States or foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities') or issued or guaranteed
by international organizations designated or supported by multiple governmental
entities to promote economic reconstruction or development ('supranational
entities').
International Investing. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of a
multinational currency unit is the European Currency Unit ('ECU') which is a
'basket' consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities (described further below), in particular, issue
ECU-denominated obligations. The Fund may invest in securities denominated in
the currency of one nation although issued by a governmental entity, corporation
or financial institution of another nation. For example, the Fund may invest in
a British pound sterling-denominated obligation issued by a United States
corporation. Such investments involve credit risks associated with the issuer
and currency risks associated with the currency in which the obligation is
denominated.
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well as
in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at least
three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States
dollar-denominated obligations only for temporary defensive purposes.
United States Government securities include:
(i) U.S. Treasury obligations (bills, notes and bonds), which differ
in their interest rates, maturities and times of issuance, all of which are
backed by the full faith and credit of the United States; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related or
asset-backed securities, some of which are backed by the full faith and
credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association), some of which are supported by
the right of the issuer to borrow from the U.S. Government (e.g.,
obligations of Federal Home Loan Banks) and some of which are backed only
by the credit of the issuer itself (e.g., obligations of the Student Loan
Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
8
<PAGE>
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of the mortgage-related securities.
(Asset-backed securities, other than those backed by home equity loans,
generally do not prepay in response to changes in interest rates but may be
subject to prepayment in response to other factors.) Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for securities purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for securities
purchased at a discount. The Fund may purchase mortgage-related (and
asset-backed) securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Fund's Investment Adviser. The Investment Adviser does not believe that the
credit risk inherent in the obligations of stable foreign governments is
significantly greater than that of U.S. Government securities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The government
members, or 'stockholders', usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Allocation of Investments and Risks of High Yield, High Risk
Securities. In seeking high current income, the Fund will allocate its
investments among fixed income securities of various types, maturities and
issuers in the various global markets based upon the analysis of the Investment
Adviser of yield and price differentials, currency considerations and general
market and economic conditions. In making such allocations, the Investment
Adviser will assess the overall quality of the portfolio considering in
particular the extent to which the differences in yield justify investments in
higher risk securities. In its evaluations, the Investment Adviser will utilize
its internal financial, economic and credit analysis resources as well as
information in this regard obtained from other sources.
The Fund has established no rating criteria for the fixed income securities
in which it may invest, and a substantial portion of the securities in the
Fund's portfolio may be securities rated in the medium to low rating categories
of nationally recognized statistical rating organizations such as Moody's or
Standard & Poor's, or in unrated securities of comparable quality. See Appendix
A to this Prospectus for a description of these rating categories. See also
'Risks of High Yield Securities' below.
The average maturity of the World Income Focus Fund's portfolio securities
will vary based upon the Investment Adviser's assessment of economic and market
conditions. As with all fixed income securities, changes in market yields will
affect the Fund's asset value as the prices of portfolio securities generally
increase when interest rates decline and decrease when interest rates rise.
Prices of longer term securities generally fluctuate more in response to
interest rate changes than do shorter term securities. The Fund does not expect
the average maturity of its portfolio to exceed ten years.
9
<PAGE>
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's rating category, of the securities held by the Fund during the
year ended December 31, 1993.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- ------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
AA................................................................ .54% 1.05%
BBB............................................................... .50 .81
BB................................................................ 16.58 25.91
B................................................................. 38.23 60.54
CCC............................................................... .61 .71
NR................................................................ 4.43 7.22
NA................................................................ 2.51 3.76
-------------
100.0 %
</TABLE>
- ---------------
*A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
GLOBAL UTILITY FOCUS FUND
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of the Investment Adviser, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk, as described below under 'Transactions in
Options, Futures and Currency.' Investing on an international basis involves
special considerations. See 'Other Portfolio Strategies--Foreign Securities'
below.
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a tempororary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash in
such proportions as, in the opinion of the Investment Adviser, prevailing market
or economic conditions warrant. Except during temporary defensive periods, such
securities or cash will not exceed 20% of its total assets. Under normal
circumstances, the Fund will invest at least 65% of its total assets in issuers
domiciled in at least three countries, one of which may be the United States,
although the Investment Adviser expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt securites.
The relative weightings among common stocks, debt securities and preferred
stocks will vary from time to time based upon the Investment Adviser's judgement
of the extent to which investments in each category will contribute to meeting
the Fund's investment objective. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade, that is, rated
in
10
<PAGE>
one of the four highest rating categories by Standard & Poor's or Moody's, or
deemed to be of equivalent quality (i.e., securities rated at least BBB by
Standard & Poor's or Baa by Moody's) in the judgment of the Investment Adviser.
Securities rated Baa by Moody's are described by it as having speculative
characteristics and, according to Standard & Poor's, fixed income securities
rated BBB normally exhibit adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal. The Fund's commercial
paper investments at the time of purchase will be rate 'A-1' or 'A-2' by
Standard & Poor's or 'Prime-1' or 'Prime-2' by Moody's or, if not rated, will be
of comparable quality as determined by the Investment Adviser. The Fund may also
invest up to 5% of its total assets at the time of purchase in fixed income
securities having a minimum rating no lower than Caa by Moody's or CCC by
Standard & Poor's. The Fund may, but need not, dispose of any security if it is
subsequently downgraded. For a description of ratings of debt securities, see
Appendix A to this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts ('EDRs') or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. Generally, ADRs which are issued
in registered form, are designated for use in the United States securities
markets, and EDRs, which are issued in bearer form, are designed for use in
European securities markets. The Fund may invest in ADRs and EDRs through both
sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement,
the foreign issuer assumes the obligation to pay some or all of the depository's
transaction fees, whereas in an unsponsored arrangement the foreign issuer
assumes no obligations and the depository's transaction fees are paid by the ADR
or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs
or EDRs have been issued are not necessarily obligated to disclose material
information in the markets in which the unsponsored ADRs or EDRs are traded and,
therefore, there may not be a correlation between such information and the
market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of common
stocks issued by domestic utility companies historically have significantly
exceeded those of industrial companies' common stocks, while the prices of
domestic utility stocks have tended to be less volatile than stocks of
industrial companies. Total returns on domestic utility stocks have also
generally exceeded those on stocks of industrial companies. Debt securities of
domestic utility companies historically also have yielded slightly more than
similar debt securities of industrial companies, and have had higher total
returns. For certain periods, the total return of utility companies' securities
has underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in the
future. The Investment Adviser believes that the average dividend yields of
common stocks issued by foreign utility companies have also historically
exceeded those of foreign industrial companies' common stocks. To meet its
objective of capital appreciation, the Fund may invest in foreign utility
companies which pay lower than average dividends, but have a greater potential
for capital appreciation.
11
<PAGE>
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availabilty of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are
substantial differences between the regulatory practices and policies of various
jurisdicions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for these
utilities to obtain adequate relief. Certain of the issuers of securities of the
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies, and impose
additional requirements governing the licensing, construction and operation of
nuclear power plants.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. In some instances, utility companies
are operating on an unregulated basis. Because of trends toward deregulation and
the evolution of independent power producers as well as new entrants to the
field of telecommunications, non-regulated providers of utility services have
become a significant part of their respective industries. The Investment Adviser
believes that the emergence of competition and deregulation will result in
certain utility companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
businesses from increased competition and may be less profitable. The Investment
Adviser seeks to take advantage of favorable investment opportunities that are
expected to arise from these structural changes. Of course, there can be no
assurance that favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to
12
<PAGE>
meet any proposed pollution restrictions. Foreign regulatory systems vary from
country to country and may evolve in ways different from regulation in the
United States.
The Global Utility Focus Fund's investment policies are designed to enable
it to capitalize on evolving investment opportunities throughout the world. For
example, the rapid growth of certain foreign economies will necessitate
expansion of capacity in the utility industries in those countries. Although
many foreign utility companies currently are government-owned, thereby limiting
current investment opportunities for the Fund, the Investment Adviser believes
that, in order to attract significant capital for growth, foreign governments
are likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership
of assets rather than government ownership, is expected to occur in newer,
faster-growing economies and in mature economies. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. The Investment Adviser will take into account anticipated economic
growth rates and other economic developments when selecting securities of
utility companies. The principal sectors of the global utility industries are
discussed below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates have
declined, many utilities have refinanced high cost debt and in doing so have
improved their fixed charges coverage. Regulators, however, have lowered allowed
rates of return as interest rates have declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of, the
Nuclear Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for decommissioning of such plants.
In October 1993, S&P stiffened its debt-ratings formula for the electric
utility industry, stating that the industry is in long-term decline. In
addition, Moody's stated that it expected a drop in the next three years in its
average credit ratings for the industry. Reasons set forth for these outlooks
included slowing demand and increasing cost pressures as a result of competition
from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access to
the telephone networks comprise the greatest portion of this segment. Telephone
companies in the United States are still experiencing the effects of the breakup
of American
13
<PAGE>
Telephone & Telegraph Company, which occurred in 1984. Since 1984, companies
engaged in telephone communication services have expanded their non-regulated
activities into other businesses, including cellular telephone services, data
processing, equipment retailing, computer software and hardware services, and
financial services. This expansion has provided significant opportunities for
certain telephone companies to increase their earnings and dividends at faster
rates than had been allowed in traditional regulated businesses. Increasing
competition, technological innovations and other structural changes, however,
could adversely affect the profitability of such utilities. Technological
breakthroughs and the merger of telecommunications with video and entertainment
is now associated with the expansion of the role of cable companies as providers
of utility services in the telecommunications industry and the competitive
response of traditional telephone companies. Given mergers and certain marketing
tests currently underway, it is likely that both traditional telephone companies
and cable companies will soon provide a greatly expanded range of utility
services, including two-way video and informational services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decades, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Investment
Adviser, however, environmental considerations could improve the gas industry
outlook in the future. For example, natural gas is the cleanest of the
hydrocarbon fuels, and this may result in incremental shifts in fuel consumption
toward natural gas and away from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic companies.
The Investment Adviser believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Investment Outside the Utility Industries. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that are
outside the utility industries. Such investments may include common stocks, debt
securities or preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies. Some of these
issuers may be in industries related to utility industries and, therefore, may
be subject to similar risks. Securities that are issued by foreign companies or
are denominated in foreign currencies are subject to the risks outlined above.
The Global Utility Focus Fund is also permitted to invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
('U.S. Government Securities'). Such investments may be backed by the 'full
faith and credit' of the United States, including U.S. Treasury bills, notes and
bonds as well as certain agency securities and mortgage-backed securities issued
by the Government National Mortgage Association (GNMA). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the 'full
14
<PAGE>
faith and credit' of the United States, such as certain securities issued by the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation, the Student Loan Marketing Association and the Farm Credit Bank.
The Global Utility Focus Fund may invest in securities issued or guaranteed
by foreign governments. Such securities are typically denominated in foreign
currencies and are subject to the currency fluctuation and other risks of
foreign securities investments. The foreign government securities in which the
Fund intends to invest generally will consist of obligations supported by
national, state or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank.
Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities including quasi-governmental agencies. Foreign
government securities will not be considered government securities for purposes
of determining the Fund's compliance with diversification and concentration
policies.
INTERNATIONAL EQUITY FOCUS FUND
The investment objective of the International Equity Focus Fund is to seek
capital appreciation and, secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal conditions, at least 65% of the Fund's net assets
will be invested in such equity securities. The investment objective of the Fund
is a fundamental policy and may not be changed without approval of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. Investing
on an international basis involves special considerations. Investing in smaller
capital markets entails the risk of significant volatility in the Fund's
security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The
Fund is designed for investors seeking to complement their U.S. holdings through
foreign investments. The Fund should be considered as a long-term investment and
a vehicle for diversification and not as a balanced investment program.
The International Equity Focus Fund will invest in an international
portfolio of securities of foreign companies located thoughout the world. While
there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. However, for the reasons stated below, management of the Fund will give
special attention to investment opportunities in the developing countries of the
world, including, but not limited to Latin America, the Far East and Eastern
Europe. It is anticipated that a significant portion of the Fund's assets may be
invested in such developing countries.
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The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser based primarily on its
assessment of the relative condition and growth potential of the various
economies and securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. Within such
allocations, the Investment Adviser will seek to identify equity investments in
each market which are expected to provide a total return which equals or exceeds
the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called 'emerging' countries (such as
Malaysia, Mexico and Thailand), which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Fund will primarily emphasize investments in common stock, the
Fund may also invest in preferred stocks and convertible debt securities. The
Fund reserves the right, as a temporary defensive measure and to provide for
redemptions, to hold cash or cash equivalents in U.S. dollars or foreign
currencies and short-term securities including money market securities. Under
certain adverse investment conditions, the Fund may restrict the markets in
which its assets will be invested and may increase the proportion of assets
invested in temporary defensive obligations of U.S. issuers. Under normal
conditions, at least 65% of the Fund's total assets will be invested in the
securities of issuers from at least three different foreign countries.
Investments made for defensive purposes will be maintained only during periods
in which the Investment Adviser determines that economic or financial conditions
are adverse for holding or being fully invested in equity securities of foreign
issuers.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Recipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world.
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental policy
and may not be changed without approval of a majority
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of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. Investing
on an international basis involves special considerations. Investing in smaller
capital markets entails the risk of significant volatility in the Fund's
security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The
Fund is designed for investors seeking to complement their U.S. holdings through
foreign investments. The Fund should be considered as a long-term investment and
a vehicle for diversification and not as a balanced investment program.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four countries
having the largest equity market capitalizations. Currently, these four
countries are Japan, the United Kingdom, the United States and Germany. On March
31, 1994, those countries' equity market capitalizations totalled approximately
71% of the world's equity market capitalization according to data provided by
Morgan Stanley Capital International. The Fund will at all times, except during
defensive periods, maintain investments in at least three countries having
smaller capital markets.
The Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called 'emerging' countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries (such as France, the Netherlands and Spain), although
having relatively mature smaller capital markets, may also be in a position to
benefit from local or international developments encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in countries having smaller capital markets. It also
may not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Investment Adviser will emphasize
the allocation of assets among certain countries' capital markets, rather than
the selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. See 'Risks of High Yield Securities' below.
Such income can be used, however, to offset the operating expenses of the Fund.
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The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ('supranational entities'), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the 'World Bank'), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or 'stockholders', usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Investment
Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign
Securities' and 'Risks of High Yield Securities' below.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market of
its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues or profits in any one
of the two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such countries. The Fund also may
consider closed-end investment companies to be located in the country or
countries in which they primarily make their portfolio investments.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
INTERNATIONAL BOND FUND
The investment objective of the International Bond Fund is to seek a high
total investment return by investing in an international portfolio of non-U.S.
debt instruments denominated in various currencies and multinational currency
units. Total investment return is the aggregate of capital value changes and
income. The
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investment objective of the Fund is a fundamental policy and may not be changed
without approval of a majority of the Fund's outstanding shares. There can be no
assurance that the Fund's investment objective will be achieved. Under normal
circumstances, the Fund will invest at least 65% of its assets in non-U.S. debt
instruments. The Fund may seek to hedge against interest rate and currency risks
through the use of option, futures and currency transactions. Investing on an
international basis involves special considerations. See 'Other Portfolio
Strategies--Foreign Securities' below. The Fund is designed for investors
seeking to complement their U.S. holdings through foreign investments. The Fund
should be considered as a vehicle for diversification and not as a balanced
investment program.
The Fund may purchase debt obligations issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
('supranational entities') such as the International Bank for Reconstruction and
Development (the 'World Bank') and the European Coal and Steel Community, or
issued by foreign corporations or financial institutions.
With respect to the creditworthiness of the Fund's portfolio securities,
under normal conditions all of the securities owned by the Fund will be (i)
obligations which have a credit rating of A or better by S&P or by Moody's or
commercial paper rated A-1 by S&P or Prime-1 by Moody's or obligations that the
Fund's Investment Adviser has determined to be of similar creditworthiness. The
Fund' Investment Adviser may determine that a non-dollar denominated obligation
of a foreign government is of similar creditworthiness notwithstanding S&P's or
Moody's less favorable rating of a dollar denominated obligation of the same
issuer, provided that the Investment Adviser believes that such dollar
denominated obligation is assigned a lower rating because it is denominated in a
currency other than the foreign government's own currency.
In evaluating obligations, the Investment Adviser will utilize its internal
credit analysis resources as well as financial and economic information obtained
from other sources. With respect to foreign corporate issuers, the Investment
Adviser will consider the financial condition of the issuer and market and
economic conditions relevant to its operations. In terms of foreign governmental
obligations, the Investment Adviser will review the financial position of the
issuer and political and economic conditions in the country. Investment in
securities of supranational entities is subject to the additional risk to be
considered by the Investment Adviser that member governments will fail to make
required capital contributions and that a supranational entity will thus be
unable to meet its obligations.
The Fund's fully managed approach enables it to seek high total investment
return by investing in debt instruments denominated in various currencies and
currency units on the basis of the potential capital appreciation of such
instruments in U.S. dollars and the rates of income paid on such instruments. As
a general matter, in evaluating investments, the Fund will consider, among other
factors, the relative levels of interest rates prevailing in various countries,
the potential appreciation of such investments in their denominated currencies
and, for debt instruments not denominated in U.S. dollars, the potential
movement in the value of such currencies compared to the U.S. dollar. In seeking
capital appreciation, the Fund may invest in relatively low-yielding instruments
in expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short-term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
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The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. As
with all debt securities, changes in market yields will affect the Fund's asset
value as the prices of portfolio securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer term
securities generally fluctuate more in response to interest rate changes than do
shorter term securities. The Fund does not expect the average maturity of its
portfolio to exceed ten years.
The Fund may invest in debt instruments denominated in any currency or
multinational currency unit. An illustration of a multinational currency unit is
the European Currency Unit ('ECU') which is a 'basket' consisting of specified
amounts of the currencies of certain of the twelve member states of the European
Community, a Western European economic cooperative association including France,
Germany, The Netherlands and the United Kingdom. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Investment Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranationals, in particular, issue ECU-denominated
obligations. The Fund may invest in debt instruments denominated in the currency
of one nation although issued by a governmental entity, corporation or financial
institution of another nation. For example, the Fund may invest in a Japanese
yen-denominated obligation issued by a German corporation. Such investments
involve credit risks associated with the issuer and currency risks associated
with the currency in which the obligation is denominated. It is anticipated that
the Fund will invest primarily in marketable instruments denominated in the
currencies of the U.S., Japan, Canada, Western European nations, New Zealand and
Australia as well as in ECUs. Further, it is anticipated that such instruments
will be issued primarily by entities located in such countries and by
supranational entities. Under certain adverse conditions, the Fund may restrict
the financial markets or currencies in which its assets will be invested and may
invest its assets solely in U.S. dollar-denominated obligations.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in foreign markets, to hold
cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term
securities, including money market securities.
NON-DIVERSIFIED FUNDS
The World Income Focus, Developing Capital Markets Focus and International
Bond Funds are classified as non-diversified investment companies under the
Investment Company Act of 1940. However, each Fund will have to limit its
investments to the extent required by the diversification requirements
applicable to regulated investment companies under the Internal Revenue Code. To
qualify as a regulated investment company, a Fund, at the close of each fiscal
quarter, may not have more than 25% of its total assets invested in the
securities (except obligations of the U.S. Government, its agencies or
instrumentalities) of any one issuer and with respect to 50% of its assets, (i)
may not have more than 5% of its total assets invested in the securities of any
one issuer and (ii) may not own more than 10% of the outstanding voting
securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
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OTHER PORTFOLIO STRATEGIES
Restricted Securities. Each of the Funds is subject to limitations on the
amount of illiquid securities they may purchase; however, each Fund may purchase
without regard to that limitation certain securities that are not registered
under the Securities Act of 1933 (the 'Securities Act'), including (a)
commercial paper exempt from registration under Section 4(2) of the Securities
Act, and (b) securities that can be offered and sold to 'qualified institutional
buyers' under Rule 144A under the Securities Act, provided that the Company'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 liquidity of restricted securities. The Board has
determined that securities sold under Rule 144A 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.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Indexed and Inverse Securities. A Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an 'index'). As an illustration, a Fund may invest in a security that pays
interest and returns principal based on the change in an index of interest rates
or on the value of a precious or industrial metal. Interest and principal
payable on a security may also be based on relative changes among particular
indices. In addition, certain of the Funds may invest in securities whose
potential investment return is inversely based on the change in particular
indices. For example, a Fund may invest in securities that pay a higher rate of
interest and principal when a particular index decreases and pay a lower rate of
interest and principal when the value of the index increases. To the extent that
a Fund invests in such types of securities, it will be subject to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal. An example of
such types of securities are indexed or inverse securities issued with respect
to a stock market index in a particular emerging market Asia-Pacific country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Company believes that indexed securities, including inverse securities,
represent flexible portfolio management instruments that may allow a Fund to
seek potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
Foreign Securities. The Basic Value Focus, World Income Focus, Global
Utility Focus, International Equity Focus, Developing Capital Markets Focus and
International Bond Funds may invest in 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
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countries. If it should become necessary, a Fund could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs in foreign securities may be higher. The
operating expense ratio of a Fund 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 Fund, such as custodial
and brokerage costs, are higher. In addition, net investment income earned by a
Fund on a foreign security may be subject to withholding and other taxes imposed
by foreign governments which will reduce a Fund'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 Fund. No
Fund which may invest in foreign securities will concentrate its investments in
any particular country. The World Income Focus, Global Utility Focus,
International Equity Focus, Developing Capital Markets Focus and International
Bond Funds may from time to time be substantially invested in
non-dollar-denominated securities of foreign issuers. A Fund's return on
investments in non-dollar-denominated securities may be reduced or enhanced as a
result of changes in foreign currency rates during the period in which the Fund
holds such investments. Each Fund other than the Basic Value Focus, World Income
Focus, Global Utility Focus and International Equity Focus Funds, Developing
Capital Markets Focus and International Bond Funds will purchase only securities
issued in dollar denominations.
Each of the International Equity Focus Fund and Developing Capital Markets
Focus Fund may invest a significant portion of its assets in securities of
foreign issuers in smaller capital markets, while each of the other Funds which
is permitted to invest in foreign securities may from time to time invest in
securities of such foreign issuers. Foreign investments in smaller capital
markets involve risks not involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems and the existence or possible imposition
of exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. These risks are often heightened
for investments in small capital markets. Because a Fund which invests in
foreign securities will invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of securities in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Foreign currency exchange rates are determined by forces of
supply and demand in the foreign exchange markets. These forces are, in turn,
affected by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With respect
to certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries. In
addition, certain foreign investments may be subject to foreign withholding
taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities The transactions, making it
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difficult to conduct such transactions. Further, satisfactory custodial services
for investment securities may not be available in some countries having smaller
capital markets, which may result in a Fund which invests in these markets
incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in
temporary periods when assets of such a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience. Due to its emphasis on securities
of issuers located in smaller capital markets, the Developing Capital Markets
Focus Fund and the International Equity Focus Fund should be considered as a
vehicle for diversification and not as a balanced investment program.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government debtor,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole and the political constraints to which a
government debtor may be subject. Government debtors may default on their debt
and may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. Holders of government debt, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing and
emerging market countries are among the world's largest debtors to commercial
banks, other governments, international financial organizations and other
financial institutions. The issuers of the government debt securities in which a
Fund may invest have in the past experienced substantial difficulties in
servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements.
The Developing Capital Markets Focus and International Equity Focus Funds
intend to invest in securities of foreign issuers in smaller capital markets.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries require governmental approval prior to investments
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by foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons to only a
specific class of securities of a company which may have less advantageous terms
than securities of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the 'Investment Company Act'), the
Developing Capital Markets Focus and International Equity Focus Funds each may
invest up to 10% of its total assets in securities of closed-end investment
companies. This restriction on investments in securities of closed-end
investment companies may limit opportunities for the Fund to invest indirectly
in certain smaller capital markets. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their net asset values. If the Fund acquires shares in closed-end investment
companies, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such closed-end investment companies. The Fund also may seek, at its own
cost, to create its own investment entities under the laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a Fund's
investments in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from 'securities related
activities', as defined by the rules thereunder. These provisions may also
restrict the Fund's investments in certain foreign banks and other financial
institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash, securities issued or guaranteed by the U.S. Government or, in the case
of the Domestic Money Market Fund, cash equivalents which, while the loan is
outstanding, will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities plus accrued interest. Such
cash collateral will be invested in short-term securities, the income from which
will increase the return to the Fund.
Forward Commitments. Each of the Funds may purchase securities on a
when-issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be more
or less than its purchase price. A Fund entering into such transactions will
maintain a segregated account with its custodian of cash or liquid, high-grade
debt obligations in an aggregate amount equal to the amount of its commitments
in connection with such delayed delivery and purchase transactions.
Standby Commitment Agreements. The Global Utility Focus and Developing
Capital Markets Focus Funds may from time to time enter into standby commitment
agreements. Such agreements commit the respective Fund, for a stated period of
time, to purchase a stated amount of a fixed income security which may be issued
and sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement the Fund is paid a commitment fee which is typically approximately
0.5% of the aggregate purchase price of the security which the Fund has
committed to purchase. The Fund will at all times maintain a segregated account
with its custodian of cash or liquid, high-grade debt obligations in an amount
equal to the purchase price of the securities underlying the commitment. There
can be no assurance that the securities subject to a standby commitment will be
issued, and the value of the security, if issued, on the delivery date may be
more or less than its purchase price.
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TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
The Basic Value Focus, World Income Focus, Global Utility Focus,
International Equity Focus, Developing Capital Markets Focus and International
Bond Funds may engage in certain of the options, futures and currency
transactions discussed in Appendix A to this Prospectus. A Fund may engage in
transactions in futures contracts, options on futures contracts, forward foreign
exchange contracts, currency options and options on portfolio securities and on
stock indexes only for hedging purposes and not for speculation. A Fund may
write call options on portfolio securities and on stock indexes for the purpose
of achieving, through receipt of premium income, a greater average total return
than it would otherwise realize from holding portfolio securities alone. There
can be no assurance that the objectives sought to be obtained from the use of
these instruments will be achieved. A Fund's use of such instruments may be
limited by certain Internal Revenue Code requirements for qualification of the
Fund for the favorable tax treatment afforded investment companies. There can be
no assurance that a Fund's hedging transactions will be effective. Furthermore,
a Fund will only engage in hedging activities from time to time and will not
necessarily engage in hedging transactions in all the smaller capital markets in
which certain of the Funds may be invested at any given time.
RISKS OF HIGH YIELD SECURITIES
The World Income Focus Fund and Developing Capital Markets Focus Fund may
invest a substantial portion of their assets in high yield, high risk securities
or junk bonds, which are regarded as being predominantly speculative as to the
issuer's ability to make payments of principal and interest. Investment in such
securities involves substantial risk. Issuers of junk bonds may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of such
issuers generally are greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield securities may be more likely to experience
financial stress, especially if such issuers are highly leveraged. During
recessionary periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer. While the high yield securities in which the World Income Focus Fund or
Developing Capital Markets Focus Fund may invest normally do not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after a Fund purchases a particular security, in which case a Fund may
experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the
World Income Focus Fund and Developing Capital Markets Focus Fund each will
diversify its holdings among many issuers. However, there can be no assurance
that diversification will protect a Fund from widespread defaults brought about
by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated
fixed-income securities, so that adverse economic events may have a greater
impact on their prices and yields than on higher-rated fixed-income securities.
Zero coupon bonds and bonds which pay interest and/or principal in additional
bonds rather than in cash are especially volatile. Like higher-rated
fixed-income securities, junk bonds are generally purchased and sold through
dealers who make a market in such securities for their own accounts. However,
there are fewer dealers in this market, which may be less liquid than the market
for higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
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by various dealers. Adverse economic conditions or investor perceptions (whether
or not based on economic fundamentals) may impair the liquidity of this market,
and may cause the prices the World Income Focus Fund and International Bond Fund
receive for their junk bonds to be reduced, or a Fund may experience difficulty
in liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgment may play a greater role in valuing certain of each Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the World Income Focus Fund and International Bond Fund. In addition, each Fund
may incur additional expenses to the extent that it is required to seek recovery
upon a default on a portfolio holding or to participate in the restructuring of
the obligation.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an 'ordinarily prudent person.' In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that compliance
with these standards will not have any negative impact on the performance of any
of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
DIRECTORS
The Directors of the Company consist of five individuals, four of whom are
not 'interested persons' of the Company as defined in the Investment Company Act
of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as follows:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the
Investment Adviser and Fund Asset Management, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch'); and Director of Merrill Lynch Funds
Distributor, Inc.
WALTER MINTZ--Special Limited Partner of Cumberland Partners
(investment partnership).
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MELVIN R. SEIDEN--President of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial
consultants).
JOE GRILLS--Investment Management Advisor; Director of the Duke
Management Company and a member of the Executive Committee; formerly,
Assistant Treasurer of International Business Machines Corporation.
HARRY WOOLF--Professor and former Director of the Institute for
Advanced Study (private institution devoted to the encouragement, support
and patronage of learning).
- ---------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. ('MLAM'), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the investment adviser for the Fund.
The principal address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey
08543-9011). The Investment Adviser or its affiliate, Fund Asset Management,
L.P. ('FAM'), acts as the investment adviser for over 90 other registered
investment companies. MLAM also offers portfolio management and portfolio
analysis services to individuals and institutions. In the aggregate, as of
January 31, 1994, MLAM and FAM had a total of approximately $167.1 billion in
investment company and other portfolio assets under management.
Effective January 1, 1994, MLAM was reorganized as a Delaware limited
partnership. MLAM (the general partner of which is Princeton Services, Inc., a
wholly-owned subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. and has its principal place of business
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. Prior to the
reorganization, the Investment Adviser was a Delaware corporation known as
Merrill Lynch Investment Management, Inc., which did business as Merrill Lynch
Asset Management, which was incorporated in 1976. The reorganization did not
result in a change to the Investment Adviser's management or personnel, nor did
the reorganization cause any adverse change to the Investment Adviser's
financial condition. MLAM was a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. prior to its reorganization and continues to be after its reorganization.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the Funds,
who consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the
Company and is obligated to provide all the office space, facilities, equipment
and personnel necessary to perform its duties under the Agreements. The
Investment Adviser has access to the full range of the securities and economic
research facilities of Merrill Lynch.
During the Company's fiscal year ended December 31, 1993, the advisory fees
expense incurred by the Company with respect to all of its funds totalled
$5,421,039 of which $54,569 related to the Basic Value Focus Fund (representing
0.60% of its average net assets), $88,050 related to the World Income Focus Fund
(representing 0.60% of its average net assets), $142,995 related to the Global
Utility Focus Fund (representing 0.60% of its net assets) and $133,754 related
to International Equity Focus Fund (representing 0.75% of its net assets). The
advisory fees for the Developing Capital Markets Focus and International Bond
Funds are 1.00% and 0.60% of their respective average daily net assets.
During the Company's fiscal year ended December 31, 1993, the total
operating expenses of the Funds (including the advisory fees paid to the
Investment Adviser), before reimbursement of a portion of such expenses, were as
follows: $77,816 related to the Basic Value Focus Fund (representing 0.86% of
its average net assets), $137,370 related to the World Income Focus Fund
(representing 0.94% of its average net assets), $212,080 related to the Global
Utility Focus Fund (representing 0.89% of its net assets) and $203,643 related
to the International Equity Focus Fund (representing 1.14% of its net assets).
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The Investment Advisory Agreements require the Investment Adviser to
reimburse the Company's Funds if and to the extent that in any fiscal year the
operating expenses of each Fund exceeds the most restrictive expense limitations
then in effect under any state securities laws or published regulations
thereunder. At present the most restrictive expense limitation requires the
Investment Adviser to reimburse expenses which exceed 2.5% of each Fund's first
$30 million of average daily net assets, 2.0% of its average daily net assets in
excess of $30 million but less than $100 million, and 1.5% of its average daily
net assets in excess of $100 million. Expenses for this purpose include the
Investment Adviser's fee but exclude interest, taxes, brokerage fees and
commissions and extraordinary charges, such as litigation. No fee payments will
be made to the Investment Adviser with respect to any Fund during any fiscal
year which would cause the expenses of such Fund to exceed the pro rata expense
limitation applicable to such Fund at the time of such payment.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have
entered into two agreements which limit the operating expenses paid by each Fund
in a given year to 1.25% of its average daily net assets (the 'Reimbursement
Agreements'), which is less than the expense limitations imposed by state
securities laws or published regulations thereunder. The reimbursement
agreements provide that any expenses in excess of 1.25% of average daily net
assets will be reimbursed to the Fund by the Investment Adviser which, in turn,
will be reimbursed by MLLA. See 'Investment Advisory Arrangements' in the
Statement of Additional Information. MLLA sells the Contracts described in the
Prospectus for the Contracts.
The following is information with respect to the Portfolio Managers for
each of the Company's Funds offered hereby.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
Walter Rogers has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have served
as the International Equity Focus Fund's Portfolio Managers since July 1993, and
are primarily responsible for the Fund's day-to-day management. Andrew Bascand
has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global
Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P.
Investments (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior
Research Officer of the Bank of England's International Department from 1986 to
1987; Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993;
Vice President from 1990 to 1993; and an employee since 1987. Grace Pineda and
Steve Silverman have served as Vice Presidents of MLAM since 1989 and 1983,
respectively.
Vincent Lathbury, III and Robert Parish have served as the World Income
Focus Fund's Portfolio Managers since July 1993 and are primarily responsible
for the Fund's day-to-day management. They have served as Vice Presidents of
MLAM since 1982 and 1991, respectively. Mr. Parish was the Vice President and
Senior Portfolio Manager for Templeton International from 1987 to 1991.
Grace Pineda will serve as the Developing Capital Markets Focus Fund's
Portfolio Manager beginning May 1994, and is primarily responsible for the
Fund's day-to-day management. She has served as Vice President of MLAM since
1989.
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<PAGE>
Robert Parish will serve as the International Bond Fund's Portfolio Manager
beginning May 1994 and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1991, and was Vice
President and Senior Portfolio Manager for Templeton International from 1987 to
1991.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis. For the year ended
December 31, 1993, the Company paid brokerage commissions of $2,120,358, of
which $158,442 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company is offering shares in the Funds offered hereby, without sales
charge, only for purchase by MLLIC and ML of New York for the Separate Accounts
to fund benefits under the Variable Life Contracts. Shares in all of the
Company's Funds are offered to the Insurance Companies for certain other
separate accounts to fund benefits under variable life insurance contracts. The
Company continuously offers shares in each of its Funds to the Insurance
Companies at prices equal to the respective per share net asset value of the
Funds. Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary of the
Investment Adviser, acts as the distributor of the shares. Net asset value is
determined in the manner set forth below under 'Additional
Information-Determination of Net Asset Value.'
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund will consist of all payments of dividends or interest
received by such Fund less the estimated expenses of such Fund (including fees
payable to the Investment Adviser).
Dividends from net investment income of the World Income Focus and
International Bond Funds are declared and reinvested monthly in additional full
and fractional shares of the respective Funds at net asset value.
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Dividends from net investment income of the Global Utility Focus Fund are
declared and reinvested quarterly in additional full and fractional shares of
the Fund. Dividends from net investment income of the International Equity
Focus, Basic Value Focus and Developing Capital Markets Focus Funds are declared
and reinvested at least annually in additional full and fractional shares of the
respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
'Code'). Under such provisions, a Fund 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. One of the requirements to qualify for treatment as
a regulated investment company under the Code is that a Fund, among other
things, derive less than 30% of its gross income in each taxable year from gains
(without deduction of losses) from the sale or other disposition of stocks,
securities and certain options, futures or forward contracts held for less than
three months. This requirement may limit the ability of certain Funds to dispose
of certain securities at times when management of the Company might otherwise
deem such disposition appropriate or desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make distributions
in amounts necessary to satisfy its distribution requirements under the Code.
TAX TREATMENT OF MLLIC AND ML OF NEW YORK AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send to
the Insurance Companies a written notice required by the Code designating the
amount and character of any distributions made during such year.
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PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. The yield for the 30-day period ending
December 31, 1993 was 5.60% for the World Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost. The yield and
total return quotations may be of limited use for comparative purposes because
they do not reflect charges imposed at the Separate Account level which, if
included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line
Composite Index, the Dow Jones Industrial Average, or performance data published
by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service
or contained in publications such as Morningstar Publications, Inc., Chase
Investment Performance Digest, Money Magazine, U.S. News & World Report,
Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Ibbotson Associates. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined (i) for shares of the Basic Value Focus Funds at 4:00 P.M. New
York City time on each day the New York Stock Exchange is open for business and
(ii) for shares of the World Income Focus, Global Utility Focus, International
Equity Focus, Developing Capital Markets Focus and International Bond Funds, as
of 4:15 P.M. New York City time on each day the New York Stock Exchange is open
for business. The New York Stock Exchange is open on business days other than
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national holidays (except for Martin Luther King Day, when it is open) and Good
Friday. The net asset value per share of each Fund other than the Domestic Money
Market Fund are computed by dividing the sum of the value of the securities held
by that Fund plus any cash or other assets (including interest and dividends
accrued) minus all liabilities (including accrued expenses) by the total number
of shares outstanding of that Fund at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees payable to the Investment
Adviser, are accrued daily.
Securities held by each Fund will be valued as follows: Portfolio
securities which are traded on stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the closing bid price. Securities traded in the
over-the-counter market are valued at the bid price or yield equivalent as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market,
and it is expected that for debt securities this ordinarily will be the
over-the-counter market. Options are valued at the last bid price in the case of
options purchased and the last asked price in the case of options written.
Futures contracts are valued at settlement price at the close of the applicable
exchange. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. 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.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. The Basic Value Focus,
World Income Focus, Global Utility Focus and International Equity Focus Funds
commenced operations on July 1, 1993. The Developing Capital Markets Focus and
International Bond Funds are expected to commence operations on or about May 2,
1994. The authorized capital stock of the Company consists of 2,300,000,000
shares of Common Stock, par value $0.10 per share. The shares of Common Stock
are divided into seventeen classes designated Merrill Lynch Reserve Assets Fund
Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High
Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common
Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Flexible
Strategy Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common
Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global
Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund
Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch
World Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund
Common Stock, Merrill Lynch International Equity Focus Fund Common Stock,
Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch
International Bond Fund Common Stock and Merrill Lynch Intermediate Government
Bond Fund Common Stock, respectively. The Company may, from time to time, at the
sole discretion of its Board of Directors and without the need to obtain the
approval of its shareholders or of Contract Owners, offer and sell shares of one
or more of such classes. Each class consists of 100,000,000 shares except for
Domestic Money Market Fund Common Stock which consists of 300,000,000 shares and
Reserve Assets Fund Common Stock which consists of 500,000,000 shares. All
shares of Common Stock have equal voting rights, except that only shares of the
respective classes are entitled to vote on matters concerning only that class.
Pursuant to the Investment Company Act of 1940 and the rules and regulations
thereunder, certain matters approved by a vote of all shareholders of the
Company may not be binding on a class whose shareholders have not approved such
matter. Each issued and outstanding share of a class is entitled to one vote and
to participate equally in dividends and distributions declared with respect to
such class and in net assets of such class upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities. The shares of each
class, when issued, will be fully paid and nonassessable,
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have no preference, preemptive, conversion, exchange or similar rights, and will
be freely transferable. Holders of shares of any class are entitled to redeem
their shares as set forth under 'Redemption of Shares.' Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Company voting for the election of directors can elect all of the directors of
the Company if they choose to do so and in such event the holders of the
remaining shares would not be able to elect any directors. The Company does not
intend to hold meetings of shareholders unless under the Investment Company Act
of 1940 shareholders are required to act on any of the following matters: (i)
election of directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of the selection of
independent accountants.
MLLIC purchased $100 worth of shares of each of the Basic Value Focus,
World Income Focus, Global Utility Focus and International Equity Focus Funds on
June 28, 1993. MLLIC purchased, on July 1, 1993, $8,000,000 worth of shares of
each of the World Income Focus Fund and International Equity Focus Fund and
$2,000,000 worth of shares of each of the Basic Value Focus Fund and the Global
Utility Focus Fund. It is anticipated that MLLIC will purchase, on May 2, 1994,
$8,000,000 worth of shares of the Developing Capital Markets Focus Fund and
$5,000,000 worth of shares of the International Bond Fund. The organizational
expenses of each of the Company's Funds are paid by the Investment Adviser. The
Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year
period.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of the Company's assets, except that Chase Manhattan
Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245, acts as custodian
for assets of the Company's Developing Capital Markets Focus Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Financial Data Services, Inc. ('FDS'), which is a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., acts as the Company's transfer agent and is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts. FDS will receive an annual fee of
$5,000 per Fund and will be entitled to reimbursement of out-of-pocket expenses.
Prior to June 1, 1990, BONY was the Company's transfer agent.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
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ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated April 29, 1994, which forms
a part of the Registration Statement, is incorporated by reference into this
Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
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APPENDIX A
REPURCHASE AGREEMENTS
Each of the Funds may invest in securities subject to repurchase agreements
with any member bank of the Federal Reserve System or primary dealer in U.S.
Government securities. A repurchase agreement is an instrument under which the
purchaser (i.e., a Fund) acquires ownership of the obligation (debt security)
and the seller agrees, at the time of the sale, to repurchase the obligation at
a mutually agreed upon time and price, thereby determining the yield during the
purchaser's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. The underlying securities will only
consist of U.S. Government or government agency securities, certificates of
deposit, commercial paper or bankers' acceptances. Repurchase agreements usually
are for short periods, such as under one week. Repurchase agreements are
considered to be collateralized loans under the Investment Company Act of 1940,
and a Fund will require the seller to provide additional collateral if the
market value of the securities falls below the repurchase price any time during
the term of the repurchase agreement. If a repurchase agreement is construed to
be a collateralized loan, the underlying securities will not be considered to be
owned by the Fund but only to constitute collateral for the seller's obligation
to pay the repurchase price, and, in the event of a default by the seller
because of bankruptcy or otherwise, the Fund may suffer time delays and incur
costs or losses in connection with the disposition of the collateral. The
Investment Adviser evaluates the creditworthiness of dealers with which the Fund
enters into repurchase agreements, using guidelines established by the Company's
Board of Directors.
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as 'gilt-edge.' Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa--Bonds which are rated Baa are considered medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded both during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any period of time may be
small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
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Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other market shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
Options on Portfolio Securities. Each of the Basic Value Focus, World
Income Focus, Global Utility Focus, International Equity Focus, International
Bond and Developing Capital Markets Focus Funds may from time to time sell
('write') covered call options on its portfolio securities in which it may
invest and may engage in closing purchase transactions with respect to such
options. A covered call option is an option where the Fund, in return for a
premium, gives another party a right to buy particular securities held by the
Fund at a specified future date and at a price set at the time of the contract.
The principal reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater return than would be realized on the
securities alone. By writing covered call options, a Fund gives up the
opportunity, while the option is in effect, to profit from any price increase in
the underlying security above the option exercise price. In addition, the Fund's
ability to sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a partial
hedge against the price of the underlying security declining. The Basic Value
Focus Fund may not write covered call options on underlying securities exceeding
15% of the value of its total assets.
Each of the World Income Focus, Global Utility Focus, International Equity
Focus, International Bond and Developing Capital Markets Focus Funds also may
write put options, which give the holder of the option the right to sell the
underlying security to the Fund at the stated exercise price. The Fund will
receive a premium for writing a put option which increases the Fund's return. A
Fund will write only covered put options which means that so long as the Fund is
obligated as the writer of the option, it will, through its custodian, have
deposited and
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maintained cash, cash equivalents, U.S. Government securities or other high
grade liquid debt or equity securities denominated in U.S. dollars or non-U.S.
currencies with a securities depository with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise for as long as
the option is outstanding. A Fund may engage in closing transactions in order to
terminate put options that it has written.
The World Income Focus, Global Utility Focus, International Equity Focus,
International Bond and Developing Capital Markets Focus Funds may purchase put
options on portfolio securities. In return for payment of a premium, the
purchase of a put option gives the holder thereof the right to sell the security
underlying the option to another party at a specified price until the put option
is closed out, expires or is exercised. Each Fund will only purchase put options
to seek to reduce the risk of a decline in value of the underlying security. The
total return on the security may be reduced by the amount of the premium paid
for the option by the Fund. Prior to its expiration, a put option may be sold in
a closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Each of the Funds may engage in options transactions on exchanges and in
the over-the-counter ('OTC') markets. In general, exchange traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See 'Over-the-Counter Options'
below for information as to restrictions on the use of OTC options.
Options on Stock Indices. The World Income Focus, International Equity
Focus, International Bond and Developing Capital Markets Focus Funds may
purchase and write call options and put options on stock indices traded on a
national securities exchange to seek to reduce the general market risk of their
securities or specific industry sectors which the Fund invests in. Options on
indices are similar to options on securities except that, on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Funds may invest in index options
based on a broad market index, e.g., the S&P 500, or on a narrow index
representing an industry or market segment, e.g., the Amex Oil & Gas Index. The
effectiveness of a hedge employing stock index options will depend primarily on
the degree of correlation between movements in the value of the index underlying
the option and in the portion of the portfolio being hedged. For further
discussion concerning such options, see 'Risk Factors in Options, Futures and
Currency Transactions' below and the Company's Statement of Additional
Information.
Stock Index and Financial Futures Contracts. The World Income Focus,
International Equity Focus, International Bond and Developing Capital Markets
Focus Funds may purchase and sell stock index futures contracts and financial
futures contracts to hedge their portfolios. The Funds may sell stock index
futures contracts and financial futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the Funds'
securities portfolios that might otherwise result. When the Funds are not fully
invested in the securities market and anticipate a significant market advance,
they may purchase stock index or financial futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of securities
that the Funds intend to purchase. A stock index or financial futures contract
is a bilateral agreement pursuant to which the Funds will agree to buy or
deliver at settlement an amount of cash equal to a dollar multiplied by the
difference between the value of a stock index or financial instrument at the
close of the last trading day of the contract and the price at which the futures
contract is originally entered into. The Funds may engage in transactions in
stock index futures contracts based on broad market indexes or on indexes on
industry or market segments. A Fund may effect transactions in stock index
futures contracts in connection with the equity securities in which it invests
and in financial futures contracts in connection with the debt securities in
which it
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invests. As with stock index options, the effectiveness of the Funds' hedging
strategies depend primarily upon the degree of correlation between movements in
the value of the securities subject to the hedge and the index or securities
underlying the futures contract. See 'Risk Factors in Options, Futures and
Currency Transactions' below.
Hedging Foreign Currency Risks. The World Income Focus, Global Utility
Focus, International Equity Focus, International Bond and Developing Capital
Markets Focus Funds are authorized to deal in forward foreign exchange contracts
between currencies of the different countries in which they will invest,
including multi-national currency units, as a hedge against possible variations
in the foreign exchange rate between these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price at the time of the contract.
The dealings of the Funds in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Funds accruing in connection with the
purchase and sale of their portfolio securities, the sale and redemption of
shares of the Funds or the payment of dividends and distributions by the Funds.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Funds will not speculate in forward foreign exchange. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Funds to
hedge against a devaluation that is so generally anticipated that the Funds are
not able to contract to sell the currency at a price above the devaluation level
they anticipate.
The Funds are also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency options provide
the holder thereof the right to buy or to sell a currency at a fixed price on or
before a future date. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Such transactions may be effected with respect to hedges
on non-U.S. dollar-denominated securities (including securities denominated in
multi-national currency units) owned by the Funds, sold by the Funds but not yet
delivered, or committed or anticipated to be purchased by the Funds. As an
illustration, the Funds may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese yen-denominated security.
In such circumstances, for example, the Funds may purchase a foreign currency
put option enabling them to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Funds may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a 'straddle'). By
selling such call option in this illustration, the Funds give up the opportunity
to profit without limit from increases in the relative value of the yen to the
dollar.
The Funds will not speculate in foreign currency options or futures.
Accordingly, the Funds will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which they own, the
expected acquisition price of securities which they have committed or anticipate
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Funds but not yet delivered, the proceeds
thereof in its denominated currency. Further, if a security with respect to
which a currency hedging transaction has been executed should subsequently
decrease in value, the Funds will direct their custodian to segregate liquid,
high-grade debt securities having a market value equal to such decrease in
value, less any initial or variation margin held in the account of their broker.
As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
Options on Futures Contracts. The World Income Focus, Global Utility Focus
and International Equity Focus Funds may also purchase and write call and put
options on futures contracts in connection with their hedging activities.
Generally, these strategies are utilized under the same market conditions (i.e.,
conditions
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relating to specific types of investments) in which the Funds enter into futures
transactions. The Funds may purchase put options or write call options on
futures contracts rather than selling the underlying futures contract in
anticipation of a decline in the equities markets or in the value of a foreign
currency. Similarly, the Funds may purchase call options, or write put options
on futures contracts, as a substitute for the purchase of such futures to hedge
against the increased cost resulting from appreciation of equity securities or
in the currency in which securities which the Funds intend to purchase are
denominated. Limitations on transactions in options on futures contracts are
described below.
Over-the-Counter Options. The World Income Focus, Global Utility Focus,
International Equity Focus, International Bond and Developing Capital Markets
Focus Funds may engage in options transactions in the over-the-counter markets.
In general, over-the-counter ('OTC') options are two-party contracts with price
and terms negotiated by the buyer and seller, whereas exchange-traded options
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options include put and call options on
individual securities, cash settlement options on groups of securities, and
options on currency. The Funds may engage in an OTC options transaction only if
they are permitted to enter into transactions in exchange-traded options of the
same general type. The Funds will engage in OTC options only with member banks
of the Federal Reserve System and primary dealers in U.S. Government securities
or their affiliates which have a capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Company require that each of the
World Income Focus, Global Utility Focus, International Equity Focus,
International Bond and Developing Capital Markets Focus Funds' futures
transactions constitute bona fide hedging transactions or, with respect to
non-hedging transactions, that the Fund not enter into such transactions, if,
immediately thereafter, the sum of the amount of initial margin deposits on the
respective Fund's existing non-hedging futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total assets.
When a Fund purchases a futures contract, a call option thereon or writes a
put option, an amount of cash and cash equivalents will be deposited in a
segregated account with the Company's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby insuring
that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission
which exempts the Company from certain provisions of the Investment Company Act
of 1940 in connection with transactions involving futures contracts and options
thereon.
Risk Factors in Options, Futures and Currency Transactions. A Fund's
ability to effectively hedge all or a portion of its portfolio of securities
through transactions in options on stock indexes, stock index futures and
financial futures depends on the degree to which price movements in the index
underlying the hedging instrument correlates with price movements in the
relevant portion of the securities portfolio. The securities portfolio will not
duplicate the components of the index. As a result, the correlation will not be
perfect. Consequently, a Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as the
underlying index or securities and that the Fund would experience a loss on one
position which is not completely offset by a gain on the other position. It is
also possible that there may be a negative correlation between the index or
securities underlying an option or futures contract in which a Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the securities and the hedging instrument. A Fund
will invest in a hedging instrument only if, in the judgment of the Investment
Adviser, there is expected to be a sufficient degree of correlation between
movements in the value of the instrument and movements in the value of the
relevant portion of the portfolio of securities for such hedge to be effective.
There can be no assurance that the judgment will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entail the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index or
currency. The anticipated spread between the prices may be distorted due to
differences in the nature of the markets, such as differences in margin and
maintenance requirements, the liquidity of such markets and the
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participation of speculators in the futures market. However, the risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract or termination date of the option approaches.
The Funds intend to enter into exchange-traded options and futures
transactions only if there appears to be a liquid secondary market for such
options or futures. However, there can be no assurance that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to close an
options or futures transaction. The inability to close options and futures
positions could have an adverse impact on a Fund's ability to effectively hedge
its portfolio. There is also the risk of loss by a Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom a Fund has an open
position in an option or futures contract.
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