<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1995
FILE NO. 2-74452
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 23 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 24 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH INVESTMENT MANAGEMENT, LEONARD B. MACKEY, JR., ESQ.
L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
------------------------
The Registrant has registered an indefinite number of shares of its Funds,
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The notice required by such rule for the Registrant's most
recent fiscal year was filed on February 28, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM PROSPECTUS CAPTION
- ---------- --------------------------------
<S> <C> <C>
PART A
1. Cover Page...................... Cover Page
2. Synopsis........................ *
3. Financial Highlights............ Financial Highlights;
Performance Data
4. General Description of
Registrant.................... Investment Objective and
Policies of the Funds;
Additional Information
5. Management of the Fund.......... Investment Adviser; Directors;
Portfolio Transactions and
Brokerage; Additional
Information
5A. Management Discussion of Fund
Performance................... *
6. Capital Stock and Other
Securities.................... Cover Page; Dividends;
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered....................... Purchase of Shares; Additional
Information
8. Redemption or Repurchase........ Redemption of Shares
9. Pending Legal Proceedings....... *
STATEMENT OF
ADDITIONAL INFORMATION
CAPTION
--------------------------------
PART B
10. Cover Page...................... Cover Page
11. Table of Contents............... Table of Contents
12. General Information and
History....................... Additional Information
13. Investment Objectives and
Policies...................... Investment Objectives and
Policies; Investment
Restrictions; Portfolio
Transactions and Brokerage
14. Management of the Registrant.... Management of the Company
15. Control Persons and Principal
Holders of Securities......... Management of the Company;
Additional Information
16. Investment Advisory and Other
Services...................... Management of the Company
17. Brokerage Allocation and Other
Practices..................... Portfolio Transactions and
Brokerage
18. Capital Stock and Other
Securities.................... *
19. Purchase, Redemption and Pricing
of Securities Being Offered... Determination of Net Asset
Value; Redemption of Shares
20. Tax Status...................... Dividends, Distributions and
Taxes
21. Underwriters.................... Distribution Arrangements
22. Calculation of Performance
Data.......................... Performance Data
23. Financial Statements............ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
- ------------------
* Item inapplicable or answer negative.
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: the first
prospectus to be found herein is to be used in connection with the sale of
shares of the Funds to fund variable annuity contracts, and variable life
contracts issued by Insurance Companies other than Merrill Lynch Life Insurance
Company ('MLLIC') or Merrill Lynch Life Insurance Company of New York ('ML of
New York') and the second prospectus to be found herein is to be used in
connection with the sale of shares of the Funds to fund benefits under variable
life insurance contracts issued by MLLIC or ML of New York.
<PAGE>
PROSPECTUS
APRIL 28, 1995
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') for certain separate accounts ('Separate Accounts') to fund
benefits under variable annuity contracts ('Variable Annuity Contracts') issued
by such 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'). Shares of the Funds may also be sold in the future to
Separate Accounts of insurance companies other than MLLIC, ML of New York or
Family Life (together with MLLIC, ML of New York and Family Life, 'Insurance
Companies') to fund Contracts issued by them. 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 Rating Group.
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 28, 1995, 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.
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.
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.
For more information on the Funds' investment objectives and policies,
please 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>
Financial 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............................. 49
Portfolio Transactions and Brokerage........... 52
Purchase of Shares............................. 53
Redemption of Shares........................... 53
Dividends, Distributions and Taxes............. 53
Performance Data............................... 54
Additional Information......................... 55
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. The table has been audited by Deloitte &
Touche LLP, independent auditors, in connection with their annual audits of the
Company's financial statements. Financial statements for the year ended December
31, 1994 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>
The following per share AMERICAN BALANCED FUND
data and ratios have -------------------------------------------------------------------------------------------------
been derived from FOR THE
information provided in PERIOD
the financial JUNE 1,
statements. FOR THE YEAR ENDED DECEMBER 31, 1988+ TO
INCREASE (DECREASE) IN ---------------------------------------------------------------------------- DEC. 31,
NET ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988
-------- -------- ------- ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 14.08 $ 12.85 $ 12.82 $11.26 $11.74 $10.41 $10.00
-------- -------- ------- ------ ------ ------ -----
Investment income--net... .48 .32 .31 .47 .47 .44 .29
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... (1.06) 1.37 .37 1.76 (.35) 1.40 .12
-------- -------- ------- ------ ------ ------ -----
Total from investment
operations.............. (.58) 1.69 .68 2.23 .12 1.84 .41
-------- -------- ------- ------ ------ ------ -----
Less dividends and
distributions:
Investment
income--net......... (.37) (.34) (.37) (.49) (.46) (.50) --
Realized gain on
investments--net.... -- (.12) (.28) (.18) (.14) (.01) --
In excess of realized
gain on
investments--net.... (.05) -- -- -- -- -- --
-------- -------- ------- ------ ------ ------ -----
Total dividends and
distributions........... (.42) (.46) (.65) (.67) (.60) (.51) --
-------- -------- ------- ------ ------ ------ -----
Net asset value, end of
period.................. $ 13.08 $ 14.08 $ 12.85 $12.82 $11.26 $11.74 $10.41
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... (4.19)% 13.49% 5.72% 20.65% 1.22% 18.11% 4.10%++
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .63% .70% .97% 1.20% 1.25% 1.25% 1.25%*
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
Expenses................. .63% .70% .97% 1.20% 1.50% 2.29% 1.25%*
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
Investment income--net... 3.95% 3.20% 3.71% 4.16% 4.71% 4.71% 5.13%*
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $158,951 $115,420 $24,918 $7,937 $5,675 $3,854 $2,276
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
Portfolio turnover....... 35.36% 12.55% 36.34% 50.82% 23.52% 37.60% 2.04%
-------- -------- ------- ------ ------ ------ -----
-------- -------- ------- ------ ------ ------ -----
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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>
DEVELOPING
CAPITAL DOMESTIC
BASIC VALUE MARKETS MONEY
The following per share data and FOCUS FUND FOCUS FUND MARKET FUND
ratios have been derived from ---------------------------------------- ---------------------- ------------
information provided in the FOR THE YEAR FOR THE PERIOD JULY 1, FOR THE PERIOD FOR THE YEAR
financial statements. ENDED 1993+ TO MAY 2 1994+ TO ENDED
INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
VALUE: 1994 1993 1994 1994
------------ ----------------------- ---------------------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 10.95 $ 10.00 $ 10.00 $ 1.00
------------ ------ ------ ------------
Investment income--net............... .17 .04 .09 .0386
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net................... .08 .91 (.58) (.0007)
------------ ------ ------ ------------
Total from investment operations..... .25 .95 (.49) .0379
------------ ------ ------ ------------
Less dividends and distributions:
Investment income--net............ (.10) -- -- (.0386)
Realized gain on
investments--net.................. -- -- -- --
------------ ------ ------ ------------
Total dividends and distributions.... (.10) -- -- (.0386)
------------ ------ ------ ------------
Net asset value, end of period....... $ 11.10 $ 10.95 $ 9.51 $ 1.00
------------ ------ ------ ------------
------------ ------ ------ ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 2.36% 9.50%++ (4.90)%++ 3.94%
------------ ------ ------ ------------
------------ ------ ------ ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... .72% .86%* 1.29%* .50%
------------ ------ ------ ------------
------------ ------ ------ ------------
Expenses............................. .72% .86%* 1.35%* .57%
------------ ------ ------ ------------
------------ ------ ------ ------------
Investment income--net............... 2.08% 1.69%* 2.18%* --%
------------ ------ ------ ------------
------------ ------ ------ ------------
Investment income--net, and realized
gain (loss) on
investments--net***................. -- -- -- 4.02%
------------ ------ ------ ------------
------------ ------ ------ ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $164,307 $47,207 $ 36,676 $363,199
------------ ------ ------ ------------
------------ ------ ------ ------------
Portfolio turnover................... 60.55% 30.86% 29.79% --%
------------ ------ ------ ------------
------------ ------ ------ ------------
<CAPTION>
DOMESTIC MONEY
MARKET FUND
------------------------------
The following per share data and FOR THE
ratios have been derived from PERIOD
information provided in the FOR THE YEAR FEBRUARY 20,
financial statements. ENDED 1992+ TO
INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31,
VALUE: 1993 1992
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 1.00 $ 1.00
------------ ------
Investment income--net............... .0302 .0302
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net................... .0005 .0013
------------ ------
Total from investment operations..... .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....... $ 1.00 $ 1.00
------------ ------
------------ ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 3.10% 3.16%++
------------ ------
------------ ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... .36% .32%*
------------ ------
------------ ------
Expenses............................. .63% .88%*
------------ ------
------------ ------
Investment income--net............... --% --%
------------ ------
------------ ------
Investment income--net, and realized
gain (loss) on
investments--net***................. 3.03% 3.48%*
------------ ------
------------ ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $170,531 $ 41,128
------------ ------
------------ ------
Portfolio turnover................... --% --%
------------ ------
------------ ------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** Applicable to the Domestic Money Market Fund only.
+ 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 EQUITY GROWTH FUND
and ratios have been derived -------------------------------------------------------------------------------------------
from information provided in
the financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET -------------------------------------------------------------------------------------------
ASSET VALUE: 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987
-------- ------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47 $ 18.42
-------- ------- --------- ------- ------- ------- ------- -------
Investment income--net........ .05 (.01) .01 .09 .05 (.07) (.10) (.09)
Realized and unrealized gain
(loss) on investments and
foreign curency
transactions--net............ (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01)
-------- ------- --------- ------- ------- ------- ------- -------
Total from investment
operations................... (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10)
-------- ------- --------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net..... -- --* (.07) (.02) -- -- -- (.03)
Realized gain on
investments--net......... (.19) -- -- -- -- -- (.22) (2.82)
-------- ------- --------- ------- ------- ------- ------- -------
Total dividends and
distributions................ (.19) -- (.07) (.02) -- -- (.22) (2.85)
-------- ------- --------- ------- ------- ------- ------- -------
Net asset value, end of
year......................... $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ (7.27)% 17.78% (0.53)% 50.10% (12.55)% 16.60% 4.25% (22.29)%
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25% 1.24%
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
Expenses...................... .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24%
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
Investment income
(loss)--net.................. .27% (.05)% .04% .51% .14% (.68)% (.56)% (.60)%
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $170,044 $98,976 $ 23,167 $11,318 $ 6,851 $ 6,811 $ 5,521 $ 6,707
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
Portfolio turnover............ 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91%
-------- ------- --------- ------- ------- ------- ------- -------
-------- ------- --------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data EQUITY GROWTH FUND
and ratios have been derived ------------------
from information provided in FOR THE YEAR ENDED
the financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET -------------------
ASSET VALUE: 1986 1985
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 15.56 $ 11.85
------- -------
Investment income--net........ .04 .05
Realized and unrealized gain
(loss) on investments and
foreign curency
transactions--net............ 2.86 3.73
------- -------
Total from investment
operations................... 2.90 3.78
------- -------
Less dividends and
distributions:
Investment income--net..... (.04) (.07)
Realized gain on
investments--net......... -- --
------- -------
Total dividends and
distributions................ (.04) (.07)
------- -------
Net asset value, end of
year......................... $ 18.42 $ 15.56
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 18.68% 32.01%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ 1.25% 1.08%
------- -------
------- -------
Expenses...................... 1.44% 1.48%
------- -------
------- -------
Investment income
(loss)--net.................. .24% .34%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $ 4,955 $ 2,662
------- -------
------- -------
Portfolio turnover............ 80.52% 66.55%
------- -------
------- -------
</TABLE>
- ------------------
* Amount is less than $.01 per share.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average number of shares outstanding during the year.
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: 1994+++ 1993 1992 1991 1990 1989 1988
--------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 $ 9.97
--------- --------- -------- -------- -------- -------- -------
Investment income--net........... .37 .28 .33 .47 .65 .48 .52
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............... (1.02) 1.94 .25 2.52 (.08) 1.67 .60
--------- --------- -------- -------- -------- -------- -------
Total from investment
operations...................... (.65) 2.22 .58 2.99 .57 2.15 1.12
--------- --------- -------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net........ (.30) (.15) (.54) (.66) (.46) (.55) (.25)
Realized gain on
investments--net............ (.54) (.03) (.68) (.09) -- -- --
--------- --------- -------- -------- -------- -------- -------
Total dividends and
distributions................... (.84) (.18) (1.22) (.75) (.46) (.55) (.25)
--------- --------- -------- -------- -------- -------- -------
Net asset value, end of period... $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................... (4.20)% 15.80% 4.25% 24.98% 4.81% 20.29% 11.26%
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... .73% .80% .90% .96% 1.08% 1.19% 1.09%
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
Expenses......................... .73% .80% .90% .96% 1.08% 1.19% 1.09%
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
Investment income--net........... 2.52% 2.26% 2.62% 3.51% 5.19% 3.94% 4.37%
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)...................... $ 274,498 $ 194,777 $ 82,549 $ 55,221 $ 47,428 $ 47,837 $46,662
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
Portfolio turnover............... 65.54% 56.42% 55.25% 67.13% 52.95% 83.31% 80.07%
--------- --------- -------- -------- -------- -------- -------
--------- --------- -------- -------- -------- -------- -------
<CAPTION>
FLEXIBLE STRATEGY FUND
--------------------------
FOR THE
The following per share data and YEAR FOR THE
ratios have been derived from ENDED PERIOD
information provided in the DECEM- MAY 1,
financial statements. BER 31, 1986+ TO
INCREASE (DECREASE) IN NET ASSET ------ DEC. 31,
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 insurance-related fees and expenses.
+ The Fund commenced operations on May 1, 1986.
++ Aggregate total investment return.
+++ Based on average shares outstanding during the year.
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 STRATEGY FOCUS FUND GLOBAL UTILITY FOCUS FUND
-------------------------------------- ---------------------------
The following per share data FOR THE FOR THE
and ratios have been derived PERIOD PERIOD
from information provided in FOR THE YEAR ENDED FEBRUARY 28, FOR THE JULY 1,
the financial statements. DECEMBER 31, 1992+ TO YEAR ENDED 1993+ TO
INCREASE (DECREASE) IN NET ----------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
ASSET VALUE: 1994 1993 1992 1994 1993
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 12.17 $ 10.22 $ 10.00 $ 10.66 $ 10.00
-------- ------------ ------ ------------ ------------
Investment income--net........ .30 .16 .13 .35 .04
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.48) 1.96 .13 (1.25) .64
-------- ------------ ------ ------------ ------------
Total from investment
operations................... (.18) 2.12 .26 (.90) .68
-------- ------------ ------ ------------ ------------
Less dividends and
distributions:
Investment income--net..... (.21) (.17) (.04) (.29) (.02)
Realized gain on
investments--net......... (.04) -- -- -- --
In excess of realized gain
on investments--net...... (.01) -- -- (.02) --
-------- ------------ ------ ------------ ------------
Total dividends and
distributions................ (.26) (.17) (.04) (.31) (.02)
-------- ------------ ------ ------------ ------------
Net asset value, end of
period....................... $ 11.73 $ 12.17 $ 10.22 $ 9.45 $ 10.66
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ (1.46)% 21.03% 2.62%++ (8.51)% 6.85%++
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .77% .88% 1.25%* .73% .89%*
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
Expenses...................... .77% .88% 1.35%* .73% .89%*
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
Investment income--net........ 2.85% 2.41% 2.66%* 3.68% 2.84%*
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $515,407% $269,627 $ 15,527 $126,243% $104,517
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
Portfolio turnover............ 21.03% 17.07% 14.47% 9.52% 1.72%
-------- ------------ ------ ------------ ------------
-------- ------------ ------ ------------ ------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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: 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- --------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year........................... $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55 $ 11.42
-------- -------- --------- ------ ------ ------- ------- -------
Investment income--net........... 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net.............. (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79)
-------- -------- --------- ------ ------ ------- ------- -------
Total from investment
operations..................... (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44
-------- -------- --------- ------ ------ ------- ------- -------
Less dividends and distributions:
Investment income--net........... (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23)
Realized gain on
investments--net............... -- -- -- -- -- -- -- (.08)
-------- -------- --------- ------ ------ ------- ------- -------
Total dividends and distributions... (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31)
-------- -------- --------- ------ ------ ------- ------- -------
Net asset value, end of year........ $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82%
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01%
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
Expenses......................... .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01%
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
Investment income--net........... 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88%
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)..................... $255,719 $163,428 $ 26,343 $9,649 $8,106 $12,942 $13,960 $13,075
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
Portfolio turnover............... 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07%
-------- -------- --------- ------ ------ ------- ------- -------
-------- -------- --------- ------ ------ ------- ------- -------
<CAPTION>
HIGH CURRENT
The following per share data and INCOME FUND
ratios have been derived from ------------------
information provided in the FOR THE YEAR
financial statements. ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET ------------------
VALUE: 1986 1985
------- ------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year........................... $ 11.39 $10.33
------- ------
Investment income--net........... 1.25 1.32
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net.............. .03 1.06
------- ------
Total from investment
operations..................... 1.28 2.38
------- ------
Less dividends and distributions:
Investment income--net........... (1.25) (1.32)
Realized gain on
investments--net............... -- --
------- ------
Total dividends and distributions... (1.25) (1.32)
------- ------
Net asset value, end of year........ $ 11.42 $11.39
------- ------
------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.......................... 11.74% 24.24%
------- ------
------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... 1.12% 1.11%
------- ------
------- ------
Expenses......................... 1.12% 1.54%
------- ------
------- ------
Investment income--net........... 10.65% 11.87%
------- ------
------- ------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)..................... $12,577 $4,695
------- ------
------- ------
Portfolio turnover............... 22.44% 33.67%
------- ------
------- ------
</TABLE>
- ------------------
** Total investment returns exclude insurance-related fees and expenses.
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>
INTERMEDIATE
INTERNATIONAL GOVERNMENT
BOND FUND INTERNATIONAL EQUITY FOCUS FUND BOND FUND
------------ ------------------------------- ------------
The following per share data FOR THE FOR THE FOR THE
and ratios have been derived PERIOD PERIOD PERIOD
from information provided in MAY 2, FOR THE YEAR JULY 1, MAY 2,
the financial statements. 1994+ TO ENDED 1993+ TO 1994+ TO
INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
ASSET VALUE: 1994 1994 1993 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.00 $ 11.03 $ 10.00 $ 10.00
----- ------------ ------ ------
Investment income--net........ .38 .19 .01 .25
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.35) (.13) 1.02 (.07)
----- ------------ ------ ------
Total from investment
operations................... .03 .06 1.03 .18
----- ------------ ------ ------
Less dividends and
distributions:
Investment income--net..... (.33) (.18) -- (.21)
Realized gain on
investments--net........... -- (.01) -- --
In excess of realized gain
on investments--net........ -- -- -- --
----- ------------ ------ ------
Total dividends and
distributions................ (.33) (.19) -- (.21)
----- ------------ ------ ------
Net asset value, end of
period....................... $ 9.70 $ 10.90 $ 11.03 $ 9.97
----- ------------ ------ ------
----- ------------ ------ ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 0.37%++ 0.55% 10.30%++ 1.79%++
----- ------------ ------ ------
----- ------------ ------ ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .00%* .97% 1.14%* .00%*
----- ------------ ------ ------
----- ------------ ------ ------
Expenses...................... 1.08%* .97% 1.14%* .80%*
----- ------------ ------ ------
----- ------------ ------ ------
Investment income--net........ 6.34%* 1.09% 0.30%* 4.66%*
----- ------------ ------ ------
----- ------------ ------ ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $9,933 $247,884 $ 76,906 $ 17,811
----- ------------ ------ ------
----- ------------ ------ ------
Portfolio turnover............ 152.20% 58.84% 17.39% 103.03%
----- ------------ ------ ------
----- ------------ ------ ------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
----------------------------------------------------------------------------------------------
The following per share data FOR THE
and ratios have been derived PERIOD
from information provided in JUNE 1,
the financial statements. FOR THE YEAR ENDED DECEMBER 31, 1988+ TO
INCREASE (DECREASE) IN NET ------------------------------------------------------------------------- DEC. 31,
ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988
------- ------- ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 $10.00
------- ------- ------ ------ ------ ------ -----
Investment income--net........ .17 .11 .18 .25 .22 .24 .12
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.02) .92 (.05) (.11) (.90) 1.49 (.54)
------- ------- ------ ------ ------ ------ -----
Total from investment
operations................... .15 1.03 .13 .14 (.68) 1.73 (.42)
------- ------- ------ ------ ------ ------ -----
Less dividends and
distributions:
Investment income--net..... (.15) (.05) (.29) (.25) (.24) (.22) --
Realized gain on
investments--net......... -- -- (.06) -- -- -- --
------- ------- ------ ------ ------ ------ -----
Total dividends and
distributions................ (.15) (.05) (.35) (.25) (.24) (.22) --
------- ------- ------ ------ ------ ------ -----
Net asset value, end of
period....................... $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 1.44% 10.47% 1.36% 1.36% (6.21)% 18.23% (4.20)%++
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .87% 1.13% 1.25% 1.25% 1.25% 1.25% 1.24%*
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
Expenses...................... .87% 1.13% 1.27% 1.30% 1.38% 1.74% 1.24%*
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
Investment income--net........ 1.91% 1.34% 2.00% 2.31% 2.26% 2.26% 2.59%*
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $39,715 $14,778 $4,144 $3,084 $3,247 $2,704 $2,371
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
Portfolio turnover............ 10.94% 58.44% 22.88% 31.38% 27.61% 93.97% 16.31%
------- ------- ------ ------ ------ ------ -----
------- ------- ------ ------ ------ ------ -----
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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 PRIME BOND FUND
and ratios have been derived ---------------------------------------------------------------------------------------------
from information provided in
the financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ---------------------------------------------------------------------------------------------
ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04
-------- -------- ------- ------- ------- ------- ------- -------
Investment income--net..... .77 .70 .79 .90 .88 .90 .87 .87
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net........ (1.36) .71 .04 .84 (.12) .48 (.15) (1.00)
-------- -------- ------- ------- ------- ------- ------- -------
Total from investment
operations............... (.59) 1.41 .83 1.74 .76 1.38 .72 (.13)
-------- -------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net..... (.76) (.70) (.81) (.90) (.87) (.90) (.80) (.87)
Realized gain on
investments--net........... -- (.11) -- -- -- -- -- (.15)
In excess of realized gain
on investments--net........ (.17) -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions................ (.93) (.81) (.81) (.90) (.87) (.90) (.80) (1.02)
-------- -------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period....................... $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ (4.80)% 12.02% 7.27% 16.41% 7.13% 13.29% 6.75% (1.10)%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............ .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
Expenses................... .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
Investment income--net..... 6.74% 5.86% 6.76% 7.94% 8.01% 8.12% 8.05% 7.66%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $391,234 $314,091 $84,810 $39,743 $34,655 $29,593 $22,499 $17,385
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
Portfolio turnover......... 139.89% 115.26% 82.74% 152.18% 155.17% 144.52% 225.81% 129.46%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data PRIME BOND FUND
and ratios have been derived ------------------
from information provided in FOR THE YEAR
the financial statements. ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET -------------------
ASSET VALUE: 1986 1985
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 11.50 $ 10.44
------- -------
Investment income--net..... .99 1.13
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net........ .54 1.06
------- -------
Total from investment
operations............... 1.53 2.19
------- -------
Less dividends and
distributions:
Investment income--net..... (.99) (1.13)
Realized gain on
investments--net........... -- --
In excess of realized gain
on investments--net........ -- --
------- -------
Total dividends and
distributions................ (.99) (1.13)
------- -------
Net asset value, end of
period....................... $ 12.04 $ 11.50
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ 13.75% 22.15%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............ 1.12% 1.11%
------- -------
------- -------
Expenses................... 1.12% 1.43%
------- -------
------- -------
Investment income--net..... 7.98% 10.26%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $20,869 $ 7,631
------- -------
------- -------
Portfolio turnover......... 103.63% 16.58%
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude insurance-related fees and expenses.
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 QUALITY EQUITY FUND
and ratios have been derived ---------------------------------------------------------------------------------------------
from information provided in
the financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ---------------------------------------------------------------------------------------------
ASSET VALUE: 1994* 1993 1992 1991 1990 1989 1988 1987
-------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15
-------- -------- ------- ------- ------- ------- ------- -------
Investment income--net........ .38 .24 .34 .43 .47 .50 .43 .42
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.74) 3.46 .32 5.75 (.38) 4.96 1.73 (.35)
-------- -------- ------- ------- ------- ------- ------- -------
Total from investment
operations................... (.36) 3.70 .66 6.18 .09 5.46 2.16 .07
-------- -------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net..... (.25) (.12) (.58) (.50) (.41) (.52) (.22) (.60)
Realized gain on
investments--net........... (.67) (.04) (.95) (1.05) (.84) -- -- (3.62)
-------- -------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions................ (.92) (.16) (1.53) (1.55) (1.25) (.52) (.22) (4.22)
-------- -------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year......................... $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ (1.20)% 14.57% 2.69% 30.18% 0.66% 30.77% 13.54% (0.70)%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .54% .62% .74% .79% .94% 1.05% 1.02% .93%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
Expenses...................... .54% .62% .74% .79% .94% 1.05% 1.02% .93%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
Investment income--net........ 1.39% 1.07% 1.54% 1.87% 2.36% 2.58% 2.25% 2.31%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $464,360 $309,420 $87,977 $55,005 $39,470 $31,467 $20,055 $23,986
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
Portfolio turnover............ 60.57% 88.25% 62.54% 55.83% 69.05% 44.23% 32.53% 65.58%
-------- -------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data QUALITY EQUITY FUND
and ratios have been derived -------------------
from information provided in FOR THE YEAR
the financial statements. ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET -------------------
ASSET VALUE: 1986 1985
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 17.14 $ 13.94
------- -------
Investment income--net........ .43 .45
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ 3.01 3.84
------- -------
Total from investment
operations................... 3.44 4.29
------- -------
Less dividends and
distributions:
Investment income--net..... (.43) (.60)
Realized gain on
investments--net........... -- (.49)
------- -------
Total dividends and
distributions................ (.43) (1.09)
------- -------
Net asset value, end of
year......................... $ 20.15 $ 17.14
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 20.38% 32.66%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ 1.09% 1.08%
------- -------
------- -------
Expenses...................... 1.09% 1.22%
------- -------
------- -------
Investment income--net........ 2.41% 3.20%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $16,704 $ 9,973
------- -------
------- -------
Portfolio turnover............ 50.96% 34.21%
------- -------
------- -------
</TABLE>
- ------------------
* Based on average shares outstanding during the year.
** Total investment returns exclude insurance-related fees and expenses.
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 RESERVE ASSETS FUND
and ratios have been derived -------------------------------------------------------------------------------------------
from information provided in
the financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET -------------------------------------------------------------------------------------------
ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net........ .0371 .0268 .0320 .0546 .0730 .0822 .0661 .0574
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.0009) .0005 .0007 .0014 .0019 .0012 .0002 .0005
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations................... .0362 .0273 .0327 .0560 .0749 .0834 .0663 .0579
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net..... (.0362) (.0268) (.0320) (.0546) (.0730) (.0822) (.0661) (.0574)
Realized gain on
investments--net........... -- (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+ (.0005)+
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions................ (.0362) (.0273) (.0325) (.0560) (.0749) (.0834) (.0663) (.0579)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year........................] $ 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........................ 3.80% 2.77% 3.29% 5.68% 7.65% 8.62% 6.85% 5.96%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .65% .70% .79% .79% .97% 1.03% 1.01% 1.04%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Expenses...................... .65% .70% .79% .79% .97% 1.03% 1.01% 1.04%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net, and
realized gain (loss) on
investments--net.............. 3.75% 2.73% 3.36% 5.64%+ 7.46%+ 8.34%+ 6.65%+ 5.86%+
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $32,196 $30,168 $26,767 $34,362 $35,871 $29,311 $24,951 $23,068
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
The following per share data RESERVE ASSETS FUND
and ratios have been derived -------------------
from information provided in FOR THE YEAR
the financial statements. ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET -------------------
ASSET VALUE: 1986 1985
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 1.00 $ 1.00
------- -------
Investment income--net........ .0560 .0712
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ .0027 .0016
------- -------
Total from investment
operations................... .0587 .0728
------- -------
Less dividends and
distributions:
Investment income--net..... (.0560) (.0712)
Realized gain on
investments--net........... (.0027)+ (.0016)+
------- -------
Total dividends and
distributions................ (.0587) (.0728)
------- -------
Net asset value, end of
year......................... $ 1.00 $ 1.00
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 6.05% 7.55%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ 1.18% 1.07%
------- -------
------- -------
Expenses...................... 1.18% 1.26%
------- -------
------- -------
Investment income--net, and
realized gain (loss) on
investments--net.............. 5.89%+ 7.24%+
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $17,214 $15,955
------- -------
------- -------
</TABLE>
- ------------------
** Total investment returns exclude insurance-related fees and expenses.
+ 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
The following per share data and ratios have FOR THE YEAR JULY 1,
been derived from information provided in ENDED 1993+ TO
the financial statements. DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 10.38 $ 10.00
------------
Investment income--net....................... .76
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... (1.19) .33
------------ ------------
Total from investment operations............. (.43) .58
------------ ------------
Less dividends and distributions
Investment income--net.................... (.76) (.20)
Realized gain on investments--net......... -- --
In excess of realized gain on
investments--net.......................... (.02) --
------------ ------------
Total dividends and distributions............ (.78) (.20)
------------ ------------
Net asset value, end of period............... $ 9.17 $ 10.38
------------ ------------
------------ ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... (4.21)% 5.90%++
------------ ------------
------------ ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............... .75% .94%*
------------ ------------
------------ ------------
Expenses..................................... .75% .94%*
------------ ------------
------------ ------------
Investment income--net....................... 8.01% 6.20%*
------------ ------------
------------ ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 75,150 $ 50,737
------------ ------------
------------ ------------
Portfolio turnover........................... 117.58 54.80%
------------ ------------
------------ ------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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. ('ML&Co.')
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 ML&Co. 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
'Original Funds') are sold to MLLIC, ML of New York and Family Life 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, 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 currently 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
Company has applied for an exemptive order from the Securities and Exchange
Commission which would allow shares of both the Original Funds and the New Funds
to be sold to Separate Accounts of insurance companies not affiliated with
MLLIC, ML of New York or Family Life (together with MLLIC, ML of New York and
Family Life, 'Insurance Companies') and, if such exemptive order is granted,
shares of both the Original Funds and the New Funds may be sold to fund certain
variable life insurance contracts and variable annuities issued by such
companies.
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 ML&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, 1994,
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................... 5.00% 5.17%
Excluding gains and losses................... 5.00% 5.17%
Compounded Annualized Yield....................... 5.13% 5.31%
Average maturity of portfolio at end of period.... 38 days 35 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 Rating Group ('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),
variable amount master demand notes, securities of foreign issuers (including
Eurodollar, Yankeedollar and foreign bank obligations) and repurchase and
reverse repurchase agreements. U.S. Government securities may be
17
<PAGE>
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 credit 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 prices of fixed-income securities such as those purchased by the Fund are
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 U.S.
government or government agency securities, money market 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.' 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-
18
<PAGE>
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 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 U.S. government or government agency securities, money
market securities 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.
19
<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, 1994.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------------------------------------------- ----------- -------------
<S> <C> <C>
AAA.......................................... .15% 0.14%
AA........................................... .20 0.20
A............................................ 5.78 5.79
BBB.......................................... .38 0.38
BB........................................... 24.16 24.31
B............................................ 56.20 56.55
CCC.......................................... 3.81 3.85
CC........................................... 0.04 0.04
C............................................ 0.05 0.05
D............................................ 0.03 0.03
NR........................................... 8.62 8.66
-------------
100.00%
</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.
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 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 U.S. government and government agency,
money-market securities or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or cash.
20
<PAGE>
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 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
21
<PAGE>
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, U.S.
government and government agency securities, money market securities or other
fixed-income Securities deemed by the Investment Adviser to be consistent with a
defensive posture, 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
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. 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 achieved. As a matter of operating policy, this Fund may not
invest more than 25% of its assets in the securities of foreign issuers.
22
<PAGE>
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 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,
23
<PAGE>
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 and government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, 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 maturity in cash at the stated principal amount or,
at the option of the holder, directly in a stated amount of the
24
<PAGE>
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 4 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.
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<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 short-term U.S. government or government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or 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. 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.
26
<PAGE>
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 U.S.
government or government agency securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market securities
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 U.S. government
and government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant. The Fund may
27
<PAGE>
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, 1994.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------------------------------------------- ----------- -------------
<S> <C> <C>
A............................................ 0.35% 0.44%
AA........................................... 1.60 2.03
BBB.......................................... 0.04 0.09
BB........................................... 17.88 22.53
B............................................ 38.59 48.54
CCC.......................................... 3.15 3.83
NR........................................... 12.06 15.19
NA........................................... 5.42 6.85
UR........................................... 0.28 0.50
-------------
100.00%
</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 rated '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
jurisdictions, 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
32
<PAGE>
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.
33
<PAGE>
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. Some of these
issuers may be in industries related to utility industries and, therefore, may
be subject to similar
34
<PAGE>
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.
35
<PAGE>
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
36
<PAGE>
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. At
March 31, 1995, those countries' equity market capitalizations totalled
approximately 78% 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.
37
<PAGE>
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 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.
38
<PAGE>
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. 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.
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 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. 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 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
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's Investment Adviser may determine that a non-dollar
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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.
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
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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.
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, 1994, the average maturity of the Reserve Assets Fund's assets
ranged from 35 days to 85 days and the average maturity of the Domestic Money
Market Fund's assets ranged from 31 days to 78 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 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
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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.
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
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, 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,
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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,
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 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 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
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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 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' or 'the
Act'), the Developing Capital Markets Focus and International Equity Focus Funds
each may invest up to 10% of its total assets in
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securities of such 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 a 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. A 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 a 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 or securities issued or guaranteed by the U.S. Government 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.
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
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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 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 Developing Capital Markets Focus 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.
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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 Developing Capital
Markets Focus 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 six individuals, five 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 of the Investment Adviser; Executive Vice
President of Merrill Lynch & Co., Inc. ('ML&Co.'); Executive Vice President
of Merrill Lynch; Director of the Distributor.
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--Member of the Committee on Investment of Employee Benefits
Assets of the Financial Executives Institute.
HARRY WOOLF--Professor and former Director of the Institute for
Advanced Study (private institution devoted to the encouragement, support
and patronage of learning).
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* 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 130 other registered
investment companies. MLAM also offers portfolio management and portfolio
analysis services to individuals and institutions. In the aggregate, as of March
31, 1995, MLAM and FAM had a total of approximately $170.3 billion in investment
company and other portfolio assets under management including accounts of
certain affiliates of FAM.
MLAM (the general partner of which is Princeton Services, Inc., a
wholly-owned subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned
affiliate of Merrill Lynch & Co., Inc. and has its principal place of business
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
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 (certain of which it may delegate to third parties) 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, 1994, the advisory fees
expense incurred by the Company totalled $16,313,767 of which $166,992 related
to the Reserve Assets Fund (representing .50% of its average net assets),
$1,740,429 related to the Prime Bond Fund (representing .47% of its average net
assets), $1,176,777 related to the High Current Income Fund (representing .52%
of its average net assets), $1,889,188 related to the Quality Equity Fund
(representing .47% of its average net assets), $1,062,086 related to the Equity
Growth Fund (representing .75% of its average net assets), $1,598,769 related to
the Flexible Strategy Fund (representing .65% of its average net assets),
$179,492 related to the Natural Resources Focus Fund (representing .65% of its
average net assets), $803,973 related to the American Balanced Fund
(representing .55% of its average net assets), $1,418,479 related to the
Domestic Money Market Fund (representing .50% of its average net assets),
$2,818,040 related to the Global Strategy Focus Fund (representing .65% of its
average net assets), $683,107 related to the Basic Value Focus Fund
(representing .60% of its average net assets), $429,608 related to the World
Income Focus Fund (representing .60% of its average net assets), $777,517
related to the Global Utility Focus Fund (representing .60% of its average net
assets), $1,355,159 related to the International Equity Focus Fund
(representing .75% of its average net assets), $30,838 related to the
International Bond Fund (representing .60% of its average net assets), $151,621
related to the Developing Capital Markets Focus Fund (representing 1.00% of its
average net assets), and $31,692 related to the Intermediate Government Bond
Fund (representing .50% of its average net assets). Although the .75% and the
1.00% investment advisory fees of the Equity Growth Fund and Developing Capital
Markets Focus Fund, respectively, are higher than that of many other mutual
funds, the Funds believe they are justified by the high degree of care that must
be given to the initial selection and continuous supervision of the types of
portfolio securities in which the Funds invest.
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During the Company's fiscal year ended December 31, 1994, 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: $216,442 by the Reserve Assets Fund (representing .65% of its
average net assets), $1,989,456 by the Prime Bond Fund (representing .54% of its
average net assets), $1,371,582 by the High Current Income Fund (representing
.61% of its average net assets), $2,171,770 by the Quality Equity Fund
(representing .54% of its average net assets), $1,181,790 by the Equity Growth
Fund (representing .83% of its average net assets), $1,798,136 by the Flexible
Strategy Fund (representing .73% of its average net assets), $241,363 by the
Natural Resources Focus Fund (representing .87% of its average net assets)
$921,933 by the American Balanced Fund (representing .63% of its average net
assets), $1,629,682 by the Domestic Money Market Fund (representing .57% of its
average net assets), $3,336,174 by the Global Strategy Focus Fund (representing
.77% of its average net assets), $814,168 related to the Basic Value Focus Fund
(representing .72% of its average net assets), $535,498 related to the World
Income Focus Fund (representing .75% of its average net assets), $943,233
related to the Global Utility Focus Fund (representing .73% of its net assets),
$1,758,567 related to the International Equity Focus Fund (representing .97% of
its net assets), $204,274 related to the Developing Capital Markets Focus Fund
(representing 1.35% of its average net assets), $55,475 related to the
International Bond Fund (representing 1.08% of its average net assets), and
$50,942 related to the Intermediate Government Bond Fund (representing .80% of
its average 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, 1994, the Domestic Money
Market Fund, Developing Capital Markets Focus Fund, International Bond Fund, and
Intermediate Government Bond Fund were reimbursed for operating expenses. Such
reimbursements amounted to $201,286, $8,915, $55,475, and $50,942, respectively.
See 'Investment Advisory Arrangements' in the Statement of Additional
Information. MLLA sells the Contracts described in the Prospectus for the
Contracts.
The Investment Adviser has entered into an Administrative Services
Agreement with MLLIC and ML of New York pursuant to which the Investment Adviser
compensates such companies for administrative responsibilities relating to the
Company which are performed by MLLIC and ML of New York. The Investment Adviser
may enter into similar agreements with other Insurance Companies in the future.
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CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Adviser
(together, the 'Codes'). The Codes significantly restrict the personal investing
activities of all employees of the Adviser and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a 'hot' initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Adviser.
Furthermore, the Codes provide for trading 'blackout periods' which prohibit
trading by investment personnel of the Company within periods of trading by the
Company in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
PORTFOLIO MANAGERS
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.
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.
Fredric Lutcher has served as the Equity Growth Fund's Portfolio Manager
since June 1990, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1989.
Denis 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
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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.
Denis 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.
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 has served as the Developing Capital Markets Focus Fund's
Portfolio Manager since 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 has served as the International Bond Fund's Portfolio Manager
since 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 has served as the Intermediate Government Fund's Portfolio
Manager since 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.
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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, 1994, the Company engaged in 33
transactions pursuant to such order involving $154.9 million of securities. For
the year ended December 31, 1994, the Company paid brokerage commissions of
$3,526,815, of which $219,686 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company will offer shares in the Funds, without sales charge, only for
purchase by the Insurance Companies for the Separate Accounts to fund benefits
under the 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
currently sold only to MLLIC and ML of New York, but may be sold to other
Insurance Companies if the Company is granted an exemptive order by the
Securities and Exchange Commission permitting such sales. 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, 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
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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 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 INSURANCE COMPANIES 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.
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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 offering price per
share on the last day of the period. The yield for the 30-day period ending
December 31, 1994 was 7.69% for the Prime Bond Fund, 11.57% for the High Current
Income Fund, 9.96% for the World Income Fund, 7.62% for the International Bond
Fund and 5.07% for the Intermediate Government Bond 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 as of fifteen minutes following the close of trading 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 is 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.
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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 (regular way) as of
the close of business on the day the securities are being valued, or, lacking
any sales, at the last available bid price. Securities traded in the
over-the-counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. 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. When a Portfolio writes a call option, the amount of the premium
received is recorded on the books as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options being traded in the
over-the-counter market, the last asked price. Options purchased are valued at
their last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. 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. 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, 1994, the Company used the pricing services of MLSPS and made
payment of $31,356 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 1, 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 Fund and
International Bond Fund and Intermediate Government Bond Fund commenced
operations on 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
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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, 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. MLLIC purchased, 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 LLP, 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.
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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.
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 28, 1995, 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 (and, for temporary
or defensive purposes, each other 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 (and, for temporary
or defensive purposes, each other 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 Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) 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 (and, for temporary or defensive purposes, the
Flexible Strategy Fund, Natural Resources Focus Fund, Global Strategy Focus
Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity
Focus Fund, Developing Capital Markets Focus Fund and International Bond 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.
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The Reserve Assets Fund (and, for temporary or defensive purposes, the
Flexible Strategy Fund, Natural Resources Focus Fund, Global Strategy Focus
Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity
Focus Fund, Developing Capital Markets Focus Fund and International Bond 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 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 no Fund may 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
a Fund (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 Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) 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. Because 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 Fund and Reserve Assets Fund 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 (and, for temporary or defensive purposes, The
Flexible Strategy Fund, Natural Resources Focus Fund, Global Strategy Focus
Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity
Focus Fund, Developing Capital Markets Focus Fund and International Bond 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.
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REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. Repurchase agreements and purchase and sale
contracts maturing in more than seven days will be considered 'illiquid
securities.' The Domestic Money Markets and Reserve Assets Funds will not enter
into repurchase agreements maturing in 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.
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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.
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
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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.
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.
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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 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.
A-6
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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 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
A-7
<PAGE>
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 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.
A-8
<PAGE>
APRIL 28, 1995
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 (the 'Variable Annuity Contracts')
issued by such 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 the Variable Annuity Contracts, are collectively
referred to as the 'Contracts'). Shares of the Funds may also be sold in the
future to Separate Accounts of insurance companies other than MLLIC, ML of New
York or Family Life (together with MLLIC, ML of New York and Family Life,
'Insurance Companies') to fund Contracts issued by them. 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').
------------------------
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 28, 1995 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>
<CAPTION>
PAGE
---------
<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............................ 49
Independent Auditor's Report...................... 50
Financial Statements..............................
</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 Rating Group ('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 in 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 in 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 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.
(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 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 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
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(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 invest 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.
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:
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(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.
(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.)
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(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.
(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.
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(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.
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.
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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 or Chase Manhattan Bank N.A. (for Developing Capital Markets Focus Fund)
(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 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
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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.
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
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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
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
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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 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
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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 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
35
<PAGE>
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 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
36
<PAGE>
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 ages and
principal occupations for at least the last five years 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 (62)--President and Director(1)(2)--President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ('FAM')
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ('Princeton Services') since
1993; Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Executive Vice President of Merrill Lynch &
Co., Inc. ('ML&Co.') since 1990; Director of the Distributor.
WALTER MINTZ (65)--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 (64)--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 (61)--Director(2)--24 Federal Street, Boston,
Massachusetts 02110. Principal of Fernwood Associates (financial consultants);
Director, Hitchiner Manufacturing Company.
JOE GRILLS (59)--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.
HARRY WOOLF (71)--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 Advanced Technology Laboratories and Space
Labs Medical (medical equipment manufacturing and marketing).
TERRY K. GLENN (54)--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; Executive Vice President and Director of Princeton
Services of Princeton Administrators, Inc. since 1988; and Director of Financial
Data Services, Inc. since 1985.
BERNARD J. DURNIN (52)--Senior Vice President(1)(2)--Senior Vice President
of the Investment Adviser since 1981.
37
<PAGE>
N. JOHN HEWITT (60)--Senior Vice President(1)(2)--Senior Vice President of
MLAM and FAM since 1980.
JOSEPH T. MONAGLE, JR. (46)--Senior Vice President(1)(2)--Senior Vice
President of MLAM since 1990; Vice President of MLAM from 1978 to 1990.
CHRISTOPHER G. AYOUB (39)--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 (34)--Vice President(1)(2)--Vice President of MLAM since
1990; employee of Deloitte & Touche LLP from 1982 to 1990.
DENIS B. CUMMINGS (52)-- Vice President(1)(2)--Vice President of MLAM since
1978.
JOEL HEYMSFELD (50)--Vice President(1)(2)--Vice President of MLAM since
1978.
VINCENT T. LATHBURY, III (54)--Vice President(1)(2)--Vice President of MLAM
and FAM and Portfolio Manager of MLAM and FAM since 1982.
FREDRIC LUTCHER (46)--Vice President(1)(2)--Vice President of MLAM since
1990 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 (60)--Vice President(1)(2)--Vice President of MLAM since
1986.
ALDONA A. SCHWARTZ (46)--Vice President(1)(2)--Vice President of MLAM since
1991 and an employee of the Investment Adviser since 1986.
GERALD M. RICHARD (45)--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 (42)--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) The Officers of the Company are officers of certain other investment
companies for which the Investment Adviser or FAM acts as investment
adviser.
Set forth below is a chart showing the aggregate compensation paid by the
Company to each of its Directors, as well as the total compensation paid to each
Director of the Company by the Company and by other investment companies advised
by the Adviser or FAM for their services as Directors or Trustees of such
investment companies for the year ending December 31, 1994.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE PENSION OR RETIREMENT COMPANY AND FAM/MLAM
COMPENSATION BENEFITS ACCRUED AS PART ADVISED COMPANIES PAID
NAME OF DIRECTOR FROM COMPANY OF COMPANY EXPENSE TO DIRECTORS(1)
- ----------------------------------- ------------ ------------------------ -----------------------
<S> <C> <C> <C>
Walter Mintz $ 15,500 NONE $ 157,325
Melvin R. Seiden $ 15,500 NONE $ 157,325
Harry Woolf $ 15,500 NONE $ 157,325
Stephen B. Swensrud $ 15,500 NONE $ 165,325
Joe Grills $ 15,500 NONE $ 190,383
</TABLE>
- ------------------
(1) In addition to the Fund, the Directors serve on the boards of other FAM/MLAM
Advised Funds as follows: Mr. Mintz (18 boards); Mr. Seiden (18 boards); Mr.
Woolf (18 boards); Mr. Swensrud (19 boards); Mr. Grills (18 boards).
38
<PAGE>
Mr. Zeikel and the officers of the Company owned on February 28, 1995 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, 1994, such fees and expenses aggregated $61,192.
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
39
<PAGE>
daily net assets of the International Bond Fund and 0.50% of 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, 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.
For the fiscal year ended December 31, 1994, the Investment Adviser earned fees
of $16,313,767 from the Company and reimbursed $8,915 for the Developing Capital
Markets Focus Fund, $55,475 for the International Bond Fund, and $50,942 for the
Intermediate Government Bond Fund.
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 12, 1995. 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.
The Investment Adviser has entered into a Administrative Services Agreement
with MLLIC and ML of New York pursuant to which the Investment Adviser
compensates such companies for administrative responsibilities relating to the
Company which are performed by MLLIC and ML of New York. The Investment Adviser
may enter into similar agreements with other Insurance Companies in the future.
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
41
<PAGE>
are provided for the Company by the Investment Adviser, and the Company
reimburses the Investment Adviser for its costs in connection with such
services. For the year ended December 31, 1994, the amount of such reimbursement
was $893,297. 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
43
<PAGE>
same transaction. Information so received will be in addition to and not in lieu
of the services required to be performed by the Investment Adviser under the
Investment Advisory 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, 1994, the Company paid brokerage
commissions of $3,526,815, of which $219,686 was paid to Merrill Lynch. 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.
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, 1994, the portfolio turnover rate for the Prime Bond Fund was
approximately 139.89%.
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, 1994, the portfolio turnover rate for the High
Current Income Fund was approximately 51.88%.
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, 1994, the
portfolio turnover rate for the Quality Equity Fund was approximately 60.57%.
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, 1994, the
portfolio turnover rate for the Equity Growth Fund was approximately 88.48%.
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, 1994, the portfolio turnover rate for the Flexible Strategy Fund
was 65.54%.
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%, 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, 1994,
the portfolio turnover rates for the Natural
44
<PAGE>
Resources Focus Fund, the American Balanced Fund and the Global Strategy Focus
Fund were 10.94%, 35.36% and 21.03%, 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, 1994, the
portfolio turnover rates were 60.55%, 9.52% and 58.84%, 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, 1994, the portfolio turnover rate was 117.58%.
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. For the year ended December 31, 1994, the portfolio turnover rates
were 29.79%, 155.20% and 103.03%, 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, payments with respect to securities loans, 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, certain options, futures or forward
contracts and certain foreign currencies 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 the above-described requirements.
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 tax 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, and such change
may apply retroactively.
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 12, 1995 and will continue in effect until June 30, 1996.
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.
46
<PAGE>
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 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 and Domestic
Money Market 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
OF A
HYPOTHETICAL
EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT
ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD
----------------- ----------------
<S> <C> <C>
PRIME BOND FUND:
One Year Ended December 31, 1994...... (4.80)% $ 952.00
Five Years Ended December 31, 1994.... 7.37 1,426.80
Ten Years Ended December 31, 1994..... 9.02 2,371.40
HIGH CURRENT INCOME FUND:
One Year Ended December 31, 1994...... (3.59) 964.10
Five Years Ended December 31, 1994.... 12.49 1,801.40
Ten Years Ended December 31, 1994..... 12.12 3,138.10
QUALITY EQUITY FUND:
One Year Ended December 31, 1994...... (1.20) 988.00
Five Years Ended December 31, 1994.... 8.78 1,523.10
Ten Years Ended December 31, 1994..... 13.62 3,586.20
EQUITY GROWTH FUND:
One Year Ended December 31, 1994...... (7.27) 927.30
Five Years Ended December 31, 1994.... 7.36 1,426.10
Ten Years Ended December 31, 1994..... 7.76 2,110.50
FLEXIBLE STRATEGY FUND:
One Year Ended December 31, 1994...... (4.20) 958.00
Five Years Ended December 31, 1994.... 8.66 1,514.90
Inception* Through December 31,
1994............................... 9.06 2,122.50
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE
OF A
HYPOTHETICAL
EXPRESSED AS A $1,000
PERCENTAGE BASED 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, 1994...... 1.44% $ 1,014.40
Five Years Ended December 31, 1994.... 1.55 1,079.80
Inception* Through December 31,
1994............................... 3.10 1,223.00
AMERICAN BALANCED FUND:
One Year Ended December 31, 1994...... (4.19) 958.10
Five Years Ended December 31, 1994.... 7.02 1,403.80
Inception* Through December 31,
1994............................... 8.64 1,726.00
GLOBAL STRATEGY FOCUS FUND:
One Year Ended December 31, 1994...... (1.46) 985.40
Inception* Through December 31,
1994............................... 7.37 1,223.90
BASIC VALUE FOCUS FUND:
One Year Ended December 31, 1994...... 2.36 1,023.60
Inception* Through December 31,
1994............................... 7.90 1,120.90
WORLD INCOME FOCUS FUND:
One Year Ended December 31, 1994...... (4.21) 957.90
Inception* Through December 31,
1994............................... 0.96 1,014.40
GLOBAL UTILITY FOCUS FUND:
One Year Ended December 31, 1994...... (8.51) 914.90
Inception* Through December 31,
1994............................... (1.50) 977.60
INTERNATIONAL EQUITY FOCUS FUND:
One Year Ended December 31, 1994...... 0.55 1,005.50
Inception* Through December 31,
1994............................... 7.14 1,109.10
DEVELOPING CAPITAL MARKETS FOCUS FUND:
Inception* Through December 31,
1994............................... (4.90) 951.00
INTERNATIONAL BOND FUND:
Inception* Through December 31,
1994............................... 0.37 1,003.70
INTERMEDIATE GOVERNMENT BOND FUND:
Inception* Through December 31,
1994............................... 1.79 1,017.90
</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; International Equity Focus Fund is July 1, 1993; Developing
Capital Markets Focus Fund is May 2, 1994; International Bond Fund is May 2,
1994; and Intermediate Government Bond Fund is May 2, 1994.
48
<PAGE>
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.
49
<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, Basic Value Focus,
Developing Capital Markets Focus, Domestic Money Market, Equity Growth, Flexible
Strategy, Global Strategy Focus, Global Utility Focus, High Current Income,
Intermediate Government Bond, International Bond, International Equity Focus,
Natural Resources Focus, Prime Bond, Quality Equity, Reserve Assets, and World
Income Focus Funds of Merrill Lynch Variable Series Funds, Inc. as of December
31, 1994, 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 procedure included confirmation of securities owned at December
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of American Balanced,
Basic Value Focus, Developing Capital Markets Focus, Domestic Money Market,
Equity Growth, Flexible Strategy, Global Strategy Focus, Global Utility Focus,
High Current Income, Intermediate Government Bond, International Bond,
International Equity Focus, Natural Resources Focus, Prime Bond, Quality Equity,
Reserve Assets, and World Income Focus Funds of Merrill Lynch Variable Series
Funds, Inc. as of December 31, 1994, the results of their operations, the
changes in their net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
February 17, 1995
50
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AEROSPACE 42,000 United Technologies Corp......... $ 2,368,095 $ 2,640,750 1.7%
- ------------------------------------------------------------------------------------------------------------------------
BANKING 42,000 Morgan (J.P.) & Co............... 2,772,971 2,352,000 1.5
- ------------------------------------------------------------------------------------------------------------------------
BUILDING--RELATED 67,700 Stanley Works Co................. 2,802,105 2,420,275 1.5
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 47,100 Eastman Chemical Co.............. 2,041,302 2,378,550 1.5
82,400 Nalco Chemical Co................ 2,742,236 2,760,400 1.7
4,783,538 5,138,950 3.2
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 30,600 Hewlett-Packard Co............... 2,149,544 3,056,175 1.9
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER--SERVICES 88,000 Kelly Services, Inc.............. 2,331,400 2,398,000 1.5
- ------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 121,000 + California Energy Co. Inc........ 2,187,016 1,890,625 1.2
- ------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 167,792 + Wheelabrator Technologies Inc.... 2,869,023 2,474,932 1.6
- ------------------------------------------------------------------------------------------------------------------------
FOODS 184,069 Archer-Daniels-Midland Co........ 2,699,457 3,796,423 2.4
- ------------------------------------------------------------------------------------------------------------------------
HEALTHCARE 147,400 + Humana Inc....................... 1,940,466 3,334,925 2.1
- ------------------------------------------------------------------------------------------------------------------------
MACHINERY 77,700 Ingersoll-Rand Co................ 2,609,066 2,447,550 1.5
- ------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--MANUFACTURING 137,900 Keystone International, Inc...... 3,285,477 2,344,300 1.5
- ------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 66,900 Consolidated Natural Gas Co...... 3,024,660 2,374,950 1.5
- ------------------------------------------------------------------------------------------------------------------------
OFFICE RELATED 73,800 Pitney-Bowes, Inc................ 2,913,361 2,343,150 1.5
- ------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 90,500 Phillips Petroleum Co............ 2,637,514 2,963,875 1.9
- ------------------------------------------------------------------------------------------------------------------------
PETROLEUM & EQUIPMENT SERVICES 130,300 Dresser Industries, Inc.......... 2,729,193 2,459,413 1.6
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 90,000 Abbott Laboratories.............. 2,827,672 2,936,250 1.8
101,000 Merck & Co., Inc................. 3,482,470 3,850,625 2.4
6,310,142 6,786,875 4.2
- ------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 57,400 Eastman Kodak Co................. 2,420,080 2,740,850 1.7
- ------------------------------------------------------------------------------------------------------------------------
PRINTING/PUBLISHING 51,200 Gannett Co., Inc................. 2,589,416 2,726,400 1.7
- ------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 57,800 American Telephone & Telegraph 3,086,880 2,904,450 1.8
Co...............................
59,600 Bell Atlantic Corp............... 3,218,314 2,965,100 1.9
86,500 Comsat Corp...................... 2,451,106 1,611,062 1.0
8,756,300 7,480,612 4.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 64,178,824 64,171,030 40.4
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT US GOVERNMENT OBLIGATIONS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
US TREASURY NOTES US Treasury Notes:
$ 900,000 7.50% due 5/15/2002................. $ 955,500 $ 883,404 0.6%
3,500,000 6.375% due 8/15/2002................ 3,459,668 3,204,670 2.0
12,550,000 6.25% due 2/15/2003................. 12,863,703 11,349,844 7.1
12,750,000 5.75% due 8/15/2003................. 12,841,898 11,080,515 7.0
10,300,000 5.875% due 2/15/2004................ 9,682,422 8,981,909 5.7
11,300,000 7.25% due 5/15/2004................. 11,427,203 10,851,503 6.8
30,500,000 7.25% due 8/15/2004................. 30,594,766 29,275,120 18.4
10,000,000 7.875% due 11/15/2004............... 10,003,750 10,028,100 6.3
91,828,910 85,655,065 53.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS 91,828,910 85,655,065 53.9
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 7,043,000 General Electric Capital Corp.,
5.80% due 1/03/1995................. 7,038,461 7,038,461 4.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 7,038,461 7,038,461 4.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS................... $163,046,195 156,864,556 98.7
------------
------------
OTHER ASSETS LESS LIABILITIES....... 2,086,184 1.3
NET ASSETS.......................... $158,950,740 100.0%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of
purchase by the Fund.
+ Non-income producing security.
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------
DISCOUNT FROM BOOK VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AEROSPACE 150,000 Aviall, Inc....................... $ 2,234,988 $ 1,143,750 0.7%
BANKING 70,000 Bankers Trust Company............. 4,143,450 3,876,250 2.4
HOME--BUILDERS 225,000 + Beazer Homes USA, Inc............. 3,558,474 2,615,625 1.6
SAVINGS & LOANS 150,000 + Brooklyn Bancorp Inc.............. 4,817,050 4,425,000 2.7
RETAIL 150,000 + Federated Department Stores,
Inc............................. 3,112,749 2,887,500 1.7
SAVINGS & LOANS 110,000 GP Financial Corp................. 2,160,925 2,268,750 1.4
OIL & GAS PRODUCERS 100,000 Gerrity Oil & Gas Corp............ 1,339,313 425,000 0.3
SAVINGS & LOANS 325,000 Greater N.Y. Savings Bank......... 2,895,742 2,803,125 1.7
STEEL 518,600 + Lone Star Technologies Inc........ 3,712,010 3,630,200 2.2
TECHNOLOGY 525,000 Micronics Computers, Inc.......... 2,470,294 2,231,250 1.4
TECHNOLOGY 585,000 + Network Systems Corp.............. 4,724,176 4,095,000 2.5
SAVINGS & LOANS 100,000 River Bank America................ 900,000 937,500 0.6
INSURANCE 210,000 TIG Holdings Inc.................. 3,709,325 3,937,500 2.4
OIL--REFINERS 300,000 Total Petroleum Ltd............... 3,525,248 3,750,000 2.3
OIL--REFINERS 150,000 Valero Energy Corp................ 3,126,262 2,531,250 1.5
46,430,006 41,557,700 25.4
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BELOW-AVERAGE PRICE/EARNINGS RATIO
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONGLOMERATES 300,000 + ADT Ltd. (ADR) (a)................ 2,813,075 3,225,000 2.0
ELECTRONICS 650,000 Automated Security (Holdings) PLC
(ADR) (a)....................... 2,039,500 1,462,500 0.9
TEXTILES 200,000 + Burlington Industries, Inc........ 2,297,829 1,975,000 1.2
TECHNOLOGY 200,000 + Conner Peripherals, Inc........... 2,479,943 1,900,000 1.2
RETAIL APPAREL 100,000 + Fruit of the Loom, Inc............ 2,541,440 2,700,000 1.6
AUTOMOTIVE 100,000 General Motors Corp............... 4,824,087 4,225,000 2.6
INFORMATION PROCESSING 50,000 International Business Machine
Corp............................ 2,753,000 3,675,000 2.2
HOTELS 250,000 + John Q Hammons Hotels Inc......... 3,793,112 3,500,000 2.1
OIL & GAS PRODUCERS 152,000 KCS Energy Inc.................... 2,178,495 2,470,000 1.5
RETAIL SPECIALTY 200,000 + The Limited, Inc.................. 3,931,540 3,625,000 2.2
AUTO--RELATED 386,000 + National Auto Credit Inc.......... 4,405,603 4,583,750 2.8
SEMICONDUCTORS 155,000 + National Semiconductor Corp....... 2,734,089 3,022,500 1.8
INSURANCE 100,000 PartnerRe Holdings Ltd............ 2,029,881 2,062,500 1.3
TECHNOLOGY 150,000 + Syquest Technology Inc............ 1,847,920 2,662,500 1.6
INSURANCE 100,000 Travelers Corp.................... 3,791,524 3,250,000 2.0
44,461,038 44,338,750 27.0
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ABOVE-AVERAGE YIELD
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OIL/DOMESTIC 25,000 Atlantic Richfield Co............. 2,460,592 2,543,750 1.6
REAL ESTATE INVESTMENT TRUST 120,000 Bay Apartment Communities, Inc.... 2,400,000 2,415,000 1.5
PHARMACEUTICALS 70,000 Bristol-Myers Squibb Co........... 3,867,699 4,051,250 2.5
REAL ESTATE INVESTMENT TRUST 120,000 Camden Property Trust............. 2,907,225 2,985,000 1.8
PHOTOGRAPHY 70,000 Eastman Kodak Co.................. 3,137,689 3,342,500 2.0
REAL ESTATE INVESTMENT TRUST 150,000 Evans Withycombe Residential, 3,013,688 3,150,000 1.9
Inc.............................
REAL ESTATE INVESTMENT TRUST 180,000 Felcor Suite Hotels, Inc.......... 3,872,250 3,442,500 2.1
OIL SERVICES 135,000 Halliburton Co.................... 4,438,600 4,471,875 2.7
RETAIL 314,500 K mart Corp....................... 5,429,472 4,088,500 2.5
REAL ESTATE INVESTMENT TRUST 120,000 Liberty Property Trust............ 2,406,656 2,355,000 1.4
PHARMACEUTICALS 100,000 Merck & Co., Inc.................. 3,127,175 3,812,500 2.3
OIL/DOMESTIC 140,000 Occidental Petroleum Corp......... 2,528,525 2,695,000 1.6
TOBACCO 60,000 Philip Morris Cos. Inc............ 3,341,700 3,450,000 2.1
SAVINGS & LOANS 125,000 River Bank America (Preferred).... 3,453,125 3,156,250 1.9
RETAIL 60,000 Sears, Roebuck & Co............... 3,043,578 2,760,000 1.7
FINANCIAL SERVICES 140,000 Student Loan Marketing
Association..................... 5,430,576 4,550,000 2.8
54,858,550 53,269,125 32.4
</TABLE>
- --------------------------------------------------------------------------------
53
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------
SPECIAL SITUATIONS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MEDICAL SERVICES 365,000 + Applied Bioscience International
Inc............................. $ 1,875,863 $ 2,007,500 1.2%
FOOD & HOUSEHOLD 150,000 Sara Lee Corp..................... 3,296,038 3,787,500 2.3
OIL--RELATED 285,000 + TETRA Technologies, Inc........... 2,185,200 3,348,750 2.0
OIL SERVICES 440,000 + Varco International, Inc.......... 2,676,579 2,750,000 1.7
10,033,680 11,893,750 7.2
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL COMMON STOCKS 155,783,274 151,059,325 92.0
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $3,384,000 General Electric Capital Corp.,
5.80% due 1/03/1995............. 3,381,819 3,381,819 2.1
3,000,000 Nomura Holding America, Inc.,
5.83% due 1/27/1995............. 2,986,397 2,986,397 1.8
6,500,000 Xerox Credit Corp., 5.95% due
1/17/1995....................... 6,480,825 6,480,825 3.9
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL SHORT-TERM SECURITIES 12,849,041 12,849,041 7.8
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL INVESTMENTS................. $168,632,315 163,908,366 99.8
------------
------------
OTHER ASSETS LESS LIABILITIES..... 398,353 0.2
NET ASSETS........................ $164,306,719 100.0%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
* 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) American Depositary Receipt (ADR).
+ Non-income producing security.
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES HELD/ VALUE PERCENT OF NET
AFRICA INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA MULTI--INDUSTRY 6,000 ASA Ltd................. $ 281,052 $ 269,250 0.7%
22,000 + The Morgan Stanley
Africa Investment
Fund, Inc............. 254,320 250,250 0.7
18,000 New South Africa Fund,
Inc................... 257,580 254,250 0.7
18,000 + Southern Africa Fund,
Inc................... 264,224 249,750 0.7
1,057,176 1,023,500 2.8
TRANSPORTATION ZAL 12,000,000 Transnet Ltd., 15.00%
due 10/01/1995........ 2,886,806 2,970,458 8.1
TOTAL INVESTMENTS IN
SOUTH AFRICA 3,943,982 3,993,958 10.9
TOTAL INVESTMENTS IN
AFRICA 3,943,982 3,993,958 10.9
EUROPE
GREECE BEVERAGE 9,600 Hellenic Bottling Co.
S.A. (Bearer)......... 281,725 340,142 0.9
TOTAL INVESTMENTS IN
GREECE 281,725 340,142 0.9
HUNGARY FOOD 2,065 Pick Szeged
Reszvenytarasag (ADR)
(a)................... 141,347 121,298 0.3
TOTAL INVESTMENTS IN
HUNGARY 141,347 121,298 0.3
PORTUGAL ENGINEERING & 25,000 Sociedade de Construsoes
CONSTRUCTION Soares de Costa
S.A................... 519,168 471,757 1.3
5,000 Sociedade de Construsoes
Soares de Costa S.A.
(Baby Shares)......... 0 94,351 0.3
2,500 Sociedade de Construsoes
Soares de Costa S.A.
(Ordinary)............ 31,270 47,176 0.1
550,438 613,284 1.7
RETAIL 48,000 Sonae Investimentos-SGPS
S.A................... 1,006,931 1,105,347 3.0
TOTAL INVESTMENTS IN
PORTUGAL 1,557,369 1,718,631 4.7
RUSSIA MULTI--INDUSTRY 60,000 + Fleming Russia 588,000 405,000 1.1
Securities Fund (ADR)
(a)...................
TOTAL INVESTMENTS IN
RUSSIA 588,000 405,000 1.1
SRI LANKA DIVERSIFIED 6,500 + John Keells Holdings
Corp. (GDR) (b)....... 65,000 58,500 0.2
TOTAL INVESTMENTS IN
SRI LANKA 65,000 58,500 0.2
TURKEY BEVERAGE 397,500 Erciyas Biracilik Ve
Malt Sanayii A.S...... 322,290 294,253 0.8
BUILDING MATERIALS 305,250 Alarko Holdings A.S..... 239,118 261,643 0.7
72,600 + Cimentas Izmir Cimento
Fabrikasi T.A.S....... 56,392 50,914 0.1
295,510 312,557 0.8
INSURANCE 93,000 Akisgorta A.S........... 23,250 18,842 0.0
STEEL 1,971,000 + Izmir Demir Celik
Sanayii A.S........... 147,748 107,509 0.3
TOTAL INVESTMENTS IN
TURKEY 788,798 733,161 1.9
TOTAL INVESTMENTS IN
EUROPE 3,422,239 3,376,732 9.1
</TABLE>
55
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN SHARES HELD/ VALUE PERCENT OF NET
AMERICA INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ARGENTINA OIL & RELATED 27,000 Yacimientos Petroliferos
Fiscales S.A.
(Sponsored) (ADR)
(a)................... $ 695,315 $ 577,125 1.6%
REAL ESTATE 19,000 Inversiones y
Representaciones S.A.
(GDR) (b)............. 495,140 503,500 1.4
TOBACCO 100,126 + Nobleza Piccardo S.A.... 501,811 425,535 1.2
TOTAL INVESTMENTS IN
ARGENTINA 1,692,266 1,506,160 4.2
BRAZIL APPLIANCES 1,335,000 Brasmotor Group S.A.
(Preferred)........... 582,433 541,259 1.5
AUTOMOTIVE 55,000 + CAPCO Automotive
Products Corp. S.A.... 719,383 660,000 1.8
STEEL 339,000,000 Usinas Siderurgicas de
Minas Gerais--Usiminas
S.A. (Preferred)...... 578,807 460,816 1.3
TELECOMMUNICATIONS 25,480 Telecomunicacoes
Brasileiras
S.A.--Telebras (ADR)
(a)................... 1,048,742 1,133,860 3.1
1,600,000 Telecomunicacoes
Brasileiras
S.A.--Telebras PN
(Preferred)........... 68,826 71,678 0.2
1,117,568 1,205,538 3.3
UTILITIES 31,100 + Companhia Energetica de
Minas Gerais S.A.
(CEMIG) (ADR) (a)..... 558,442 730,850 2.0
UTILITIES--ELECTRIC 117,000 Centrais Eletricas
Brasileiras
S.A.--Eletrobras 'B'
(Preferred)........... 40,181 40,660 0.1
3,828,000 Light--Servicios de
Electricidade S.A..... 1,631,835 1,384,596 3.8
1,672,016 1,425,256 3.9
TOTAL INVESTMENTS IN
BRAZIL 5,228,649 5,023,719 13.8
CHILE TELECOMMUNICATIONS 5,500 Compania de Telefonos de
Chile S.A. (ADR)
(a)................... 500,110 433,125 1.2
TOTAL INVESTMENTS IN
CHILE 500,110 433,125 1.2
ECUADOR BUILDING MATERIALS 260 La Cemento Nacional
C.A................... 100,100 96,200 0.3
TOTAL INVESTMENTS IN
ECUADOR 100,100 96,200 0.3
MEXICO BEVERAGE 17,500 Grupo Embotellador de
Mexico, S.A. de C.V.
(GEMEX) (ADR) (a)..... 497,000 251,562 0.7
BUILDING & 39,000 Tolmex, S.A. de C.V. 455,106 330,306 0.9
CONSTRUCTION 'B2'..................
DIVERSIFIED 60,000 Desc Sociedad de Fomento
Industrial, S.A. de
C.V. 'C'.............. 459,346 341,633 0.9
FINANCIAL SERVICES 26,000 Grupo Financiero (GBM)
Atlantico, S.A. de
C.V. (Class L)........ 517,525 182,000 0.5
GLASS MANUFACTURING
51,500 Vitro, S.A. de C.V...... 354,538 241,209 0.7
6,200 Vitro, S.A. de C.V.
(ADR) (a)............. 131,105 86,800 0.2
485,643 328,009 0.9
LEISURE 56,000 + Grupo Carso, S.A. de
C.V. 'A1'............. 562,674 419,429 1.1
METALS 12,000 Grupo Simec, S.A. de
C.V. (ADR) (a)........ 301,145 181,500 0.5
NEWSPAPER/ PUBLISHING 264,000 Grupo Fernandez
Editores, S.A. de
C.V................... 422,478 287,706 0.8
TELECOMMUNICATIONS 10,000 Telefonos de Mexico,
S.A. de C.V. (ADR)
(a)................... 585,600 410,000 1.1
TOTAL INVESTMENTS IN
MEXICO................ 4,286,517 2,732,145 7.4
</TABLE>
56
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES HELD/ VALUE PERCENT OF NET
(CONCLUDED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERU BANKING 25,000 + Banco Weise Limitado
S.A. (ADR) (a)........ $ 493,750 $ 468,750 1.3%
TOTAL INVESTMENTS IN
PERU 493,750 468,750 1.3
TOTAL INVESTMENTS IN
LATIN AMERICA 12,301,392 10,260,099 28.2
PACIFIC
BASIN/ASIA
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA MERCHANDISING 18,600 Amway Asia Pacific
Ltd................... 540,642 604,500 1.6
TOTAL INVESTMENTS IN
AUSTRALIA 540,642 604,500 1.6
HONG KONG AUTOMOTIVE 254,000 Sime Darby (Hong Kong)
Ltd................... 406,139 282,368 0.8
DIVERSIFIED 116,000 Jardine Matheson
Holdings, Ltd......... 859,252 828,464 2.3
MACHINERY 252,000 Beiren Printing
Machinery Holdings
Ltd................... 138,774 70,036 0.2
MULTI--INDUSTRY 1,091,000 Sinocan Holdings Ltd.... 215,590 242,570 0.7
TOTAL INVESTMENTS IN
HONG KONG 1,619,755 1,423,438 4.0
INDIA BROADCASTING & 37,600 + Videocon International
PUBLISHING Ltd. (ADR) (a)........ 323,217 174,088 0.5
LEISURE 40,400 + East India Hotels,
Ltd................... 640,744 585,800 1.6
TOBACCO 31,500 + Indian Tobacco Co.
Ltd................... 419,437 315,000 0.9
TOTAL INVESTMENTS IN
INDIA 1,383,398 1,074,888 3.0
INDONESIA BROADCASTING & $ 15,000 P.T. Surya Citra
PUBLISHING Television, 4.00% due
7/01/1997............. 15,000 14,850 0.0
FOOD & HOUSEHOLD 592,000 + P.T. Wicaksana Overseas
PRODUCTS International......... 1,160,794 1,697,588 4.6
TOTAL INVESTMENTS IN
INDONESIA 1,175,794 1,712,438 4.6
MALAYSIA AUTOMOTIVE 79,400 Sime Darby BHD.......... 191,533 181,975 0.5
BROADCASTING 93,000 Sistem Televisyen
Malaysia BHD.......... 267,129 202,213 0.5
FINANCIAL SERVICES 57,000 Commerce Asset--Holdings
BHD................... 293,164 230,010 0.6
FOODS 30,000 Nestle (Malaysia) BHD... 197,136 199,804 0.5
NEWSPAPER/ PUBLISHING 76,000 New Straits Times Press
BHD................... 311,411 244,153 0.7
TELECOMMUNICATIONS 115,000 Leader Universal
Holdings BHD.......... 407,073 369,442 1.0
TOTAL INVESTMENTS IN
MALAYSIA 1,667,446 1,427,597 3.8
NEW ZEALAND TRANSPORTATION 7,700 Ports of Auckland 10,869 11,085 0.0
Ltd...................
TOTAL INVESTMENT IN NEW
ZEALAND 10,869 11,085 0.0
PHILIPPINES MULTI--INDUSTRY 10,500 + Benpres Holdings Corp.
(c)................... 106,200 94,500 0.3
TELECOMMUNICATIONS $ 1,000,000 Philippine Long Distance
Telephone Co., 10.625%
due 6/02/2004......... 1,015,000 960,000 2.6
TOTAL INVESTMENTS IN THE
PHILIPPINES 1,121,200 1,054,500 2.9
SOUTH KOREA UTILITIES-ELECTRIC 77,000 + Korea Electric Power
Corp.................. 1,606,935 1,645,875 4.5
TOTAL INVESTMENTS IN
SOUTH KOREA 1,606,935 1,645,875 4.5
</TABLE>
57
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA VALUE PERCENT OF NET
(CONCLUDED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TAIWAN MERCHANDISING 12,047 Hocheng Group Corp.
(ADR) (a) (c)......... $ 349,363 $ 271,057 0.7%
TOTAL INVESTMENTS IN
TAIWAN 349,363 271,057 0.7
THAILAND APPLIANCES & HOUSEHOLD 41,400 Karat Sanitary Ware Co.,
DURABLES Ltd................... 244,164 169,922 0.5
AUTOMOTIVE PARTS 13,700 Swedish Motor Corp.
Ltd................... 90,197 84,618 0.2
BANKING 65,000 Bangkok Bank Ltd.
'Foreign'............. 616,906 694,162 1.9
REAL ESTATE 56,000 Bangkok Land Company
Ltd................... 181,816 139,470 0.4
UTILITIES 5,100 Sanyo Universal Electric
Co., Ltd.............. 120,776 118,279 0.3
TOTAL INVESTMENTS IN
THAILAND 1,253,859 1,206,451 3.3
TOTAL INVESTMENTS IN THE
PACIFIC BASIN/ASIA 10,729,261 10,431,829 28.4
FACE AMOUNT SHORT-TERM SECURITIES
COMMERCIAL $ 960,000 General Electric Capital
PAPER** Corp., 5.80% due
1/03/1995............. 959,536 959,536 2.6
COMMERCIAL
PAPER**--FOREIGN Mexican Cetes
(Certificados de la
Tesorera de la
Federacion):
449,030 23.32%* due 1/26/1995... 92,019 90,235 0.2
610,690 23.32%* due 2/02/1995... 124,600 120,326 0.3
327,240 23.32%* due 2/16/1995... 66,188 64,720 0.2
810,000 23.32%* due 2/23/1995... 163,124 159,357 0.4
445,931 434,638 1.1
US GOVERNMENT &
AGENCY OBLIGATIONS** Federal Home Loan Bank:
1,000,000 5.57% due 1/04/1995..... 999,381 999,381 2.7
1,500,000 5.76% due 1/17/1995..... 1,495,920 1,495,920 4.1
1,000,000 Federal Home Loan
Mortgage Association,
5.91% due 1/12/1995... 998,030 998,030 2.7
Federal National
Mortgage Association:
3,500,000 5.78% due 1/23/1995..... 3,487,075 3,487,075 9.5
1,500,000 5.74% due 1/30/1995..... 1,492,825 1,492,825 4.1
8,473,231 8,473,231 23.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 9,878,698 9,867,405 26.8
TOTAL INVESTMENTS.......................... $40,275,572 37,930,023 103.4
LIABILITIES IN EXCESS OF OTHER ASSETS...... (1,254,271) (3.4)
NET ASSETS................................. $36,675,752 100.0%
</TABLE>
<TABLE>
<C> <S>
(a) American Depositary Receipt (ADR).
(b) Global Depositary Receipt (GDR).
(c) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately
$366,000, representing 1.00% of net assets.
- ------------------------------------------------------------------------------------------------------------------------
ACQUISITION VALUE
ISSUE DATES COST (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------------
Benpres Holdings Corp.................................................................. 10/25/1994 $ 106,200 $ 94,500
Hocheng Group Corp. (ADR).............................................................. 8/09/1994 349,363 271,057
- ------------------------------------------------------------------------------------------------------------------------
TOTAL.................................................................................. $ 455,563 $ 365,557
- ------------------------------------------------------------------------------------------------------------------------
* Represents the yield to maturity on this zero coupon issue.
** 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 of the Fund.
+ Non-income producing security.
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
BANK NOTES--2.7% $ 10,000,000 PNC Bank N.A..................................... 5.15 % 2/22/95 $ 9,984,066
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST -- $9,999,001) 9,984,066
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
PAPER--67.6% 5,000,000 ABN-AMRO North American Finance, Inc............. 5.42 1/04/95 4,996,181
10,000,000 ANZ (Delaware), Inc.............................. 5.05 1/20/95 9,966,750
7,000,000 Abbey National N.A. Corp......................... 5.07 2/28/95 6,929,417
5,000,000 Abbey National N.A. Corp......................... 5.075 3/02/95 4,946,611
5,000,000 Avco Financial Services, Inc..................... 5.68 2/14/95 4,961,667
5,134,000 BTR Dunlop Finance Inc........................... 5.40 1/13/95 5,122,979
10,000,000 Bankers Trust New York Corp...................... 5.41 1/27/95 9,955,278
1,000,000 Bankers Trust New York Corp...................... 5.40 1/30/95 994,963
4,794,000 Bankers Trust New York Corp...................... 5.58 4/12/95 4,707,588
8,323,000 CS First Boston, Inc............................. 5.50 1/25/95 8,288,436
5,000,000 CS First Boston, Inc............................. 6.00 2/10/95 4,965,000
10,000,000 Deer Park Refining, L.P.......................... 6.10 1/19/95 9,966,111
5,125,000 Falcon Asset Securization Corp................... 6.00 1/09/95 5,116,458
5,000,000 Ford Motor Credit Co............................. 5.42 1/11/95 4,990,800
6,000,000 Ford Motor Credit Co............................. 5.42 1/12/95 5,988,040
5,000,000 General Electric Capital Corp.................... 5.50 1/09/95 4,992,333
5,000,000 General Electric Capital Corp.................... 5.03 1/23/95 4,980,833
5,000,000 General Electric Capital Corp.................... 5.48 1/24/95 4,980,035
3,974,000 Goldman Sachs Group L.P.......................... 4.95 2/01/95 3,952,507
4,000,000 Goldman Sachs Group L.P.......................... 5.15 3/01/95 3,957,978
5,000,000 Goldman Sachs Group L.P.......................... 5.25 3/13/95 4,937,139
5,000,000 International Lease Finance Corp................. 5.42 1/09/95 4,992,333
5,000,000 International Lease Finance Corp................. 5.33 1/20/95 4,983,375
1,500,000 MCA Funding Corp................................. 5.50 1/25/95 1,493,771
4,000,000 Miles Inc........................................ 5.70 2/10/95 3,972,000
5,000,000 NationsBank Corp................................. 5.33 1/23/95 4,980,833
5,000,000 New Center Asset Trust........................... 5.44 1/19/95 4,984,167
6,000,000 New Center Asset Trust........................... 5.48 1/24/95 5,976,042
4,000,000 New Center Asset Trust........................... 5.72 2/08/95 3,973,333
5,000,000 Norfolk Southern Corporation..................... 5.75 2/07/95 4,967,933
4,000,000 Panasonic Finance, Inc........................... 5.50 1/26/95 3,982,750
9,500,000 Panasonic Finance, Inc........................... 6.20 3/29/95 9,354,386
5,000,000 Preferred Receivables Funding Corp............... 6.10 1/05/95 4,994,917
10,000,000 Premium Funding, Inc., Series A.................. 6.05 1/13/95 9,976,472
7,000,000 Riverwoods Funding Corp.......................... 5.95 1/25/95 6,969,919
15,000,000 SBC Finance (Delaware) Inc....................... 5.43 1/20/95 14,950,125
3,000,000 Santander Finance (Delaware) Inc................. 5.40 1/17/95 2,991,450
3,340,000 Sheffield Receivables Corp....................... 5.90 2/01/95 3,321,936
10,000,000 Societe Generale North America, Inc.............. 5.40 1/23/95 9,961,667
1,126,000 Transamerica Finance Corp........................ 5.40 1/18/95 1,122,613
5,000,000 Transamerica Finance Corp........................ 5.80 2/17/95 4,959,167
4,000,000 US Borax Inc..................................... 5.70 2/07/95 3,974,347
8,500,000 WCP Funding Inc.................................. 6.17 3/03/95 8,407,775
711,000 Windmill Funding Corp............................ 6.00 1/13/95 709,341
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$245,780,511) 245,697,756
- ------------------------------------------------------------------------------------------------------------------------
MASTER NOTES+--2.2% 5,000,000 Bear Stearns Cos., Inc. (The).................... 5.978 2/17/95 5,000,409
3,000,000 Goldman Sachs Group L.P.......................... 6.07 5/26/95 3,000,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$8,000,409) 8,000,409
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY
& INSTRUMENTALITY $ 2,000,000 US Treasury Bills................................ 3.43 % 2/09/95 $ 1,987,427
OBLIGATIONS-- 9,000,000 US Treasury Bills................................ 4.905 3/16/95 8,896,830
DISCOUNT--4.9% 7,000,000 US Treasury Bills................................ 6.335 7/06/95 6,775,280
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY OBLIGATIONS--
DISCOUNT (COST--$17,674,804) 17,659,537
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY
& INSTRUMENTALITY 9,500,000 Federal Farm Credit Bank......................... 5.19 3/01/95 9,481,950
OBLIGATIONS-- 5,000,000 Federal Home Loan Bank........................... 5.79 4/28/95 4,987,500
NON-DISCOUNT--24.2% 3,000,000 Federal Home Loan Bank+.......................... 5.93 12/28/95 3,000,000
1,500,000 Federal Home Loan Bank+.......................... 5.83 5/06/96 1,496,404
5,000,000 Federal Home Loan Bank+.......................... 5.82 9/12/96 4,995,506
10,000,000 Federal Home Loan Mortgage Corp.+................ 5.86 9/01/95 9,998,725
1,000,000 Federal Home Loan Mortgage Corp.+................ 5.75 6/03/96 997,154
10,000,000 Federal Home Loan Mortgage Corp.+................ 5.95 6/07/96 9,995,588
3,000,000 Federal National Mortgage Association+........... 5.70 6/01/95 2,999,877
2,000,000 Federal National Mortgage Association+........... 5.83 5/13/96 2,000,000
2,000,000 Federal National Mortgage Association+........... 5.83 8/13/96 2,000,000
15,000,000 Federal National Mortgage Association+........... 6.093 10/11/96 15,000,000
2,000,000 Federal National Mortgage Association+........... 5.95 5/19/97 2,000,000
2,000,000 Federal National Mortgage Association+........... 6.00 5/14/98 2,000,000
2,000,000 Student Loan Marketing Association+.............. 6.32 4/17/95 2,002,984
1,500,000 Student Loan Marketing Association+.............. 6.02 6/02/95 1,501,397
600,000 Student Loan Marketing Association+.............. 6.07 3/20/96 601,620
3,000,000 Student Loan Marketing Association+.............. 5.90 5/14/96 3,003,150
4,000,000 Student Loan Marketing Association+.............. 6.17 8/22/96 4,019,534
2,000,000 Student Loan Marketing Association+.............. 6.04 3/03/97 2,000,502
1,500,000 US Treasury Notes................................ 3.875 4/30/95 1,488,984
1,000,000 US Treasury Notes................................ 4.125 6/30/95 988,437
750,000 US Treasury Notes................................ 3.875 8/31/95 735,234
500,000 US Treasury Notes................................ 4.00 1/31/96 482,812
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY OBLIGATIONS--
NON-DISCOUNT (COST--$87,860,716) 87,777,358
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$369,315,441)--101.6%... 369,119,126
LIABILITIES IN EXCESS OF OTHER ASSETS --(1.6%)... (5,920,026)
-------------
NET ASSETS--100.0%............................... $ 363,199,100
-------------
-------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Commercial Paper and certain US Government, Agency & Instrumentality 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,
1994.
+ Variable Rate Notes.
</TABLE>
See Notes to Financial Statements.
60
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARE VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE 80,000 Teledyne, Inc....................... $ 1,354,796 $ 1,610,000 0.9%
- ------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION 100,000 Skywest, Inc........................ 2,305,063 1,225,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
AUTO-RELATED 115,000 + Automotive Industries Inc........... 2,842,963 2,328,750 1.4
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS 50,000 + Custom Chrome, Inc.................. 1,149,000 843,750 0.5
- ------------------------------------------------------------------------------------------------------------------------
BANKING 90,000 Cole Taylor Financial Group, Inc.... 1,598,829 1,845,000 1.1
110,000 Collective Bancorp, Inc............. 2,208,751 1,856,250 1.1
50,000 First Financial Corp................ 743,437 675,000 0.4
50,000 Mercantile Bancorp., Inc............ 1,621,750 1,562,500 0.9
100,000 Midlantic National Bank............. 2,628,125 2,650,000 1.6
100,000 Roosevelt Financial Group, Inc...... 1,515,001 1,487,500 0.9
50,000 TCF Financial Corp.................. 1,962,682 2,062,500 1.2
12,278,575 12,138,750 7.2
- ------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 140,000 Apogee Enterprises Inc.............. 1,943,285 2,380,000 1.4
- ------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 95,000 Amresco, Inc........................ 781,875 593,750 0.3
70,000 Reynolds & Reynolds Co. (The) (Class 1,649,200 1,750,000 1.0
A)..................................
2,431,075 2,343,750 1.3
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 155,000 + BWIP Holdings, Inc.................. 2,732,500 2,635,000 1.5
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 150,000 Crompton & Knowles Corp............. 2,530,875 2,475,000 1.5
45,000 + Mississippi Chemical Corp........... 675,000 770,625 0.5
3,205,875 3,245,625 2.0
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 80,000 + Devry, Inc.......................... 2,025,179 2,440,000 1.4
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 70,000 + FileNet Corp........................ 1,838,121 1,872,500 1.1
57,000 Metatec Corp. (Class A)............. 629,250 498,750 0.3
25,000 + Phamis, Inc......................... 300,000 446,875 0.3
75,000 + Sterling Software, Inc.............. 2,318,689 2,756,250 1.6
5,086,060 5,574,375 3.3
- ------------------------------------------------------------------------------------------------------------------------
COMPUTERS 130,000 + AST Research, Inc................... 1,872,500 1,885,000 1.1
55,000 + Electronics For Imaging, Inc........ 907,500 1,498,750 0.9
65,000 Exide Electronics Group Inc......... 1,200,000 1,251,250 0.7
100,000 + Read-Rite Corp...................... 1,301,953 1,837,500 1.1
5,281,953 6,472,500 3.8
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS & 130,000 Scotts Co. (Class A)................ 2,310,625 2,031,250 1.2
SERVICES
- ------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 65,000 Lancaster Colony Corp............... 2,248,125 1,909,375 1.1
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 120,000 + Willcox & Gibbs, Inc................ 617,266 705,000 0.4
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC/INSTRUMENTS 70,000 BMC Industries Inc.................. 566,421 1,093,750 0.6
80,000 DOVatron International, Inc......... 1,871,250 2,060,000 1.2
100,000 + Electro Scientific Industries, 1,843,994 2,137,500 1.3
Inc.................................
35,000 + Kent Electronics Corp............... 730,910 1,386,875 0.8
155,000 Methode Electronics Inc. (Class 1,895,370 2,557,500 1.5
A)..................................
30,750 Vishay Intertechnology Inc.......... 1,007,977 1,506,750 0.9
7,915,922 10,742,375 6.3
- ------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 45,000 + Regal Cinemas, Inc.................. 785,625 1,113,750 0.7
- ------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL 200,000 Calgon Carbon Corp.................. 2,433,712 2,075,000 1.2
80,000 Donaldson Inc....................... 1,366,077 1,920,000 1.1
92,400 IMCO Recycling Inc.................. 1,262,004 1,397,550 0.8
87,500 TETRA Technologies, Inc............. 1,201,250 1,509,375 0.9
6,263,043 6,901,925 4.0
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 75,000 GFC Financial Corp.................. 2,393,126 2,381,250 1.4
150,000 + National Auto Credit, Inc........... 1,933,125 1,781,250 1.0
4,326,251 4,162,500 2.4
- ------------------------------------------------------------------------------------------------------------------------
FOODS/FOOD PROCESSING 50,000 + Smithfield Foods, Inc............... 1,590,000 1,587,500 0.9
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
GAMING 135,000 Players International Inc............ $ 3,020,625 $ 3,003,750 1.8%
100,000 + Shuffle Master, Inc.................. 1,297,500 1,187,500 0.7
50,000 Sodak Gaming Inc..................... 1,268,874 762,500 0.4
5,586,999 4,953,750 2.9
- ------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES 100,000 Advocat, Inc......................... 950,000 1,325,000 0.8
150,000 + Ornda Health Corp.................... 2,331,250 1,837,500 1.1
100,000 + Physician Reliance Network, Inc...... 1,400,000 1,850,000 1.1
40,000 + Physicians Health Services, Inc...... 882,500 1,070,000 0.6
80,000 Sun Healthcare Group Inc............. 1,336,150 2,030,000 1.2
6,899,900 8,112,500 4.8
- ------------------------------------------------------------------------------------------------------------------------
HEALTHCARE--PRODUCTS & 85,000 Sybron Corp.......................... 2,357,265 2,932,500 1.7
SERVICES 110,000 Thermedics, Inc...................... 1,535,333 1,402,500 0.8
3,892,598 4,335,000 2.5
- ------------------------------------------------------------------------------------------------------------------------
HIGH TECHNOLOGY 100,000 Thermotrex Corp...................... 1,589,918 1,350,000 0.8
30,000 + Videonics Inc........................ 330,000 367,500 0.2
1,919,918 1,717,500 1.0
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE 93,700 + Acceptance Insurance Holdings, 1,345,459 1,405,500 0.8
Inc..................................
105,000 Gainsco Inc.......................... 1,031,649 866,250 0.5
2,377,108 2,271,750 1.3
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURED HOUSING 125,000 Clayton Homes, Inc.................. 1,920,136 1,968,750 1.2
100,000 Oakwood Homes Corp.................. 2,299,368 2,437,500 1.4
150,000 Redman Industries Inc............... 2,660,186 2,437,500 1.4
6,879,690 6,843,750 4.0
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING 75,000 Modine Manufacturing Co............. 2,045,000 2,118,750 1.2
- ------------------------------------------------------------------------------------------------------------------------
MEDIA/PUBLISHING 100,000 + Electronic Arts, Inc................ 1,994,731 1,912,500 1.1
- ------------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 150,000 + North American Biologicals, Inc..... 1,050,000 1,087,500 0.6
- ------------------------------------------------------------------------------------------------------------------------
MEDICAL SUPPLIES 80,000 Beckman Instruments, Inc............ 2,217,984 2,230,000 1.3
70,000 Dentsply International, Inc......... 2,378,125 2,170,000 1.3
50,000 + Isolyser Company, Inc............... 904,169 900,000 0.5
102,000 + Maxxim Medical Inc.................. 1,281,120 1,479,000 0.9
6,781,398 6,779,000 4.0
- ------------------------------------------------------------------------------------------------------------------------
METALS 65,000 Harsco Corp......................... 2,668,892 2,656,875 1.6
100,000 + Magma Copper Co..................... 1,632,000 1,675,000 1.0
79,500 Material Sciences Corp.............. 1,107,365 1,262,063 0.7
5,408,257 5,593,938 3.3
- ------------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 80,000 Danka Business Systems PLC.......... 1,685,000 1,710,000 1.0
- ------------------------------------------------------------------------------------------------------------------------
OIL & GAS 125,000 Lomak Petroleum Inc................. 915,625 828,125 0.5
60,000 Parker & Parsley Development
Partners............................ 1,380,798 1,230,000 0.7
2,296,423 2,058,125 1.2
- ------------------------------------------------------------------------------------------------------------------------
PRINTING 107,000 Merrill Corp........................ 2,289,739 1,819,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
PRINTING & 60,000 Banta Corp.......................... 1,973,750 1,800,000 1.1
PUBLISHING 50,000 International Imaging Materials 864,374 1,612,500 0.9
Inc.................................
2,838,124 3,412,500 2.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE 50,000 Capstone Capital Trust, Inc......... $ 900,000 $ 787,500 0.5%
50,000 First Industrial Realty Trust, 1,180,200 975,000 0.6
Inc.................................
45,250 National Health Investors, Inc...... 1,250,000 1,182,156 0.7
3,330,200 2,944,656 1.8
- ------------------------------------------------------------------------------------------------------------------------
RESTAURANTS 75,000 + Outback Steakhouse, Inc............. 2,053,125 1,734,375 1.0
- ------------------------------------------------------------------------------------------------------------------------
RETAIL APPAREL 55,000 + Tommy Hilfiger Corp................. 2,258,269 2,481,875 1.5
- ------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 200,000 MicroAge Inc........................ 3,065,251 2,325,000 1.4
110,000 + Tech Data Corp...................... 1,722,527 1,856,250 1.1
4,787,778 4,181,250 2.5
- ------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 60,000 + Electroglas Inc..................... 2,043,125 1,995,000 1.2
PRODUCTION EQUIPMENT 50,000 + Ultratech Stepper Inc............... 1,095,001 1,900,000 1.1
30,000 + Veeco Instruments, Inc.............. 330,000 285,000 0.2
3,468,126 4,180,000 2.5
- ------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 170,000 Dallas Semiconductor Corp........... 2,926,559 2,826,250 1.7
50,000 + Tower Semiconductor Ltd............. 585,820 525,000 0.3
3,512,379 3,351,250 2.0
- ------------------------------------------------------------------------------------------------------------------------
SHIPPING 50,000 + Kirby Corp.......................... 896,850 987,500 0.6
- ------------------------------------------------------------------------------------------------------------------------
STEEL 90,000 Birmingham Steel Corp............... 2,511,223 1,800,000 1.1
75,000 Reliance Steel & Aluminum Co........ 1,087,500 946,875 0.6
3,598,723 2,746,875 1.7
- ------------------------------------------------------------------------------------------------------------------------
TEXTILES 55,000 + Galey & Lord, Inc................... 761,875 790,625 0.5
100,000 + Mohawk Industries,Inc............... 1,790,625 1,225,000 0.7
2,552,500 2,015,625 1.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 149,096,016 151,740,144 89.2
- ------------------------------------------------------------------------------------------------------------------------
FACE AMOUNT SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $8,000,000 Daimler-Benz AG, 5.64% due 7,993,778 7,993,778 4.7
1/04/1995...........................
2,204,000 General Electric Capital Corp.,
5.80% due 1/03/1995................. 2,202,580 2,202,580 1.3
10,196,358 10,196,358 6.0
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 8,000,000 Federal Home Loan Mortgage Corp.,
AGENCY OBLIGATIONS* 5.54% due 1/05/1995................. 7,992,613 7,992,613 4.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 18,188,971 18,188,971 10.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS................... $167,284,987 169,929,115 99.9
OTHER ASSETS LESS LIABILITIES....... 114,508 0.1
NET ASSETS.......................... $170,043,623 100.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
+ Non-income producing security.
See Notes to Financial Statements.
63
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALUMINUM 16,000 Aluminum Co. of America.......... $ 1,358,485 $ 1,386,000 0.5%
- ------------------------------------------------------------------------------------------------------------------------
APPLIANCES 180,000 Singer Co. N.V. (f).............. 5,613,949 5,377,500 2.0
205,000 Sunbeam-Oster Inc................ 4,195,820 5,278,750 1.9
------------ ------------ ----------
9,809,769 10,656,250 3.9
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE 65,000 Consorcio G Grupo Dina S.A. de
C.V. (ADR) (a) (f)............. 1,273,435 617,500 0.2
- ------------------------------------------------------------------------------------------------------------------------
BANKING 50,000 BankAmerica Corp................. 2,267,371 1,975,000 0.7
70,000 Bank of New York, Inc............ 1,973,776 2,030,000 0.7
40,000 + Bank of New York, Inc. (Warrants)
(b)............................ 300,938 385,000 0.1
110,000 Espirito Santo Financial Holdings
S.A. (ADR) (a) (f)............. 1,638,728 1,471,250 0.5
50,000 Grupo Financiero Serfin S.A. de
C.V. (ADR) (a) (f)............. 1,284,529 375,000 0.1
------------ ------------ ----------
7,465,342 6,236,250 2.1
- ------------------------------------------------------------------------------------------------------------------------
BEVERAGES 8,000 Panamerican Beverage, Inc. (Class
A) (f)......................... 287,834 253,000 0.1
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 40,000 du Pont (E.I.) de Nemours &
Co............................. 2,355,629 2,250,000 0.8
75,000 Eastman Chemical Co.............. 3,860,673 3,787,500 1.4
45,000 + IMC Fertilizer Group, Inc........ 1,826,535 1,946,250 0.7
40,000 Rohm and Haas Co................. 2,347,779 2,285,000 0.8
------------ ------------ ----------
10,390,616 10,268,750 3.7
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 110,000 + ADC Telecommunication Inc........ 3,872,648 5,445,000 2.0
100,000 DSC Communications Corp.......... 2,363,175 3,600,000 1.3
30,000 Motorola, Inc.................... 1,560,200 1,736,250 0.6
30,000 Tellabs, Inc..................... 831,315 1,665,000 0.6
------------ ------------ ----------
8,627,338 12,446,250 4.5
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER EQUIPMENT 11,000 International Business Machines
Corp........................... 781,579 808,500 0.3
85,000 + Solectron Corp................... 1,824,067 2,337,500 0.9
------------ ------------ ----------
2,605,646 3,146,000 1.2
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 165,000 Computer Sciences Corp........... 5,588,070 8,415,000 3.1
25,000 General Motors Corp. (Class E)... 981,560 962,500 0.3
------------ ------------ ----------
6,569,630 9,377,500 3.4
- ------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION 63,000 Empresas ICA Sociedad
Controladora, S.A. de C.V.
(ADR) (a) (f).................. 1,407,219 976,500 0.4
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER--MISCELLANEOUS 50,000 Duracell International, Inc...... 2,093,659 2,168,750 0.8
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER SERVICES 55,000 Block (H&R), Inc................. 2,478,297 2,041,875 0.7
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 75,000 Grainger (W.W), Inc.............. 4,651,873 4,331,250 1.6
- ------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 100,000 + California Energy Co., Inc....... 1,837,585 1,562,500 0.6
- ------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 350,000 + Wheelabrator Technologies,
Inc............................ 5,888,869 5,162,500 1.9
- ------------------------------------------------------------------------------------------------------------------------
HEALTHCARE 175,000 + Humana Inc....................... 3,164,634 3,959,375 1.4
80,000 + Physician Corp. of America....... 1,759,763 1,620,000 0.6
15,000 + Vivra Inc........................ 278,914 420,000 0.2
------------ ------------ ----------
5,203,311 5,999,375 2.2
- ------------------------------------------------------------------------------------------------------------------------
HEALTH AND
PERSONAL CARE 45,000 Huntington International Holdings
PLC (ADR) (a) (f).............. 461,978 118,125 0.0
- ------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 100,000 Procter & Gamble Co.............. 5,564,714 6,200,000 2.3
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE 35,000 ITT Corp......................... 3,004,477 3,101,875 1.1
- ------------------------------------------------------------------------------------------------------------------------
MACHINERY 45,000 Siebe PLC (f).................... 392,986 391,813 0.1
- ------------------------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 60,000 + Allied Signal Inc................ 2,155,828 2,040,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 190,000 Danka Business Systems Inc. PLC
(ADR) (a) (f).................. 3,055,107 4,061,250 1.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 15,110 British Petroleum PLC (ADR) (a)
(f)............................ $ 1,147,919 $ 1,206,911 0.4%
50,000 Mobil Oil Corp................... 3,922,826 4,212,500 1.5
50,000 Phillips Petroleum Co............ 1,699,244 1,637,500 0.6
30,000 Royal Dutch Petroleum Co.
(ADR) (a) (f).................. 3,013,607 3,225,000 1.2
------------ ------------ ----------
9,783,596 10,281,911 3.7
- ------------------------------------------------------------------------------------------------------------------------
PACKAGING 40,000 + Crown Cork & Seal Co., Inc....... 1,456,240 1,510,000 0.5
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 25,000 American Home Products Corp...... 1,557,695 1,568,750 0.6
100,000 Merck & Co., Inc................. 3,637,356 3,812,500 1.4
------------ ------------ ----------
5,195,051 5,381,250 2.0
- ------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 40,000 Eastman Kodak Co................. 1,969,398 1,910,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
RAILROADS 105,000 + Southern Pacific Rail Corp....... 2,146,353 1,903,125 0.7
- ------------------------------------------------------------------------------------------------------------------------
RETAIL 30,000 Phillips-Van Heusen Corp......... 853,660 457,500 0.2
25,000 + Revco D.S., Inc.................. 579,095 590,625 0.2
------------ ------------ ----------
1,432,755 1,048,125 0.4
- ------------------------------------------------------------------------------------------------------------------------
SOAP 7,000 Unilever Capital Corp. (ADR) (a)
(f)............................ 812,101 815,500 0.3
- ------------------------------------------------------------------------------------------------------------------------
TIRE & RUBBER 25,000 Bandag, Inc. (Class A)........... 1,354,227 1,337,500 0.5
35,000 Cooper Tire & Rubber Co.......... 949,285 826,875 0.3
------------ ------------ ----------
2,303,512 2,164,375 0.8
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 15,500 + ALC Communications Corp.......... 464,664 482,438 0.2
60,000 GTE Corp......................... 1,920,691 1,822,500 0.7
164,734 LDDS Communications Inc.......... 3,522,400 3,191,721 1.2
130,000 + MCI Communications Corp.......... 3,498,756 2,388,750 0.9
70,000 + Southwestern Bell Corp........... 2,980,278 2,826,250 1.0
45,000 Telefonos de Mexico, S.A. de C.V.
(ADR) (a) (f).................. 2,814,912 1,845,000 0.7
------------ ------------ ----------
15,201,701 12,556,659 4.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS & WARRANTS 126,884,705 130,114,258 47.3
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COUNTRY FOREIGN STOCKS++++
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA 69,633 National Australia Bank Ltd.
(2)............................ 577,474 557,068 0.2
80,000 News Corp. Ltd. (ADR) (a) (19)... 1,626,298 1,250,000 0.5
40,000 News Corp. Ltd. (Preferred)
(ADR) (a) (19)................. 499,721 555,000 0.2
475 Pacific Dunlop, Ltd. (20)........ 1,371 1,263 0.0
------------ ------------ ----------
2,704,864 2,363,331 0.9
- ------------------------------------------------------------------------------------------------------------------------
CANADA 30,000 Hudson Bay Co. (23).............. 740,755 534,721 0.2
50,000 Semi-Tech Corp. Receipts,
Inc. (d) (11).................. 536,117 196,064 0.1
55,000 Nova Corp. (5)................... 577,810 508,750 0.2
------------ ------------ ----------
1,854,682 1,239,535 0.5
- ------------------------------------------------------------------------------------------------------------------------
CHILE 15,200 Banco O'Higgins (Sponsored)
(ADR) (a) (2).................. 221,987 260,300 0.1
20,000 Cristalerias de Chile S.A. (ADR)
(a) (26)....................... 391,925 315,000 0.1
25,000 ++ Distribuidora Chilectra
Metropolitana S.A. (ADR) (a)
(9)............................ 795,208 1,225,000 0.4
14,000 Telex Chile S.A. (25)............ 276,514 148,750 0.1
------------ ------------ ----------
1,685,634 1,949,050 0.7
- ------------------------------------------------------------------------------------------------------------------------
DENMARK 42,000 Tele Danmark A/S (ADR) (a)
(25)........................... 1,020,702 1,071,000 0.4
- ------------------------------------------------------------------------------------------------------------------------
FRANCE 4,646 Compagnie Generale des Eaux
(Ordinary) (28)................ 485,421 452,227 0.2
7,800 + Eramet (29)...................... 488,521 504,689 0.2
------------ ------------ ----------
973,942 956,916 0.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++++ COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
HONG KONG 91,641 HSBC Holdings PLC (2)............ $ 766,003 $ 989,145 0.4%
245,000 Hutchison Whampoa Co. (20)....... 810,025 991,275 0.4
200,000 Johnson Electric Holdings Ltd.
(11)........................... 408,481 458,894 0.2
700,000 Shanghai Petrochemical Co., Ltd.
(21)........................... 233,787 199,069 0.1
------------ ------------ ----------
2,218,296 2,638,383 1.1
- ------------------------------------------------------------------------------------------------------------------------
INDONESIA 980 P.T. Indonesia Satellite (ADR)
(a) (25)....................... 31,409 35,035 0.0
- ------------------------------------------------------------------------------------------------------------------------
ITALY 25,000 Istituto Mobiliare Italiano
S.p.A. (ADR) (a) (2)........... 552,180 459,375 0.2
- ------------------------------------------------------------------------------------------------------------------------
JAPAN 20,000 Fujitsu, Ltd. (7)................ 220,570 203,015 0.1
45,000 Hitachi, Ltd. (10)............... 447,643 447,286 0.2
6,000 Kyocera Corp. (11)............... 444,404 445,628 0.2
115,000 Mitsubishi Electric Corp. (10)... 805,387 817,136 0.3
15,000 NEC Corp. (11)................... 192,442 171,859 0.1
10,000 TDK Corp. (11)................... 471,824 485,427 0.2
------------ ------------ ----------
2,582,270 2,570,351 1.1
- ------------------------------------------------------------------------------------------------------------------------
MEXICO 210,000 Cifra, S.A. de C.V. (23)......... 551,720 406,286 0.1
96,400 ++ Grupo Carso, S.A. de C.V. (ADR)
(a) (20)....................... 1,124,115 1,458,050 0.5
311,500 Telefonos de Mexico, S.A. de C.V.
(Telemex) (Class L) (25)....... 579,168 648,429 0.2
------------ ------------ ----------
2,255,003 2,512,765 0.8
- ------------------------------------------------------------------------------------------------------------------------
NORWAY 30,000 Norsk Hydro A.S. (ADR) (a) (5)... 1,143,208 1,173,750 0.4
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN 5,000 Electrolux A.B. 'B' Free (10).... 254,436 254,187 0.1
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 15,000 Hanson PLC (ADR) (a) (20)........ 332,006 270,000 0.1
50,000 L.M. Ericsson Telephone Co.
(25)........................... 2,895,870 2,756,250 1.0
40,000 Reuters Holdings PLC (ADR) (a)
(4)............................ 1,467,162 1,755,000 0.6
------------ ------------ ----------
4,695,038 4,781,250 1.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 21,971,664 22,004,928 8.3
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
INDUSTRY AMOUNT* CORPORATE & FOREIGN BONDS++++
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--AUSTRALIA Queensland Treasury Corp., Global
Notes (15):
A$ 7,300,000 8.00% due 5/14/1997............... 5,356,175 5,405,042 2.0
1,925,000 8.00% due 7/14/1999............... 1,436,763 1,371,506 0.5
------------ ------------ ----------
6,792,938 6,776,548 2.5
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA US$ 5,000,000 Hydro-Electric Quebec, 6.35% due
1/15/2002 (15).................. 5,000,000 4,462,500 1.6
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--GERMANY DM 13,700,000 Bundes Obligation, 6.375% due
5/20/1998 (15).................. 8,366,515 8,664,843 3.2
1,450,000 Deutschland Republic, 8.00% due
7/22/2002 (15).................. 950,668 953,647 0.3
------------ ------------ ----------
9,317,183 9,618,490 3.5
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--ITALY US$ 500,000 Republic of Italy, 8.75% due
2/08/2001 (15).................. 537,305 502,188 0.2
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN-- Pound 625,000 UK Treasury Gilt (15):
UNITED KINGDOM Sterling 7.25% due 3/30/1998............. 942,775 942,659 0.3
1,800,000 8.00% due 6/10/2003............... 2,729,309 2,687,551 1.0
------------ ------------ ----------
3,672,084 3,630,210 1.3
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE CORPORATE & FOREIGN BONDS++++ VALUE PERCENT OF
INDUSTRY AMOUNT* COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US--FINANCIAL US$ 1,000,000 Ford Motor Credit Co., 7.125%
SERVICES due 12/01/1997............. $ 995,000 $ 966,564 0.4%
- ---------------------------------------------------------------------------------------------------------
US--INDUSTRIAL 1,000,000 International Business
Machines Corp., 6.375% due
6/15/2000.................. 1,000,000 915,314 0.3
- ---------------------------------------------------------------------------------------------------------
US-- 5,000,000 Chesapeake & Potomac Telecom
tELECOMMUNICATIONS Co., 6.125% due
7/15/2005.................. 4,503,300 4,243,750 1.5
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE & FOREIGN
BONDS 31,817,810 31,115,564 11.3
- ---------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY
OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------
FEDERAL Federal National Mortgage
AGENCY Association:
OBLIGATIONS
US$ 5,000,000 7.85% due 9/10/2004.......... 4,992,969 4,791,405 1.7
5,000,000 8.00% due 1/01/2020.......... 4,774,219 4,790,625 1.7
2,000,000 Series 93D, 5.85% due
2/25/2006.................. 1,996,250 1,819,375 0.7
------------ ------------ ----------
11,763,438 11,401,405 4.1
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT
OBLIGATIONS US Treasury Notes:
1,000,000 8.625% due 8/15/1997....... 1,027,344 1,018,750 0.4
6,000,000 7.50% due11/15/2001.......... 6,143,336 5,891,250 2.1
5,000,000 6.25% due 2/15/2003.......... 4,990,469 4,523,440 1.6
10,000,000 7.25% due 8/15/2004.......... 10,103,125 9,604,690 3.5
US Treasury STRIPS++:
3,000,000 7.77% due 5/15/2000 (e)...... 2,219,543 1,994,094 0.7
10,000,000 7.92% due 11/15/2004 (e)..... 4,661,724 4,634,520 1.7
------------ ------------ ----------
29,145,541 27,666,744 10.0
- ---------------------------------------------------------------------------------------------------------
MORTGAGE- Government National Mortgage
BACKED Association (c):
SECURITIES 1,184,942 9.00% due 11/15/2019....... 1,174,190 1,195,311 0.4
541,884 9.00% due 11/15/2019......... 538,159 546,626 0.2
------------ ------------ ----------
1,712,349 1,741,937 0.6
- ---------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS 42,621,328 40,810,086 14.7
- ---------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT* SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL US$ 14,000,000 Corporate Asset Funding Co.
PAPER** Inc., 5.83% due 1/27/1995.. $ 13,938,785 $ 13,938,785 5.1%
7,789,000 General Electric Capital
Corp.,
5.80% due 1/03/1995........ 7,785,235 7,785,235 2.8
14,000,000 PHH Corp., 6.00% due
1/17/1995.................. 13,960,333 13,960,333 5.1
------------ ------------ ----------
35,684,353 35,684,353 13.0
- ---------------------------------------------------------------------------------------------------------
US
GOVERNMENT
&
AGENCY 14,000,000 Federal Home Loan Mortgage
OBLIGATIONS** Association, 5.54% due
1/05/1995.................. 13,989,228 13,989,228 5.1
- ---------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 49,673,581 49,673,581 18.1
- ---------------------------------------------------------------------------------------------------------
SHARES PREMIUMS
COVERED ISSUE RECEIVED
- ---------------------------------------------------------------------------------------------------------
CALL 10,000 ADC Telecommunications Inc.,
OPTIONS expiring January 1995 at
WRITTEN US$50...................... (13,271) (11,250) 0.0
6,000 ITT Corp., expiring January
1995 at US$90.............. (7,257) (6,750) 0.0
- ---------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (20,528) (18,000) 0.0
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF
OPTIONS WRITTEN............ $272,948,560 273,700,417 99.7
------------
------------
OTHER ASSETS LESS
LIABILITIES................ 797,849 0.3
------------ ----------
NET ASSETS................... $274,498,266 100.0%
------------ ----------
------------ ----------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(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 Corp. Receipts. 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.
(f) Consistent with 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) the country in which the issuer derives a
significant proportion (at least 50%) of its revenue 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 issuers are situated.
* Denominated in US dollars unless otherwise indicated.
** 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.
+ Non-income producing security.
</TABLE>
68
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
++ Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately
$2,683,000, representing 0.98% of net assets.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACQUISITION VALUE
ISSUE DATES COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Distribuidora Chilectra Metropolitana S.A. (ADR)................................. 2/12/1992 $ 795,208 $ 1,225,000
Grupo Carso, S.A. de C.V. (ADR).................................................. 1/24/1992
1,124,115 1,458,050
- -----------------------------------------------------------------------------------------------------------------------
TOTAL............................................................................
$ 1,919,323 $ 2,683,050
------------ ------------
------------ ------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
++ Separate Trading of Registered Interest and Principal of Securities (STRIPS).
++++ Corresponding industry groups for foreign securities:
</TABLE>
<TABLE>
<C> <S>
(1) Automotive
(2) Banking
(3) Beverages
(4) Business Services
(5) Chemicals
(6) Communications Equipment
(7) Computers
(8) Construction
(9) Electric Utilities
(10) Electrical Equipment
(11) Electronics
(12) Energy
(13) Financial Services
(14) Food Chains
(15) Government Entities
(16) Health and Personal Care
(17) Insurance
(18) Machinery
(19) Media Publishing
(20) Multi-Industry
(21) Petroleum
(22) Real Estate
(23) Retail Stores
(24) Soap
(25) Telecommunications
(26) Containers
(27) Packaging
(28) Utilities-Water
(29) Metals
</TABLE>
See Notes to Financial Statements.
69
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AEROSPACE 61,500 United Technologies Corp........... $ 3,820,923 $ 3,866,812 0.7%
- ------------------------------------------------------------------------------------------------------------------------
BANKING 46,900 Morgan (J.P.) & Co................. 3,144,878 2,626,400 0.5
- ------------------------------------------------------------------------------------------------------------------------
BUILDING--RELATED 75,700 Stanley Works Co................... 3,136,707 2,706,275 0.5
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 54,050 Eastman Chemical Co................ 2,354,380 2,729,525 0.5
94,500 Nalco Chemical Co.................. 3,283,332 3,165,750 0.6
------------ ------------ ----------
5,637,712 5,895,275 1.1
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 30,400 Hewlett-Packard Co................. 2,362,976 3,036,200 0.6
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER--SERVICES 112,000 Kelly Services, Inc. (Class A)..... 3,154,750 3,052,000 0.6
- ------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 134,000 + California Energy Co., Inc......... 2,383,346 2,093,750 0.4
- ------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 201,800 + Wheelabrator Technologies, Inc..... 3,633,140 2,976,550 0.6
- ------------------------------------------------------------------------------------------------------------------------
FOODS 172,275 Archer-Daniels-Midland Co.......... 2,567,582 3,553,172 0.7
- ------------------------------------------------------------------------------------------------------------------------
HEALTH CARE 120,000 + Humana Inc......................... 2,876,654 2,715,000 0.5
- ------------------------------------------------------------------------------------------------------------------------
MACHINERY 78,900 Ingersoll-Rand Co.................. 2,785,025 2,485,350 0.5
- ------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--
MANUFACTURING 162,200 Keystone International, Inc........ 3,719,883 2,757,400 0.5
- ------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 119,000 Westcoast Energy Inc............... 1,925,615 1,889,125 0.4
- ------------------------------------------------------------------------------------------------------------------------
OFFICE--RELATED 84,500 Pitney Bowes, Inc.................. 3,323,892 2,682,875 0.5
- ------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 96,700 Phillips Petroleum Co.............. 2,816,185 3,166,925 0.6
- ------------------------------------------------------------------------------------------------------------------------
PETROLEUM & SERVICE 142,900 Dresser Industries, Inc............ 3,146,100 2,697,238 0.5
EQUIPMENT 50,200 Schlumberger Ltd................... 2,972,633 2,528,825 0.5
------------ ------------ ----------
6,118,733 5,226,063 1.0
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 112,000 Abbott Laboratories................ 3,152,867 3,654,000 0.7
105,000 Merck & Co., Inc................... 3,539,150 4,003,125 0.8
------------ ------------ ----------
6,692,017 7,657,125 1.5
- ------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 57,200 Eastman Kodak Co................... 2,529,035 2,731,300 0.5
- ------------------------------------------------------------------------------------------------------------------------
PRINTING/PUBLISHING 70,800 Gannett Co., Inc................... 3,634,477 3,770,100 0.7
- ------------------------------------------------------------------------------------------------------------------------
50,100 American Telephone & Telegraph
TELECOMMUNICATIONS Co............................... 2,740,599 2,517,525 0.5
50,300 Bell Atlantic Corp................. 2,829,968 2,502,425 0.5
98,000 Comsat Corp........................ 2,582,928 1,825,250 0.4
------------ ------------ ----------
8,153,495 6,845,200 1.4
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS 74,417,025 71,732,897 13.8
- ------------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS & WARRANTS++
- ------------------------------------------------------------------------------------------------------------------------
ARGENTINA 127,520 Banco de Galicia S.A. (ADR)* (3)... 2,868,834 2,183,780 0.4
117,000 + Banco Frances del Rio de la Plata
S.A. (Class A) (ADR)* (3)........ 3,272,016 2,500,875 0.5
100,000 Yacimientos Petroliferos Fiscales
S.A. (Sponsored) (ADR)* (21)..... 2,345,882 2,137,500 0.4
------------ ------------ ----------
8,486,732 6,822,155 1.3
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA 621,000 CSR Ltd. (Ordinary) (18)........... 1,970,236 2,142,226 0.4
251,000 National Bank of Australia (3)..... 1,939,280 2,008,016 0.4
837,600 Pacific Dunlop, Ltd. (18).......... 2,815,855 2,227,125 0.4
------------ ------------ ----------
6,725,371 6,377,367 1.2
- ------------------------------------------------------------------------------------------------------------------------
CANADA 172,100 Canadian Pacific Ltd. (18)......... 2,710,067 2,581,500 0.5
65,000 Imperial Oil Ltd. (9).............. 2,297,743 2,143,341 0.4
20,000 Imperial Oil Ltd. (ADR)* (9)....... 592,938 660,000 0.1
77,400 Northern Telecommunications, Ltd.
(27)............................. 2,137,422 2,583,225 0.5
217,000 Thomson Corp. (7).................. 2,673,122 2,668,794 0.5
------------ ------------ ----------
10,411,292 10,636,860 2.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS & WARRANTS++ COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
150,000 + Banco O'Higgins (Sponsored) (ADR)*
CHILE (3).............................. $ 2,377,482 $ 2,568,750 0.5%
- ------------------------------------------------------------------------------------------------------------------------
CHINA 8,000,000 Shanghai Petrochemical Company,
Ltd. (9)......................... 2,557,317 2,275,078 0.4
- ------------------------------------------------------------------------------------------------------------------------
FRANCE 33,900 Alactel Alsthom (8)................ 3,830,275 2,899,175 0.6
22,100 Compagnie de Saint Gobain (14)..... 2,366,194 2,544,899 0.5
23,800 + Compagnie General des Eaux (31).... 2,592,063 2,316,617 0.4
36,766 + Schneider S.A (11)................. 2,409,589 2,440,953 0.5
1,966 + Schneider S.A. (Warrants) (a)
(11)............................. 16,314 14,011 0.0
40,300 TOTAL S.A. (21).................... 2,118,813 2,344,535 0.5
------------ ------------ ----------
13,333,248 12,560,190 2.5
- ------------------------------------------------------------------------------------------------------------------------
GERMANY 10,250 + Mannesmann AG (17)................. 2,195,390 2,794,251 0.5
9,750 Preussag AG (18)................... 2,569,641 2,834,302 0.5
10,700 RWE AG (Rheinisch Westfalisches)
(31)............................. 2,883,098 3,003,327 0.6
6,150 Siemens AG (12).................... 2,507,770 2,578,391 0.5
16,600 Thyssen AG (Ordinary) (17)......... 2,353,011 3,168,798 0.6
------------ ------------ ----------
12,508,910 14,379,069 2.7
- ------------------------------------------------------------------------------------------------------------------------
536,400 China Light & Power Co., Ltd.
HONG KONG (31)............................. 2,653,976 2,288,159 0.4
350,000 Sun Hung Kai Properties, Ltd.
(24)............................. 2,393,488 2,090,228 0.4
397,000 Swire Pacific, Ltd. (Class A)
(8).............................. 2,402,225 2,473,552 0.5
------------ ------------ ----------
7,449,689 6,851,939 1.3
- ------------------------------------------------------------------------------------------------------------------------
65,180 PT Indonesia Satellite (ADR)*
INDONESIA (27)............................. 2,516,111 2,330,185 0.5
- ------------------------------------------------------------------------------------------------------------------------
ITALY 680,000 Daniel & Co. (17).................. 2,451,794 2,433,667 0.5
660,000 Italcementi S.p.A. (4)............. 2,340,308 2,288,782 0.4
------------ ------------ ----------
4,792,102 4,722,449 0.9
- ------------------------------------------------------------------------------------------------------------------------
JAPAN 229,000 Asahi Glass Co., Ltd. (4).......... 2,536,504 2,830,854 0.5
68,000 Bandai Co. (29).................... 2,243,363 2,904,523 0.6
165,000 Canon, Inc. (12)................... 2,315,252 2,802,513 0.5
165,000 Dai Nippon Printing Co., Ltd.
(23)............................. 2,681,206 2,819,095 0.5
305,000 Hitachi Cable, Ltd. (8)............ 2,258,069 2,544,221 0.5
57,000 Ito-Yokado Co., Ltd. (25).......... 2,773,666 3,053,367 0.6
281,000 Kamigumi Co. (26).................. 3,327,164 2,993,568 0.6
146,000 Kandenko Co., Ltd. (4)............. 3,108,742 2,465,126 0.5
117,000 Kansai Electric Power Co. (32)..... 3,171,203 2,822,111 0.5
320,000 + Komatsu Ltd. (17).................. 2,495,093 2,894,472 0.6
242,000 Maeda Corp. (4).................... 2,444,979 2,529,447 0.5
407,000 Makino Milling Machine Co. (17).... 2,527,613 3,673,226 0.7
162,000 Makita Electric Works, Ltd. (12)... 2,941,609 2,930,653 0.6
166,000 Matsushita Electric Industries,
Ltd. (12)........................ 2,324,954 2,736,080 0.5
430,000 Mitsubishi Electric Co. (11)....... 2,778,342 3,055,377 0.6
386,000 Mitsubishi Heavy Industry, Ltd.
(8).............................. 2,363,424 2,948,342 0.6
415,000 Nippon Fire and Marine Insurance
Co., Ltd. (16)................... 2,923,392 2,886,231 0.6
364,000 Nippon Oil Co., Ltd. (21).......... 2,469,057 2,425,447 0.5
310,000 Okumura Corp. (4).................. 2,626,893 2,321,106 0.5
294,000 Sekisui Chemical Co., Ltd. (9)..... 2,969,066 2,925,226 0.6
170,000 Sharp Corp. (12)................... 2,504,542 3,075,377 0.6
119,000 Shikoku Electric Power Co. (31).... 3,095,822 2,834,472 0.5
285,000 + Sumitomo Corp. (30)................ 2,414,459 2,921,608 0.6
225,000 Tokio Marine and Fire Insurance
Co., Ltd. (16)................... 2,906,154 2,758,794 0.5
103,000 Tokyo Electric Power Co., Inc.
(31)............................. 3,203,802 2,877,789 0.6
144,000 Tokyo Style Co. (10)............... 2,477,721 2,445,829 0.5
400,000 + Toray Industries Ltd. (28)......... 2,827,073 2,914,573 0.6
172,000 Toto Ltd. (4)...................... 3,106,946 2,817,688 0.5
87,000 Toyo Seikan Kaisha Corp. (20)...... 2,447,671 2,902,915 0.6
</TABLE>
71
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS & WARRANTS++ COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAPAN 141,000 Toyota Motor Corp. (1)............. $ 2,461,767 $ 2,975,879 0.6%
(CONCLUDED) 151,000 Yamazaki Banking Ltd. (3).......... 2,993,580 3,035,176 0.6
------------ ------------ ----------
83,719,128 88,121,085 17.3
- ------------------------------------------------------------------------------------------------------------------------
MALAYSIA 400,000 Hong Leong Industries BHD (5)...... 2,162,754 2,068,560 0.4
800,000 UMW Holdings BHD (2)............... 2,055,479 2,131,244 0.4
------------ ------------ ----------
4,218,233 4,199,804 0.8
- ------------------------------------------------------------------------------------------------------------------------
MEXICO 458,813 Cementos Mexicanos, S.A. de C.V.
(Class B) (8).................... 2,998,578 2,439,200 0.5
1,399,000 + Cifra, S.A. de C.V. (Class C)
(25)............................. 3,373,615 2,706,637 0.5
246,000 Consorcio G Grupo Dina, S.A. de
C.V. (ADR)* (6).................. 3,781,859 2,337,000 0.5
130,000 Empresas ICA Sociedad Controladora,
S.A. de C.V. (ADR)* (32)......... 3,203,355 2,015,000 0.4
71,600 Telefonos de Mexico, S.A. de C.V.
(Telmex) (ADR)* (27)............. 3,705,673 2,935,600 0.6
------------ ------------ ----------
17,063,080 12,433,437 2.5
- ------------------------------------------------------------------------------------------------------------------------
466 ABN Amro Holdings N.V. (Preferred)
NETHERLANDS (3).............................. 15,383 15,540 0.0
23,000 Royal Dutch Petroleum Co. N.V.
(ADR)* (21)...................... 2,269,122 2,472,500 0.5
29,400 Ver Ner Utigevers (23)............. 2,383,457 3,056,704 0.6
------------ ------------ ----------
4,667,962 5,544,744 1.1
- ------------------------------------------------------------------------------------------------------------------------
16,200 Hafslund Nycomed, Inc. (ADR)*
NORWAY (22)............................. 328,622 334,125 0.1
147,200 Hafslund Nycomed, Inc. (Class B)
(22)............................. 2,587,241 3,072,114 0.6
72,200 Kvaerner, Inc. (Class B) (8)....... 2,934,292 3,270,160 0.6
------------ ------------ ----------
5,850,155 6,676,399 1.3
- ------------------------------------------------------------------------------------------------------------------------
PORTUGAL 169,200 Banco Commercial Portugues (ADR)*
(3).............................. 2,313,645 2,136,150 0.4
- ------------------------------------------------------------------------------------------------------------------------
SINGAPORE 333,000 Jurong Shipyards Ltd. (4).......... 2,607,046 2,560,659 0.5
1,875,000 Neptune Orient Lines Ltd. (26)..... 2,302,432 2,574,665 0.5
------------ ------------ ----------
4,909,478 5,135,324 1.0
- ------------------------------------------------------------------------------------------------------------------------
82,400 Repsol S.A. (Sponsored) (ADR)*
SPAIN (21)............................. 2,379,669 2,245,400 0.4
76,700 Telefonica Nacional de Espana S.A.
(ADR)* (27)...................... 2,873,677 2,694,087 0.5
------------ ------------ ----------
5,253,346 4,939,487 0.9
- ------------------------------------------------------------------------------------------------------------------------
SWEDEN 167,000 SKF AB 'B' Free (8)................ 2,580,434 2,758,637 0.5
- ------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 3,300 BBC Brown Boveri & Cie (8)......... 2,297,018 2,844,436 0.6
3,340 Holderbank Financiere Glarus AG
(8).............................. 1,776,158 2,531,503 0.5
3,890 Sulzer Gebrueder AG (17)........... 2,142,764 2,695,480 0.5
------------ ------------ ----------
6,215,940 8,071,419 1.6
- ------------------------------------------------------------------------------------------------------------------------
THAILAND 374,000 M.D.X. Corp., Ltd. (24)............ 1,925,555 1,266,786 0.2
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 295,600 Allied Lyons PLC (13).............. 2,648,038 2,499,712 0.5
553,000 British Gas PLC (19)............... 2,565,455 2,701,914 0.5
345,000 British Telecommunications PLC
(27)............................. 2,219,411 2,039,519 0.4
294,000 GKN PLC (6)........................ 2,318,167 2,704,873 0.5
585,000 General Electric PLC (11).......... 2,809,289 2,510,141 0.5
101,100 Grand Metropolitan PLC (Sponsored)
(ADR)* (13)...................... 2,697,289 2,527,500 0.5
667,000 Hanson PLC (10).................... 2,615,796 2,412,846 0.5
1,052,000 Hillsdown Holdings PLC (10)........ 2,595,494 2,965,378 0.6
207,000 Imperial Chemical Industries PLC
(9).............................. 2,402,001 2,426,353 0.5
737,000 Lucas Industries PLC (6)........... 1,866,692 2,377,533 0.5
------------ ------------ ----------
24,737,632 25,165,769 5.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS & WARRANTS 234,612,842 235,973,083 45.9
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF
COUNTRY FACE AMOUNT** FOREIGN BONDS++ COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA Queensland Treasury Corp. (15):
A$ 4,125,000 8.00% due 7/14/1999................ $ 2,922,527 $ 2,938,942 0.6%
6,500,000 8.00% due 5/14/2003................ 4,820,875 4,394,136 0.9
------------ ------------ ----------
7,743,402 7,333,078 1.5
- ------------------------------------------------------------------------------------------------------------------------
CANADA C$ 15,800,000 Government of Canada,
7.25% due 6/01/2003 (15)......... 11,839,688 10,036,244 1.9
- ------------------------------------------------------------------------------------------------------------------------
GERMANY DM 24,000,000 Bundes Obligation,
6.375% due 5/20/1998 (15)........ 15,218,569 15,179,287 2.9
- ------------------------------------------------------------------------------------------------------------------------
ITALY Buoni Poliennali del Tesoro (15):
Lit 6,000,000,000 8.50% due 1/01/1997................ 3,753,480 3,513,513 0.7
7,100,000,000 10.00% due 8/01/2003............... 4,508,125 3,912,864 0.8
------------ ------------ ----------
8,261,605 7,426,377 1.5
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM UK Gilt (15):
Pound Sterling 8,190,000 7.25% due 3/30/1998................ 12,651,800 12,352,598 2.4
75,000 9.75% due 8/27/2002................ 149,409 123,066 0.0
3,000,000 8.00% due 6/10/2003................ 4,822,692 4,479,252 0.9
------------ ------------ ----------
17,623,901 16,954,916 3.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS 60,687,165 56,929,902 11.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
US GOVERNMENT OBLIGATIONS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
US Treasury Notes:
US$ 300,000 7.875% due 8/15/2001............. 304,953 300,516 0.1
700,000 7.50% due 11/15/2001............. 714,297 687,312 0.1
1,400,000 6.375% due 8/15/2002............. 1,383,906 1,281,657 0.2
7,175,000 6.25% due 2/15/2003.............. 7,371,895 6,491,136 1.3
19,000,000 5.75% due 8/15/2003.............. 19,162,891 16,515,161 3.2
12,000,000 5.875% due 2/15/2004............. 11,185,391 10,470,000 2.0
19,000,000 7.25% due 5/15/2004.............. 19,248,281 18,254,839 3.5
40,000,000 7.25% due 8/15/2004.............. 40,330,469 38,418,760 7.5
35,000,000 7.875% due 11/15/2004............ 34,979,219 35,114,835 6.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS.. 134,681,302 127,534,216 24.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT** SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER*** $ 1,023,000 General Electric Capital Corp.,
5.80% due 1/03/1995............ $ 1,022,505 $ 1,022,505 0.2%
19,000,000 Penney (J.C.) Funding Corp.,
5.75% due 1/17/1995............ 18,948,410 18,948,410 3.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 19,970,915 19,970,915 3.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS...................................... $ 524,369,249 512,141,013 99.4
-------------
-------------
UNREALIZED APPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS+++.................................. 559,659 0.1
OTHER ASSETS LESS LIABILITIES.......................... 2,706,644 0.5
------------- ----------
NET ASSETS............................................. $ 515,407,316 100.0%
------------- ----------
------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* 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) 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:
</TABLE>
<TABLE>
<C> <S> <C> <C>
(1) Automobiles (17) Machinery
(2) Automotive & Equipment (18) Multi-Industry
(3) Banking (19) Natural Gas
(4) Building & Construction (20) Packaging
(5) Building Materials (21) Petroleum
(6) Business & Public Service (22) Pharmaceutical
(7) Business Publishing (23) Printing & Publishing
(8) Capital Goods (24) Real Estate
(9) Chemicals (25) Retail Stores
(10) Diversified (26) Shipping
(11) Electrical Equipment (27) Telecommunications
(12) Electronics (28) Textiles
(13) Food (29) Toys
(14) Glass (30) Trading
(15) Government (Bonds) (31) Utilities
(16) Insurance (32) Utilities--Electric
</TABLE>
<TABLE>
<C> <S>
+++ Forward foreign exchange contracts as of December 31, 1994 were as follows:
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
UNREALIZED
EXPIRATION APPRECIATION
FOREIGN CURRENCY SOLD DATE (NOTE 1B)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Yen 5,235,000,000................................................................... July 1995 $559,659
- ------------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS (US$ COMMITMENT--$54,492,984)........................... $559,659
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
74
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF NET
COUNTRY INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ARGENTINA TELECOMMUNICATIONS 7,900 Central Costanera S.A.
(ADR)* (b)................ $ 261,847 $ 205,400 0.2%
25,600 Telecom Argentina Stet S.A.
(ADR)*(b)................. 1,160,819 1,324,800 1.0
22,400 Telefonica de Argentina S.A.
(ADR)*.................... 1,173,168 1,187,200 0.9
------------ ------------ ----------
2,595,834 2,717,400 2.1
TOTAL COMMON STOCKS IN
ARGENTINA 2,595,834 2,717,400 2.1
AUSTRALIA UTILITIES--GAS 434,496 Australian Gas & Light Co.,
Ltd....................... 1,238,060 1,465,173 1.2
TOTAL COMMON STOCKS IN
AUSTRALIA 1,238,060 1,465,173 1.2
AUSTRIA UTILITIES--GAS 11,300 Energie Versorgung
Niederoesterreich AG
(EVN)..................... 1,388,213 1,468,326 1.2
TOTAL COMMON STOCKS IN
AUSTRIA 1,388,213 1,468,326 1.2
BRAZIL UTILITIES--ELECTRIC 140,000 Companhia Energetica de
Minas Gerais S.A. (CEMIG)
(ADR)* (b)................ 3,360,000 3,290,000 2.6
TOTAL COMMON STOCKS IN
BRAZIL.................... 3,360,000 3,290,000 2.6
CANADA TELECOMMUNICATIONS 56,000 BC Telecom, Inc............. 1,052,989 958,220 0.8
UTILITIES--GAS 70,100 Transcanada Pipeline Co.,
Ltd. (ADR)*............... 1,045,275 849,963 0.7
93,000 Westcoast Energy Inc........ 1,594,099 1,476,375 1.2
------------ ------------ ----------
2,639,374 2,326,338 1.9
TOTAL COMMON STOCKS IN
CANADA 3,692,363 3,284,558 2.7
CHILE TELECOMMUNICATIONS 14,400 Compana de Telefonos de
Chile S.A. (ADR)*......... 1,254,995 1,134,000 0.9
UTILITIES--ELECTRIC 20,000 Chilgener S.A. (ADR)*....... 460,000 492,500 0.4
35,100 Distribuidora Chilectra
Metropolitana S.A. (ADR)*
(b)....................... 1,098,338 1,719,900 1.4
48,300 Enersis S.A. (ADR)*......... 1,026,061 1,340,325 1.1
------------ ------------ ----------
2,584,399 3,552,725 2.9
TOTAL COMMON STOCKS IN
CHILE..................... 3,839,394 4,686,725 3.8
DENMARK TELECOMMUNICATIONS 77,000 Tele Danmark A/S (ADR)*..... 1,826,433 1,963,500 1.6
TOTAL COMMON STOCKS IN
DENMARK 1,826,433 1,963,500 1.6
FRANCE UTILITIES--WATER 16,409 Compagnie Generale des
Eaux...................... 1,872,761 1,597,200 1.3
7,111 Lyonnaise des Eaux-Dumez.... 722,326 625,480 0.5
------------ ------------ ----------
2,595,087 2,222,680 1.8
TOTAL COMMON STOCKS IN
FRANCE 2,595,087 2,222,680 1.8
GERMANY UTILITIES--ELECTRIC 4,000 Veba AG..................... 1,305,397 1,395,349 1.1
TOTAL COMMON STOCKS IN
GERMANY 1,305,397 1,395,349 1.1
HONG KONG TELECOMMUNICATIONS 894,000 Hong Kong
Telecommunications, Ltd.
PLC....................... 1,646,544 1,704,563 1.4
UTILITIES--ELECTRIC 355,200 China Light & Power Co.,
Ltd....................... 2,385,389 1,515,202 1.2
253,500 Hong Kong Electric Holdings,
Ltd....................... 681,517 693,062 0.5
------------ ------------ ----------
3,066,906 2,208,264 1.7
UTILITIES--GAS 394,800 The Hong Kong & China Gas
Co., Ltd. 755,615 637,927 0.5
32,900 + The Hong Kong & China Gas
Co., Ltd. (Warrants)
(a)....................... 0 6,252 0.0
------------ ------------ ----------
755,615 644,179 0.5
TOTAL COMMON STOCKS &
WARRANTS IN HONG KONG 5,469,065 4,557,006 3.6
</TABLE>
75
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF NET
COUNTRY INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INDIA UTILITIES-ELECTRIC 4,500 CESC Ltd. (GDR)** (b)....... $ 40,950 $ 32,625 0.0%
7,500 CESC Ltd. (Units)........... 400,050 277,500 0.2
1,000 + Tata Electric Companies
(GDR)** (b)............... 710,000 440,000 0.3
------------ ------------ ----------
1,151,000 750,125 0.5
TOTAL COMMON STOCKS IN INDIA 1,151,000 750,125 0.5
INDONESIA TELECOMMUNICATIONS 1,110 P.T. Indonesian Satellite
Corp. (ADR)*.............. 35,575 39,683 0.0
TOTAL COMMON STOCKS IN
INDONESIA 35,575 39,683 0.0
ITALY TELECOMMUNICATIONS 761,900 Societa Finanziara
Telefonica S.p.A.
(STET).................... 1,629,934 1,807,667 1.4
729,600 Telecom Italia S.p.A........ 1,635,193 1,899,859 1.5
------------ ------------ ----------
3,265,127 3,707,526 2.9
UTILITIES--GAS 513,400 Italgas Torino.............. 1,581,576 1,414,495 1.1
TOTAL COMMON STOCKS IN
ITALY..................... 4,846,703 5,122,021 4.0
KOREA UTILITIES--ELECTRIC 40,800 Korea Electric Power Corp.
(ADR)*.................... 821,100 872,100 0.7
TOTAL COMMON STOCKS IN
KOREA..................... 821,100 872,100 0.7
MALAYSIA TELECOMMUNICATIONS 139,000 Telekom Malaysia BHD........ 962,438 942,096 0.7
TOTAL COMMON STOCKS IN
MALAYSIA 962,438 942,096 0.7
MEXICO TELECOMMUNICATIONS 29,000 Telefonos de Mexico, S.A. de
C.V. (Telemex) (ADR)*..... 1,706,306 1,189,000 0.9
TOTAL COMMON STOCKS IN
MEXICO 1,706,306 1,189,000 0.9
NEW ZEALAND TELECOMMUNICATIONS 36,800 Telecom Corporation of New
Zealand Ltd. (ADR)*....... 1,680,030 1,890,600 1.5
TOTAL COMMON STOCKS IN NEW
ZEALAND 1,680,030 1,890,600 1.5
PHILIPPINES TELECOMMUNICATIONS 21,800 Philippine Long Distance
Telephone Co. (ADR)*...... 1,270,791 1,201,725 1.0
UTILITIES--ELECTRIC 38,000 Manila Electric Co.
(MERALCO) 'B'............. 518,117 521,721 0.4
TOTAL COMMON STOCKS IN THE
PHILIPPINES 1,788,908 1,723,446 1.4
SPAIN TELECOMMUNICATIONS 28,700 Telefonica de Espana S.A.
(ADR)*.................... 1,065,201 1,008,088 0.8
UTILITIES--ELECTRIC 36,400 Empresa Nacional de
Electricidad, S.A.
(Endesa) (ADR)*........... 1,634,684 1,474,200 1.2
15,000 Hidrocantabrico S.A......... 503,484 410,490 0.3
131,000 Iberdrola I S.A............. 879,896 808,605 0.6
------------ ------------ ----------
3,018,064 2,693,295 2.1
TOTAL COMMON STOCKS IN
SPAIN..................... 4,083,265 3,701,383 2.9
THAILAND TELECOMMUNICATIONS 2,000 TelecomAsia Corp. Public
Co., Ltd. (ADR)* (b)...... 43,740 56,000 0.0
UTILITIES--ELECTRIC 68,000 + Electricity Generating
Public Co., Ltd. (b)...... 60,715 113,808 0.1
TOTAL COMMON STOCKS IN
THAILAND 104,455 169,808 0.1
</TABLE>
76
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF NET
COUNTRY INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED KINGDOM TELECOMMUNICATIONS 10,000 British Telecommunications
PLC (ADR)*................ $ 741,450 $ 601,250 0.5%
57,000 British Telecommunications
PLC (Ordinary)............ 406,712 336,964 0.3
87,000 Vodafone Group PLC (ADR)*... 2,549,289 2,925,375 2.3
------------ ------------ ----------
3,697,451 3,863,589 3.1
UTILITIES--ELECTRIC 86,000 London Electricity.......... 860,944 1,003,336 0.8
90,000 Powergen PLC................ 658,010 755,438 0.6
------------ ------------ ----------
1,518,954 1,758,774 1.4
TOTAL COMMON STOCKS IN THE
UNITED KINGDOM 5,216,405 5,622,363 4.5
UNITED
STATES TELECOMMUNICATIONS 36,400 AirTouch Communications,
Inc....................... 879,157 1,060,150 0.8
45,800 Ameritech Corp.............. 1,864,458 1,849,175 1.5
31,800 Bell Atlantic Corp.......... 1,872,160 1,582,050 1.3
33,700 BellSouth Corp.............. 2,020,584 1,824,013 1.4
53,500 GTE Corp.................... 1,866,628 1,625,063 1.3
150,000 NYNEX Corp.................. 5,893,598 5,512,500 4.4
163,600 Pacific Telesis Group....... 4,956,976 4,662,600 3.7
45,300 Southwestern Bell Corp...... 1,921,580 1,828,988 1.4
66,900 U S West Inc................ 2,970,861 2,383,313 1.9
------------ ------------ ----------
24,246,002 22,327,852 17.7
UTILITIES--ELECTRIC 65,600 Allegheny Power System,
Inc....................... 1,689,846 1,426,800 1.1
47,500 Boston Edison Co............ 1,386,299 1,134,063 0.9
84,192 CINergy Corp................ 2,052,668 1,967,988 1.6
42,300 Central & SouthWest Corp.... 1,326,363 957,037 0.8
49,300 Consolidated Edison Co. of
New York.................. 1,597,050 1,269,475 1.0
31,500 Detroit Edison Co........... 989,953 822,937 0.7
26,400 Dominion Resources, Inc..... 1,242,516 943,800 0.7
61,000 Duke Power Co............... 2,452,906 2,325,625 1.8
54,300 Entergy Corp................ 1,905,240 1,187,812 0.9
85,200 General Public Utilities
Corp...................... 2,559,840 2,236,500 1.8
73,100 Houston Industries, Inc..... 3,215,466 2,604,187 2.1
56,000 NIPSCO Industries, Inc...... 1,787,890 1,666,000 1.3
50,700 New York State Electric &
Gas Corp.................. 1,537,761 963,300 0.8
42,300 Northeast Utilities Co...... 1,096,216 914,737 0.7
93,800 PECO Energy Co.............. 2,719,313 2,298,100 1.8
72,800 PacifiCorp.................. 1,401,416 1,319,500 1.0
35,307 Pennsylvania Power & Light
Co........................ 958,939 670,833 0.5
44,000 Public Service Co. of
Colorado.................. 1,312,146 1,292,500 1.0
39,900 Rochester Gas & Electric
Corp...................... 1,077,409 832,912 0.7
64,000 SCEcorp..................... 1,220,732 936,000 0.7
86,200 Southern Co................. 1,846,654 1,724,000 1.4
40,000 Texas Utilities Co.......... 1,615,997 1,280,000 1.0
40,600 Western Resources Co........ 1,393,851 1,162,175 0.9
------------ ------------ ----------
38,386,471 31,936,281 25.2
UTILITIES--GAS 33,000 The Brooklyn Union Gas
Co........................ 855,855 734,250 0.6
52,000 The Coastal Corp............ 1,509,758 1,339,000 1.1
24,800 El Paso Natural Gas Co...... 895,148 756,400 0.6
65,700 Enron Corp.................. 2,152,889 2,003,850 1.6
55,100 NICOR Inc................... 1,539,128 1,253,525 1.0
26,100 National Fuel Gas Company... 788,314 665,550 0.5
25,000 New Jersey Resources
Corp...................... 656,623 565,625 0.4
53,500 Questar Corp................ 1,908,628 1,471,250 1.2
72,200 Sonat, Inc.................. 2,342,585 2,021,600 1.6
24,900 Washington Gas Light Co..... 1,046,197 834,150 0.7
78,600 Williams Co., Inc........... 2,298,643 1,974,825 1.6
------------ ------------ ----------
15,993,768 13,620,025 10.9
TOTAL COMMON STOCKS IN THE
UNITED STATES 78,626,241 67,884,158 53.8
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON
STOCKS & WARRANTS 128,332,272 116,957,500 92.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF NET
COUNTRY INDUSTRY AMOUNT FIXED-INCOME SECURITIES COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA TELECOMMUNICATIONS $1,040,000 Telstra Corp. Ltd., 6.50%
due 7/31/2003 (b)......... $ 1,084,062 $ 912,194 0.7%
TOTAL FIXED-INCOME
SECURITIES IN AUSTRALIA 1,084,062 912,194 0.7
- ------------------------------------------------------------------------------------------------------------------------
KOREA UTILITIES--ELECTRIC 1,000,000 Korea Electric Power Corp.,
6.375% due 12/01/2003..... 985,510 848,890 0.7
TOTAL FIXED-INCOME
SECURITIES IN KOREA 985,510 848,890 0.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FIXED-
INCOME SECURITIES 2,069,572 1,761,084 1.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER*** 6,000,000 Ford Motor Credit Company,
5.75% due 1/17/1995......... 5,982,900 5,982,900 4.7
1,491,000 General Electric Capital
Corp., 5.80% due
1/03/1995................... 1,490,039 1,490,039 1.2
------------ ------------ ----------
7,472,939 7,472,939 5.9
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 7,472,939 7,472,939 5.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS............. $137,874,783 126,191,523 100.0
------------
------------
OTHER ASSETS LESS
LIABILITIES................. 51,284 0.0
------------ ----------
NET ASSETS.................... $126,242,807 100.0%
------------ ----------
------------ ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* American Depositary Receipt (ADR).
** Global Depositary Receipt (GDR).
*** 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) 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.
(b) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately
$8,095,000, representing 6.41% of the net assets.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATES COST (NOTE 1A)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
CESC Ltd. (GDR)................................................. 5/17/1994 $ 40,950 $ 32,625
Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR)......... 9/22/1994 3,360,000 3,290,000
Central Costanera S.A. (ADR).................................... 12/17/1993 261,847 205,400
Distribuidora Chilectra Metropolitana S.A. (ADR)................ 8/06/1993-12/21/1993 1,098,338 1,719,900
Electricity Generating Public Co., Ltd.......................... 10/27/1994 60,715 113,808
Tata Electric Companies (GDR)................................... 2/22/1994 710,000 440,000
Telecom Argentina Stet S.A. (ADR)............................... 10/05/1993-12/22/1993 1,160,819 1,324,800
TelecomAsia Corp. Public Co., Ltd. (ADR)........................ 11/15/1993 43,740 56,000
Telstra Corp. Ltd., 6.50% due 7/31/2003......................... 7/26/1993-9/29/1993 1,084,062 912,194
- ------------------------------------------------------------------------------------------------------------------------
TOTAL........................................................... $ 7,820,471 $ 8,094,727
----------- ------------
----------- ------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
See Notes to Financial Statements.
78
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AIRLINES--2.5% Delta Air Lines Inc.:
BB+ Baa3 $ 1,000,000 9.30% due 1/02/2010................. $ 987,700 $ 935,216
BB+ Baa3 500,000 10.50% due 4/30/2016................ 506,875 490,755
United Air Lines, Inc.:
BB+ Baa2 1,000,000 9.35% due 4/07/2016................. 1,016,260 883,500
BB+ Ba2 995,000 9.21% due 1/21/2017................. 991,938 857,849
BB B1 4,000,000 USAir, Inc., 10.375% due
3/01/2013......................... 3,935,000 3,260,000
------------- -------------
7,437,773 6,427,320
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS--0.8% B B3 2,000,000 SPX Corp., 11.75% due 6/01/2002..... 2,043,750 1,990,000
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING & BB- Ba3 750,000 Heritage Media Services Inc., 11.00%
PUBLISHING--3.3% due 6/15/2002..................... 789,063 761,250
B B1 1,000,000 K-III Communications Corp., 10.25%
due 6/01/2004..................... 995,000 955,000
B B3 1,200,000 The Katz Corp., 12.75% due
11/15/2002........................ 1,238,625 1,248,000
B Caa 3,800,000 NWCG Holding Corp., 13.50%** due
6/15/1999++....................... 2,122,486 1,938,000
BB- B3 2,500,000 SCI Television Inc., 11.00% due
6/30/2005(a)...................... 2,560,000 2,525,000
B+ B3 1,000,000 Sinclair Broadcast Group Inc.,
10.00% due 12/15/2003............. 1,000,000 930,000
------------- -------------
8,705,174 8,357,250
- ------------------------------------------------------------------------------------------------------------------------
BUILDING & B B2 2,500,000 Del Webb Corp., 9.00% due
CONSTRUCTION--0.9% 2/15/2006......................... 2,497,500 1,900,000
B B1 250,000 K Hovnanian Enterprises Inc., 11.25%
due 4/15/2002..................... 247,813 208,750
BB- Ba3 250,000 Ryland Group Inc., 10.50% due
7/15/2002......................... 246,260 223,750
------------- -------------
2,991,573 2,332,500
- ------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--1.0% B+ B3 2,650,000 Pacific Lumber Co., 10.50% due
3/01/2003......................... 2,606,938 2,464,500
- ------------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS--1.1% B+ B1 250,000 American Standard Inc., 9.25% due
12/01/2016........................ 251,875 228,750
B Ba3 1,750,000 Inter-City Products Corp., 9.75% due
3/01/2000......................... 1,718,750 1,631,875
B B2 1,000,000 USG Corp., 8.75% due 3/01/2017...... 904,375 850,000
------------- -------------
2,875,000 2,710,625
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--0.6% B+ B1 1,660,000 Essex Group, Inc., 10.00% due
5/01/2003......................... 1,668,925 1,560,400
- ------------------------------------------------------------------------------------------------------------------------
CELLULAR TELEPHONES--2.4% CCC Caa 3,750,000 Dial Page, Inc., 12.25% due
2/15/2000......................... 3,850,563 3,750,000
CCC+ B3 3,000,000 USA Mobile Communications Holdings,
Inc., 9.50% due 2/01/2004......... 2,710,000 2,430,000
------------- -------------
6,560,563 6,180,000
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS--5.3% B B2 4,600,000 Agricultural Minerals & Chemicals
Co., L.P., 10.75% due 9/30/2003... 4,623,188 4,646,000
B+ Ba3 7,310,000 G-I Holdings Inc., 11.38%** due
10/01/1998........................ 4,731,660 4,513,925
B B2 2,000,000 Harris Chemical North America,
11.95%** due 7/15/2001............ 1,654,408 1,645,000
B B3 3,000,000 Laroche Industries Inc., 13.00% due
8/15/2004......................... 2,991,250 2,760,000
------------- -------------
14,000,506 13,564,925
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--2.9% CCC- Caa 3,670,000 American Telecasting, Inc., 12.50%**
due 6/15/2004..................... 2,137,449 1,578,100
BB- B2 4,000,000 Telefonica de Argentina, S.A.,
11.875% due 11/01/2004............ 3,917,780 3,600,000
B+ B3 4,000,000 Videotron Holdings PLC, 11.817%**
due 7/01/2004..................... 2,328,826 2,100,000
------------- -------------
8,384,055 7,278,100
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONGLOMERATES--6.6% NR* B3 $ 2,000,000 Astrum International Corp., 11.50%
due 6/08/2003..................... $ 2,017,500 $ 2,010,000
B+ B1 1,750,000 Coltec Industries, Inc., 10.25% due
4/01/2002......................... 1,866,250 1,715,000
Foamex L.P.:
B+ B1 530,000 9.50% due 6/01/2000................. 517,413 484,950
B+ B1 1,450,000 11.25% due 10/01/2002............... 1,455,125 1,377,500
2,000,000 JB Poindexter & Co., 12.50% due
5/15/2004......................... 2,000,000 1,860,000
B+ B3 3,000,000 Jordan Industries Inc., 10.375% due
8/01/2003......................... 2,993,000 2,670,000
NR* B3 890,000 MacAndrews & Forbes Group, Inc.,
13.00% due 3/01/1999.............. 868,373 881,100
Sequa Corp.:
BB B2 750,000 9.625% due 10/15/1999............... 740,625 712,500
B+ B3 2,500,000 9.375% due 12/15/2003............... 2,512,813 2,200,000
BB- B1 3,000,000 Sherritt Gordon, Ltd., 9.75% due
4/01/2003......................... 2,985,938 2,880,000
------------- -------------
17,957,037 16,791,050
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER--
PRODUCTS--3.3% B NR* 4,950,000 Coleman Holdings, Inc., 11.28%** due
5/27/1998......................... 3,395,934 3,328,875
NR* Caa 750,000 Formica Corp., 14.843% due
9/15/2005 (a)..................... 750,000 874,232
Liggett Group, Inc.:
NR* NR* 500,000 11.50% due 2/01/1999................ 451,760 350,000
NR* NR* 9,000 16.50% due 2/01/1999++.............. 9,000 7,740
B- Caa 4,000,000 Polymer Group Inc., 12.25% due
7/15/2002++....................... 3,967,500 3,890,000
------------- -------------
8,574,194 8,450,847
- ------------------------------------------------------------------------------------------------------------------------
CONTAINERS--4.5% B B2 3,500,000 Anchor Glass Container Co., 9.875%
due 12/15/2008.................... 3,353,750 3,010,000
Owens-Illinois, Inc.:
B+ B2 2,000,000 10.00% due 8/01/2002................ 2,000,000 1,955,000
BB Ba3 1,500,000 11.00% due 12/01/2003............... 1,624,688 1,556,250
B- B3 3,660,000 Silgan Holdings, Inc., 13.25%** due
12/15/2002........................ 3,121,703 3,074,400
B+ B1 1,000,000 Stone Consolidated Corp., 10.25% due
12/15/2000........................ 1,000,000 985,000
B+ Ba3 1,000,000 Sweetheart Cup Co., 9.625% due
9/01/2000......................... 1,000,000 945,000
------------- -------------
12,100,141 11,525,650
- ------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS+--0.5% B- B3 400,000 Farm Fresh Inc., 7.50% due
3/01/2010 (1)..................... 208,000 246,705
B- B3 200,000 MEDIQ Inc., 7.25% due 6/01/2006
(2)............................... 138,000 126,000
B B2 1,200,000 OHM Corp., 8.00% due 10/01/2006
(3)............................... 1,070,500 936,000
B B2 250,000 UNC Inc., 7.50% due 3/31/2006 (4)... 145,625 196,250
------------- -------------
1,562,125 1,504,955
- ------------------------------------------------------------------------------------------------------------------------
COSMETICS--0.7% B B2 2,000,000 Revlon Group Inc., 9.375% due
4/01/2001......................... 1,738,721 1,790,000
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--9.0% B+ B1 4,000,000 Clark Oil & Refining Corp., 10.54%**
due 2/15/2000..................... 2,366,264 2,280,000
NR* NR* 1,500,000 Consolidated Hydro, Inc., 12.00%**
due 7/15/2003..................... 999,961 870,000
BB- B1 2,925,000 Energy Ventures, Inc., 10.25% due
3/15/2004++....................... 2,901,875 2,749,500
BB B1 1,580,000 Gulf Canada Resources, Ltd., 9.00%
due 8/15/1999..................... 1,517,450 1,501,000
Maxus Energy Corp.:
BB- B1 2,500,000 9.375% due 11/01/2003............... 2,352,500 2,112,500
BB- B1 250,000 11.50% due 11/15/2015............... 246,562 230,000
</TABLE>
80
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ENERGY (CONCLUDED) BB- Ba3 $ 2,000,000 Noble Drilling Corp., 9.25% due
10/01/2003........................ $ 1,952,500 $ 1,890,000
BB- Ba3 2,500,000 Seagull Energy Corp., 8.625% due
8/01/2005......................... 2,493,750 2,131,250
NR* B3 250,000 Tesoro Petroleum Corp., 12.75% due
3/15/2001......................... 230,216 250,000
BB- B1 3,000,000 Trans Texas Gas Corp., 10.50% due
9/01/2000......................... 2,985,625 2,865,000
B+ B1 4,000,000 Triton Energy Corp., 9.68%** due
11/01/1997........................ 3,012,395 2,940,000
BB- B1 4,500,000 Yacimientos Petroliferos Fiscales
S.A.-ADR, 8.00% due 2/15/2004
(e)............................... 3,694,375 3,240,000
------------- -------------
24,753,473 23,059,250
- ------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--2.4% B B3 500,000 AMC Entertainment, Inc., 12.625% due
8/01/2002......................... 509,742 528,750
B+ B1 250,000 Cinemark USA, Inc., 12.00% due
6/01/2002......................... 250,000 260,000
B Caa 4,500,000 Marvel Holdings, Inc., 9.125% (d)
due 2/15/1998..................... 3,999,375 3,915,000
CCC+ B2 3,415,000 Spectra Vision Inc., 11.50%** due
10/01/2001........................ 2,836,700 1,468,450
------------- -------------
7,595,817 6,172,200
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--1.8% B+ B1 1,500,000 Lomas Mortgage USA Inc., 10.25% due
10/01/2002........................ 1,561,250 1,245,000
B- B3 250,000 Pioneer Finance Corp., 13.50% due
12/01/1998........................ 264,062 180,000
BB- B1 3,500,000 Reliance Group Holdings Inc., 9.75%
due 11/15/2003.................... 3,432,500 3,062,500
------------- -------------
5,257,812 4,487,500
- ------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--6.5% B+ B1 3,500,000 Canandaigua Wine Inc., 8.75% due
12/15/2003........................ 3,115,000 3,185,000
BB- B1 3,000,000 Chiquita Brands International Inc.,
9.125% due 3/01/2004.............. 2,950,625 2,610,000
NR* NR* 2,000,000 Cumberland Farms, 10.50% due
10/01/2003++...................... 1,957,500 1,660,000
BB- B1 2,500,000 Del Monte Corp., 10.00% due
5/01/2003......................... 2,310,000 1,700,000
B B2 3,000,000 Envirodyne Industries, Inc., 10.25%
due 12/01/2001.................... 3,056,250 2,100,000
CCC Caa 3,000,000 Grand Union Co., 12.25% due
7/15/2002......................... 3,090,000 1,185,000
D Ca 1,000,000 Kash N' Karry Food Stores, Inc.,
14.00% due 2/01/2001(c)........... 996,250 345,000
BB- Ba3 250,000 P&C Food Markets, Inc., 11.50% due
10/15/2001........................ 260,156 253,750
B B2 1,000,000 Penn Traffic Co., 9.625% due
4/15/2005......................... 1,013,760 870,000
B- B2 2,000,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003............... 2,004,375 1,680,000
B B2 1,000,000 Specialty Foods Corp., 10.25% due
8/15/2001......................... 1,000,000 890,000
------------- -------------
21,753,916 16,478,750
- ------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES--0.2% B B2 250,000 Continental Medical Systems Inc.,
10.875% due 8/15/2002............. 248,125 201,250
B B2 250,000 Continental Medsystems, Inc.,
10.375% due 4/01/2003............. 249,687 193,750
B+ B1 250,000 MEDIQ/PRN Life Support Services,
Inc., 11.125% due 7/01/1999....... 250,625 232,500
------------- -------------
748,437 627,500
- ------------------------------------------------------------------------------------------------------------------------
HIGH TECHNOLOGY--0.1% B B2 250,000 ComputerVision Corp., 10.875% due
8/15/1997......................... 250,625 230,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HOTELS & CASINOS--8.3% B B2 $ 2,250,000 Aztar Corp., 11.00% due
10/01/2002........................ $ 2,295,000 $ 2,047,500
BB B1 3,000,000 Bally's Park Place Funding Corp.,
9.25% due 3/15/2004............... 2,850,000 2,580,000
NR* NR* 158,000 Goldriver Hotel & Casino Finance
Corp., 11.375% due 8/31/1999...... 222,801 137,460
B+ B2 3,000,000 Greater Bay Properties, Inc.,
10.875% due 1/15/2004............. 2,755,000 2,430,000
BB+ B1 2,500,000 Harrah's Jazz Company, 14.25% due
11/15/2001........................ 2,500,000 2,625,000
BB- B1 3,260,000 Host Marriott Hospitality, Inc.,
10.375% due 6/15/2011............. 3,317,227 3,260,000
BB- B1 3,500,000 JQ Hammons Hotel, 8.875% due
2/15/2004......................... 3,092,500 3,027,500
B B2 2,500,000 Showboat Inc., 13.00% due
8/01/2009......................... 2,500,000 2,375,000
B B3 3,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001..................... 2,963,277 2,280,000
NR* Caa 541,954 Trump Taj Mahal Funding, Inc.,
11.35% due 11/15/1999 (a)......... 422,261 321,997
------------- -------------
22,918,066 21,084,457
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- BB- B2 4,000,000 ADT Operations, 9.25% due
8/01/2003......................... 4,010,000 3,700,000
SERVICES--1.6% B- B3 500,000 Bell & Howell Co., 10.75% due
10/01/2002........................ 507,500 475,000
------------- -------------
4,517,500 4,175,000
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS--2.2% B B2 3,000,000 Coca-Cola Bottling Co., 9.00% due
11/15/2003........................ 2,973,750 2,632,500
B+ B2 2,800,000 Navistar Financial Co., 8.875% due
11/15/1998........................ 2,754,500 2,632,000
Thermadyne Industries, Inc.:
NR* Caa 154,000 10.25% due 5/01/2002................ 155,008 144,760
NR* Caa 215,000 10.75% due 11/01/2003............... 216,545 202,100
------------- -------------
6,099,803 5,611,360
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINING--1.1% 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......................... 1,957,826 1,710,000
------------- -------------
2,961,576 2,717,500
- ------------------------------------------------------------------------------------------------------------------------
PAPER--7.3% BB- Ba3 2,000,000 Doman Industries Ltd., 8.75% due
3/15/2004......................... 1,825,000 1,765,000
Fort Howard Corp.:
B+ B1 250,000 9.25% due 3/15/2001................. 250,000 233,750
B B2 3,000,000 9.00% due 2/01/2006................. 2,935,000 2,580,000
BB Ba3 2,000,000 Indah Kiat International Finance,
11.875% due 6/15/2002............. 1,957,500 1,940,000
BB- Ba3 2,100,000 Rainy River Forest Products, Inc.,
10.75% due 10/15/2001............. 2,094,897 2,084,250
B+ B1 3,000,000 Repap Wisconsin Finance, Inc., 9.25%
due 2/01/2002..................... 2,760,000 2,700,000
B B1 1,250,000 Riverwood International Corp.,
11.25% due 6/15/2002.............. 1,340,312 1,284,375
B+ B1 2,000,000 S.D. Warren Co., 12.00% due
12/15/2004........................ 2,000,000 2,045,000
Stone Container Corp.:
B B1 1,950,000 9.875% due 2/01/2001................ 1,869,375 1,833,000
B+ B1 1,300,000 10.75% due 10/01/2002............... 1,287,000 1,293,500
BB B1 1,000,000 Tjiwa Kimia International N.V.,
13.25% due 8/01/2001.............. 1,000,000 1,012,500
------------- -------------
19,319,084 18,771,375
- ------------------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING--0.5% B- Caa 3,500,000 IVEX Holdings Corp., 13.25%** due
3/15/2005......................... 1,934,554 1,400,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POLLUTION CONTROL--1.4% B B3 $ 3,500,000 Mid-American Waste Systems, Inc.,
12.25% due 2/15/2003.............. $ 3,555,000 $ 3,500,000
- ------------------------------------------------------------------------------------------------------------------------
RAILROADS--0.4% B+ Ba3 1,000,000 Southern Pacific Rail Co., 9.375%
due 8/15/2005..................... 1,000,000 920,000
- ------------------------------------------------------------------------------------------------------------------------
RESTAURANTS--3.1% B B1 3,000,000 Family Restaurants Inc., 9.75% due
2/01/2002......................... 2,775,000 2,355,000
CCC+ Caa 3,890,000 Flagstar Corp., 11.375% due
9/15/2003......................... 3,701,100 3,228,700
Foodmaker, Inc.:
B- B2 1,500,000 9.75% due 6/01/2002................. 1,502,812 1,125,000
B+ Ba3 1,750,000 9.75% due 11/01/2003................ 1,722,700 1,316,875
------------- -------------
9,701,612 8,025,575
- ------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--2.2% B+ B2 4,500,000 Bradlees, Inc., 11.00% due
8/01/2002......................... 4,466,562 4,095,000
B- B3 1,500,000 Pamida Holdings, Inc., 11.75% due
3/15/2003......................... 1,502,187 1,402,500
------------- -------------
5,968,749 5,497,500
- ------------------------------------------------------------------------------------------------------------------------
STEEL--1.3% B B2 1,500,000 AK Steel Holding Corp., 10.75% due
4/01/2004......................... 1,500,000 1,485,000
B+ B1 2,000,000 WCI Steel Inc., 10.50% due
3/01/2002......................... 2,000,000 1,920,000
------------- -------------
3,500,000 3,405,000
- ------------------------------------------------------------------------------------------------------------------------
TEXTILES--1.2% B+ B3 3,500,000 Westpoint Stevens Industries, Inc.,
9.375% due 12/15/2005............. 3,291,250 3,167,500
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.6% B+ Ba3 1,750,000 Viking Star Shipping Co., 9.625% due
7/15/2003......................... 1,735,937 1,627,500
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION B+ B2 186,000 ACF Industries Inc., 11.60% due
SERVICES--0.8% 5/15/2000......................... 177,630 186,000
NR* NR* 3,700,000 Transtar Holdings Inc., 13.375%**
due 12/15/2003.................... 2,241,291 1,850,000
------------- -------------
2,418,921 2,036,000
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--2.5% B+ B1 3,453,000 Beaver Valley Funding Corp., 9.00%
due 6/01/2017..................... 3,252,225 2,451,630
CTC Mansfield Funding Corp.:
B+ Ba3 500,000 10.25% due 3/30/2003................ 490,000 465,000
B+ Ba3 1,500,000 11.125% due 9/30/2016............... 1,612,500 1,389,855
Midland Cogeneration Venture L.P.:
BB Ba3 946,678 ++10.33% due 7/23/2002.............. 927,745 893,980
B- B2 250,000 11.75% due 7/23/2005................ 250,000 228,357
Tucson Electric Power Co.++:
NR* NR* 570,386 10.21% due 1/01/2009................ 529,034 490,025
NR* NR* 500,000 10.732% due 1/01/2013............... 461,050 440,440
------------- -------------
7,522,554 6,359,287
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CORPORATE BONDS--90.9% 256,011,161 232,281,376
- ------------------------------------------------------------------------------------------------------------------------
SHARES HELD PREFERRED STOCKS
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING &
PUBLISHING--0.5% 36,600 K-III Communications Corp........... 998,487 924,150
2,959 K-III Communications Corp. (a)...... 302,184 284,464
------------- -------------
1,300,671 1,208,614
- ------------------------------------------------------------------------------------------------------------------------
STEEL--1.0% 120,000 USX Capital Corp. (c)............... 3,000,000 2,655,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PREFERRED STOCKS--1.5% 4,300,671 3,863,614
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0% 4,900 Petrolane Inc....................... 56,962 64,925
- ------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--0.0% 4,169 Doskocil Companies, Inc. (c)........ 239,327 30,225
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HOTELS & CASINOS--0.0% 2,500 Goldriver Hotel & Casino Finance
Corp.............................. $ 18,603 $ 7,031
500 Trump Taj Mahal
Holding Corp. (Class A) (c)....... 250 5,000
------------- -------------
18,853 12,031
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS--0.0% 311 Thermadyne Industries, Inc. (c)..... 4,495 3,538
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMON STOCKS--0.0% 319,637 110,719
- ------------------------------------------------------------------------------------------------------------------------
TRUSTS & WARRANTS
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--0.0% 18,350 American Telecasting, Inc.
(Warrants)
(b) (c)........................... 0 36,700
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0% 833 UGI Corp. (Warrants) (b) (c)........ 3,644 677
- ------------------------------------------------------------------------------------------------------------------------
HIGH TECHNOLOGY--0.0% 7,588 Anacomp, Inc. (Warrants) (b) (c)
++................................ 10,000 7,588
- ------------------------------------------------------------------------------------------------------------------------
HOTEL--0.0% 250 Goldriver Hotel & Casino Finance
Corp. (Liquidating Trust) ++
(c)............................... 6,000 4,282
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TRUSTS & WARRANTS--0.0% 19,644 49,247
- ------------------------------------------------------------------------------------------------------------------------
FACE AMOUNT SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER***--3.3% $ 4,000,000 CXC Inc., 6.00% due
1/13/1995......................... 3,990,667 3,990,667
4,632,000 General Electric Capital Corp.,
5.80% due 1/03/1995............... 4,629,015 4,629,015
------------- -------------
8,619,682 8,619,682
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 4,000,000 Federal Farm Credit Banks, 5.57% due
OBLIGATIONS***--1.6% 1/11/1995......................... 3,992,573 3,992,573
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES--4.9% 12,612,255 12,612,255
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.3%............ $ 273,263,368 248,917,211
-------------
-------------
OTHER ASSETS LESS
LIABILITIES--2.7%................. 6,801,529
-------------
NET ASSETS--100.0%.................. $ 255,718,740
-------------
-------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Not Rated.
** Represents the yield to maturity at time of purchase.
*** 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.
(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.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond, the interest rate shown is the effective yield at the time of purchase.
(e) American Depositary Receipts.
+ Corresponding industry groups for convertible bonds:
(1) Food & Beverage
(2) Healthcare
(2) Waste Management
(4) Conglomerates
</TABLE>
84
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
++ Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately
$12,082,000, representing 4.72% of net assets.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATES COST (NOTE 1A)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Anacomp Inc. (Warrants).......................................... 10/23/90 $ 10,000 $ 7,588
Cumberland Farms, 10.50% due 10/01/2003.......................... 2/18/94 1,957,500 1,660,000
Energy Ventures, Inc., 10.25% due 3/15/2004...................... 3/17/94 to 4/25/94 2,901,875 2,749,500
Goldriver Hotel & Casino Finance Corp. (Liquidating Trust)....... 8/31/92 6,000 4,282
Liggett Group, Inc., 16.50% due 2/01/1999........................ 2/12/92 to 5/20/93 9,000 7,740
Midland Cogeneration Venture L.P., 10.33% due 7/23/2002.......... 6/10/93 927,745 893,980
NWCG Holdings Corp., 13.50% due 6/15/1999........................ 6/28/94 2,122,486 1,938,000
Polymer Group Inc., 12.25% due 7/15/2002......................... 6/17/94 to 12/07/94 3,967,500 3,890,000
Tucson Electric Power Co., 10.21% due 1/01/2009.................. 6/16/93 529,034 490,025
Tucson Electric Power Co., 10.732% due 1/01/2013................. 3/01/93 461,050 440,440
- ------------------------------------------------------------------------------------------------------------------------
TOTAL............................................................ $ 12,892,190 $ 12,081,555
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
85
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERMEDIATE GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE $ 500,000 Federal National Mortgage Association, 7.85%
ASSOCIATIONS--2.7% due 9/10/2004............................... $ 499,297 $ 479,685
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 499,297 479,685
- ------------------------------------------------------------------------------------------------------------------------
US TREASURY NOTES--11.5% US Treasury Notes:
1,000,000 8.875% due 2/15/1999.......................... 1,086,250 1,035,000
1,000,000 7.875% due 11/15/2004......................... 992,690 1,002,810
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY NOTES 2,078,940 2,037,810
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--14.2% 2,578,237 2,517,495
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
US TREASURY BILLS*--84.5% US Treasury Bills:
14,641,000 4.05% due 1/05/1995........................... 14,631,117 14,631,117
103,000 4.10% due 1/05/1995........................... 102,930 102,930
80,000 4.09% due 1/19/1995........................... 79,818 79,818
93,000 4.45% due 2/02/1995........................... 92,609 92,609
152,000 4.20% due 2/09/1995........................... 151,273 151,273
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--84.5% 15,057,747 15,057,747
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.7%...................... $ 17,635,984 17,575,242
------------
------------
OTHER ASSETS LESS LIABILITIES--1.3%........... 235,409
------------
NET ASSETS--100.0%............................ $ 17,810,651
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
See Notes to Financial Statements.
86
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF NET
NORTH AMERICA FACE AMOUNT ISSUE COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canadian Government
CANADA FOREIGN GOVERNMENT Bonds:
OBLIGATIONS
C$ 140,000 7.75% due
9/01/1999.......... $ 96,443 $ 95,173 1.0%
600,000 9.00% due
12/01/2004......... 441,161 424,740 4.3
537,604 519,913 5.3
TOTAL INVESTMENTS IN
CANADA 537,604 519,913 5.3
TOTAL INVESTMENTS IN
NORTH AMERICA 537,604 519,913 5.3
PACIFIC BASIN
AUSTRALIA FOREIGN GOVERNMENT Australian Government
OBLIGATIONS Bonds:
A$ 500,000 7.00% due
4/15/2000.......... 325,128 339,565 3.4
350,000 9.00% due
9/15/2004.......... 241,424 254,018 2.5
500,000 Queensland Treasury
Corp., 8.00% due
7/14/1999.......... 356,672 356,464 3.6
923,224 950,047 9.5
TOTAL INVESTMENTS IN
AUSTRALIA 923,224 950,047 9.5
JAPAN FOREIGN GOVERNMENT Japanese Government
OBLIGATIONS Bonds:
Yen 50,000,000 5.50% due
3/20/2002.......... 522,957 533,367 5.4
18,000,000 4.10% due
6/21/2004.......... 173,866 174,613 1.8
696,823 707,980 7.2
TOTAL INVESTMENTS IN
JAPAN 696,823 707,980 7.2
TOTAL INVESTMENTS IN
THE
PACIFIC BASIN 1,620,047 1,658,027 16.7
WESTERN EUROPE
DENMARK FOREIGN GOVERNMENT Dkr 3,000,000 Denmark Government
OBLIGATIONS Bond, 6.00% due
12/10/1999......... 451,033 440,770 4.4
TOTAL INVESTMENTS IN
DENMARK 451,033 440,770 4.4
EUROPEAN
CURRENCY FOREIGN GOVERNMENT ECU 400,000 Republic of Portugal,
UNIT OBLIGATIONS 6.00% due
2/16/2004.......... 404,448 404,990 4.1
TOTAL INVESTMENTS IN
EUROPEAN CURRENCY
UNITS 404,448 404,990 4.1
FINLAND FOREIGN GOVERNMENT Fmk 1,000,000 Finland Government
OBLIGATIONS Bond, 6.50% due
9/15/1996.......... 199,459 205,878 2.1
TOTAL FIXED-INCOME
INVESTMENTS IN
FINLAND 199,459 205,878 2.1
FRANCE FOREIGN GOVERNMENT Frf 2,500,000 French Government
OBLIGATIONS 'B-Tan', 4.75% due
4/12/1999.......... 423,692 415,416 4.2
1,750,000 French Government
'OAT', 6.75% due
10/25/2004......... 306,186 294,533 3.0
729,878 709,949 7.2
TOTAL INVESTMENTS IN
FRANCE 729,878 709,949 7.2
</TABLE>
87
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE FACE VALUE PERCENT OF NET
(CONCLUDED) AMOUNT ISSUE COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GERMANY FOREIGN GOVERNMENT DM 750,000 Treuhand-Obligationen,
OBLIGATIONS 5.75% due
4/29/1999.......... $ 462,861 $ 456,928 4.6%
750,000 Kingdom of Belgium,
7.25% due
10/18/1999......... 483,855 484,496 4.9
550,000 Treuhand-Obligationen,
6.25% due
7/29/1999.......... 354,485 341,014 3.4
1,301,201 1,282,438 12.9
TOTAL INVESTMENTS IN
GERMANY 1,301,201 1,282,438 12.9
IRELAND FOREIGN GOVERNMENT Iep 300,000 Irish Gilts, 6.25%
OBLIGATIONS due 4/01/1999...... 420,056 419,196 4.2
TOTAL INVESTMENTS IN
IRELAND 420,056 419,196 4.2
ITALY FOREIGN GOVERNMENT Buoni Poliennali del
OBLIGATIONS Tesoro (Italian
Government Bonds):
Lit 400,000,000 8.50% due 8/01/1999.. 228,653 216,562 2.2
400,000,000 8.50% due 4/01/1999.. 239,408 219,005 2.2
468,061 435,567 4.4
TOTAL INVESTMENTS IN
ITALY 468,061 435,567 4.4
NETHERLANDS FOREIGN GOVERNMENT Nlg 700,000 Netherlands
OBLIGATIONS Government Bond,
7.25% due
10/01/2004......... 386,865 389,540 3.9
TOTAL INVESTMENTS IN
THE NETHERLANDS 386,865 389,540 3.9
SPAIN FOREIGN GOVERNMENT Government of Spain:
OBLIGATIONS Pta 50,000,000 8.30% due
12/15/1998......... 360,283 341,125 3.4
30,000,000 8.00% due 5/30/2004.. 189,189 179,704 1.8
549,472 520,829 5.2
TOTAL INVESTMENTS IN
SPAIN 549,472 520,829 5.2
UNITED FOREIGN GOVERNMENT Pound Sterling United Kingdom Gilt,
KINGDOM OBLIGATIONS 800,000 9.00% due 3/03/2000.. 1,284,293 1,268,852 12.8
TOTAL INVESTMENTS IN
THE UNITED KINGDOM 1,284,293 1,268,852 12.8
TOTAL INVESTMENTS IN
WESTERN EUROPE 6,194,766 6,078,009 61.2
</TABLE>
88
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF NET
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $ 467,000 General Electric
Capital Corp.,
5.80% due
1/03/1995.......... $ 466,774 $ 466,774 4.7%
US GOVERNMENT & AGENCY 800,000 Federal Home Loan
OBLIGATIONS* Bank, 5.74% due
1/23/1995.......... 797,066 797,066 8.0
500,000 Federal Home Loan
Mortgage Corp.,
5.85% due
1/27/1995.......... 497,806 497,806 5.0
600,000 Federal National
Mortgage
Association, 5.90%
due 1/05/1995...... 599,508 599,508 6.0
1,894,380 1,894,380 19.0
TOTAL INVESTMENTS IN
SHORT-TERM
SECURITIES......... 2,361,154 2,361,154 23.7
TOTAL INVESTMENTS.......................... $10,713,571 10,617,103 106.9
-----------
-----------
UNREALIZED DEPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS**............... (66,829) (0.7)
LIABILITIES IN EXCESS OF OTHER ASSETS...... (616,980) (6.2)
----------- ----------
NET ASSETS................................. $ 9,933,294 100.0%
----------- ----------
----------- ----------
* 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.
</TABLE>
** Forward foreign exchange contracts as of December 31, 1994 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION
EXPIRATION (DEPRECIATION)
FOREIGN CURRENCY PURCHASED DATE (NOTE 1B)
<S> <C> <C>
- --------------------------------------------------------------------------------
A$ 140,319... January 1995 $ 1,158
C$ 267,506... January 1995 (2,263)
DM 3,174,573... January 1995 20,110
Frf 463,735... January 1995 751
Lit 183,247,080... January 1995 (373)
- --------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$2,531,259) $ 19,383
--------
- --------------------------------------------------------------------------------
<CAPTION>
FOREIGN CURRENCY SOLD
<S> <C> <C>
- --------------------------------------------------------------------------------
A$ (589,235)... January 1995 $ (10,285)
Dkr (1,046,077)... January 1995 (2,448)
DM (6,305,200)... January 1995 (75,385)
Frf (2,340,234)... January 1995 (1,483)
Lit (530,387,580)... January 1995 4,092
Pta (18,597,466)... February 1995 (703)
- --------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$5,525,073) $ (86,212)
--------
- --------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS--NET $ (66,829)
--------
--------
- --------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
See Notes to Financial Statements.
89
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET
AFRICA INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTH INVESTMENT MANAGEMENT 20,700 The Morgan Stanley Africa
AFRICA Investment Fund, Inc. (e).... $ 239,340 $ 235,463 0.1%
3,000 New South Africa Fund, Inc..... 41,805 42,375 0.0
13,500 Southern Africa Fund, Inc.
(e).......................... 200,143 187,313 0.1
----------- ----------- ---
481,288 465,151 0.2
TOTAL INVESTMENTS IN SOUTH
AFRICAN STOCKS 481,288 465,151 0.2
TOTAL INVESTMENTS IN
AFRICA 481,288 465,151 0.2
LATIN AMERICA
ARGENTINA ENERGY 56,000 Transportadora de Gas del Sur
S.A.......................... 744,919 525,000 0.2
OIL & GAS PRODUCERS 41,000 Yacimientos Petroliferos
Fiscales S.A. (Sponsored)
(ADR) (a).................... 1,047,553 876,375 0.4
TOTAL INVESTMENTS IN
ARGENTINEAN STOCKS 1,792,472 1,401,375 0.6
BRAZIL AUTOMOBILES 17,500 CAPCO Automotive Products Corp.
S.A. (e)..................... 210,710 210,000 0.1
STEEL 25,000 Usinas Siderurgicas de Minas
Gerais-Usiminas S.A. (d)..... 397,125 328,000 0.1
429,000,000 Usinas Siderurgicas de Minas
Gerais-Usiminas S.A.
(Preferred).................. 725,036 583,156 0.2
----------- ----------- ---
1,122,161 911,156 0.3
TELECOMMUNICATIONS 55,250 Telecomunicacoes Brasileiras
S.A.--Telebras (ADR) (a)
(d).......................... 2,239,272 2,458,625 1.0
8,900,000 Telecomunicacoes Brasileiras
S.A.--Telebras PN
(Preferred).................. 393,159 398,712 0.2
----------- ----------- ---
2,632,431 2,857,337 1.2
UTILITIES--ELECTRIC 2,170,000 Centrais Eletricas Brasileiras
S.A.--Electrobras 'B'
(Preferred).................. 735,350 754,113 0.3
UTILITIES--GAS 53,500 Companhia Generale des Eaux
(ADR) (a).................... 1,252,271 1,257,250 0.5
TOTAL INVESTMENTS IN
BRAZILIAN STOCKS 5,952,923 5,989,856 2.4
CHILE TELECOMMUNICATIONS 7,900 Compania de Telefonos de Chile
S.A. (ADR) (a)............... 950,388 622,125 0.2
TOTAL INVESTMENTS IN
CHILEAN STOCKS 950,388 622,125 0.2
MEXICO BEVERAGES 10,150 Panamerican Beverages, Inc.
(ADR) (a).................... 295,626 320,994 0.1
BUILDING & 319,625 Cementos Mexicanos, S.A. de
CONSTRUCTION C.V. (Cemex) (Series B)...... 2,283,655 1,699,231 0.7
FINANCIAL SERVICES 29,800 Servicios Financieros Quadrum,
S.A. de C.V. (ADR) (a) (d)... 642,075 186,250 0.1
HOLDING COMPANY 9,600 Desc Sociedad de Fomento
Industrial, S.A. de C.V.
'B'.......................... 72,459 46,041 0.0
LEISURE 233,500 Grupo Carso, S.A. de C.V.
(Series A1).................. 2,081,150 1,748,867 0.7
TELECOMMUNICATIONS 59,500 Telefonos de Mexico, S.A. de
C.V. (Telmex) (ADR) (a)...... 3,254,272 2,439,500 1.0
TOTAL INVESTMENTS IN
MEXICAN STOCKS 8,629,237 6,440,883 2.6
TOTAL INVESTMENTS IN
LATIN AMERICA 17,325,020 14,454,239 5.8
</TABLE>
90
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET
AMERICA INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CANADA DIVERSIFIED 127,500 Horsham Corp................... $ 2,065,790 $ 1,625,625 0.7%
ENERGY SOURCES 12,000 Imperial Oil Ltd. (ADR) (a).... 390,385 396,000 0.1
51,000 Imperial Oil Ltd. (Ordinary)... 1,666,831 1,681,698 0.7
----------- ----------- ---
2,057,216 2,077,698 0.8
FOREIGN GOVERNMENT Canadian Government Bonds:
OBLIGATIONS C$ 1,400,000 6.50% due 8/01/1996............ 1,098,976 966,644 0.4
C$ 2,650,000 5.75% due 3/01/1999............ 1,918,555 1,680,685 0.7
----------- ----------- ---
3,017,531 2,647,329 1.1
MULTI-INDUSTRY 129,671 American Barrick Resources
Corp......................... 3,323,482 2,900,633 1.2
24,350 American Barrick Resources
Corp. (ADR) (a).............. 617,883 541,788 0.2
----------- ----------- ---
3,941,365 3,442,421 1.4
TOTAL INVESTMENTS IN
CANADIAN STOCKS & BONDS 11,081,902 9,793,073 4.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 11,081,902 9,793,073 4.0
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PACIFIC
BASIN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA DIVERSIFIED 798,000 BTR Nylex Ltd.................. 1,901,058 1,484,663 0.6
FOOD & BEVERAGE 129,855 Coca-Cola Amatil, Ltd.
(Ordinary)................... 702,346 825,441 0.3
FOOD & HOUSEHOLD 346,165 Burns Philp & Co., Ltd.
PRODUCTS (Ordinary)................... 1,030,868 818,459 0.3
MEDIA 103,347 The News Corp., Ltd. (ADR)
(a).......................... 510,504 404,579 0.2
51,674 The News Corp., Ltd.
(Preferred).................. 219,425 177,856 0.1
----------- ----------- ---
729,929 582,435 0.3
MERCHANDISING 30,850 Amway Asia Pacific Ltd......... 904,749 1,002,625 0.4
NATURAL GAS PIPELINES 56,521 Broken Hill Proprietary Co..... 754,227 858,776 0.3
PROPERTY 150,796 Lend Lease Corp................ 1,874,136 1,865,677 0.7
TOTAL INVESTMENTS IN
AUSTRALIAN STOCKS 7,897,313 7,438,076 2.9
- ------------------------------------------------------------------------------------------------------------------------
HONG KONG BANKING 232,000 Winton Holdings Ltd............ 68,750 58,780 0.0
FOODS 5,337,000 C.P. Pokphand Co., Ltd.
(Ordinary)................... 1,510,008 1,248,703 0.5
MULTI-INDUSTRY 63,000 Swire Pacific Ltd. (Class A)... 428,737 392,528 0.2
PROPERTY 343,000 Hang Lung Development Co., Ltd.
(Ordinary)................... 585,187 487,720 0.2
34,300 Hang Lung Development Co., Ltd.
(Warrants) (c) (e)........... 0 5,143 0.0
----------- ----------- ---
585,187 492,863 0.2
TELECOMMUNICATIONS 1,863,000 Hong Kong Telecommunications
Ltd. (Ordinary).............. 3,710,688 3,552,126 1.4
UTILITIES 282,000 The Hong Kong & China Gas Co.,
Ltd. (Ordinary).............. 529,795 455,662 0.2
UTILITIES--ELECTRIC 752,800 China Light & Power Co., Ltd.
(Ordinary)................... 3,706,269 3,211,272 1.3
TOTAL INVESTMENTS IN
HONG KONG STOCKS & WARRANTS 10,539,434 9,411,934 3.8
INDONESIA BANKING--
INTERNATIONAL 352,500 PT Bank Bali................... 1,016,998 994,766 0.4
FOOD & HOUSEHOLD 337,000 PT Wicaksana Overseas
PRODUCTS International (e)............ 519,283 966,363 0.4
TELECOMMUNICATIONS 15,160 PT Indonesia Satellite (ADR)
(a).......................... 560,218 541,970 0.2
TOTAL INVESTMENTS IN
INDONESIAN STOCKS 2,096,499 2,503,099 1.0
</TABLE>
91
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET
(CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAPAN AUTOMOBILES 257,000 Suzuki Motor Co. (Ordinary).... $ 2,913,077 $ 3,022,010 1.2%
90,000 Toyota Motor Corp.............. 1,936,140 1,899,497 0.8
----------- ----------- ---
4,849,217 4,921,507 2.0
BEVERAGES 16,000 Chukyo Coca-Cola Bottling Co.,
Ltd. (Ordinary).............. 226,551 181,709 0.1
15,000 Hokkaido Coca-Cola Bottling
Co., Ltd. (Ordinary)......... 249,702 203,518 0.1
17,000 Kinki Coca-Cola Bottling Co.,
Ltd. (Ordinary).............. 312,980 232,362 0.1
19,000 Mikuni Coca-Cola Bottling Co.,
Ltd.......................... 340,923 259,698 0.1
17,600 Sanyo Coca-Cola Bottling Co.,
Ltd.......................... 267,996 263,558 0.1
----------- ----------- ---
1,398,152 1,140,845 0.5
CAPITAL GOODS 596,000 Mitsubishi Heavy Industries,
Ltd.......................... 4,091,717 4,552,362 1.8
CHEMICALS 14,000 Shimachu Co. (Ordinary)........ 586,177 505,126 0.2
119,000 Shin-Etsu Chemical Co., Ltd.
(Ordinary)................... 2,474,232 2,368,040 1.0
----------- ----------- ---
3,060,409 2,873,166 1.2
CONSUMER 11,000 Sony Corp...................... 682,355 624,623 0.2
ELECTRONICS
ELECTRICAL
CONSTRUCTION 45,000 Chudenko Corp. (Ordinary)...... 1,688,835 1,650,754 0.7
63,000 Sanki Engineering Co., Ltd..... 888,004 747,136 0.3
44,000 Taihei Dengyo Kaisha, Ltd...... 1,174,357 1,052,462 0.4
----------- ----------- ---
3,751,196 3,450,352 1.4
ELECTRICAL EQUIPMENT 300,000 Hitachi Ltd.................... 2,980,233 2,981,910 1.2
133,000 Murata Manufacturing Co.,
Ltd.......................... 5,003,881 5,146,231 2.1
74,000 The Nippon Signal Co., Ltd..... 1,013,087 758,593 0.3
85,000 Rohm Co........................ 3,261,820 3,605,025 1.5
240,000 Sumitomo Electric Industries,
Ltd.......................... 3,394,542 3,425,126 1.4
----------- ----------- ---
15,653,563 15,916,885 6.5
INSURANCE 230,000 Dai-Tokyo Fire & Marine
Insurance Co., Ltd........... 1,715,601 1,678,191 0.7
70,000 Fuji Fire & Marine Insurance
Co.,
Ltd.......................... 477,842 448,141 0.2
292,000 Koa Fire & Marine Insurance
Co.,
Ltd.......................... 2,008,042 2,013,186 0.8
149,000 Mitsui Marine & Fire Insurance
Co., Ltd..................... 1,217,441 1,127,608 0.5
282,000 Nichido Fire & Marine Insurance
Co., Ltd..................... 2,210,110 2,445,889 1.0
117,000 Nippon Fire & Marine Insurance
Co., Ltd..................... 858,344 813,709 0.3
245,000 Sumitomo Marine & Fire
Insurance Co., Ltd........... 2,084,181 2,117,588 0.8
236,000 Tokio Marine & Fire Insurance
Co., Ltd. (Ordinary)......... 2,855,929 2,893,668 1.2
201,000 Yasuda Fire & Marine Insurance
Co., Ltd..................... 1,505,908 1,474,673 0.6
----------- ----------- ---
14,933,398 15,012,653 6.1
OFFICE EQUIPMENT 435,000 Canon, Inc. (Ordinary)......... 7,169,831 7,388,442 3.0
PACKAGING 133,000 Toyo Seikan Kaisha, Ltd.
(Ordinary)................... 4,075,420 4,437,789 1.8
PHARMACEUTICALS 122,000 Sankyo Co., Ltd. (Ordinary).... 2,950,570 3,040,804 1.2
124,000 Taisho Pharmaceutical Co., Ltd.
(Ordinary)................... 2,478,234 2,380,302 1.0
----------- ----------- ---
5,428,804 5,421,106 2.2
RETAILING 87,000 Ito Yokado Co., Ltd.
(Ordinary)................... 4,474,880 4,660,402 1.9
30,000 Sangetsu Co., Ltd.............. 1,120,547 904,523 0.4
----------- ----------- ---
5,595,427 5,564,925 2.3
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STEEL 48,000 Maruichi Steel Tube, Ltd.
(Ordinary)................... 840,875 863,518 0.3
TRANSPORTATION 185,000 Nippon Express Co., Ltd........ 1,925,618 1,859,296 0.7
TOTAL INVESTMENTS IN
JAPANESE STOCKS 73,455,982 74,027,469 30.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
92
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET
(CONCLUDED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MALAYSIA BANKING 83,000 Public Bank (Malaysia) BHD
'Foreign'.................... $ 188,648 $ 165,837 0.1%
BROADCAST--MEDIA 367,000 Sistem Televisyen Malaysia
BHD.......................... 1,060,002 797,982 0.3
FINANCIAL SERVICES 198,000 Commerce Asset Holdings BHD.... 1,016,180 798,981 0.3
FOOD 134,000 Nestle (Malaysia) BHD.......... 893,373 892,458 0.3
LEISURE 22,500 Genting BHD.................... 138,632 193,046 0.1
NEWSPAPER/PUBLISHING 231,000 New Straits Times Press BHD.... 931,391 742,096 0.3
TOTAL INVESTMENTS IN
MALAYSIAN STOCKS 4,228,226 3,590,400 1.4
NEW FOREIGN
ZEALAND GOVERNMENT New Zealand Government Bonds:
NZ$ OBLIGATIONS 1,600,000 9.00% due 11/15/1996........... 973,385 1,010,864 0.4
NZ$ 1,650,000 6.50% due 2/15/2000............ 921,954 959,224 0.4
NZ$ 10,000,000 New Zealand Treasury Bills,
7.54%++ due 1/11/1995........ 6,017,116 6,386,880 2.6
----------- ----------- ---
7,912,455 8,356,968 3.4
PAPER & FOREST 1,306,000 Carter Holt Harvey, Ltd........ 3,097,064 2,673,852 1.1
PRODUCTS
TOTAL INVESTMENTS IN
NEW ZEALAND STOCKS & BONDS 11,009,519 11,030,820 4.5
PHILIPPINES MULTI--INDUSTRY 39,000 Benpres Holdings Corp. (d)
(e).......................... 421,200 351,000 0.1
TOTAL INVESTMENTS IN
PHILIPPINE STOCKS 421,200 351,000 0.1
TAIWAN MERCHANDISING 74,360 Hocheng Group Corp. (ADR) (a)
(d).......................... 2,149,131 1,673,100 0.7
TOTAL INVESTMENTS IN
TAIWANESE STOCKS 2,149,131 1,673,100 0.7
THAILAND REAL ESTATE 106,000 Bangkok Land Ltd. 'Foreign'.... 349,820 263,997 0.1
TOTAL INVESTMENTS IN THAI
STOCKS 349,820 263,997 0.1
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 112,147,124 110,289,895 44.5
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHEAST
ASIA
INDIA MEDIA 203,000 Videocon International Ltd.
(ADR)
(a) (e)...................... 1,900,666 939,890 0.4
TOBACCO 151,000 Indian Tobacco Co. Ltd. (e).... 2,015,375 1,510,000 0.6
TOTAL INVESTMENTS IN
INDIAN STOCKS 3,916,041 2,449,890 1.0
TOTAL INVESTMENTS IN
SOUTHEAST ASIA 3,916,041 2,449,890 1.0
WESTERN EUROPE
AUSTRIA UTILITIES 8,395 Verbund Oesterreichische
Elekrizitats AG.............. 489,227 484,993 0.2
TOTAL INVESTMENTS IN
AUSTRIAN STOCKS 489,227 484,993 0.2
</TABLE>
93
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET
(CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BELGIUM BANKING 2,300 Generale de Banque S.A.
(Ordinary)................... $ 567,216 $ 583,863 0.2%
BUILDING MATERIALS--
GLASS 670 Glaverbel S.A. (Ordinary)...... 89,188 88,729 0.1
TOTAL INVESTMENTS IN
BELGIAN STOCKS 656,404 672,592 0.3
FINLAND BANKING 414,400 Kansallis-Osake-Pankki (e)..... 695,163 484,540 0.2
330,000 Unitas Bank Ltd. (Ordinary)
(e).......................... 908,262 851,253 0.3
----------- ----------- ---
1,603,425 1,335,793 0.5
DIVERSIFIED 27,500 Outokumpu OY (e)............... 402,133 505,867 0.2
PAPER & FOREST
PRODUCTS 75,400 Enso-Gutzeit OY (Registered)... 555,578 648,859 0.3
15,050 Metsa Serla OY................. 610,058 661,888 0.3
33,775 Repola OY S (d)................ 568,828 610,585 0.2
----------- ----------- ---
1,734,464 1,921,332 0.8
TOTAL INVESTMENTS IN
FINNISH STOCKS 3,740,022 3,762,992 1.5
FRANCE AUTOMOBILES 9,400 Peugeot S.A.................... 1,392,143 1,290,473 0.5
BANKING 7,400 Compagnie Financiere de
Paribas...................... 556,543 492,686 0.2
8,400 Compagnie Financiere de Suez... 471,127 385,971 0.2
2,500 Societe Generale de
Surveillance S.A. (Class A)
(Ordinary)................... 272,615 263,035 0.1
----------- ----------- ---
1,300,285 1,141,692 0.5
CHEMICALS 18,000 Rhone-Poulenc S.A.............. 454,174 418,267 0.2
INSURANCE 6,270 Societe Centrale du Groupe des
Assurances Nationales S.A.... 548,917 321,026 0.1
MULTI-INDUSTRY 1,765 EuraFrance S.A................. 588,784 542,542 0.2
PACKAGING 12,700 Pechiney International S.A..... 353,880 381,095 0.2
UTILITIES 5,984 Compagnie Generale des Eaux.... 684,057 582,464 0.2
TOTAL INVESTMENTS IN
FRENCH STOCKS 5,322,240 4,677,559 1.9
GERMANY AUTOMOBILE PARTS 2,620 Continental AG................. 394,839 382,506 0.2
4,440 Continental AG (Warrants) (c)
(e).......................... 252,413 195,039 0.1
----------- ----------- ---
647,252 577,545 0.3
AUTOMOBILES 3,100 Daimler-Benz AG................ 1,480,090 1,525,969 0.6
3,350 Volkswagen AG (Ordinary)....... 919,646 921,899 0.4
3,500 Volkswagen AG (Preferred)...... 788,556 769,864 0.3
2,659 Volkswagen AG (Preferred)
(Warrants) (c) (e)........... 239,121 237,043 0.1
----------- ----------- ---
3,427,413 3,454,775 1.4
BANKING 2,400 Deutsche Bank AG (Ordinary).... 1,139,399 1,116,279 0.4
CHEMICALS 4,500 BASF AG (Ordinary)............. 858,048 928,779 0.4
2,900 Bayer AG (Ordinary)............ 663,276 680,039 0.3
----------- ----------- ---
1,521,324 1,608,818 0.7
INSURANCE 340 Munich Reinsurance Co.
(Ordinary) (e)............... 599,135 636,951 0.3
MACHINERY 17,250 Kloeckner Werke AG (e)......... 1,232,262 1,376,211 0.6
6,100 Mannesmann AG.................. 1,547,131 1,662,920 0.7
----------- ----------- ---
2,779,393 3,039,131 1.3
METALS & MINING 10,200 Thyssen AG (Ordinary) (e)...... 1,737,040 1,947,093 0.8
UTILITIES 6,500 Vereinigte Elektrizitaets &
Bergwerks AG (Veba)
(Warrants) (c) (e)........... 279,834 332,642 0.1
TOTAL INVESTMENTS IN GERMAN
STOCKS & WARRANTS 12,130,790 12,713,234 5.3
</TABLE>
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET
(CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GREECE BEVERAGES 13,000 Hellenic Bottling Co........... $ 382,927 $ 460,609 0.2%
TOTAL INVESTMENTS IN
GREEK STOCKS 382,927 460,609 0.2
HUNGARY FOODS 1,633 Pick Szeged Reszvenytarsasag
(ADR) (a).................... 111,887 95,922 0.0
TOTAL INVESTMENTS IN
HUNGARIAN STOCKS 111,887 95,922 0.0
IRELAND BANKING 21,200 Allied Irish Banks PLC
(Ordinary)................... 84,167 88,379 0.0
BANKING & FINANCIAL 640,000 Anglo Irish Bank Corp.......... 507,043 553,370 0.2
BUILDING & 70,000 CRH PLC (Ordinary)............. 335,762 385,846 0.2
CONSTRUCTION
CLOSED-END FUNDS 520,000 First Ireland Investment Co.... 782,598 814,320 0.3
TOTAL INVESTMENTS IN
IRISH STOCKS 1,709,570 1,841,915 0.7
ITALY BUILDING &
CONSTRUCTION 96,100 Fochi Filippo S.p.A............ 304,917 210,215 0.1
DIVERSIFIED 335,500 CIR NC Savings................. 157,313 229,588 0.1
477,700 Compagnie Industrial Riunite
S.p.A. (CIR)................. 494,269 557,110 0.2
----------- ----------- ---
651,582 786,698 0.3
TELECOMMUNICATIONS 468,816 Stet Savings Telecom........... 1,130,247 1,112,303 0.5
TOTAL INVESTMENTS IN
ITALIAN STOCKS 2,086,746 2,109,216 0.9
NETHERLANDS BANKING 25,000 ABN Amro Bank (Ordinary)....... 875,455 869,778 0.3
CHEMICALS 9,000 Akzo N.V. (Ordinary)........... 983,573 1,040,619 0.4
8,500 European Vinyls Corporation
International N.V. (e)....... 375,244 377,135 0.1
----------- ----------- ---
1,358,817 1,417,754 0.5
ELECTRICAL EQUIPMENT 68,000 Philips Industries Inc......... 1,794,160 2,016,617 0.8
INSURANCE 15,600 AEGON N.V. (Ordinary).......... 813,328 999,077 0.4
20,000 Amev N.V. (Ordinary)........... 825,683 850,450 0.3
19,300 Internationale Nederlanden
Groep N.V.................... 816,416 913,109 0.4
----------- ----------- ---
2,455,427 2,762,636 1.1
PAPER & FOREST
PRODUCTS 800 Koninklijke KNP (Preferred)
(e).......................... 3,250 3,309 0.0
22,055 Koninklijke KNP (Warrants) (c)
(e).......................... 76,134 81,822 0.0
----------- ----------- ---
79,384 85,131 0.0
TELECOMMUNICATIONS 11,500 Koninklijke Ptt Nederland
N.V.......................... 359,562 388,155 0.2
TRANSPORTATION 42,000 KLM Royal Dutch Airlines....... 1,057,842 1,032,310 0.4
TOTAL INVESTMENTS IN
NETHERLANDS STOCKS 7,980,647 8,572,381 3.3
NORWAY OIL & GAS PRODUCERS 13,100 Saga Petroleum A.S. (Class
A)........................... 154,863 142,518 0.1
84,000 Saga Petroleum A.S. (Class
B)........................... 951,425 870,337 0.3
----------- ----------- ---
1,106,288 1,012,855 0.4
TOTAL INVESTMENTS IN
NORWEGIAN STOCKS 1,106,288 1,012,855 0.4
PORTUGAL BANKING 80,400 Banco Commercial Portugues S.A.
(ADR) (a).................... 1,256,303 1,015,050 0.4
</TABLE>
95
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET
(CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PORTUGAL BUILDING &
(CONCLUDED) CONSTRUCTION 11,500 Sociedade de Construsoes Soares
de Costa S.A................. $ 228,190 $ 217,008 0.1%
2,300 Sociedade de Construsoes Soares
de Costa S.A. (Baby
Shares)...................... 0 43,402 0.0
1,150 Sociedade de Construsoes Soares
de Costa S.A. (Ordinary)..... 14,384 21,701 0.0
----------- ----------- ---
242,574 282,111 0.1
RETAIL 7,800 Estabelecimentes Jeronimo
Martins
& Filho...................... 308,013 334,068 0.1
42,750 Sonae Investimentos S.A........ 887,629 984,449 0.4
----------- ----------- ---
1,195,642 1,318,517 0.5
TOTAL INVESTMENTS IN
PORTUGUESE STOCKS 2,694,519 2,615,678 1.0
SPAIN BANKING 4,800 Banco Popular Espanol
(Ordinary)................... 545,778 571,038 0.2
OIL--RELATED 51,000 Repsol S.A..................... 1,551,028 1,384,036 0.6
TELECOMMUNICATIONS 84,800 Telefonica Nacional de Espana
S.A. (Ordinary).............. 1,107,347 1,002,387 0.4
TOTAL INVESTMENTS IN
SPANISH STOCKS 3,204,153 2,957,461 1.2
SWEDEN APPLIANCES 15,181 Electrolux AB.................. 758,842 771,763 0.3
AUTOMOBILES &
EQUIPMENT 110,000 Volvo AB 'B'................... 2,026,886 2,076,647 0.8
BANKING 34,700 Svenska Handelsbanken, Inc.
(Class A) (e)................ 463,127 458,561 0.2
BUILDING RELATED 19,100 Svedala Industry (d)........... 388,692 445,576 0.2
ENGINEERING 38,850 SKF AB 'A' (e)................. 716,222 644,374 0.3
15,300 SKF AB 'B' Free (e)............ 297,054 252,737 0.1
----------- ----------- ---
1,013,276 897,111 0.4
INSURANCE 10,260 Skandia Group Forsakrings AB... 154,301 177,784 0.1
METALS & MINING 105,000 Avesta Sheffield AB (e)........ 917,807 1,040,683 0.4
TOTAL INVESTMENTS IN
SWEDISH STOCKS 5,722,931 5,868,125 2.4
SWITZERLAND CHEMICALS 1,400 Ciba-Geigy AG (Registered)..... 786,967 836,252 0.3
ELECTRICAL EQUIPMENT 1,500 BBC Brown Boveri & Cie......... 1,152,901 1,292,925 0.5
INSURANCE 135 Baloise Holding Insurance...... 240,990 245,736 0.1
TOTAL INVESTMENTS IN
SWISS STOCKS 2,180,858 2,374,913 0.9
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TURKEY AUTOMOBILES 53,200 Turk Otomobil Fabrikasi A.S.
(GDS) (b) (e)................ 426,100 228,760 0.1
BEVERAGES 215,000 Erciyas Biracilik Ve Malt
Sanayii A.S.................. 171,663 159,156 0.1
BUILDING MATERIALS 138,250 Alarko Holdings A.S............ 103,023 118,500 0.0
230,900 Cimentas Izmir Cimento
Fabrikasi T.A.S. (e)......... 169,259 161,930 0.1
----------- ----------- ---
272,282 280,430 0.1
INSURANCE 918,000 Aksigorta A.S.................. 229,500 185,984 0.1
STEEL 11,019,000 Izmir Demir Celik Sanayii A.S.
(e).......................... 753,889 601,036 0.2
TOTAL INVESTMENTS IN
TURKISH STOCKS 1,853,434 1,455,366 0.6
UNITED KINGDOM AEROSPACE 316,500 Rolls Royce PLC (Ordinary)..... 782,759 892,150 0.4
BEVERAGE 154,100 Grand Metropolitan PLC
(Ordinary)................... 1,025,810 984,588 0.4
</TABLE>
96
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET
(CONCLUDED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED
BUILDING MATERIALS 248,000 Tarmac PLC (Ordinary).......... $ 623,831 $ 464,100 0.2%
KINGDOM CHEMICALS 104,100 Imperial Chemical Industries
(CONCLUDED) PLC
(ADR) (a).................... 1,278,683 1,220,209 0.5
CONSUMER--GOODS 82,600 Vendome Luxury Group (Units)... 485,376 649,345 0.3
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRICAL EQUIPMENT 239,200 General Electric Co., Ltd. PLC
(Ordinary)................... 1,122,649 1,026,369 0.4
FOOD & BEVERAGE 80,300 Tate & Lyle PLC (Ordinary)..... 517,020 533,179 0.2
FOOD MANUFACTURING 42,300 Unilever Capital Corp.......... 660,311 766,749 0.3
FOREIGN GOVERNMENT Pound3,100,000 UK Treasury Gilt, 8.75% due
OBLIGATIONS Sterling 9/01/1997.................... 5,123,042 4,894,044 2.0
INDUSTRIAL--OTHER 356,300 Tomkins PLC.................... 1,235,028 1,238,684 0.5
INSURANCE 86,200 Commercial Union Assurance Co.
PLC (Ordinary)............... 764,061 684,395 0.3
LEISURE &
ENTERTAINMENT 343,100 Forte PLC...................... 1,262,708 1,300,253 0.5
174,500 The Rank Organisation PLC
(Ordinary)................... 1,070,424 1,139,523 0.5
----------- ----------- ---
2,333,132 2,439,776 1.0
METALS & MINING 96,100 The RTZ Corp. PLC.............. 1,251,499 1,247,584 0.5
MULTI-INDUSTRY 73,000 BTR PLC (Ordinary)............. 354,879 336,095 0.1
OIL--RELATED 91,100 British Petroleum Co., Ltd..... 538,573 607,029 0.2
74,300 The Shell Transport & Trading
Co. PLC...................... 828,784 813,313 0.3
----------- ----------- ---
1,367,357 1,420,342 0.5
PHARMACEUTICALS 45,500 Glaxo Holdings PLC............. 475,215 472,407 0.2
203,600 SmithKline Beecham Corp. PLC
(Class A).................... 1,294,680 1,445,929 0.6
----------- ----------- ---
1,769,895 1,918,336 0.8
RETAIL TRADE 272,100 Sears PLC...................... 489,342 468,719 0.2
TELECOMMUNICATIONS 300,000 Racal Electronics PLC.......... 1,015,204 1,057,050 0.4
UTILITIES 252,100 British Telecommunications PLC
(Ordinary)................... 1,471,567 1,490,327 0.6
TOTAL INVESTMENTS IN THE
UNITED KINGDOM STOCKS &
BONDS 23,671,445 23,732,041 9.6
TOTAL INVESTMENTS IN
WESTERN EUROPE 75,044,088 75,407,852 30.4
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $ 7,180,000 General Electric Capital Corp.,
5.80% due 1/03/1995.......... 7,175,373 7,175,373 2.9
TOTAL INVESTMENTS IN
COMMERCIAL PAPER 7,175,373 7,175,373 2.9
</TABLE>
97
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- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF NET
FACE AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT &
AGENCY OBLIGATIONS* $20,000,000 Federal Home Loan Mortgage
Association, 5.75% due
1/31/1995.................... $19,897,778 $19,897,778 8.0%
US Treasury Bills:
250,000 5.649% due 3/23/1995........... 246,743 246,868 0.1
70,000 5.68% due 3/23/1995............ 69,083 69,123 0.0
165,000 5.25% due 3/30/1995............ 162,834 162,727 0.1
820,000 5.34% due 3/30/1995............ 809,053 808,705 0.3
430,000 5.37% due 3/30/1995............ 424,227 424,077 0.2
2,000,000 5.55% due 3/30/1995............ 1,972,250 1,972,450 0.8
100,000 5.76% due 3/30/1995............ 98,649 98,622 0.1
TOTAL INVESTMENTS IN US
GOVERNMENT & AGENCY
OBLIGATIONS 23,680,617 23,680,350 9.6
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 30,855,990 30,855,723 12.5
<CAPTION>
NUMBER OF
CONTRACTS/ PREMIUMS
FACE AMOUNT ISSUE PAID
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPTIONS CALL OPTIONS
PURCHASED PURCHASED US$ 15,000 Nikkei, expiring March 1995 at
Yen 1950.................... 50,500 77,638 0.0
35,905 + Topix Second Section, expiring
May 1995 at Yen 2330........ 80,000 15,755 0.0
50,750 + Topix Second Section, expiring
July 1995 at Yen 2512.93.... 137,151 21,754 0.0
65,535 + Topix Second Section, expiring
August 1995 at Yen
2453.64..................... 193,711 50,788 0.0
42,919 + Topix Second Section, expiring
September 1995 at Yen
2311.10..................... 100,000 45,024 0.0
------------ ------------ ----------
561,362 210,959 0.0
CURRENCY PUT
OPTIONS PURCHASED Yen4,000,000 Japanese Yen, expiring
February 1995 at Yen 101.... 80,000 24,400 0.0
8,000,000 Japanese Yen, expiring
February 1995 at Yen 100.... 167,200 78,400 0.0
7,000,000 Japanese Yen, expiring March
1995 at Yen 98.5............ 109,900 128,100 0.1
1,500,000 Japanese Yen, expiring June
1995 at Yen 100............. 45,300 26,700 0.0
------------ ------------ ----------
402,400 257,600 0.1
TOTAL OPTIONS PURCHASED 963,762 468,559 0.1
TOTAL INVESTMENTS 251,815,215 244,184,382 98.5
<CAPTION>
NOMINAL PREMIUMS
VALUE RECEIVED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPTIONS CURRENCY CALL OPTIONS
WRITTEN WRITTEN Yen4,000,000 Japanese Yen, expiring
February 1995 at Yen
95.75....................... (80,000) (13,200) 0.0
8,000,000 Japanese Yen, expiring
February 1995 at Yen 94.6... (167,200) (12,000) 0.0
7,000,000 Japanese Yen, expiring March
1995 at Yen 93.06........... (109,900) (11,900) 0.0
------------ ------------ ----------
(357,100) (37,100) 0.0
PUT OPTIONS WRITTEN
US$ 1,500 FTSE, expiring January 1995 at
Pound Sterling 2800......... (63,211) (7,940) 0.0
65,535 + Topix Second Section, expiring
August 1995 at Yen
2453.64..................... (136,111) (227,581) (0.1)
------------ ------------ ----------
(199,322) (235,521) (0.1)
CURRENCY PUT OPTIONS
WRITTEN Yen1,500,000 Japanese Yen, expiring June
1995 at Yen 108............. (16,500) (4,200) 0.0
TOTAL OPTIONS WRITTEN (572,922) (276,821) (0.1)
TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN............................. $251,242,293 243,907,561 98.4
------------
------------
0.0
VARIATION MARGIN ON STOCK INDEX FUTURES CONTRACTS**................... (99,903)
0.1
UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS***...... 300,276
1.5
OTHER ASSETS LESS LIABILITIES......................................... 3,775,841
------------ ----------
100.0%
NET ASSETS............................................................ $247,883,775
------------ ----------
------------ ----------
</TABLE>
98
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
(a) American Depositary Receipt (ADR).
(b) Global Depositary Shares (GDS).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and the
number of shares are subject to adjustment under certain conditions until the expiration date.
(d) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately
$6,053,000, representing 2.44% of net assets.
</TABLE>
<TABLE>
<CAPTION>
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1A)
<S> <C> <C> <C>
Benpres Holdings Corp.......................................................... 10/25/1994 $ 421,200 $ 351,000
Hocheng Group Corp............................................................. 8/09/1994 2,149,131 1,673,100
Repola OY S.................................................................... 8/03/1993 568,828 610,585
Servicios Financieros Quadrum, S.A. de C.V. (ADR).............................. 11/02/1993 642,075 186,250
Svedala Industry............................................................... 10/28/1993 388,692 445,576
Telecomunicacoes Brasileiras S.A.--Telebras (ADR).............................. 10/08/1993 2,239,272 2,458,625
Usinas Siderurgicas de Minas Gerais--Usiminas S.A.............................. 10/05/1994 397,125 328,000
TOTAL.......................................................................... $ 6,806,323 $ 6,053,136
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<C> <S>
(e) Non-income producing security.
+ All Topix 2nd Section OTCs are with Morgan Stanley & Co. International Ltd. as counterparty.
++ Represents the yield to maturity on this foreign discount security.
* Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates
shown are the rates paid at the time of purchase by the Fund.
** Stock index futures contracts purchased as of December 31, 1994 were as follows:
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTE 1B)
<C> <S> <C> <C>
81 Nikkei 225.............................................................CME March 1995 $ 8,006,850
213 Nikkei 225...........................................................SIMEX March 1995 21,160,854
TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT PRICE--$28,472,945) $ 29,167,704
-------------
-------------
**Stock index futures contracts sold as of December 31, 1994 were as follows:
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTE 1B)
<C> <S> <C> <C>
20 EOE....................................................................EOE January 1995 $ (957,904)
10 DAX....................................................................DTB March 1995 (1,363,049)
TOTAL STOCK INDEX FUTURES CONTRACTS SOLD (TOTAL CONTRACT PRICE--$2,304,772)................
$ (2,320,953)
-------------
-------------
The market value of pledged securities is $3,782,572.
</TABLE>
***Forward foreign exchange contracts as of December 31, 1994 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
EXPIRATION (DEPRECIATION)
FOREIGN CURRENCY SOLD DATE (NOTE 1B)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
DM 10,391,435......................................................................... March 1995 38,486
Nlg 7,098,115......................................................................... March 1995 11,821
Yen 397,200,000....................................................................... February 1995 (9,360)
Yen 1,400,572,500..................................................................... March 1995 191,837
Yen 1,263,080,000..................................................................... June 1995 74,003
Yen 155,480,000....................................................................... August 1995 (6,511)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS
(US$ COMMITMENT--$43,861,208)......................................................... $ 300,276
--------------
--------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
99
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ALUMINUM 15,000 Alcan Aluminium Ltd.................. $ 314,175 $ 380,625 1.0
7,700 Reynolds Metals Co................... 349,628 377,300 0.9
663,803 757,925 1.9
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 68,000 Asahi Chemical Industry Co., Ltd..... 502,124 522,131 1.3
10,400 Dow Chemical Co...................... 646,664 699,400 1.8
10,700 duPont (E.I.) de Nemours & Co........ 534,988 601,875 1.5
1,683,776 1,823,406 4.6
- ------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 19,000 Canadian Pacific Limited............. 302,765 285,000 0.7
COMPANIES 18,500 Coastal Corp......................... 493,653 476,375 1.2
30,000 Cyprus Amax Minerals Co.............. 843,290 783,750 2.0
4,800 Equitable Resources, Inc............. 118,772 130,200 0.3
24,000 Freeport-McMoran Inc................. 472,088 426,000 1.1
38,500 Norcen Energy Resources Ltd.......... 600,603 456,340 1.1
20,000 Occidental Petroleum Corp............ 391,200 385,000 1.0
43,000 Renison Goldfields Consolidated 171,823 163,335
Ltd.................................. 0.4
3,394,194 3,106,000 7.8
- ------------------------------------------------------------------------------------------------------------------------
GAS DISTRIBUTION/ 12,100 Consolidated Natural Gas Co.......... 586,109 429,550 1.1
TRANSMISSION
- ------------------------------------------------------------------------------------------------------------------------
GOLD 20,300 + Delta Gold NL........................ 43,832 44,377 0.1
175,000 Newcrest Mining Ltd.................. 816,087 780,045 2.0
15,864 Newmont Mining Corp.................. 664,211 571,104 1.4
35,000 Placer Dome Inc...................... 797,957 761,250 1.9
28,000 Santa Fe Pacific Gold Corp........... 413,022 360,500 0.9
2,735,109 2,517,276 6.3
- ------------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL 10,500 Amoco Corp........................... 554,378 620,813 1.6
COMPANIES 8,500 Exxon Corp........................... 527,985 516,375 1.3
15,800 Imperial Oil Ltd..................... 576,846 521,400 1.3
17,900 Norsk Hydro a.s. (ADS)*.............. 471,629 700,337 1.8
39,000 Petro-Canada......................... 325,876 316,288 0.8
17,700 Phillips Petroleum Co................ 517,938 579,675 1.5
5,200 Royal Dutch Petroleum Co............. 452,860 559,000 1.4
12,000 Societe Nationale Elf Aquitaine 427,829 423,000
(ADS)*............................... 1.1
9,000 Total S.A. (Class B)................. 536,001 523,593 1.3
21,000 YPF S.A. (ADS)*...................... 523,296 448,875 1.1
4,914,638 5,209,356 13.2
- ------------------------------------------------------------------------------------------------------------------------
METAL & MINING 6,900 ASARCO Inc........................... 193,079 196,650 0.5
21,000 CRA Ltd.............................. 258,884 289,770 0.7
4,365 + Eramet............................... 287,729 282,432 0.7
31,500 + Falconbridge Ltd..................... 436,776 550,228 1.4
900 Freeport-McMoran Copper & Gold 21,338 19,125
Inc.................................. 0.0
283,000 M.I.M. Holdings Ltd.................. 618,436 471,670 1.2
43,500 Noranda Inc.......................... 835,357 821,867 2.1
10,000 Phelps Dodge Corp.................... 556,143 618,750 1.6
60,000 The RTZ Corp. PLC.................... 776,284 778,928 2.0
26,000 Trelleborg 'B' Fria.................. 353,318 380,404 1.0
134,000 Western Mining Corp. Holdings Ltd.... 784,884 774,921 2.0
5,122,228 5,184,745 13.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
100
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 104,000 Ampolex Ltd.......................... $ 325,645 $ 280,560 0.7%
10,500 Anadarko Petroleum Corp.............. 513,411 404,250 1.0
18,000 Apache Corp.......................... 482,356 450,000 1.1
13,500 Burlington Resources Inc............. 528,438 472,500 1.2
24,000 Enron Oil & Gas Co................... 514,140 450,000 1.1
65,000 Enterprise Oil PLC................... 418,650 398,762 1.0
13,000 Oryx Energy Co....................... 216,739 154,375 0.4
63,000 Ranger Oil Ltd....................... 416,247 370,125 0.9
15,000 Sonat Inc............................ 477,890 420,000 1.1
7,100 The Louisiana Land and Exploration 282,233 258,262
Co................................... 0.6
9,000 + Triton Energy Corp................... 293,016 306,000 0.8
9,800 Vastar Resources Inc................. 268,604 243,775 0.6
4,737,369 4,208,609 10.5
- ------------------------------------------------------------------------------------------------------------------------
OIL SERVICE 16,800 Baker Hughes, Inc.................... 322,264 306,600 0.8
8,000 + Coflexip............................. 172,000 184,000 0.5
18,000 IHC Caland........................... 400,101 455,920 1.1
64,400 Rowan Companies Inc.................. 602,479 394,450 1.0
11,400 Schlumberger Ltd..................... 693,409 574,275 1.4
13,400 Tidewater Inc........................ 271,679 247,900 0.6
2,461,932 2,163,145 5.4
- ------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST 18,400 Aracruz Celulose A.S. (ADS)*......... 196,788 234,600 0.6
PRODUCTS 10,000 Georgia-Pacific Corp................. 710,723 715,000 1.8
7,400 International Paper.................. 497,368 557,775 1.4
9,800 Metsa-Serla OY 'B'................... 424,632 430,997 1.1
6,700 Mo Och Domsjo AB Co.................. 269,783 312,603 0.8
12,000 Scott Paper Co....................... 479,340 829,500 2.1
12,200 Union Camp Corp...................... 530,591 574,925 1.4
20,000 Weyerhaeuser Co...................... 796,864 750,000 1.9
9,000 Willamette Industries Inc............ 376,875 423,000 1.1
4,282,964 4,828,400 12.2
- ------------------------------------------------------------------------------------------------------------------------
PLANTATIONS 86,000 Golden Hope Plantations BHD.......... 158,974 157,007 0.4
60,000 Kuala Lumpur Kepong BHD.............. 120,553 159,843 0.4
279,527 316,850 0.8
- ------------------------------------------------------------------------------------------------------------------------
POWER GENERATION 33,100 + Destec Energy Inc.................... 562,619 351,687 0.9
- ------------------------------------------------------------------------------------------------------------------------
REFINING 22,300 Total Petroleum (North America), 328,442 278,750
Ltd.................................. 0.7
- ------------------------------------------------------------------------------------------------------------------------
STEEL 21,000 Allegheny Ludlum Corp................ 493,494 393,750 1.0
4,600 + Koninklijke Nederlandsche Hoogovens
en Staalfabrieken N.V................ 196,722 209,139 0.5
150,000 + Sumimoto Metal Industries, Ltd....... 497,497 486,935 1.2
1,187,713 1,089,824 2.7
- ------------------------------------------------------------------------------------------------------------------------
WOOD PRODUCTS 18,000 Louisiana-Pacific Corp............... 689,580 490,500 1.2
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 33,630,003 32,756,023 82.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $1,733,000 General Electric Capital Corp., 5.80% $ 1,731,883 $ 1,731,883
due 1/03/1995........................ 4.4%
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 5,000,000 US Treasury Bills, 4.85% due 4,967,667 4,967,667
OBLIGATIONS** 2/16/1995............................ 12.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 6,699,550 6,699,550 16.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.................... $ 40,329,553 39,455,573 99.4
------------
------------
OTHER ASSETS LESS LIABILITIES........ 259,288 0.6
NET ASSETS........................... $ 39,714,861 100.0%
------------ ----------
------------ ----------
- ------------------------------------------------------------------------------------------------------------------------
* American Depositary Shares (ADS).
** 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.
+ Non-income producing security.
</TABLE>
See Notes to Financial Statements.
102
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES
- ------------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--9.5% A+ Aa3 $ 8,000,000 Boatmen's Bancshares, Inc., 4.34%
due 6/14/1995................... $ 8,000,000 $ 7,991,376
A- A2 6,000,000 Comerica Inc., 8.375% due
7/15/2024....................... 5,706,180 5,574,600
A- A3 3,000,000 First Interstate Bancorp, 11.00%
due 3/05/1998................... 3,605,145 3,191,280
A- A3 5,000,000 First Union Corp., 8.125% due
6/24/2002....................... 5,541,690 4,861,700
Golden West Financial Corp.:
A- A3 2,000,000 9.15% due 5/23/1998............... 2,271,480 2,047,480
A- A3 2,000,000 8.375% due 4/15/2002.............. 2,014,380 1,971,980
A- A3 1,000,000 Huntington National Bank, 7.625%
due 1/15/2003................... 1,066,660 945,560
A- A3 6,500,000 NationsBank Corp., 10.50% due
3/15/1999....................... 6,808,555 6,678,750
AA+ Aa2 5,000,000 Wachovia Bank, 6.55% due
6/09/1997....................... 4,996,350 4,839,650
------------- ------------
40,010,440 38,102,376
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--
CAPTIVE--3.3% Chrysler Finance Corp.:
A A3 1,000,000 7.13% due 9/30/1996............... 985,130 984,340
BBB+ A3 2,500,000 9.50% due 12/15/1999.............. 2,747,175 2,593,900
BBB+ A3 6,500,000 10.95% due 8/01/2017.............. 7,380,520 7,136,805
A A2 2,115,000 Ford Motor Credit Corp., 7.75% due
11/15/2002...................... 2,161,943 2,016,927
------------- ------------
13,274,768 12,731,972
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- A+ A1 2,000,000 American General Finance Corp.,
CONSUMER--7.7% 8.50% due 8/15/1998............. 2,278,920 2,006,000
Associates Corp. of North America:
AA- A1 5,000,000 8.375% due 1/15/1998.............. 5,016,100 4,999,950
AA- A1 1,500,000 8.80% due 8/01/1998............... 1,690,365 1,513,560
AA- A1 1,000,000 8.25% due 12/01/1999.............. 996,740 994,150
A A2 10,000,000 Beneficial Corp., 6.68% due
10/14/1997...................... 10,000,000 9,994,000
A+ Aa3 3,000,000 CIT Group Holdings, Inc., 7.625%
due
12/05/1996...................... 2,990,340 2,980,500
Commercial Credit Co.:
A A2 3,250,000 10.00% due 5/01/1999.............. 3,626,350 3,403,043
A A2 3,000,000 6.70% due 8/01/1999............... 3,022,580 2,800,080
A+ A2 1,000,000 Transamerica Financial Corp.,
6.80% due 3/15/1999............. 999,730 941,660
------------- ------------
30,621,125 29,632,943
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--
OTHER--9.3% Dean Witter, Discover & Co.:
A A2 5,000,000 6.50% due 11/01/2005.............. 4,942,250 4,246,300
A A2 4,750,000 6.75% due 10/15/2013.............. 4,691,575 3,866,785
A+ A2 2,000,000 Dillard Investment Co., 9.25%
due 2/01/2001................... 2,354,230 2,066,040
General Electric Capital Corp.:
AAA Aaa 3,000,000 14.00% due 7/01/1996.............. 3,405,570 3,256,020
AAA Aaa 3,500,000 8.125% due 5/15/2012.............. 3,553,725 3,438,750
A A3 10,000,000 Lehman Brothers Holdings, Inc.,
7.375% due 8/15/1997............ 9,987,000 9,693,800
PaineWebber Group, Inc.:
BBB+ A3 1,000,000 6.25% due 6/15/1998............... 1,026,020 919,610
BBB+ A3 4,000,000 9.25% due 12/15/2001.............. 4,670,870 4,041,360
A- A3 4,000,000 Smith Barney Holdings, 7.875% due
10/01/1999...................... 3,986,160 3,889,920
A+ A2 1,000,000 The Travelers Corp., 9.50% due
3/01/2002....................... 1,084,200 1,047,940
------------- ------------
39,701,600 36,466,525
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
103
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS & NOTES
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN*--11.4% AA- A1 $ 4,000,000 Aegon N.V., 8.00% due 8/15/2006
(5)............................. $ 3,963,480 $ 3,832,680
CRA Finance Ltd. (4):
A+ A2 3,000,000 6.50% due 12/01/2003.............. 3,001,380 2,626,290
A+ A2 3,000,000 7.125% due 12/01/2013............. 2,982,600 2,560,680
AAA Aaa 2,000,000 Export-Import Bank of Japan, 8.35%
due 12/01/1999 (2).............. 2,113,320 2,016,600
A A3 5,413,000 Hydro-Quebec, 10.75% due
6/15/2010 (1)................... 5,959,821 5,687,439
Metropolis of Tokyo (Japan) (3):
AAA Aaa 3,000,000 8.70% due 10/05/1999.............. 3,469,410 3,064,620
AAA Aaa 250,000 9.25% due 11/08/2000.............. 268,428 261,510
AAA Aaa 2,000,000 8.65% due 7/18/2001............... 2,288,720 2,038,800
Province of Ontario (Canada) (3):
AA Aa2 5,000,000 8.00% due 10/17/2001.............. 5,082,900 4,928,900
AA Aa2 6,000,000 7.75% due 6/04/2002............... 5,917,560 5,795,580
Province of Quebec (Canada) (3):
A+ A1 1,000,000 8.80% due 4/15/2003............... 1,038,020 1,009,410
A+ A1 9,000,000 7.125% due 2/09/2024.............. 7,384,440 7,231,860
AA A1 3,000,000 Republic of Italy, 6.875% due
9/27/2023 (3)................... 2,898,730 2,363,160
------------- ------------
46,368,809 43,417,529
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--CONSUMER
GOODS--9.0% Anheuser-Busch Cos., Inc.:
AA- A1 2,500,000 8.75% due 12/01/1999.............. 2,839,090 2,551,350
AA- A1 5,000,000 7.375% due 7/01/2023.............. 5,127,300 4,343,750
A+ A1 2,500,000 Bass America, Inc., 8.125% due
3/31/2002....................... 2,668,930 2,458,250
Dillard Department Stores, Inc.:
A+ A2 5,000,000 7.375% due 6/15/1999.............. 5,305,840 4,825,200
A+ A2 3,000,000 9.125% due 8/01/2011.............. 3,240,150 3,146,040
Grand Metropolitan Investment
Corp.:
A+ A2 5,500,000 6.50% due 9/15/1999............... 5,615,810 5,113,295
A+ A2 1,000,000 8.625% due 8/15/2001.............. 1,049,910 1,006,640
AAA Aaa 3,000,000 Johnson & Johnson Co., 8.72% due
11/01/2024...................... 3,000,000 3,035,130
A A1 1,000,000 PepsiCo, Inc., 6.125% due
1/15/1998....................... 993,060 944,290
A A2 4,000,000 Philip Morris Corp. Inc., 9.00%
due 1/01/2001................... 4,071,540 4,048,360
AA Aa1 4,000,000 Wal-Mart Stores, Inc., 8.50% due
9/15/2024....................... 3,926,560 3,911,280
------------- ------------
37,838,190 35,383,585
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--ENERGY--
4.0% BP America Inc.:
A+ Aa3 1,000,000 9.50% due 1/01/1998............... 1,169,680 1,029,790
A+ Aa3 4,865,000 9.375% due 11/01/2000............. 5,363,565 5,104,601
AA- A1 5,500,000 7.875% due 5/15/2002.............. 5,972,510 5,376,910
Texaco Capital Inc.:
A+ A1 1,500,000 9.00% due 12/15/1999.............. 1,731,670 1,542,975
A+ A1 1,000,000 8.875% due 2/15/2021.............. 999,860 1,048,440
A+ A1 1,000,000 8.625% due 11/15/2031............. 1,045,390 993,930
------------- ------------
16,282,675 15,096,646
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--OTHER--5.8% AA- Aa2 2,000,000 Archer-Daniels-Midland Co., 8.875%
due 4/15/2011................... 2,159,000 2,079,680
AA- A1 5,000,000 Capital Cities/ABC, Inc., 8.875%
due 12/15/2000.................. 5,846,030 5,124,500
A- A3 1,000,000 Carnival Cruise Lines, Inc., 6.15%
due 10/01/2003.................. 891,530 853,840
AA+ Aa1 2,000,000 Ford Motor Credit Company, 9.50%
due 6/01/2010................... 2,217,880 2,113,320
</TABLE>
104
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL--OTHER
(CONCLUDED) A- A3 $ 6,250,000 International Paper Co., 9.70% due
3/15/2000....................... $ 7,418,447 $ 6,595,750
AA Aa2 5,890,000 Kaiser Foundation Hospital, 9.55%
due 7/15/2005................... 6,625,366 6,325,035
------------- ------------
25,158,253 23,092,125
- ------------------------------------------------------------------------------------------------------------------------
SUPRANATIONAL--5.3% Asian Development Bank:
AAA Aaa 1,000,000 10.75% due 6/01/1997.............. 1,084,890 1,055,610
AAA Aaa 3,000,000 8.50% due 5/02/2001............... 3,224,400 3,039,870
European Investment Bank:
AAA Aaa 2,000,000 8.875% due 3/01/2001.............. 2,380,320 2,061,020
AAA Aaa 5,000,000 9.125% due 6/01/2002.............. 6,147,500 5,246,450
Inter-American Development Bank
Co.:
AAA Aaa 2,000,000 8.875% due 6/01/2009.............. 2,481,700 2,117,000
AAA Aaa 4,000,000 8.50% due 3/15/2011............... 4,910,200 4,070,320
AAA Aaa 3,000,000 International Bank for
Reconstruction & Development,
12.375% due 10/15/2002.......... 3,817,430 3,692,850
------------- ------------
24,046,440 21,283,120
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION
SERVICES--5.2% AA A1 9,500,000 Boeing Co. (The), 6.35% due
6/15/2003....................... 8,549,905 8,362,945
A A2 3,640,000 Conrail Inc., 9.75% due
6/01/2000....................... 4,047,134 3,823,856
Southwest Airlines, Inc.:
A- Baa1 3,500,000 9.40% due 7/01/2001............... 4,021,990 3,629,990
A- Baa1 4,000,000 8.75% due 10/15/2003.............. 4,417,060 4,054,000
A- Baa1 1,000,000 7.875% due 9/01/2007.............. 992,600 935,530
------------- ------------
22,028,689 20,806,321
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--
COMMUNICATIONS--1.3% GTE Corp.:
BBB+ A3 1,000,000 8.85% due 3/01/1998............... 1,143,360 1,009,580
BBB+ Baa1 1,000,000 9.10% due 6/01/2003............... 1,221,680 1,024,850
AA- Aa3 2,000,000 Pacific Bell, Inc., 8.70% due
6/15/2001....................... 2,293,800 2,039,200
A+ A1 1,000,000 Southwestern Bell
Telecommunications Corp., 6.125%
due 3/01/2000................... 1,005,000 913,890
------------- ------------
5,663,840 4,987,520
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC--4.6% AA- Aa2 7,000,000 Duke Power Co., 8.00% due
11/01/1999...................... 6,966,520 6,957,440
A- A3 3,000,000 Georgia Power Co., 6.125% due
9/01/1999....................... 2,892,720 2,767,770
A A2 1,000,000 Pennsylvania Power & Light Co.,
7.75% due 5/01/2002............. 995,100 960,400
A A2 7,500,000 Virginia Electric & Power Co.,
8.625% due 10/01/2024........... 7,416,540 7,396,028
------------- ------------
18,270,880 18,081,638
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS--1.8% AA- A1 7,000,000 Consolidated Natural Gas Co.,
8.75% due 6/01/1999............. 7,448,861 7,089,880
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES--
78.2% 326,714,570 306,172,180
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
NR+ Aaa 5,000,000 Federal Home Loan Bank, 5.00% due
FEDERAL AGENCY 5/06/1996.......................
OBLIGATIONS--4.4% 4,980,500 4,989,950
Federal National Mortgage
Association:
NR+ Aaa 7,000,000 7.85% due 9/10/2004............... 6,925,569 6,715,590
NR+ Aaa 2,000,000 8.25% due 10/12/2004.............. 1,975,937 1,963,120
NR+ Aaa 3,500,000 8.55% due 12/10/2004.............. 3,497,266 3,469,375
------------- ------------
17,379,272 17,138,035
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
105
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
- --------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT US Treasury Notes & Bonds:
OBLIGATIONS--7.3% AAA Aaa $ 2,500,000 8.75% due 8/15/2000............... $ 2,976,172 $ 2,602,350
AAA Aaa 9,500,000 7.875% due 11/15/2004............. 9,440,785 9,526,695
AAA Aaa 2,000,000 7.50% due 11/15/2016.............. 2,219,480 1,898,120
AAA Aaa 1,000,000 8.125% due 8/15/2021.............. 1,227,187 1,016,870
AAA Aaa 14,000,000 7.50% due 11/15/2024.............. 13,688,151 13,391,840
------------- ------------
29,551,775 28,435,875
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS--
11.7% 46,931,047 45,573,910
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER**--6.5% 12,000,000 American Express Credit Corp.,
5.875% due 1/03/1995............ 11,992,167 11,992,167
13,300,000 General Electric Capital Corp.,
5.25% due 1/06/1995............. 13,286,423 13,286,423
------------- ------------
25,278,590 25,278,590
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE 1,698,000 UBS Securities Funding Inc.,
AGREEMENT***--2.0% purchased on 12/30/1994 to yield
3.50% to 1/03/1995.............. 1,698,000 1,698,000
6,077,000 UBS Securities Funding Inc.,
purchased on 12/30/1994 to yield
5.75% to 1/03/1995.............. 6,077,000 6,077,000
------------- ------------
7,775,000 7,775,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--8.5% 33,053,590 33,053,590
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.4%.......... $ 406,699,207 384,799,680
-------------
-------------
OTHER ASSETS LESS LIABILITIES--
1.6%............................ 6,434,495
------------
NET ASSETS--100.0%................ $391,234,175
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Corresponding industry groups for foreign securities, which are denominated in US dollars.
(1) Electric Utility
(2) Financial Institution
(3) Government Entity
(4) Industrial Mining
(5) Insurance
** 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.
+ Not Rated.
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
106
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ALUMINUM 45,000 Aluminum Co. of America.............. $ 3,824,580 $ 3,898,125 0.8%
- ------------------------------------------------------------------------------------------------------------------------
APPLIANCES 395,300 Singer Co., N.V...................... 13,068,067 11,809,588 2.5
550,000 Sunbeam-Oster Inc.................... 11,293,706 14,162,500 3.1
------------- ------------- ----------
24,361,773 25,972,088 5.6
- ------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 30,000 Consorcio G Grupo Dina S.A. de C.V.
(ADR) (a).......................... 577,769 285,000 0.1
- ------------------------------------------------------------------------------------------------------------------------
BANKING 60,000 + Bank of New York Co. (Warrants)
(b)................................ 433,750 577,500 0.1
220,000 Bank of New York, Inc................ 6,267,283 6,380,000 1.4
175,000 BankAmerica Corp..................... 8,029,172 6,912,500 1.5
207,000 Espirito Santo Financial Holdings
S.A. (ADR) (a)..................... 2,944,953 2,768,625 0.6
------------- ------------- ----------
17,675,158 16,638,625 3.6
- ------------------------------------------------------------------------------------------------------------------------
BEVERAGES 39,000 Panamerican Beverage, Inc. (Class
A)................................. 1,418,965 1,233,375 0.3
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS 133,000 du Pont (E.I.) de Nemours & Co....... 7,786,636 7,481,250 1.6
238,100 Eastman Chemical Co.................. 12,207,346 12,024,050 2.6
150,000 IMC Global Inc....................... 5,797,935 6,487,500 1.4
100,000 Rohm and Haas Co..................... 5,741,215 5,712,500 1.2
------------- ------------- ----------
31,533,132 31,705,300 6.8
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATION
EQUIPMENT 350,000 ADC Telecommunications Inc........... 12,373,105 17,325,000 3.7
315,000 DSC Communications Corp.............. 7,527,792 11,340,000 2.5
75,000 Motorola, Inc........................ 3,879,432 4,340,625 0.9
85,000 Tellabs, Inc......................... 2,227,494 4,717,500 1.0
------------- ------------- ----------
26,007,823 37,723,125 8.1
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 385,000 Computer Sciences Corp............... 12,262,440 19,635,000 4.2
65,000 General Motors Corp. (Class E)....... 2,552,056 2,502,500 0.5
------------- ------------- ----------
14,814,496 22,137,500 4.7
- ------------------------------------------------------------------------------------------------------------------------
COMPUTER EQUIPMENT 35,000 International Business Machines
Corp............................... 2,486,568 2,572,500 0.6
220,000 + Solectron Corp....................... 5,164,478 6,050,000 1.3
------------- ------------- ----------
7,651,046 8,622,500 1.9
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER-- 100,000 Duracell International, Inc.......... 4,202,024 4,337,500 0.9
MISCELLANEOUS
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER--SERVICES 200,000 Block (H & R), Inc................... 8,204,393 7,425,000 1.6
- ------------------------------------------------------------------------------------------------------------------------
DRUG STORES 50,000 + Revco D.S., Inc. 1,158,190 1,181,250 0.3
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 215,000 Grainger (W.W.) Inc.................. 13,189,353 12,416,250 2.7
- ------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 350,000 + California Energy Co., Inc........... 6,491,715 5,468,750 1.2
- ------------------------------------------------------------------------------------------------------------------------
ENGINEERING & 135,000 + Empresas ICA Sociedad Controladora,
CONSTRUCTION S.A. de C.V. (ADR) (a)............. 3,612,410 2,092,500 0.4
- ------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 775,000 + Wheelabrator Technologies, Inc....... 13,330,204 11,431,250 2.5
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--AUSTRALIA 130,000 News Corp., Ltd. (ADR) (a) (8)....... 2,733,083 2,031,250 0.4
65,000 News Corp., Ltd. (Preferred) (ADR)
(a) (8)............................ 839,808 901,875 0.2
------------- ------------- ----------
3,572,891 2,933,125 0.6
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA 180,000 NOVA Corp. (2)....................... 1,891,620 1,665,000 0.4
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--CHILE 39,000 + Banco O'Higgins (ADR) (a) (9)........ 581,650 667,875 0.1
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--DENMARK 40,000 + Tele Danmark A/S (ADR) (a) (7)....... 941,040 1,020,000 0.2
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--ITALY 30,000 Istituto Mobiliare Italiano S.p.A.
(ADR)
(a) (9)............................ 664,580 551,250 0.1
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN--MEXICO 125,000 Grupo Financiero Serfin, S.A. de C.V.
(ADR) (a) (9)...................... 3,216,645 937,500 0.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
107
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOREIGN--
UNITED KINGDOM 30,220 British Petroleum PLC (ADR) (a)
(6)................................ $ 2,239,380 $ 2,413,822 0.5%
35,000 Hanson PLC (ADR) (a) (5)............. 774,681 630,000 0.1
80,000 Reuters Holdings PLC (ADR) (a) (1)... 2,583,407 3,510,000 0.8
------------- ------------- ----------
5,597,468 6,553,822 1.4
- ------------------------------------------------------------------------------------------------------------------------
HEALTHCARE 550,000 + Humana Inc........................... 10,126,201 12,443,750 2.7
260,000 Physician Corp....................... 5,391,368 5,265,000 1.1
50,000 Vivra Inc............................ 965,297 1,400,000 0.3
------------- ------------- ----------
16,482,866 19,108,750 4.1
- ------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 220,000 Procter & Gamble Co.................. 11,868,180 13,640,000 2.9
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE 177,100 ITT Corp............................. 15,055,943 15,695,488 3.4
- ------------------------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 100,000 Allied Signal Inc.................... 3,616,074 3,400,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 650,000 Danka Business Systems PLC (ADR)
(a)................................ 10,368,086 13,893,750 3.0
- ------------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 165,000 Mobil Corp........................... 12,823,266 13,901,250 3.0
150,000 Phillips Petroleum Co................ 5,106,545 4,912,500 1.1
80,000 Royal Dutch Petroleum Co. N.V. (ADR)
(a)................................ 8,236,860 8,600,000 1.9
------------- ------------- ----------
26,166,671 27,413,750 6.0
- ------------------------------------------------------------------------------------------------------------------------
PACKAGING 120,000 Crown Cork & Seal Co., Inc........... 4,427,472 4,530,000 1.0
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 70,000 American Home Products Corp.......... 4,364,147 4,392,500 0.9
325,000 Merck & Co., Inc..................... 11,818,350 12,390,625 2.7
------------- ------------- ----------
16,182,497 16,783,125 3.6
- ------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 110,000 Eastman Kodak Co..................... 5,427,692 5,252,500 1.1
- ------------------------------------------------------------------------------------------------------------------------
RAILROADS 405,000 + Southern Pacific Rail Corp........... 8,405,529 7,340,625 1.6
- ------------------------------------------------------------------------------------------------------------------------
RETAIL 95,000 Phillips-Van Heusen Corp............. 2,715,283 1,448,750 0.3
- ------------------------------------------------------------------------------------------------------------------------
SOAP 25,000 Unilever N.V. (ADR) (a).............. 2,900,362 2,912,500 0.6
- ------------------------------------------------------------------------------------------------------------------------
TIRES & RUBBER 50,000 Cooper Tire & Rubber Co.............. 1,313,940 1,181,250 0.3
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--
COMMUNICATIONS 60,000 + ALC Communications Corp.............. 1,797,300 1,867,500 0.4
200,000 GTE Corp............................. 6,392,691 6,075,000 1.3
500,000 LDDS Communications Inc.............. 10,793,071 9,687,500 2.1
340,000 MCI Communications Corp.............. 9,152,123 6,247,500 1.3
180,000 + Southwestern Bell Corp............... 7,664,078 7,267,500 1.6
110,000 Telefonos de Mexico, S.A. de C.V.
(ADR) (a).......................... 6,696,820 4,510,000 1.0
------------- ------------- ----------
42,496,083 35,655,000 7.7
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS & WARRANTS 361,945,603 375,152,198 80.8
- ------------------------------------------------------------------------------------------------------------------------
FACE AMOUNT SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 10,000,000 Ciesco L.P., 5.60% due 1/05/1995.... 9,990,667 9,990,667 2.1
5,000,000 Corporate Receivables Corp., 6.00%
due 1/10/1995..................... 4,990,833 4,990,833 1.1
19,806,000 General Electric Capital Corp.,
5.80% due 1/03/1995............... 19,793,236 19,793,236 4.3
5,000,000 Heinz (H.J.) Co., 5.65% due
1/09/1995......................... 4,992,222 4,992,222 1.1
12,000,000 IBM Credit Corp., 5.78% due
1/19/1995......................... 11,961,800 11,961,800 2.6
10,103,000 Premium Funding, Inc., 6.12% due
2/06/1995......................... 10,037,735 10,037,735 2.1
10,000,000 USL Capital Corp., 6.05% due
1/23/1995......................... 9,959,667 9,959,667 2.1
------------- ------------- ----------
71,726,160 71,726,160 15.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
108
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT & $ 11,000,000 Federal Home Loan Bank, 5.72% due
AGENCY OBLIGATION* 1/17/1995......................... $ 10,968,760 $ 10,968,760 2.4%
7,000,000 Federal National Mortgage
Association, 5.77% due
1/27/1995......................... 6,968,585 6,968,585 1.5
------------- ------------- ----------
17,937,345 17,937,345 3.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 89,663,505 89,663,505 19.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 451,609,108 464,815,703 100.1
- ------------------------------------------------------------------------------------------------------------------------
OPTIONS SHARES PREMIUMS
WRITTEN COVERED ISSUE RECEIVED
- ------------------------------------------------------------------------------------------------------------------------
CALL OPTIONS WRITTEN 8,700 ADC Telecommunications Inc.,
expiring January 1995 at US$ 50... (10,976) (9,788) 0.0
20,000 ITT Corp., expiring January 1995 at
US$ 90............................ (24,191) (22,500) 0.0
------------- ------------- ----------
(35,167) (32,288) 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (35,167) (32,288) 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN.............. $ 451,573,941 464,783,415 100.1
-------------
-------------
LIABILITIES IN EXCESS OF OTHER ASSETS.................. (423,533) (0.1)
------------- ----------
NET ASSETS............................................. $ 464,359,882 100.0%
------------- ----------
------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(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 & 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.
+ Non-income producing security.
</TABLE>
Corresponding industry groups for foreign securities:
<TABLE>
<S> <C> <C> <C>
(1) Business Services (6) Petroleum
(2) Chemicals (7) Telecommunications
(3) Financial Services (8) Media-Publishing
(4) Food-Processing (9) Banking
(5) Multi-Industry (10) Soap
</TABLE>
See Notes to Financial Statements.
109
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
BANK NOTES--3.1% $1,000,000 PNC Bank N.A..................................... 5.15 % 2/22/95 $ 998,406
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$999,900) 998,406
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
PAPER--57.6% 1,500,000 ABN-AMRO North American Finance Inc.............. 5.42 1/04/95 1,498,854
500,000 ANZ (Delaware), Inc.............................. 5.05 1/20/95 498,338
1,000,000 Abbey National N.A. Corp......................... 5.075 3/02/95 989,322
1,500,000 Allomon Funding Corp............................. 5.80 1/17/95 1,495,650
500,000 Avco Financial Services, Inc..................... 5.68 2/14/95 496,167
204,000 BTR Dunlop Finance, Inc.......................... 5.50 1/23/95 203,218
500,000 Bankers Trust New York Corp...................... 5.41 1/27/95 497,764
1,000,000 Bankers Trust New York Corp...................... 5.58 4/12/95 981,975
500,000 Cheltenham & Glouster Building Society........... 5.08 3/09/95 494,058
1,300,000 Deer Park Refining L.P........................... 6.10 1/19/95 1,295,594
500,000 Ford Motor Credit Co............................. 5.42 1/11/95 499,080
1,000,000 General Electric Capital Corp.................... 5.48 1/24/95 996,007
300,000 Goldman Sachs Group L.P.......................... 5.15 3/01/95 296,848
300,000 Goldman Sachs Group L.P.......................... 5.25 3/13/95 296,228
218,000 Hanson Finance (UK) PLC.......................... 5.40 1/17/95 217,379
1,000,000 MCA Funding Corp................................. 5.50 1/25/95 995,847
1,400,000 Norfolk Southern Corporation..................... 5.75 2/07/95 1,391,021
1,000,000 Ontario Hydro.................................... 5.44 1/06/95 998,931
1,000,000 Panasonic Finance, Inc........................... 5.50 1/26/95 995,688
1,320,000 Preferred Receivables Funding Corp............... 5.90 2/02/95 1,312,645
609,000 Transamerica Finance Corp........................ 5.32 1/03/95 608,628
1,000,000 Transamerica Finance Corp........................ 5.40 1/18/95 996,992
500,000 WCP Funding Inc.................................. 6.17 3/03/95 494,575
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$18,558,638) 18,550,809
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES+--3.1% 1,000,000 Goldman Sachs Group L.P.......................... 6.07 5/26/95 1,000,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES--(COST--$1,000,000) 1,000,000
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT,
AGENCY & INSTRUMENTALITY 320,000 Federal National Mortgage Association............ 5.04 2/22/95 317,144
OBLIGATIONS-- 1,000,000 US Treasury Bills................................ 4.905 3/16/95 988,537
DISCOUNT--5.9% 600,000 US Treasury Bills................................ 6.335 7/06/95 580,738
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS--
DISCOUNT (COST--$1,888,010) 1,886,419
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT,
AGENCY & INSTRUMENTALITY 500,000 Federal Farm Credit Bank......................... 5.19 3/01/95 499,063
OBLIGATIONS-- 1,000,000 Federal Home Loan Bank........................... 5.79 4/28/95 997,500
NON-DISCOUNT--31.8% 500,000 Federal Home Loan Bank+.......................... 5.93 12/28/95 500,000
1,000,000 Federal National Mortgage Association+........... 5.83 5/13/96 1,000,000
1,000,000 Federal National Mortgage Association+........... 6.0925 10/11/96 1,000,000
1,000,000 Federal National Mortgage Association+........... 5.95 5/19/97 1,000,000
1,000,000 Federal National Mortgage Association+........... 6.00 5/14/98 1,000,000
500,000 Student Loan Marketing Association+.............. 6.32 3/01/95 500,412
1,000,000 Student Loan Marketing Association+.............. 6.32 3/20/95 1,001,148
1,000,000 Student Loan Marketing Association+.............. 6.32 3/23/95 1,000,539
450,000 Student Loan Marketing Association+.............. 6.07 3/20/96 450,000
100,000 Student Loan Marketing Association+.............. 5.94 4/16/96 100,084
300,000 US Treasury Notes................................ 3.875 3/31/95 298,875
250,000 US Treasury Notes................................ 3.875 4/30/95 248,164
250,000 US Treasury Notes................................ 4.125 6/30/95 247,109
400,000 US Treasury Notes................................ 3.875 8/31/95 392,125
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--NON-DISCOUNT (COST--$10,252,029) 10,235,019
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$32,698,577)--101.5%.......................... 32,670,653
LIABILITIES IN EXCESS OF OTHER ASSETS--(1.5%).......................... (474,622)
NET ASSETS--100.0%..................................................... $32,196,031
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Commercial Paper and certain US Government, Agency & Instrumentality 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
rate 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,
1994.
+ Variable Rate Note.
</TABLE>
See Notes to Financial Statements.
110
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF
AFRICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
SOUTH AFRICA FOREIGN GOVERNMENT US $ 1,000,000 Republic of South Africa,
OBLIGATIONS 9.625% due 12/15/1999... $ 996,850 $ 970,000 1.3%
TOTAL FIXED-INCOME
INVESTMENTS IN AFRICA 996,850 970,000 1.3
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LATIN AMERICA
AND THE CARIBBEAN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ARGENTINA TELECOMMUNICATIONS 500,000 Telefonica de Argentina,
S.A., 11.875%
due11/01/2004........... 490,040 450,000 0.6
TOTAL FIXED-INCOME
INVESTMENTS IN
ARGENTINA............... 490,040 450,000 0.6
- ------------------------------------------------------------------------------------------------------------------------
MEXICO ENERGY 500,000 Petroleos Mexicanos, 8.25%
due 2/04/1998 (ADR)
(d)..................... 521,875 447,500 0.6
RETAIL STORES 250,000 Controladora Comercial
Mexicana, S.A. de C.V.,
8.75% due 4/21/1998..... 263,125 210,000 0.3
TOTAL FIXED-INCOME
INVESTMENTS IN MEXICO 785,000 657,500 0.9
- ------------------------------------------------------------------------------------------------------------------------
TRINIDAD & FOREIGN GOVERNMENT 350,000 Republic of Trinidad &
TOBAGO OBLIGATIONS Tobago, 11.50% due
11/20/1997.............. 368,500 350,000 0.5
TOTAL FIXED-INCOME
INVESTMENTS IN TRINIDAD
& TOBAGO 368,500 350,000 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN
AMERICAN AND CARIBBEAN
SECURITIES 1,643,540 1,457,500 2.0
- ------------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
- ------------------------------------------------------------------------------------------------------------------------
CANADA FOREIGN GOVERNMENT
OBLIGATIONS C $ 2,005,000 Canadian Government Bond,
7.75% due 9/01/1999..... 1,437,271 1,363,017 1.8
TOTAL FIXED-INCOME
INVESTMENTS IN CANADA 1,437,271 1,363,017 1.8
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES AIR TRANSPORT US $ 250,000 Delta Air Lines, Inc.,
9.30% due 1/02/2010..... 246,925 233,804 0.3
500,000 USAir Inc., 10.375% due
3/01/2013............... 504,688 407,500 0.5
100,000 United Air Pass-Through,
10.125% due 3/22/2015... 109,036 93,935 0.1
----------- ----------- ----------
860,649 735,239 0.9
BROADCASTING & 250,000 Continental Cablevision
PUBLISHING Inc., 9.50% due
8/01/2013............... 250,000 228,750 0.3
500,000 SCI Television Inc.,
11.00% due 6/30/2005.... 520,625 505,000 0.7
----------- ----------- ----------
770,625 733,750 1.0
BUILDING MATERIALS 250,000 Inter-City Products Corp.,
9.75% due 3/01/2000..... 242,500 233,125 0.3
500,000 Pacific Lumber Co., 10.50%
due 3/01/2003........... 492,000 465,000 0.6
----------- ----------- ----------
734,500 698,125 0.9
BUILDING PRODUCTS 250,000 American Standard Inc.,
9.25% due 12/01/2016...... 251,875 228,750 0.3
CELLULAR TELEPHONES 760,000 Dial Page, Inc., 12.25%
& PAGING due 2/15/2000........... 787,150 760,000 1.0
CHEMICALS 500,000 Agriculture Minerals Co.,
L.P., 10.75% due
9/30/2003............... 501,875 505,000 0.7
500,000 Envirodyne Industries
Inc., 10.25% due
12/01/2001.............. 509,375 350,000 0.5
1,225,000 G-I Holdings, Inc.,
11.38%* due
10/01/1998.............. 792,766 747,250 1.0
500,000 Laroche Industries Inc.,
13.00% due 8/15/2004.... 500,000 460,000 0.6
----------- ----------- ----------
2,304,016 2,062,250 2.8
</TABLE>
111
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES COMMUNICATIONS US $ 940,000 + American Telecasting Inc.,
(CONTINUED) 12.50%* due 6/15/1999... $ 525,521 $ 430,050 0.6%
250,000 Panamsat L.P., 9.75% due
8/01/2000............... 233,750 235,625 0.3
----------- ----------- ----------
759,271 665,675 0.9
CONGLOMERATES Coltec Industries Inc.:
150,000 9.75% due 11/01/1999...... 159,000 147,000 0.2
100,000 10.25% due 4/01/2002...... 107,000 98,000 0.1
Foamex L.P.:
191,000 9.50% due 6/01/2000....... 186,464 174,765 0.2
500,000 11.25% due 10/01/2002..... 498,125 475,000 0.6
500,000 JB Poindexter Co., Inc.,
12.50% due 5/15/2004.... 500,000 465,000 0.6
500,000 Jordan Industries, Inc.,
10.375% due 8/01/2003... 495,688 445,000 0.6
500,000 Sequa Corp., 9.375% due
12/15/2003.............. 508,750 440,000 0.6
500,000 Sherritt Gordon, Ltd.,
9.75% due 4/01/2003..... 503,625 480,000 0.6
----------- ----------- ----------
2,958,652 2,724,765 3.5
CONSUMER-- 500,000 Coleman Holdings, Inc.,
PRODUCTS 11.09%* due 5/27/1998... 346,300 336,250 0.4
250,000 + Formica Corp., 14.843% due
9/15/2005 (c)........... 250,000 291,984 0.4
1,000,000 + Polymer Group Inc., 12.25%
due 7/15/2002........... 1,001,250 980,000 1.3
1,000,000 Revlon Consumer Products
Corp., 9.375% due
4/01/2001............... 870,055 895,000 1.2
----------- ----------- ----------
2,467,605 2,503,234 3.3
CONTAINERS 500,000 Anchor Glass Container
Co., 9.875% due
12/15/2008.............. 493,125 430,000 0.6
500,000 Owens-Illinois, Inc.,
11.00% due 12/01/2003... 512,500 518,750 0.7
500,000 Silgan Holdings, Inc.,
13.25%* due 6/15/1996... 428,338 420,000 0.6
250,000 Stone-Consolidated Corp.,
10.25% due 12/15/2000... 251,250 246,250 0.3
----------- ----------- ----------
1,685,213 1,615,000 2.2
ENERGY 100,000 + Clark Oil Co., 10.50% due
12/01/2001.............. 106,375 102,500 0.1
1,000,000 Clark R & M Holdings,
Inc., 11.00%* due
2/15/2000............... 578,372 570,000 0.8
250,000 + Consolidated-Hydro Inc.,
11.80%* due 7/15/2003... 166,660 145,000 0.2
250,000 Noble Drilling Corp.,
9.25% due 10/01/2003.... 250,000 236,250 0.3
500,000 Trans Texas Gas Corp.,
10.50% due 9/01/2000.... 493,750 477,500 0.6
500,000 Triton Energy Corp.,
9.68%* due 11/01/1997... 377,714 367,500 0.5
----------- ----------- ----------
1,972,871 1,898,750 2.5
ENTERTAINMENT 300,000 Marvel Holdings, Inc.,
9.125%* due 2/15/1998... 265,500 261,000 0.3
350,000 Spectravision Inc.,
11.50%* due
10/01/1996.............. 287,709 150,500 0.2
1,000,000 Videotron Holdings PLC,
11.817%* due 7/01/1999.. 582,206 525,000 0.7
----------- ----------- ----------
1,135,415 936,500 1.2
FINANCIAL SERVICES 500,000 Penn Financial Corp.,
9.25% due 12/15/2003.... 498,750 440,000 0.6
500,000 Reliance Group Holdings,
Inc., 9.00% due
11/15/2000.............. 460,000 455,000 0.6
----------- ----------- ----------
958,750 895,000 1.2
</TABLE>
112
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES FOOD & BEVERAGE US $ 500,000 Chiquita Brands
(CONTINUED) International Corp.,
9.125% due 3/01/2004.... $ 497,500 $ 435,000 0.6%
250,000 Coca-Cola Bottling Co.,
9.00% due 11/15/2003.... 250,625 219,375 0.3
500,000 Cumberland Farms, 10.50%
due 10/01/2003.......... 489,375 415,000 0.6
750,000 Del Monte Corp., 10.00%
due 5/01/2003........... 740,000 510,000 0.7
1,000,000 Grand Union Co., 12.25%
due 7/15/2002........... 917,438 395,000 0.5
300,000 Penn Traffic Co., 9.625%
due 4/15/2005........... 309,000 261,000 0.3
500,000 Pueblo Xtra International
Inc., 9.50% due
8/01/2003............... 500,938 420,000 0.6
250,000 Specialty Foods Corp.,
10.25% due 8/15/2001.... 250,000 222,500 0.3
----------- ----------- ----------
3,954,876 2,877,875 3.9
HOLDING COMPANY 500,000 Astrum International
Corp., 11.50% due
6/08/2003............... 504,375 505,000 0.7
HOME BUILDING 500,000 Del E. Webb Corp., 9.00%
due 2/15/2006........... 500,000 380,000 0.5
250,000 Ryland Group, Inc., 9.625%
due 6/01/2004........... 250,000 210,000 0.3
----------- ----------- ----------
750,000 590,000 0.8
HOTELS & CASINOS 500,000 Aztar Corp., 11.00% due
10/01/2002.............. 507,813 455,000 0.6
1,000,000 Bally's Park Place
Funding, Inc., 9.25% due
3/15/2004............... 920,000 860,000 1.1
1,100,000 Greater Bay Properties,
Inc., Property Funding
Corp., 10.875% due
1/15/2004............... 990,750 891,000 1.2
423,000 Host Marriott Hospitality
Corp., 10.375% due
6/15/2011............... 431,989 423,000 0.6
1,000,000 JQ Hammons Hotel, 8.875%
due 2/15/2004........... 887,500 865,000 1.2
250,000 Mirage Resorts Inc., 9.25%
due 3/15/2003........... 248,750 240,000 0.3
500,000 Showboat, Inc., 13.00% due
8/01/2009............... 500,000 477,500 0.6
750,000 Trump Plaza Funding, Inc.,
10.875% due 6/15/2001... 741,250 570,000 0.8
101,626 Trump Taj Mahal Funding,
Inc., 11.35% due
11/15/1999 (a) (c)...... 95,717 65,112 0.1
----------- ----------- ----------
5,323,769 4,846,612 6.5
INDUSTRIAL SERVICES 1,050,000 ADT Operations, 9.25% due
8/01/2003............... 1,041,062 971,250 1.3
INDUSTRIALS 500,000 Repap Wisconsin, Inc.,
9.25% due 2/01/2002..... 436,250 450,000 0.6
METALS & MINING 250,000 Maxxam Group, Inc.,
12.25%* due 8/01/2003... 163,152 142,500 0.2
PAPER 500,000 S.D. Warren Co., 12.00%
due 12/15/2004.......... 500,000 508,750 0.7
PAPER & FOREST 500,000 Fort Howard Corp., 9.00%
PRODUCTS due 2/01/2006........... 500,000 430,000 0.6
250,000 Riverwood International
Corp., 11.25% due
6/15/2002............... 274,812 256,875 0.3
100,000 Stone Container Group,
10.75% due 10/01/2002... 99,000 99,500 0.1
----------- ----------- ----------
873,812 786,375 1.0
POLLUTION CONTROL 500,000 Mid-American Waste System,
Inc., 12.25% due
2/15/2003............... 511,250 502,500 0.7
</TABLE>
113
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICA VALUE PERCENT OF
(CONCLUDED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES RESTAURANTS & FOOD US $ 750,000 Flagstar Corp., 11.375%
(CONCLUDED) SERVICES due 9/15/2003........... $ 762,500 $ 622,500 0.8%
Foodmaker, Inc.:
250,000 9.75% due 6/01/2002....... 251,250 187,500 0.3
250,000 9.75% due 11/01/2003...... 246,562 188,125 0.3
----------- ----------- ----------
1,260,312 998,125 1.4
RETAIL 500,000 Bradlees Inc., 11.00% due
8/01/2002............... 489,375 455,000 0.6
STEEL 500,000 WCI Steel Inc., 10.50% due
3/01/2002............... 500,000 480,000 0.6
TELECOMMUNICATIONS 500,000 USA Mobile Communications
Holdings, Inc., 9.50%
due 2/01/2004........... 454,375 405,000 0.5
TEXTILES 1,500,000 WestPoint Stevens Inc.,
9.375% due 12/15/2005... 1,451,875 1,357,500 1.8
TRANSPORT SERVICES 250,000 Eletson Holdings Inc.,
9.25% due 11/15/2003.... 250,000 225,000 0.3
1,050,000 Transtar Holdings, 11.00%*
due 12/15/1999.......... 636,260 525,000 0.7
250,000 Viking Star Shipping Co.,
9.625% due 7/15/2003.... 250,937 230,000 0.3
----------- ----------- ----------
1,137,197 980,000 1.3
US GOVERNMENT & 1,000,000 Federal National Mortgage
AGENCY OBLIGATIONS Association, 8.55% due
12/10/2004.............. 999,219 990,750 1.3
UTILITIES 494,000 Beaver Valley Funding
Corp., 9.00% due
6/01/2017............... 466,212 350,740 0.5
94,668 + Midland Funding Corp. II,
10.33% due 7/23/2002.... 92,774 89,461 0.1
233,382 + Tucson Electric Power Co.,
10.732% due 1/01/2013... 223,464 213,545 0.3
----------- ----------- ----------
782,450 653,746 0.9
TOTAL FIXED-INCOME
INVESTMENTS IN THE
UNITED STATES 38,779,941 34,958,021 46.5
- ------------------------------------------------------------------------------------------------------------------------
SHARES CONVERTIBLE PREFERRED STOCKS &
HELD WARRANTS
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES BROADCASTING & 9,000 K-III Communications Corp.
PUBLISHING (Preferred)............. 245,250 229,500 0.3
COMMUNICATIONS 4,700 American Telecasting Inc.
(Warrants) (b).......... 11,222 9,400 0.0
TOTAL CONVERTIBLE
PREFERRED STOCKS &
WARRANTS IN
THE UNITED STATES 256,472 238,900 0.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH
AMERICAN SECURITIES 40,473,684 36,559,938 48.6
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
114
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC VALUE PERCENT OF
BASIN INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA A $ 2,400,000 Australian Government
Bond,
FOREIGN GOVERNMENT 9.50% due 8/15/2003..... $ 1,765,774 $ 1,802,024 2.4%
OBLIGATIONS--
REGIONAL & AGENCY
2,000,000 Queensland Treasury Corp.,
Global Notes, 8.00% due
7/14/1999............... 1,426,689 1,425,128 1.9
----------- ----------- ----------
3,192,463 3,227,152 4.3
TOTAL FIXED-INCOME
INVESTMENTS IN AUSTRALIA 3,192,463 3,227,152 4.3
- ------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND FOREIGN GOVERNMENT NZ$ 500,000 New Zealand Government
OBLIGATIONS Bond, 10.00% due
3/15/2002............... 315,976 342,936 0.5
TOTAL FIXED-INCOME
INVESTMENTS IN NEW
ZEALAND 315,976 342,936 0.5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PACIFIC BASIN SECURITIES 3,508,439 3,570,088 4.8
- ------------------------------------------------------------------------------------------------------------------------
WESTERN EUROPE
- ------------------------------------------------------------------------------------------------------------------------
DENMARK FOREIGN GOVERNMENT Denmark Government Bonds:
OBLIGATIONS Dkr 9,500,000 9.00% due 11/15/1998.... 1,554,615 1,576,300 2.1
2,000,000 9.00% due 11/15/2000...... 344,014 329,944 0.4
----------- ----------- ----------
1,898,629 1,906,244 2.5
TOTAL FIXED-INCOME
INVESTMENTS IN DENMARK 1,898,629 1,906,244 2.5
- ------------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN GOVERNMENT Buoni Poliennali del
OBLIGATIONS Tesoro (Italian
Government Bonds):
Lit 5,000,000,000 8.50% due 8/01/1997....... 3,003,205 2,861,594 3.8
1,000,000,000 12.00% due 9/18/1998...... 657,255 618,289 0.8
1,600,000,000 9.00% due 10/01/1998...... 968,720 908,923 1.2
2,000,000,000 8.50% due 1/01/1999....... 1,195,380 1,107,229 1.5
----------- ----------- ----------
5,824,560 5,496,035 7.3
TOTAL FIXED-INCOME
INVESTMENTS IN ITALY 5,824,560 5,496,035 7.3
- ------------------------------------------------------------------------------------------------------------------------
SPAIN FOREIGN GOVERNMENT Government of Spain:
OBLIGATIONS Esp 200,000,000 11.00% due 6/15/1997.... 1,556,019 1,510,452 2.0
340,000,000 10.25% due 11/30/1998..... 2,584,845 2,473,949 3.3
----------- ----------- ----------
4,140,864 3,984,401 5.3
TOTAL FIXED-INCOME
INVESTMENTS IN SPAIN 4,140,864 3,984,401 5.3
- ------------------------------------------------------------------------------------------------------------------------
Government of Sweden:
SWEDEN FOREIGN GOVERNMENT SEK 5,000,000 11.00% due 1/21/1999.... 661,734 686,440 0.9
OBLIGATIONS--
REGIONAL & AGENCY
6,000,000 SBAB, 11.00% due
1/21/1999............... 816,978 809,180 1.1
----------- ----------- ----------
1,478,712 1,495,620 2.0
TOTAL FIXED-INCOME
INVESTMENTS IN SWEDEN 1,478,712 1,495,620 2.0
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM FOREIGN GOVERNMENT United Kingdom Gilt:
OBLIGATIONS Pound 300,000 10.50% due 2/21/1997.... 498,511 489,620 0.7
Sterling
2,200,000 9.00% due 3/03/2000....... 3,494,087 3,489,342 4.6
1,400,000 7.00% due 11/06/2001...... 2,075,730 1,997,139 2.7
----------- ----------- ----------
6,068,328 5,976,101 8.0
TOTAL FIXED-INCOME
INVESTMENTS IN THE
UNITED KINGDOM 6,068,328 5,976,101 8.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPEAN
SECURITIES 19,411,093 18,858,401 25.1
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
115
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PERCENT OF
FACE AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER** $ 3,000,000 CXC Inc., 6.00% due
1/13/1995.............. $ 2,993,500 $ 2,993,500 4.0%
2,661,000 General Electric Capital
Corp., 5.80% due
1/03/1995.............. 2,659,714 2,659,714 3.5
2,000,000 Matterhorn Capital Corp.,
5.95% due 1/20/1995.... 1,993,389 1,993,389 2.7
----------- ----------- ----------
7,646,603 7,646,603 10.2
US GOVERNMENT
& AGENCY 1,000,000 Federal Farm Credit Bank,
OBLIGATIONS** 5.57% due 1/11/1995.... 998,298 998,298 1.3
Federal National Mortgage
Association:
1,000,000 5.78% due 1/03/1995...... 999,518 999,518 1.3
2,500,000 5.45% due 1/11/1995...... 2,495,875 2,495,875 3.3
----------- ----------- ----------
4,493,691 4,493,691 5.9
TOTAL SHORT-TERM
SECURITIES 12,140,294 12,140,294 16.1
- ------------------------------------------------------------------------------------------------------------------------
PREMIUMS
OPTIONS PURCHASED FACE AMOUNT ISSUE PAID
- ------------------------------------------------------------------------------------------------------------------------
CURRENCY PUT Pound 1,000,000 British Pound, expiring
OPTIONS PURCHASED Sterling January 1995 at Pound
Sterling1.545.......... 5,700 5,300 0.0
Esp 3,000,000 Spanish Peseta, expiring
January 1995 at Pta
135.5.................. 14,250 11,400 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED 19,950 16,700 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 78,193,850 73,572,921 97.9
- ------------------------------------------------------------------------------------------------------------------------
PREMIUMS
RECEIVED
OPTIONS WRITTEN
- ------------------------------------------------------------------------------------------------------------------------
CURRENCY CALL Pound 1,000,000 British Pound, expiring
OPTIONS WRITTEN Sterling January 1995 at Pound
Sterling1.582.......... (4,100) (4,500) 0.0
Esp 3,000,000 Spanish Peseta, expiring
January 1995 at Pta
129.5.................. (6,000) (7,500) 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (10,100) (12,000) 0.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN............................ $78,183,750 73,560,921 97.9
-----------
-----------
UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS***..... (217,104) (0.3)
OTHER ASSETS LESS LIABILITIES........................................ 1,806,099 2.4
----------- ----------
NET ASSETS........................................................... $75,149,916 100.0%
----------- ----------
----------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(a) Each $1,000 face amount contains one non-detachable share of Taj Mahal Holding Corp.'s Class B redeemable Common
Stock.
(b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number
of shares are subject to adjustments under certain conditions until the expiration date.
(c) Represents a pay-in-kind security which may pay interest/dividends in additional face/shares.
(d) American Depositary Receipts.
* Represents the yield to maturity.
** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the Fund.
</TABLE>
116
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
*** Forward foreign exchange contracts as of December 31, 1994 were as follows:
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION
EXPIRATION (DEPRECIATION)
FOREIGN CURRENCY PURCHASED DATE (NOTE 1B)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
C$ 1,370,000 ............................................ January 1995 $ (11,589)
DM 763,647 ........................................... February 1995 2,462
Lit 939,020,000 ............................................ January 1995 7,709
- ------------------------------------------------------------------------------------------------------------------------
(TOTAL US$ COMMITMENT--$2,050,834) $ (1,418)
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOREIGN CURRENCY SOLD
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
DM 16,627,988 ............................................. January 1995 $ (190,946)
Dkr 8,388,437 .............................................. January 1995 (19,633)
Esp 65,070,400 ............................................. February 1995 (2,459)
Lit 2,141,150,970 ............................................... January 1995 16,520
SEK 11,778,323 ............................................. January 1995 (19,168)
- ------------------------------------------------------------------------------------------------------------------------
(TOTAL US$ COMMITMENT--$15,314,835) $ (215,686)
------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET... $ (217,104)
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $2,253,000, representing 3.00% of net
assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACQUISITION VALUE
ISSUE DATES COST (NOTE 1A)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
American Telecasting Inc., 12.50% due 6/15/2004............................... 10/25/1994 $ 525,521 $ 430,050
Clark Oil Co., 10.50% due 12/01/2001.......................................... 10/25/1994 106,375 102,500
Consolidated-Hydro Inc., 11.80%* due 7/15/2003................................ 7/01/1993 166,660 145,000
Formica Corp., 14.843% due 9/15/2005.......................................... 7/08/1993 250,000 291,984
Midland Funding Corp. II, 10.33% due 7/23/2002................................ 9/17/1993- 92,774 89,461
6/17/1994
Polymer Group Inc., 12.25% due 7/15/2002...................................... 7/07/1994 1,001,250 980,000
Tucson Electric Power Co., 10.732% due 1/01/2013.............................. 8/03/1993 223,464 213,545
- ------------------------------------------------------------------------------------------------------------------------
TOTAL......................................................................... $ 2,366,044 $2,252,540
----------- ----------
----------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
117
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC DEVELOPING DOMESTIC
AMERICAN VALUE CAPITAL MONEY
BALANCED FOCUS MARKETS MARKET
FUND FUND FOCUS FUND FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value*
(Note 1a)................................................... $156,864,556 $163,908,366 $ 37,930,023 $ 369,119,126
Options purchased, at value (cost-$0) (Notes 1a & 1b)......... -- -- -- --
Unrealized appreciation on forward foreign exchange contracts
(Note 1b)................................................... -- -- -- --
Cash.......................................................... 24,432 -- 511,162 117,724
Receivable for options written................................ -- -- -- --
Interest receivable........................................... 1,904,617 -- 133,580 1,020,024
Dividends receivable.......................................... 149,262 672,554 60,277 --
Receivable for securities sold................................ -- 622,683 -- --
Receivable for capital shares sold............................ 267,236 1,496,022 756,701 --
Receivable from investment adviser (Note 2)................... -- -- -- --
Receivable for variation margin on stock index futures
contracts
(Note 1b)................................................... -- -- -- --
Receivable for forward foreign exchange contracts (Note 1b)... -- -- -- --
Deferred organization expenses (Note 1f)...................... -- 2,880 3,467 2,680
Prepaid registration fees and other assets (Note 1f).......... 7,938 7,436 6,996 16,604
Foreign cash.................................................. -- -- -- --
------------ ------------ ------------ --------------
Total assets................................................ 159,218,041 166,709,941 39,402,206 370,276,158
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$0)
(Notes 1a & 1b)............................................. -- -- -- --
Unrealized depreciation on forward foreign exchange contracts
(Note 1b)................................................... -- -- -- --
Payable for capital shares redeemed........................... 152,494 2,044 414 --
Payable for securities purchased.............................. -- 1,615,738 2,667,845 6,775,811
Payable to investment adviser (Note 2)........................ 71,388 78,215 30,271 146,721
Accrued expenses and other liabilities........................ 43,419 707,225 27,924 154,526
------------ ------------ ------------ --------------
Total liabilities........................................... 267,301 2,403,222 2,726,454 7,077,058
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................... $158,950,740 $164,306,719 $ 36,675,752 $ 363,199,100
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+................................ $ 1,215,117 $ 1,480,240 $ 385,591 $ 36,339,542
Paid-in capital in excess of par.............................. 161,253,879 159,005,944 38,977,033 327,055,873
Undistributed investment income--net.......................... 3,297,750 1,591,385 330,561 --
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note
5).......................................................... (251,964) 6,953,099 (672,256) --
Accumulated distributions in excess of capital gains--net..... (382,403) -- -- --
Unrealized appreciation (depreciation) on investments and
foreign
currency transactions--net.................................. (6,181,639) (4,723,949) (2,345,177) (196,315)
------------ ------------ ------------ --------------
NET ASSETS.................................................... $158,950,740 $164,306,719 $ 36,675,752 $ 363,199,100
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING.................................... 12,151,167 14,802,400 3,855,911 363,395,415
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...... $ 13.08 $ 11.10 $ 9.51 $ 1.00
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
* Identified cost............................................. $163,046,195 $168,632,315 $ 40,275,572 $ 369,315,441
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
+ Authorized shares........................................... 100,000,000 100,000,000 100,000,000 1,300,000,000
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
118
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL GLOBAL
FLEXIBLE STRATEGY UTILITY
EQUITY STRATEGY FOCUS FOCUS
GROWTH FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a).............................. $169,929,115 $273,718,417 $512,141,013 $ 126,191,523
Options purchased, at value (cost-$0) (Notes 1a & 1b)......... -- -- -- --
Unrealized appreciation on forward foreign exchange contracts
(Note 1b)................................................... -- -- 559,659 --
Cash.......................................................... 20,700 9,065 -- 46,470
Receivable for options written................................ -- 7,257 -- --
Interest receivable........................................... -- 1,408,479 3,905,068 33,000
Dividends receivable.......................................... 141,668 251,197 832,441 516,217
Receivable for securities sold................................ 748,125 4,559,730 -- --
Receivable for capital shares sold............................ 1,145,985 612,064 1,024,634 141,262
Receivable from investment adviser (Note 2)................... -- -- -- --
Receivable for variation margin on stock index futures
contracts
(Note 1b)................................................... -- -- -- --
Receivable for forward foreign exchange contracts (Note 1b)... -- -- -- --
Deferred organization expenses (Note 1f)...................... -- -- 2,680 4,139
Prepaid registration fees and other assets (Note 1f).......... 7,983 10,015 9,009 7,649
Foreign cash.................................................. -- -- 135,671 31,393
------------ ------------ ------------ --------------
Total assets................................................ 171,993,576 280,576,224 518,610,175 126,971,653
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$20,528)
(Notes 1a & 1b)............................................. -- 18,000 -- --
Unrealized depreciation on forward foreign exchange contracts
(Note 1b)................................................... -- -- -- --
Payable for capital shares redeemed........................... 15,774 68,041 124,363 33,855
Payable for securities purchased.............................. 1,430,646 5,768,001 1,306,886 562,632
Payable to investment adviser (Note 2)........................ 99,663 144,884 276,128 62,764
Accrued expenses and other liabilities........................ 403,870 79,032 1,495,482 69,595
------------ ------------ ------------ --------------
Total liabilities........................................... 1,949,953 6,077,958 3,202,859 728,846
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................... $170,043,623 $274,498,266 $515,407,316 $ 126,242,807
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+................................ $ 883,084 $ 1,867,412 $ 4,395,430 $ 1,335,955
Paid-in capital in excess of par.............................. 168,115,089 263,415,116 515,603,136 136,710,139
Undistributed investment income--net.......................... 383,328 3,474,388 7,256,695 1,361,234
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note
5).......................................................... (1,982,006) 4,982,943 -- (1,447,878)
Accumulated distributions in excess of capital gains--net..... -- -- (169,671) (33,521)
Unrealized appreciation (depreciation) on investments and
foreign
currency transactions--net.................................. 2,644,128 758,407 (11,678,274) (11,683,122)
------------ ------------ ------------ --------------
NET ASSETS.................................................... $170,043,623 $274,498,266 $515,407,316 $ 126,242,807
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING.................................... 8,830,838 18,674,116 43,954,297 13,359,556
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...... $ 19.26 $ 14.70 $ 11.73 $ 9.45
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
* Identified cost............................................. $167,284,987 $272,969,088 $524,369,249 $ 137,874,783
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
+ Authorized shares........................................... 100,000,000 100,000,000 100,000,000 100,000,000
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
119
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INTERMEDIATE
CURRENT GOVERNMENT INTERNATIONAL INTERNATIONAL
INCOME BOND BOND EQUITY FOCUS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a).............................. $248,917,211 $ 17,575,242 $ 10,617,103 $ 243,715,823
Options purchased, at value (cost--$963,762) (Notes 1a &
1b)......................................................... -- -- -- 468,559
Unrealized appreciation on forward foreign exchange contracts
(Note 1b)................................................... -- -- -- 300,276
Cash.......................................................... 22,860 288 4,544 221,657
Receivable for options written................................ -- -- -- --
Interest receivable........................................... 6,181,269 54,647 206,379 241,288
Dividends receivable.......................................... -- -- -- 219,430
Receivable for securities sold................................ -- -- 378,451 1,973,053
Receivable for capital shares sold............................ 767,743 221,435 85,602 1,596,976
Receivable from investment adviser (Note 2)................... -- 19,250 24,543 --
Receivable for forward foreign exchange contracts (Note 1b)... -- -- 8,673 98,212
Deferred organization expenses (Note 1f)...................... -- -- 3,467 4,856
Prepaid registration fees and other assets (Note 1f).......... 58,109 9,365 7,318 18,749
Foreign cash.................................................. -- -- -- 2,155,248
------------ ------------ ------------ --------------
Total assets.................................................. 255,947,192 17,880,227 11,336,080 251,014,127
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$572,922)
(Notes 1a & 1b)............................................. -- -- -- 276,821
Unrealized depreciation on forward foreign exchange contracts
(Note 1b)................................................... -- -- 66,829 --
Payable for variation margin on stock index futures contracts
(Note 1b)................................................... -- -- -- 99,903
Payable for forward foreign exchange contracts (Note 1b)...... -- -- 3,738 210,076
Payable for capital shares redeemed........................... 48,459 60,201 41,556 34,739
Payable for securities purchased.............................. -- -- 1,278,189 2,203,033
Payable to investment adviser (Note 2)........................ 101,917 -- -- 149,750
Accrued expenses and other liabilities........................ 78,076 9,375 12,474 156,030
------------ ------------ ------------ --------------
Total liabilities........................................... 228,452 69,576 1,402,786 3,130,352
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................... $255,718,740 $ 17,810,651 $ 9,933,294 $ 247,883,775
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+................................ $ 2,409,799 $ 178,632 $ 102,432 $ 2,274,065
Paid-in capital in excess of par.............................. 277,181,703 17,674,702 10,038,837 247,618,706
Undistributed investment income--net.......................... 2,509,688 73,375 54,400 382,131
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note
5).......................................................... (2,036,293) (55,316) (98,691) 3,904,078
Accumulated distributions in excess of capital gains--net..... -- -- -- --
Unrealized appreciation (depreciation) on investments and
foreign
currency transactions--net.................................. (24,346,157) (60,742) (163,684) (6,295,205)
------------ ------------ ------------ --------------
NET ASSETS.................................................... $255,718,740 $ 17,810,651 $ 9,933,294 $ 247,883,775
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING.................................... 24,097,990 1,786,321 1,024,322 22,740,650
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...... $ 10.61 $ 9.97 $ 9.70 $ 10.90
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
* Identified cost............................................. $273,263,368 $ 17,635,984 $ 10,713,571 $ 250,851,453
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
+ Authorized shares........................................... 100,000,000 100,000,000 100,000,000 100,000,000
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
120
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL
RESOURCES PRIME QUALITY
FOCUS BOND EQUITY
FUND FUND FUND
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a).............................................. $ 39,455,573 $384,799,680 $464,815,703
Options purchased, at value (cost-$0) (Notes 1a & 1b)......................... -- -- --
Unrealized appreciation on forward foreign exchange contracts (Note 1b)....... -- -- --
Cash.......................................................................... 134,274 1,093 167
Receivable for options written................................................ -- -- 35,168
Interest receivable........................................................... -- 6,368,933 --
Dividends receivable.......................................................... 32,417 -- 559,641
Receivable for securities sold................................................ -- -- --
Receivable for capital shares sold............................................ 353,492 581,420 1,941,009
Receivable from investment adviser (Note 2)................................... -- -- --
Receivable for forward foreign exchange contracts (Note 1b)................... -- -- --
Deferred organization expenses (Note 1f)...................................... -- -- --
Prepaid registration fees and other assets (Note 1f).......................... 7,181 31,058 10,676
Foreign cash.................................................................. -- -- --
------------ ------------ ------------
Total assets................................................................ 39,982,937 391,782,184 467,362,364
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$35,167) (Notes 1a & 1b)........ -- -- 32,288
Unrealized depreciation on forward foreign exchange contracts (Note 1b)....... -- -- --
Payable for capital shares redeemed........................................... 2,115 308,607 127,639
Payable for securities purchased.............................................. 221,257 -- 2,644,351
Payable to investment adviser (Note 2)........................................ 20,728 146,922 77,519
Accrued expenses and other liabilities........................................ 23,976 92,480 120,685
------------ ------------ ------------
Total liabilities........................................................... 268,076 548,009 3,002,482
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................................... $ 39,714,861 $391,234,175 $464,359,882
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+................................................ $ 367,092 $ 3,517,366 $ 1,674,095
Paid-in capital in excess of par.............................................. 39,880,039 426,013,937 436,450,499
Undistributed investment income--net.......................................... 289,267 2,399,783 3,329,753
Undistributed (accumulated) realized capital gains (losses) on investments and
foreign currency transactions--net (Note 5)................................. 52,494 (14,592,431) 9,696,061
Accumulated distributions in excess of capital gains--net..................... -- (4,204,953) --
Unrealized appreciation (depreciation) on investments and foreign currency
transactions--net........................................................... (874,031) (21,899,527) 13,209,474
------------ ------------ ------------
NET ASSETS.................................................................... $ 39,714,861 $391,234,175 $464,359,882
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING.................................................... 3,670,928 35,173,662 16,740,944
------------ ------------ ------------
------------ ------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...................... $ 10.82 $ 11.12 $ 27.74
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
* Identified cost............................................................. $ 40,329,553 $406,699,207 $451,609,108
------------ ------------ ------------
------------ ------------ ------------
+ Authorized shares........................................................... 100,000,000 100,000,000 100,000,000
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
121
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RESERVE WORLD INCOME
ASSETS FOCUS
FUND FUND
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a)............................................................ $ 32,670,653 $ 73,556,221
Options purchased, at value (cost-$19,950) (Notes 1a & 1b).................................. -- 16,700
Unrealized appreciation on forward foreign exchange contracts
(Note 1b)................................................................................. -- --
Cash........................................................................................ 45,109 281
Receivable for options written.............................................................. -- --
Interest receivable......................................................................... 89,637 1,753,034
Dividends receivable........................................................................ -- --
Receivable for securities sold.............................................................. -- 1,483,407
Receivable for capital shares sold.......................................................... -- 96,076
Receivable from investment adviser (Note 2)................................................. -- --
Receivable for forward foreign exchange contracts (Note 1b)................................. -- 18,870
Receivable for foreign exchange contracts (Note 1c)......................................... -- 8,963
Deferred organization expenses (Note 1f).................................................... -- 5,522
Prepaid registration fees and other assets (Note 1f)........................................ 8,452 7,325
Foreign cash................................................................................ -- --
------------ ------------
Total assets.............................................................................. 32,813,851 76,946,399
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premium received--$10,100) (Notes 1a & 1b)....................... -- 12,000
Unrealized depreciation on forward foreign exchange contracts (Note 1b)..................... -- 217,104
Payable for capital shares redeemed......................................................... -- 50,604
Payable for securities purchased............................................................ 580,784 1,423,345
Payable to investment adviser (Note 2)...................................................... 13,480 36,922
Payable for forward foreign exchange contacts (Note 1b)..................................... -- 15,313
Accrued expenses and other liabilities...................................................... 23,556 41,195
------------ ------------
Total liabilities......................................................................... 617,820 1,796,483
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS.................................................................................. $ 32,196,031 $ 75,149,916
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+.............................................................. $ 3,222,396 $ 819,675
Paid-in capital in excess of par............................................................ 29,001,559 81,931,992
Undistributed investment income--net........................................................ -- 409,286
Undistributed (accumulated) realized capital gains (losses) on investments and foreign
currency transactions--net (Note 5)....................................................... -- (3,076,667)
Accumulated distributions in excess of capital gains--net................................... -- (101,589)
Unrealized appreciation (depreciation) on investments and foreign currency
transactions--net......................................................................... (27,924) (4,832,781)
------------ ------------
NET ASSETS.................................................................................. $ 32,196,031 $ 75,149,916
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING.................................................................. 32,223,956 8,196,750
------------ ------------
------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE.................................... $ 1.00 $ 9.17
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
* Identified cost........................................................................... $ 32,698,577 $ 78,173,900
------------ ------------
------------ ------------
+ Authorized shares......................................................................... 500,000,000 100,000,000
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
122
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING
BASIC CAPITAL
AMERICAN VALUE MARKETS DOMESTIC
BALANCED FOCUS FOCUS MONEY MARKET
FUND FUND FUND+ FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*................................. $ 4,958,617 $ 414,252 $ 401,983 $ 12,848,322
Dividends**................................................... 1,706,808 2,765,969 123,937 --
Other income.................................................. -- -- -- --
------------ ------------ --------------- ------------
Total income.................................................. 6,665,425 3,180,221 525,920 12,848,322
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................. 803,973 683,107 151,621 1,418,479
Transfer agent fees (Note 2).................................. 4,610 4,979 3,335 4,963
Custodian fees................................................ 20,073 21,954 19,805 21,488
Professional fees............................................. 11,626 9,878 197 19,750
Registration fees (Note 1f)................................... 21,826 46,761 10,932 61,060
Directors' fees and expenses.................................. 3,460 1,906 1,273 5,255
Accounting services (Note 2).................................. 47,773 36,941 3,357 88,336
Pricing services.............................................. 879 148 705 --
Amortization of organization expenses (Note 1f)............... -- 720 533 1,340
Other......................................................... 7,713 7,774 12,516 9,011
------------ ------------ --------------- ------------
Total expenses before reimbursement........................... 921,933 814,168 204,274 1,629,682
Reimbursement of expenses (Note 2)............................ -- -- (8,915) (201,286)
------------ ------------ --------------- ------------
Expenses after reimbursement.................................. 921,933 814,168 195,359 1,428,396
------------ ------------ --------------- ------------
Investment income--net........................................ 5,743,492 2,366,053 330,561 11,419,926
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net...................... (634,222) 7,037,711 (673,696) 5,347
Realized gain (loss) on foreign currency transactions--net.... -- -- 1,440 --
Change in unrealized appreciation/depreciation on
investments--net............................................ (11,011,500) (6,328,115) (2,345,549) (199,049)
Change in unrealized appreciation/depreciation on foreign
currency transactions....................................... -- -- 372 --
------------ ------------ --------------- ------------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net.......................... (11,645,722) 709,596 (3,017,433) (193,702)
------------ ------------ --------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS.................................................. $ (5,902,230) $ 3,075,649 $ (2,686,872) $ 11,226,224
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on interest......................... $ -- $ -- $ -- $ --
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
** Net of withholding tax on dividends........................ $ -- $ 8,543 $ 6,598 $ --
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
+ The Fund commenced operations on May 2, 1994.
</TABLE>
See Notes to Financial Statements.
123
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL
FLEXIBLE GLOBAL STRATEGY UTILITY
EQUITY STRATEGY FOCUS FOCUS
GROWTH FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*................................. $ 895,389 $ 5,787,799 $ 10,067,955 $ 1,231,526
Dividends**................................................... 669,729 2,196,302 5,567,639 4,474,341
Other income.................................................. -- -- -- --
------------ ------------ --------------- ------------
Total income.................................................. 1,565,118 7,984,101 15,635,594 5,705,867
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................. 1,062,086 1,598,769 2,818,040 777,517
Transfer agent fees (Note 2).................................. 4,834 4,590 5,036 5,151
Custodian fees................................................ 26,377 52,658 197,855 46,034
Professional fees............................................. 12,853 20,917 25,776 14,198
Registration fees (Note 1f)................................... 31,434 35,224 119,809 27,605
Directors' fees and expenses.................................. 3,186 5,455 7,619 3,081
Accounting services (Note 2).................................. 33,230 68,115 145,219 50,614
Pricing services.............................................. -- 1,755 4,692 7,173
Amortization of organization expenses (Note 1f)............... -- -- 1,340 863
Other......................................................... 7,790 10,653 10,788 10,997
------------ ------------ --------------- ------------
Total expenses before reimbursement........................... 1,181,790 1,798,136 3,336,174 943,233
Reimbursement of expenses (Note 2)............................ -- -- -- --
------------ ------------ --------------- ------------
Expenses after reimbursement.................................. 1,181,790 1,798,136 3,336,174 943,233
------------ ------------ --------------- ------------
Investment income--net........................................ 383,328 6,185,965 12,299,420 4,762,634
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net...................... (1,981,763) 5,023,562 144,657 (1,490,181)
Realized gain (loss) on foreign currency transactions--net.... -- (278,822) (347,617) 8,194
Change in unrealized appreciation/depreciation on
investments--net............................................ (8,755,921) (21,116,778) (23,945,864) (14,248,450)
Change in unrealized appreciation/depreciation on foreign
currency transactions....................................... -- 12,489 562,516 (7,346)
------------ ------------ --------------- ------------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net.......................... (10,737,684) (16,359,549) (23,586,308) (15,737,783)
------------ ------------ --------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS.................................................. $(10,354,356) $(10,173,584) $ (11,286,888) $(10,975,149)
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on interest......................... $ -- $ 4,718 $ 85,307 $ --
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
** Net of withholding tax on dividends........................ $ 5,943 $ 42,946 $ 488,165 $ 154,407
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
124
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INTERMEDIATE
CURRENT GOVERNMENT INTERNATIONAL INTERNATIONAL
INCOME BOND BOND EQUITY FOCUS
FUND FUND+ FUND+ FUND
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*................................. $ 22,778,469 $ 295,427 $ 325,753 $ 1,496,583
Dividends**................................................... 334,916 -- -- 2,235,384
Other income.................................................. 235,375 -- -- --
------------ ------------ --------------- ------------
Total income.................................................. 23,348,760 295,427 325,753 3,731,967
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................. 1,176,777 31,692 30,838 1,355,159
Transfer agent fees (Note 2).................................. 5,379 3,336 3,334 4,958
Custodian fees................................................ 30,104 3,082 8,867 229,925
Professional fees............................................. 21,025 140 105 13,648
Registration fees (Note 1f)................................... 48,801 2,855 3,273 70,488
Directors' fees and expenses.................................. 4,813 1,040 548 2,559
Accounting services (Note 2).................................. 61,084 2,152 2,401 58,093
Pricing services.............................................. 16,562 200 10 7,688
Amortization of organization expenses (Note 1f)............... -- -- 533 1,389
Other......................................................... 7,037 6,445 5,566 14,660
------------ ------------ --------------- ------------
Total expenses before reimbursement........................... 1,371,582 50,942 55,475 1,758,567
Reimbursement of expenses (Note 2)............................ -- (50,942) (55,475) --
------------ ------------ --------------- ------------
Expenses after reimbursement.................................. 1,371,582 0 0 1,758,567
------------ ------------ --------------- ------------
Investment income--net........................................ 21,977,178 295,427 325,753 1,973,400
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net...................... (1,918,504) (55,316) (41,625) 8,428,685
Realized gain (loss) on foreign currency transactions--net.... -- -- (57,066) (4,578,468)
Change in unrealized appreciation/depreciation on
investments--net............................................ (28,517,478) (60,742) (96,468) (10,859,913)
Change in unrealized appreciation/depreciation on foreign
currency transactions....................................... -- -- (67,216) 179,572
------------ ------------ --------------- ------------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net.......................... (30,435,982) (116,058) (262,375) (6,830,124)
------------ ------------ --------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS.................................................. $ (8,458,804) $ 179,369 $ 63,378 $ (4,856,724)
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on interest......................... $ -- $ -- $ 2,261 $ --
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
** Net of withholding tax on dividends........................ $ -- $ -- $ -- $ 289,260
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
- ------------------------------------------------------------------------------------------------------------------------
+ The Fund commenced operations on May 2, 1994.
</TABLE>
See Notes to Financial Statements.
125
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL
RESOURCES PRIME QUALITY
FOCUS BOND EQUITY
FUND FUND FUND
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*................................................. $ 214,093 $ 26,769,262 $ 2,816,268
Dividends**................................................................... 553,399 -- 4,900,901
Other income.................................................................. -- 72,032 18,659
------------ ------------ ------------
Total income.................................................................. 767,492 26,841,294 7,735,828
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............................................. 179,492 1,740,429 1,889,188
Transfer agent fees (Note 2).................................................. 4,937 2,518 4,612
Custodian fees................................................................ 25,200 41,220 43,242
Professional fees............................................................. 4,920 21,696 27,111
Registration fees (Note 1f)................................................... 9,221 38,164 65,571
Directors' fees and expenses.................................................. 977 8,524 8,360
Accounting services (Note 2).................................................. 10,096 125,342 122,099
Pricing services.............................................................. 1,620 1,472 345
Amortization of organization expenses (Note 1f)............................... -- -- --
Other......................................................................... 4,900 10,091 11,242
------------ ------------ ------------
Total expenses before reimbursement........................................... 241,363 1,989,456 2,171,770
Reimbursement of expenses (Note 2)............................................ -- -- --
------------ ------------ ------------
Expenses after reimbursement.................................................. 241,363 1,989,456 2,171,770
------------ ------------ ------------
Investment income--net........................................................ 526,129 24,851,838 5,564,058
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net...................................... 108,631 (18,783,776) 10,329,151
Realized gain (loss) on foreign currency transactions--net.................... (6,578) -- 36
Change in unrealized appreciation/depreciation on investments--net............ (810,334) (23,383,983) (20,646,284)
Change in unrealized appreciation/depreciation on foreign currency
transactions................................................................ (31) -- --
------------ ------------ ------------
Total realized and unrealized gain (loss) on investments and foreign currency
transactions--net........................................................... (708,312) (42,167,759) (10,317,097)
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............... $ (182,183) $(17,315,921) $ (4,753,039)
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on interest......................................... $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
** Net of withholding tax on dividends........................................ $ 29,892 $ -- $ 66,254
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
126
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND
<S> <C> <C>
- ---------------------------------------------------------------------------------
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*....................... $ 1,465,320 $ 6,249,764
Dividends**......................................... -- 19,406
Other income........................................ -- --
------------ ------------
Total income........................................ 1,465,320 6,269,170
------------ ------------
- ---------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)................... 166,992 429,608
Transfer agent fees (Note 2)........................ 4,335 5,033
Custodian fees...................................... 16,221 29,585
Professional fees................................... 7,017 12,113
Registration fees (Note 1f)......................... 3,028 12,157
Directors' fees and expenses........................ 1,316 1,820
Accounting services (Note 2)........................ 9,822 28,623
Pricing services.................................... -- 5,070
Amortization of organization expenses (Note 1f)..... -- 1,578
Other............................................... 7,711 9,911
------------ ------------
Total expenses before reimbursement................. 216,442 535,498
Reimbursement of expenses (Note 2).................. -- --
------------ ------------
Expenses after reimbursement........................ 216,442 535,498
------------ ------------
Investment income--net.............................. 1,248,878 5,733,672
------------ ------------
- ---------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS &
FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C,
1E & 3):
Realized gain (loss) on investments--net............ 1,901 (2,736,044)
Realized gain (loss) on foreign currency
transactions--net................................ -- (500,659)
Change in unrealized appreciation/depreciation on
investments--net................................. (35,001) (5,331,495)
Change in unrealized appreciation/depreciation on
foreign currency transactions.................... -- (221,597)
------------ ------------
Total realized and unrealized gain (loss) on
investments and foreign currency
transactions--net................................ (33,100) (8,789,795)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $ 1,215,778 $ (3,056,123)
------------ ------------
------------ ------------
- ---------------------------------------------------------------------------------
* Net of withholding tax interest.................. $ -- $ 34,112
------------ ------------
------------ ------------
** Net of withholding tax on dividends.............. $ -- $ --
------------ ------------
------------ ------------
- ---------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
127
<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: 1994 1993
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment Income--net.......................................................... $ 5,743,492 $ 1,898,709
Realized gain (loss) on investments and foreign currency transactions--net...... (634,222 ) 381,401
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net...................................................... (11,011,500 ) 3,571,478
------------ -------------
Net increase (decrease) in net assets resulting from operations................. (5,902,230 ) 5,851,588
------------ -------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net.......................................................... (3,724,806 ) (975,251 )
Realized gain on investments--net............................................... -- (227,751 )
In excess of realized gain on investments--net.................................. (382,403) --
------------ -------------
Net decrease in net assets resulting from dividends and distributions to
shareholders.................................................................... (4,107,209 ) (1,203,002 )
------------ -------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions.............. 53,540,259 85,853,104
------------ -------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets......................................... 43,530,820 90,501,690
Beginning of period............................................................. 115,419,920 24,918,230
------------ -------------
End of period*.................................................................. $158,950,740 $115,419,920
------------ -------------
------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
*Undistributed investment income--net........................................... $ 3,297,750 $ 1,279,064
------------ -------------
------------ -------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
128
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
FOR THE YEAR
ENDED FOR THE PERIOD
DEC. 31, JULY 1, 1993+
1994 TO DEC. 31, 1993
- ---------------------------------------
<C> <C> <C> <S>
$ 2,366,053 $ 153,585
7,037,711 (84,612)
(6,328,115 ) 1,604,166
- ------------ ----------------
3,075,649 1,673,139
- ------------ ----------------
</TABLE>
- ---------------------------------------
<TABLE>
<C> <C> <C> <S>
(928,253 ) --
-- --
-- --
- ------------ ----------------
(928,253 ) --
- ------------ ----------------
</TABLE>
- ---------------------------------------
<TABLE>
<C> <C> <C> <S>
114,952,060 43,534,024
- ------------ ----------------
</TABLE>
- ---------------------------------------
<TABLE>
<C> <C> <C> <S>
117,099,456 45,207,163
47,207,263 2,000,100
- ------------ ----------------
$164,306,719 $ 47,207,263
- ------------ ----------------
- ------------ ----------------
</TABLE>
- ---------------------------------------
<TABLE>
<C> <C> <C> <S>
$ 1,591,385 $ 153,585
- ------------ ----------------
- ------------ ----------------
</TABLE>
- ---------------------------------------
129
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING CAPITAL DOMESTIC MONEY
MARKETS FOCUS FUND MARKET FUND
FOR THE PERIOD FOR THE YEAR ENDED
MAY 2, 1994+ DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: TO DEC. 31, 1994 1994 1993
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment Income (loss)--net.................................... $ 330,561 $11,419,926 $ 2,754,970
Realized gain (loss) on investments and foreign currency
transactions--net................................................ (672,256) 5,347 41,187
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net............................... (2,345,177) (199,049 ) (1,652)
------------------- ------------ ----------------
Net increase (decrease) in net assets resulting from
operations....................................................... (2,686,872) 11,226,224 2,794,505
------------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net........................................... -- (11,419,926 ) (2,754,970)
Realized gain on investments--net................................ -- (5,347 ) (41,187)
In excess of realized gain on investments--net................... -- -- --
------------------- ------------ ----------------
Net decrease in net assets resulting from dividends and
distributions to shareholders.................................... -- (11,425,273 ) (2,796,157)
------------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share
transactions..................................................... 31,362,624 192,866,796 129,405,088
------------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
NET ASSETS:
Total increase (decrease) in net assets.......................... 28,675,752 192,667,747 129,403,436
Beginning of period.............................................. 8,000,000 170,531,353 41,127,917
------------------- ------------ ----------------
End of period*................................................... $36,675,752 $363,199,100 $170,531,353
------------------- ------------ ----------------
------------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
*Undistributed investment income--net............................ $ 330,561 $ -- $ --
------------------- ------------ ----------------
------------------- ------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
130
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
1994 1993
- --------------------------------------
<S> <C> <C>
$ 383,328 $ (24,896)
(1,981,763 ) 3,639,264
(8,755,921 ) 7,724,322
- ------------ ----------------
(10,354,356 ) 11,338,690
- ------------ ----------------
</TABLE>
- --------------------------------------
<TABLE>
<S> <C> <C>
-- (5,834)
(895,916 ) --
-- --
- ------------ ----------------
(895,916 ) (5,834)
- ------------ ----------------
</TABLE>
- --------------------------------------
<TABLE>
<S> <C> <C>
82,317,471 64,476,433
- ------------ ----------------
</TABLE>
- --------------------------------------
<TABLE>
<S> <C> <C>
71,067,199 75,809,289
98,976,424 23,167,135
- ------------ ----------------
$170,043,623 $ 98,976,424
- ------------ ----------------
- ------------ ----------------
</TABLE>
- --------------------------------------
<TABLE>
<S> <C> <C>
$ 383,328 $ --
- ------------ ----------------
- ------------ ----------------
</TABLE>
- --------------------------------------
131
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
--------------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net........................................................ $ 6,185,965 $ 2,797,378
Realized gain (loss) on investments and foreign currency transactions--net.... 4,744,740 6,698,385
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net.................................................... (21,104,289 ) 11,282,893
------------ ----------------
Net increase (decrease) in net assets resulting from operations............... (10,173,584 ) 20,778,656
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net........................................................ (4,296,790 ) (1,224,834)
Realized gain on investments--net............................................. (6,450,353 ) (235,661)
In excess of realized gain on investments--net................................ -- --
------------ ----------------
Net decrease in net assets resulting from dividends and distributions to
shareholders.................................................................. (10,747,143 ) (1,460,495)
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets derived from capital share transactions............ 100,642,477 92,909,143
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets....................................... 79,721,750 112,227,304
Beginning of year............................................................. 194,776,516 82,549,212
------------ ----------------
End of year*.................................................................. $274,498,266 $194,776,516
------------ ----------------
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net......................................... $ 3,474,388 $ 1,585,213
------------ ----------------
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
132
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND GLOBAL UTILITY FOCUS FUND
- -------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
- -------------------------------------- --------------------------------------
1994 1993 1994 1993
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
$ 12,299,420 $ 2,159,624 $ 4,762,634 $ 677,491
(202,960) 1,265,216 (1,481,987 ) 34,110
(23,383,348) 11,694,466 (14,255,796 ) 2,572,674
- ------------ ------------- ------------ -------------
(11,286,888) 15,119,306 (10,975,149 ) 3,284,275
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
(6,805,684) (531,339 ) (3,959,983 ) (118,908 )
(1,046,779) -- -- --
(169,671) -- (33,522) --
- ------------ ------------- ------------ -------------
(8,022,134) (531,339 ) (3,993,505 ) (118,908 )
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
265,089,157 239,511,867 36,694,148 99,351,846
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
245,780,135 254,099,834 21,725,494 102,517,213
269,627,181 15,527,347 104,517,313 2,000,100
- ------------ ------------- ------------ -------------
$515,407,316 $269,627,181 $126,242,807 $104,517,313
- ------------ ------------- ------------ -------------
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
$ 7,256,695 $ 1,762,959 $ 1,361,234 $ 558,583
- ------------ ------------- ------------ -------------
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
133
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net......................................................... $21,977,178 $ 6,889,208
Realized gain (loss) on investments and foreign currency transactions--net..... (1,918,504 ) 615,071
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net..................................................... (28,517,478 ) 4,541,949
------------ ------------
Net increase (decrease) in net assets resulting from operations................ (8,458,804 ) 12,046,228
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net......................................................... (20,563,966 ) (6,035,740 )
Realized gain on investments--net.............................................. -- --
In excess of realized gain on investments--net................................. -- --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders................................................................... (20,563,966 ) (6,035,740 )
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions............. 121,313,338 131,074,555
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets........................................ 92,290,568 137,085,043
Beginning of period............................................................ 163,428,172 26,343,129
------------ ------------
End of period*................................................................. $255,718,740 $163,428,172
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net.......................................... $ 2,509,684 $ 1,096,472
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
134
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT
BOND FUND INTERNATIONAL BOND FUND
FOR THE PERIOD FOR THE PERIOD
MAY 2, 1994+ TO MAY 2, 1994+ TO
DECEMBER 31, 1994 DECEMBER 31, 1994
- ------------------------------------------------------
<S> <C> <C>
$ 295,427 $ 325,753
(55,316) (98,691)
(60,742) (163,684)
- ------------------------ ------------
179,369 63,378
- ------------------------ ------------
</TABLE>
- ------------------------------------------------------
<TABLE>
<S> <C> <C>
(222,052) (271,353)
-- --
-- --
- ------------------------ ------------
(222,052) (271,353)
- ------------------------ ------------
</TABLE>
- ------------------------------------------------------
<TABLE>
<S> <C> <C>
15,853,334 5,141,269
- ------------------------ ------------
</TABLE>
- ------------------------------------------------------
<TABLE>
<S> <C> <C>
15,810,651 4,933,294
2,000,000 5,000,000
- ------------------------ ------------
$ 17,810,651 $9,933,294
- ------------------------ ------------
- ------------------------ ------------
</TABLE>
- ------------------------------------------------------
<TABLE>
<S> <C> <C>
$ 73,375 $ 54,400
- ------------------------ ------------
- ------------------------ ------------
</TABLE>
- ------------------------------------------------------
135
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
FOCUS FUND
<S> <C> <C> <C>
FOR THE YEAR FOR THE PERIOD
ENDED JULY 1, 1993+ TO
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net..................................................... $ 1,973,400 $ 53,487
Realized gain (loss) on investments and foreign currency
transactions--net.......................................................... 3,850,217 115,051
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net................................................. (10,680,341 ) 4,385,136
------------ ----------------
Net increase (decrease) in net assets resulting from operations............ (4,856,724 ) 4,553,674
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net..................................................... (1,644,756 ) --
Realized gain on investments--net.......................................... (61,190 ) --
In excess of realized gain on investments--net............................. -- --
------------ ----------------
Net decrease in net assets resulting from dividends and distributions to
shareholders............................................................... (1,705,946 ) --
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTES 4):
Net increase in net assets derived from capital share transactions......... 177,540,023 64,352,648
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets.................................... 170,977,353 68,906,322
Beginning of period........................................................ 76,906,422 8,000,100
------------ ----------------
End of period*............................................................. $247,883,775 $ 76,906,422
-
-
------------ ----------------
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net...................................... $ 382,131 $ 53,487
------------ ----------------
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
136
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL RESOURCES
FOCUS FUND PRIME BOND FUND
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
1994 1993 1994 1993
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
$ 526,129 $ 122,897 $24,851,838 $ 10,814,492
102,053 64,691 (18,783,776 ) 4,199,723
(810,365 ) (85,134) (23,383,983 ) 200,559
- ------------ ------------- ------------ -------------
(182,183 ) 102,454 (17,315,921 ) 15,214,774
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
(319,496 ) (40,449) (23,986,615 ) (9,710,533 )
-- -- -- (752,637 )
-- -- (4,204,953 ) --
- ------------ ------------- ------------ -------------
(319,496 ) (40,449) (28,191,568 ) (10,463,170 )
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
25,438,978 10,571,877 122,650,200 224,530,037
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
24,937,299 10,633,882 77,142,711 229,281,641
14,777,562 4,143,680 314,091,464 84,809,823
- ------------ ------------- ------------ -------------
$39,714,861 $14,777,562 $391,234,175 $314,091,464
- ------------ ------------- ------------ -------------
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
$ 289,267 $ 82,634 $ 2,399,783 $ 1,534,560
- ------------ ------------- ------------ -------------
- ------------ ------------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
137
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net..................................................... $ 5,564,058 $ 1,870,132
Realized gain (loss) on investments and foreign currency
transactions--net.......................................................... 10,329,187 6,568,044
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net................................................. (20,646,284 ) 20,450,896
------------ ----------------
Net increase (decrease) in net assets resulting from operations............ (4,753,039 ) 28,889,072
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net..................................................... (3,345,688 ) (758,750)
Realized gain on investments--net.......................................... (7,187,525 ) (236,123)
In excess of realized gain on investments--net............................. -- --
------------ ----------------
Net decrease in net assets resulting from dividends and distributions to
shareholders............................................................... (10,533,213 ) (994,873)
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTES 4):
Net increase in net assets derived from capital share transactions......... 170,226,497 193,548,727
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets.................................... 154,940,245 221,442,926
Beginning of period........................................................ 309,419,637 87,976,711
------------ ----------------
End of period*............................................................. $464,359,882 $309,419,637
------------ ----------------
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net...................................... $ 3,329,753 $ 1,111,383
------------ ----------------
------------ ----------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
138
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
FOR THE YEAR
RESERVE ASSETS FUND ENDED FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, DEC. 31, JULY 1, 1993+ TO
1994 1993 1994 DEC. 31, 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,248,878 $ 757,449 $ 5,733,672 $ 904,488
1,901 15,302 (3,236,703 ) 176,780
(35,001 ) (173 ) (5,553,092 ) 720,311
- ------------ ------------- ------------ ----------------
1,215,778 772,578 (3,056,123 ) 1,801,579
- ------------ ------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
(1,248,878 ) (757,449 ) (5,598,199 ) (647,419)
(1,901 ) (15,302 ) -- --
-- -- (101,589 ) --
- ------------ ------------- ------------ ----------------
(1,250,779 ) (772,751 ) (5,699,788 ) (647,419)
- ------------ ------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
2,063,127 3,400,720 33,168,379 41,583,188
- ------------ ------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
2,028,126 3,400,547 24,412,468 42,737,348
30,167,905 26,767,358 50,737,448 8,000,100
- ------------ ------------- ------------ ----------------
$32,196,031 $ 30,167,905 $75,149,916 $ 50,737,448
- ------------ ------------- ------------ ----------------
- ------------ ------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
$ -- $ -- $ 409,286 $ 257,069
- ------------ ------------- ------------ ----------------
- ------------ ------------- ------------ ----------------
</TABLE>
- --------------------------------------------------------------------------------
139
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......................... $ 14.08 $ 12.85 $ 12.82 $ 11.26 $ 11.74
------------ -------- -------- ------- -------
Investment income (loss)--net.............................. .48 .32 .31 .47 .47
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... (1.06) 1.37 .37 1.76 (.35)
------------ -------- -------- ------- -------
Total from investment operations........................... (.58) 1.69 .68 2.23 .12
------------ -------- -------- ------- -------
Less dividends and distributions:
Investment income--net................................... (.37) (.34) (.37) (.49) (.46)
Realized gain on investments--net........................ -- (.12) (.28) (.18) (.14)
In excess of realized gain on investments--net (.05) -- -- -- --
------------ -------- -------- ------- -------
Total dividends and distributions.......................... (.42) (.46) (.65) (.67) (.60)
------------ -------- -------- ------- -------
Net asset value, end of year............................... $ 13.08 $ 14.08 $ 12.85 $ 12.82 $ 11.26
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN*:
Based on net asset value per share......................... (4.19%) 13.49% 5.72% 20.65% 1.22%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................. .63% .70% .97% 1.20% 1.25%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Expenses................................................... .63% .70% .97% 1.20% 1.50%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Investment income--net..................................... 3.95% 3.20% 3.71% 4.16% 4.71%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)..................... $158,951 $115,420 $ 24,918 $ 7,937 $ 5,675
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Portfolio turnover......................................... 35.36% 12.55% 36.34% 50.82% 23.52%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
140
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED -----------------------------------------
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE FOR THE PERIOD
YEAR ENDED JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1994 DECEMBER 31, 1993
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $ 10.95 $ 10.00
----------------- --------
Investment income (loss)--net........................................... .17 .04
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net..................................................... .08 .91
----------------- --------
Total from investment operations........................................ .25 .95
----------------- --------
Less dividends and distributions:
Investment income--net................................................ (.10) --
Realized gain on investments--net..................................... -- --
----------------- --------
Total dividends and distributions....................................... (.10) --
----------------- --------
Net asset value, end of period.......................................... $ 11.10 $ 10.95
----------------- --------
----------------- --------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share...................................... 2.36% 9.50%++
----------------- --------
----------------- --------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................................... .72% .86%*
----------------- --------
----------------- --------
Expenses................................................................ .72% .86%*
----------------- --------
----------------- --------
Investment income--net.................................................. 2.08% 1.69%*
----------------- --------
----------------- --------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................ $ 164,307 $47,207
----------------- --------
----------------- --------
Portfolio turnover...................................................... 60.55% 30.86%
----------------- --------
----------------- --------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
141
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING CAPITAL
MARKETS FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED --------------------------
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE PERIOD MAY 2,
1994+
INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31,1994
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................... $ 10.00
--------
Investment income (loss)--net........................................................... .09
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net..................................................................... (.58)
--------
Total from investment operations........................................................ (.49)
--------
Less dividends and distributions:
Investment income--net................................................................ --
Realized gain on investments--net..................................................... --
--------
Total dividends and distributions....................................................... --
--------
Net asset value, end of period.......................................................... $ 9.51
--------
--------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share...................................................... (4.90%)++
--------
--------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................................................... 1.29%*
--------
--------
Expenses................................................................................ 1.35%*
--------
--------
Investment income--net.................................................................. 2.18%*
--------
--------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................ $ 36,676
--------
--------
Portfolio turnover...................................................................... 29.79%
--------
--------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
142
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
---------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. DECEMBER 31, FOR THE PERIOD
--------------------------------------- FEBRUARY 20, 1992+
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 1.00 $ 1.00 $ 1.00
---------- ----------------- ----------
Investment income (loss)--net............................ .0386 .0302 .0302
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net..................... (.0007) .0005 .0013
---------- ----------------- ----------
Total from investment operations......................... .0379 .0307 .0315
---------- ----------------- ----------
Less dividends and distributions:
Investment income--net................................. (.0386) (.0302) (.0302)
Realized gain on investments--net...................... -- (.0005) (.0010)
---------- ----------------- ----------
Total dividends and distributions........................ (.0386) (.0307) (.0312)
---------- ----------------- ----------
Net asset value, end of period........................... $ 1.00 $ 1.00 $ 1.00
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share....................... 3.94% 3.10% 3.16%++
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... .50% .36% .32%*
---------- ----------------- ----------
---------- ----------------- ----------
Expenses................................................. .57% .63% .88%*
---------- ----------------- ----------
---------- ----------------- ----------
Investment income--net, and realized gain (loss) on
investments--net....................................... 4.02% 3.03% 3.48%*
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $363,199 $ 170,531 $ 41,128
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
143
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
--------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED DECEMBER 31,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. --------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1994* 1993* 1992* 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................... $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70
------------ -------- -------- ------- --------
Investment income (loss)--net............................ .05 (.01) .01 .09 .05
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net..................... (1.56) 3.17 (.10) 5.91 (1.77)
------------ -------- -------- ------- --------
Total from investment operations......................... (1.51) 3.16 (.09) 6.00 (1.72)
------------ -------- -------- ------- --------
Less dividends and distributions:
Investment income--net................................. -- --+ (.07) (.02) --
Realized gain on investments--net...................... (.19) -- -- -- --
------------ -------- -------- ------- --------
Total dividends and distributions........................ (.19) -- (.07) (.02) --
------------ -------- -------- ------- --------
Net asset value, end of year............................. $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share....................... (7.27%) 17.78% (0.53%) 50.10% (12.55%)
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... .83% .96% 1.18% 1.25% 1.25%
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
Expenses................................................. .83% .96% 1.18% 1.28% 1.47%
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
Investment income (loss)--net............................ .27% (.05%) .04% .51% .14%
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................... $170,044 $ 98,976 $ 23,167 $11,318 $ 6,851
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
Portfolio turnover....................................... 88.48% 131.75% 98.64% 79.10% 135.24%
------------ -------- -------- ------- --------
------------ -------- -------- ------- --------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Based on average shares outstanding during the year.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
</TABLE>
See Notes to Financial Statements.
144
<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: 1994* 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44
------------ -------- -------- ------- -------
Investment income (loss)--net............................. .37 .28 .33 .47 .65
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... (1.02) 1.94 .25 2.52 (.08)
------------ -------- -------- ------- -------
Total from investment operations.......................... (.65) 2.22 .58 2.99 .57
------------ -------- -------- ------- -------
Less dividends and distributions:
Investment income--net.................................. (.30) (.15) (.54) (.66) (.46)
Realized gain on investments--net....................... (.54) (.03) (.68) (.09) --
In excess of realized gain on investments--net -- -- -- -- --
------------ -------- -------- ------- -------
Total dividends and distributions......................... (.84) (.18) (1.22) (.75) (.46)
------------ -------- -------- ------- -------
Net asset value, end of year.............................. $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share........................ (4.20%) 15.80% 4.25% 24.98% 4.81%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................ .73% .80% .90% .96% 1.08%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Expenses.................................................. .73% .80% .90% .96% 1.08%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Investment income--net.................................... 2.52% 2.26% 2.62% 3.51% 5.19%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................... $274,498 $194,777 $ 82,549 $55,221 $47,428
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Portfolio turnover........................................ 65.54% 56.42% 55.25% 67.13% 52.95%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Based on average shares outstanding during the year.
** Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
145
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
---------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. DECEMBER 31, FOR THE PERIOD
--------------------------------------- FEBRUARY 28, 1992+
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 12.17 $ 10.22 $ 10.00
---------- ----------------- ----------
Investment income (loss)--net............................ .30 .16 .13
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net..................... (.48) 1.96 .13
---------- ----------------- ----------
Total from investment operations......................... (.18) 2.12 .26
---------- ----------------- ----------
Less dividends and distributions:
Investment income--net................................. (.21) (.17) (.04)
Realized gain on investments--net...................... (.04) -- --
In excess of realized gain on investments--net (.01) -- --
---------- ----------------- ----------
Total dividends and distributions........................ (.26) (.17) (.04)
---------- ----------------- ----------
Net asset value, end of period........................... $ 11.73 $ 12.17 $ 10.22
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share....................... (1.46%) 21.03% 2.62%++
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... .77% .88% 1.25%*
---------- ----------------- ----------
---------- ----------------- ----------
Expenses................................................. .77% .88% 1.35%*
---------- ----------------- ----------
---------- ----------------- ----------
Investment income--net................................... 2.85% 2.41% 2.66%*
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $515,407 $ 269,627 $ 15,527
---------- ----------------- ----------
---------- ----------------- ----------
Portfolio turnover....................................... 21.03% 17.07% 14.47%
---------- ----------------- ----------
---------- ----------------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
146
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
-------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. YEAR ENDED FOR THE PERIOD
DECEMBER 31, JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 DECEMBER 31, 1993
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 10.66 $ 10.00
------------- -----------------
Investment income (loss)--net.............................................. .35 .04
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net........................................................ (1.25) .64
------------- -----------------
Total from investment operations........................................... (.90) .68
------------- -----------------
Less dividends and distributions:
Investment income--net................................................... (.29) (.02)
Realized gain on investments--net........................................ -- --
In excess of realized gain on investments--net (.02) --
------------- -----------------
Total dividends and distributions.......................................... (.31) (.02)
------------- -----------------
Net asset value, end of period............................................. $ 9.45 $ 10.66
------------- -----------------
------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share......................................... (8.51%) 6.85%++
------------- -----------------
------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................................. .73% .89%*
------------- -----------------
------------- -----------------
Expenses................................................................... .73% .89%*
------------- -----------------
------------- -----------------
Investment income--net..................................................... 3.68% 2.84%*
------------- -----------------
------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................... $ 126,243 $ 104,517
------------- -----------------
------------- -----------------
Portfolio turnover......................................................... 9.52% 1.72%
------------- -----------------
------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
147
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 12.06 $ 11.13 $ 10.23 $ 8.14 $ 10.21
------------ -------- -------- ------- -------
Investment income (loss)--net............................. 1.05 .95 1.07 1.19 1.40
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... (1.47) .95 .90 2.10 (2.08)
------------ -------- -------- ------- -------
Total from investment operations.......................... (.42) 1.90 1.97 3.29 (.68)
------------ -------- -------- ------- -------
Less dividends and distributions:
Investment income--net.................................. (1.03) (.97) (1.07) (1.20) (1.39)
Realized gain on investments--net....................... -- -- -- -- --
------------ -------- -------- ------- -------
Total dividends and distributions......................... (1.03) (.97) (1.07) (1.20) (1.39)
------------ -------- -------- ------- -------
Net asset value, end of year.............................. $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN*:
Based on net asset value per share........................ (3.59%) 17.84% 20.05% 43.00% (7.63%)
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................ .61% .72% .89% 1.10% 1.15%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Expenses.................................................. .61% .72% .89% 1.10% 1.15%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Investment income--net.................................... 9.73% 8.62% 10.06% 12.49% 14.52%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................... $255,719 $163,428 $ 26,343 $ 9,649 $ 8,106
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Portfolio turnover........................................ 51.88% 35.67% 28.21% 51.54% 26.43%
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
148
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT
BOND FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED --------------------------
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE PERIOD MAY 2,
1994+
INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31,1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................. $ 10.00
------------
Investment income (loss)--net......................................................... .25
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net................................................................... (.07)
------------
Total from investment operations...................................................... .18
------------
Less dividends and distributions:
Investment income--net.............................................................. (.21)
Realized gain on investments--net................................................... --
------------
Total dividends and distributions..................................................... (.21)
------------
Net asset value, end of period........................................................ $ 9.97
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share.................................................... 1.79%++
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................................ .00%*
------------
------------
Expenses.............................................................................. .80%*
------------
------------
Investment income--net................................................................ 4.66%*
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................................. $ 17,811
------------
------------
Portfolio turnover.................................................................... 103.03%
------------
------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
149
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED INTERNATIONAL BOND FUND
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ---------------------------
FOR THE PERIOD MAY 2, 1994+
INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................................. $ 10.00
----------
Investment income (loss)--net........................................................ .38
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net.................................................................. (.35)
----------
Total from investment operations..................................................... .03
----------
Less dividends and distributions:
Investment income--net............................................................. (.33)
Realized gain on investments--net.................................................. --
----------
Total dividends and distributions.................................................... (.33)
----------
Net asset value, end of period....................................................... $ 9.70
----------
----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share................................................... 0.37%++
----------
----------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....................................................... .00%*
----------
----------
Expenses............................................................................. 1.08%*
----------
----------
Investment income--net............................................................... 6.34%*
----------
----------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................................. $ 9,933
----------
----------
Portfolio turnover................................................................... 152.20%
----------
----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
150
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR FOR THE PERIOD
ENDED JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1994 DECEMBER 31, 1993
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $ 11.03 $ 10.00
---------- --------
Investment income (loss)--net........................................... .19 .01
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net..................................................... (.13) 1.02
---------- --------
Total from investment operations........................................ .06 1.03
---------- --------
Less dividends and distributions:
Investment income--net................................................ (.18) --
Realized gain on investments--net..................................... (.01) --
---------- --------
Total dividends and distributions....................................... (.19) --
---------- --------
Net asset value, end of period.......................................... $ 10.90 $ 11.03
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share...................................... 0.55% 10.30%++
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................................... .97% 1.14%*
---------- --------
---------- --------
Expenses................................................................ .97% 1.14%*
---------- --------
---------- --------
Investment income--net.................................................. 1.09% .30%*
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................ $247,884 $76,906
---------- --------
---------- --------
Portfolio turnover...................................................... 58.84% 17.39%
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
151
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................. $ 10.82 $ 9.84 $ 10.06 $ 10.17 $ 11.09
------- -------- -------- ------- -------
Investment income (loss)--net.................................. .17 .11 .18 .25 .22
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net................................... (.02) .92 (.05) (.11) (.90)
------- -------- -------- ------- -------
Total from investment operations............................... .15 1.03 .13 .14 (.68)
------- -------- -------- ------- -------
Less dividends and distributions:
Investment income--net....................................... (.15) (.05) (.29) (.25) (.24)
Realized gain on investments--net............................ -- -- (.06) -- --
------- -------- -------- ------- -------
Total dividends and distributions.............................. (.15) (.05) (.35) (.25) (.24)
------- -------- -------- ------- -------
Net asset value, end of year................................... $ 10.82 $ 10.82 $ 9.84 $ 10.06 $ 10.17
------- -------- -------- ------- -------
------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN*:
Based on net asset value per share............................. 1.44% 10.47% 1.36% 1.36% (6.21%)
------- -------- -------- ------- -------
------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................. .87% 1.13% 1.25% 1.25% 1.25%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Expenses....................................................... .87% 1.13% 1.27% 1.30% 1.38%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Investment income--net......................................... 1.91% 1.34% 2.00% 2.31% 2.26%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)......................... $39,715 $ 14,778 $ 4,144 $ 3,084 $ 3,247
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Portfolio turnover............................................. 10.94% 58.44% 22.88% 31.38% 27.61%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
152
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29
-------- -------- -------- -------- --------
Investment income (loss)--net................................ .77 .70 .79 .90 .88
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net......................... (1.36) .71 .04 .84 (.12)
-------- -------- -------- -------- --------
Total from investment operations............................. (.59) 1.41 .83 1.74 .76
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net..................................... (.76) (.70) (.81) (.90) (.87)
Realized gain on investments--net.......................... -- (.11) -- -- --
In excess of realized gain on investments--net............. (.17) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions............................ (.93) (.81) (.81) (.90) (.87)
-------- -------- -------- -------- --------
Net asset value, end of year................................. $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN*:
Based on net asset value per share........................... (4.80%) 12.02% 7.27% 16.41% 7.13%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... .54% .63% .78% .78% 1.06%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Expenses..................................................... .54% .63% .78% .78% 1.06%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Investment income--net....................................... 6.74% 5.86% 6.76% 7.94% 8.01%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)....................... $391,234 $314,091 $ 84,810 $ 39,743 $ 34,655
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Portfolio turnover........................................... 139.89% 115.26% 82.74% 152.18% 155.17%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
153
<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: 1994* 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.............................. $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88
-------- -------- -------- ------- -------
Investment income (loss)--net................................... .38 .24 .34 .43 .47
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................... (.74) 3.46 .32 5.75 (.38)
-------- -------- -------- ------- -------
Total from investment operations................................ (.36) 3.70 .66 6.18 .09
-------- -------- -------- ------- -------
Less dividends and distributions:
Investment income--net........................................ (.25) (.12) (.58) (.50) (.41)
Realized gain on investments--net............................. (.67) (.04) (.95) (1.05) (.84)
-------- -------- -------- ------- -------
Total dividends and distributions............................... (.92) (.16) (1.53) (1.55) (1.25)
-------- -------- -------- ------- -------
Net asset value, end of year.................................... $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share.............................. (1.20%) 14.57% 2.69% 30.18% .66%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................................. .54% .62% .74% .79% .94%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Expenses........................................................ .54% .62% .74% .79% .94%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Investment income--net.......................................... 1.39% 1.07% 1.54% 1.87% 2.36%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).......................... $464,360 $309,420 $ 87,977 $55,005 $39,470
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Portfolio turnover.............................................. 60.57% 88.25% 62.54% 55.83% 69.05%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Based on average shares outstanding during the year.
** Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
154
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- -------
Investment income (loss)--net................................. .0371 .0268 .0320 .0546 .0730
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................. (.0009) .0005 .0007 .0014 .0019
-------- -------- -------- ------- -------
Total from investment operations.............................. .0362 .0273 .0327 .0560 .0749
-------- -------- -------- ------- -------
Less dividends and distributions:
Investment income--net...................................... (.0362) (.0268) (.0320) (.0546) (.0730)
Realized gain on investments--net........................... -- (.0005) (.0005) (.0014)+ (.0019)+
-------- -------- -------- ------- -------
Total dividends and distributions............................. (.0362) (.0273) (.0325) (.0560) (.0749)
-------- -------- -------- ------- -------
Net asset value, end of year.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN*:
Based on net asset value per share............................ 3.80% 2.77% 3.29% 5.68% 7.65%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................................... .65% .70% .79% .79% .97%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Investment income--net, and realized gain (loss)
on investments--net......................................... 3.75% 2.73% 3.36% 5.64% 7.46%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)........................ $ 32,196 $ 30,168 $ 26,767 $34,362 $35,871
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
+ Includes unrealized gain (loss). (See Note 1g).
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
155
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR FOR THE PERIOD
ENDED JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1994 DECEMBER 31, 1993
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $ 10.38 $ 10.00
---------- --------
Investment income (loss)--net........................................... .76 .25
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net..................................................... (1.19) .33
---------- --------
Total from investment operations........................................ (.43) .58
---------- --------
Less dividends and distributions:
Investment income--net................................................ (.76) (.20)
Realized gain on investments--net..................................... -- --
In excess of realized gain on investments--net........................ (.02) --
---------- --------
Total dividends and distributions....................................... (.78) (.20)
---------- --------
Net asset value, end of period.......................................... $ 9.17 $ 10.38
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN**:
Based on net asset value per share...................................... (4.21%) 5.90%++
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................................... .75% .94%*
---------- --------
---------- --------
Expenses................................................................ .75% .94%*
---------- --------
---------- --------
Investment income--net.................................................. 8.01% 6.20%*
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................ $ 75,150 $50,737
---------- --------
---------- --------
Portfolio turnover...................................................... 117.58% 54.80%
---------- --------
---------- --------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
156
<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 17 separate funds ('Funds'
or 'Fund') offering 17 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. 'ML & Co.'), and Family Life Insurance
Company (an insurance company not affiliated with ML & Co.) for their 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 Developing Capital Markets Fund, Global Strategy Focus Fund,
International Bond Fund, Natural Resources Focus Fund and the World Income Focus
Fund, all of which are 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 value.
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 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. Futures contracts are valued at settlement price at the
close of the applicable exchange. 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.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its returns by hedging its portfolio
against adverse movements in the equity, debt and currency markets. Losses may
arise due to changes in the value of the contract or if the counterparty does
not perform under the contract.
*Forward foreign exchange contracts--Certain 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
Fund's records. However, the effect on net investment income is recorded from
the date the Fund enters into such contracts. Premiums or discount is amortized
over the life of the contracts.
*Options--Certain Funds may write or purchase call options and put options. When
a Fund writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current value of the option
written.
When a security is sold through an exercise of an option, the related premium
received (or paid) is deducted from (or added to) the basis 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 exceeds the premium paid or received).
*Foreign currency options and futures--Certain Funds may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar denominated securities owned
by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
*Futures contracts--Certain Funds may purchase or sell futures contracts and
options on such futures contracts. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by the
exchange on which the transactions is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
Written and purchased options are non-income producing investments.
(c) 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)
157
<PAGE>
- --------------------------------------------------------------------------------
or valuing (unrealized) assets or liabilities expressed in foreign currencies
into US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Company's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. 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 Fund is 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.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ('MLAM'). The general partner of MLAM is Princeton
Services, Inc. ('PSI'), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. MLAM is responsible for the management of the Company's
portfolios and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Funds.
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: 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 International
Bond 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 and
0.50% of the average daily net assets of the Intermediate Government Bond Fund,
and at the following annual rates with respect to the other Funds:
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
Portion of average daily value of net
assets of the Fund:
- -------------------------------------------------
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%
- -------------------------------------------------
QUALITY EQUITY FUND
- -------------------------------------------------
Portion of average daily value of net
assets of the Fund:
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%
- -------------------------------------------------
PRIME BOND FUND AND HIGH CURRENT
INCOME FUND
- -------------------------------------------------
PORTION OF AGGREGATE AVERAGE DAILY
VALUE OF NET ASSETS OF BOTH FUNDS:
</TABLE>
<TABLE>
<CAPTION>
ADVISORY FEE
- ----------------------------------------------------------
HIGH CURRENT PRIME
INCOME BOND
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 %
- ----------------------------------------------------------
</TABLE>
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
laws or the regulations thereunder. Under the most restrictive state regulations
presently in effect, the Investment Adviser 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 next $70 million of average daily net assets, and 1.5% of average
daily net assets in excess thereof. 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 Developing Capital Markets Focus Fund for the period May 2, 1994 to
December 31, 1994, MLAM
158
<PAGE>
- --------------------------------------------------------------------------------
earned fees of $151,621, of which $8,915 was voluntarily waived.
For Domestic Money Market Fund for the year ended December 31, 1994, MLAM
earned fees of $1,418,479, of which $201,286 was voluntarily waived.
For Intermediate Government Bond Fund for the period May 2, 1994 to December
31, 1994, MLAM earned fees of $31,692, all of which was voluntarily waived. MLAM
has also reimbursed the Fund $19,250 in additional expenses.
For the International Bond Fund for the period May 2, 1994 to December 31,
1994, MLAM earned fees of $30,838, all of which was voluntarily waived. MLAM has
also reimbursed the Fund for $24,637 in additional expenses.
Merrill Lynch, Pierce, Fenner & Smith Inc. ('MLPF&S'), an affiliate of MLIM,
earned commissions on the execution of portfolio security transactions
aggregating $10,806 in the American Balance Fund, $18,504 in the Basic Value
Focus Fund, $5,501 in the Developing Capital Markets Focus Fund, $4,020 in the
Equity Growth Fund, $29,097 in the Flexible Strategy Fund, $44,456 in the Global
Strategy Focus Fund, $2,346 in the Global Utility Focus Fund, $33,386 in the
International Equity Focus Fund, $1,344 in the Natural Resources Focus Fund,
$58,618 in the Quality Equity Fund, and $625 in the World Income Focus Fund.
Accounting services are provided to the Company by MLAM at cost.
American Balanced Fund, Global Utility Focus Fund, High Current Income Fund,
Intermediate Government Bond Fund, Prime Bond Fund and World Income Focus Fund
paid Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, $879,
$7,173, $16,562, $200, $1,472, and $5,070, respectively, for security price
quotations to compute the net asset value of the Fund.
Financial Data Services, Inc. ('FDS'), a wholly-owned subsidiary of ML & Co.,
is the company's transfer agent.
Certain officers and/or directors of the Company are officers and/or
directors of MLAM, PSI, FDS, Merrill Lynch Funds Distributor, Inc., a
wholly-owned subsidiary of Merrill Lynch Group, Inc., which is the Fund's
distributor, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities for the year
ended December 31, 1994, were as follows:
<TABLE>
<S> <C> <C>
PURCHASES SALES
- ----------------------------------------------------------
American Balanced Fund............................ $ 113,205,848 $ 47,004,890
Basic Value Focus Fund............................ 179,580,610 62,940,173
Developing Capital Markets Focus Fund............. 35,559,221 4,471,508
Domestic Money Market Fund........................ -- --
Equity Growth Fund................................ 186,468,001 109,194,836
Flexible Strategy Fund............................ 193,165,367 130,314,357
Global Strategy Focus Fund........................ 385,300,323 85,076,823
Global Utility Focus Fund......................... 60,441,616 9,826,860
High Current Income Fund.......................... 222,031,621 107,197,912
Intermediate Government Bond Fund................. 4,079,287 1,445,980
International Bond Focus Fund..................... 15,849,508 7,568,834
International Equity Focus Fund................... 244,503,377 90,821,367
Natural Resources Focus Fund...................... 23,122,635 2,472,626
Prime Bond Fund................................... 573,637,572 461,357,101
Quality Equity Fund............................... 304,407,076 204,149,998
Reserve Assets Fund............................... -- --
World Income Focus Fund........................... 93,538,055 70,565,612
- ----------------------------------------------------------
</TABLE>
Transactions in options written for the year ended December 31, 1994, were as
follows:
<TABLE>
<S> <C> <C>
FLEXIBLE STRATEGY FUND
- ----------------------------------------------------------
<CAPTION>
SHARES PREMIUMS
CALL OPTIONS WRITTEN COVERED RECEIVED
<S> <C> <C>
- ----------------------------------------------------------
Outstanding call options written, beginning of
year.......................................... -- --
Options written................................ 21,500 $ 26,693
Options closed................................. (500) (891)
Options exercised.............................. (5,000) (5,274)
-------------- ------------
Outstanding call options written, end of
year.......................................... 16,000 $ 20,528
-------------- ------------
-------------- ------------
- ----------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND
- ----------------------------------------------------------
<CAPTION>
NUMBER
OF PREMIUMS
CALL OPTIONS WRITTEN CONTRACTS RECEIVED
<S> <C> <C>
- ----------------------------------------------------------
Outstanding call options written, beginning of
year.......................................... 1 $ 15,500
Options written................................ 12 575,993
Options expired................................ (5) (148,143)
Options closed................................. (5) (86,250)
-------------- ------------
Outstanding call options written end of year... 3 $ 357,100
-------------- ------------
-------------- ------------
- ----------------------------------------------------------
<CAPTION>
NUMBER
OF PREMIUMS
PUT OPTIONS WRITTEN CONTRACTS RECEIVED
<S> <C> <C>
- ----------------------------------------------------------
Outstanding put options written, beginning of
year.......................................... 4 $ 103,350
Options written................................ 5 277,979
Options expired................................ (3) (67,405)
Options closed................................. (3) (98,102)
-------------- ------------
Outstanding put options written, end of year... 3 $ 215,822
-------------- ------------
-------------- ------------
- ----------------------------------------------------------
</TABLE>
159
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
- ----------------------------------------------------------
NUMBER OF
SHARES PREMIUMS
CALL OPTIONS WRITTEN COVERED RECEIVED
<S> <C> <C>
- ----------------------------------------------------------
Outstanding call options written, beginning of
year.......................................... -- --
Options written................................ 49,700 $ 57,999
Options closed................................. (21,000) (22,832)
-------------- ------------
Outstanding call options written, end of
year.......................................... 28,700 $ 35,167
-------------- ------------
-------------- ------------
- ----------------------------------------------------------
WORLD INCOME FOCUS FUND
- ----------------------------------------------------------
<CAPTION>
NUMBER OF PREMIUMS
CALL OPTIONS WRITTEN CONTRACTS RECEIVED
<S> <C> <C>
- ----------------------------------------------------------
Outstanding call options written, beginning of
year.......................................... -- --
Options written................................ 2 $ 10,100
-------------- ------------
Outstanding call options written, end of
year.......................................... 2 $ 10,100
-------------- ------------
-------------- ------------
- ----------------------------------------------------------
</TABLE>
At December 31, 1994, net unrealized appreciation/depreciation and aggregate
cost for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
DEVELOPING
BASIC CAPITAL DOMESTIC
AMERICAN VALUE MARKETS MONEY
BALANCED FOCUS FOCUS MARKET
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Appreciated
securities............. $ 5,377,922 $ 7,250,050 $ 1,389,196 --
Depreciated
securities............. (11,559,561) (12,127,815) (3,734,745) $ (196,315)
------------ ------------ ----------- ------------
Net unrealized
depreciation........... $ (6,181,639) $ (4,877,765) $(2,345,549) $ (196,315)
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Cost for Federal income
tax purposes*.......... $163,046,195 $168,786,131 $40,275,572 $369,315,441
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Appreciated securities.... $ 12,859,867 $ 14,334,233 $ 19,946,186 $ 3,330,334
Depreciated securities.... (10,215,739) (13,622,415) (32,174,422) (15,013,594)
------------ ------------ ------------- ------------
Net unrealized
appreciation
(depreciation)............ $ 2,644,128 $ 711,818 $ (12,228,236) $(11,683,260)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Cost for Federal income
tax purposes*............. $167,284,987 $272,988,599 $ 524,369,249 $137,874,783
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
- ----------------------------------------------------------
<CAPTION>
HIGH INTERMEDIATE INTERNATIONAL
CURRENT GOVERNMENT INTERNATIONAL EQUITY
INCOME BOND BOND FOCUS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Appreciated securities.... $ 809,848 $ 10,120 $ 48,465 $ 7,392,821
Depreciated securities.... (25,408,864) (70,862) (144,933) (14,915,053)
------------ ------------ ------------- ------------
Net unrealized
depreciation.............. $(24,599,016) $ (60,742) $ (96,468) $ (7,522,232)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Cost for Federal income
tax purposes*............. $273,516,227 $ 17,635,984 $ 10,713,571 $251,213,493
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
- ----------------------------------------------------------
<CAPTION>
NATURAL
RESOURCES PRIME QUALITY RESERVE
FOCUS BOND EQUITY ASSETS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Appreciated securities.... $ 1,673,801 $ 179,070 $ 36,163,539 --
Depreciated securities.... (2,547,781) (22,272,625) (23,217,895) $ (27,924)
------------ ------------ ------------- ------------
Net unrealized
appreciation
(depreciation)............ $ (873,980) $(22,093,555) $ 12,945,644 $ (27,924)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Cost for Federal income
tax purposes*............. $ 40,329,553 $406,893,235 $ 451,837,771 $ 32,698,577
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WORLD
INCOME
FOCUS
FUND
<S> <C>
- ----------------------------------------------------------
Appreciated securities.......................................... $ 175,154
Depreciated securities.......................................... (5,135,915)
------------
Net unrealized depreciation..................................... $ (4,960,761)
------------
------------
Cost for Federal income tax purposes*........................... $ 78,516,982
------------
------------
- ----------------------------------------------------------
</TABLE>
* Net of premiums received on options written.
At December 31, 1994, net realized and unrealized gains (losses) were as
follows:
- ----------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN BASIC VALUE
BALANCED FUND FOCUS FUND
-------------------------- ---------------------------
Realized Realized
Gains Unrealized Gains Unrealized
(Losses) Losses (Losses) Losses
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $ (635,513) $ (6,181,639) $ 7,037,866 $ (4,723,949)
Short-term investments... 1,291 -- (155) --
Foreign currency
transactions............. -- -- -- --
----------- ------------ ------------ ------------
$ (634,222) $ (6,181,639) $ 7,037,711 $ (4,723,949)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEVELOPING CAPITAL DOMESTIC MONEY
MARKETS FUND MARKET FUND
-------------------------- ---------------------------
Realized Unrealized
Gains Gains Realized Unrealized
(Losses) (Losses) Gains Losses
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $ (673,658) $ (2,334,256) -- --
Short-term investments... (38) (11,293) $ 5,347 $ (196,315)
Foreign currency
transactions............. 1,440 372 -- --
----------- ------------ ------------ ------------
$ (672,256) $ (2,345,177) $ 5,347 $ (196,315)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
<CAPTION>
EQUITY GROWTH FLEXIBLE STRATEGY
FUND FUND
-------------------------- ---------------------------
Realized Realized
Gains Unrealized Gains Unrealized
(Losses) Gains (Losses) Gains
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $(1,981,831) $ 2,644,128 $ 5,023,198 $ 749,329
Short-term investments... 68 -- (28) --
Investment options
written.................. -- -- 392 2,528
Foreign currency
transactions............. -- -- (278,822) 6,550
----------- ------------ ------------ ------------
$(1,981,763) $ 2,644,128 $ 4,744,740 $ 758,407
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
</TABLE>
160
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL STRATEGY GLOBAL UTILITY
FOCUS FUND FOCUS FUND
-------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $ 146,995 $(12,228,236) $ (1,489,424) $(11,683,260)
Short-term investments... (2,338) -- (757) --
Foreign currency
transactions............. (370,007) (9,697) 8,194 138
Forward foreign exchange
contracts................ 22,390 559,659 -- --
----------- ------------ ------------ ------------
$ (202,960) $(11,678,274) $ (1,481,987) $(11,683,122)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
<CAPTION>
HIGH CURRENT INTERMEDIATE GOVERNMENT
INCOME FUND BOND FUND
-------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Losses Losses Losses Losses
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $(1,918,271) $(24,346,157) $ (55,070) $ (60,742)
Short-term investments... (233) -- (246) --
----------- ------------ ------------ ------------
$(1,918,504) $(24,346,157) $ (55,316) $ (60,742)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
<CAPTION>
INTERNATIONAL BOND INTERNATIONAL EQUITY
FUND FOCUS FUND
-------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $ (41,534) $ (96,468) $ 7,743,365 $ (7,135,363)
Short-term investments... (91) -- (2,798) (267)
Foreign currency
transactions............. 108,688 (387) (108,210) 28,311
Forward foreign exchange
contracts................ (165,754) (66,829) (3,691,954) 300,276
Financial futures
contracts................ -- -- 726,501 710,940
Currency option
written.................. -- -- (133,883) 332,300
Currency option
purchased................ -- -- (644,421) (144,800)
Investment option
purchased................ -- -- (226,045) (350,403)
Investment option
written.................. -- -- 187,662 (36,199)
----------- ------------ ------------ ------------
$ (98,691) $ (163,684) $ 3,850,217 $ (6,295,205)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
<CAPTION>
NATURAL RESOURCES PRIME BOND
FOCUS FUND FUND
-------------------------- ---------------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Losses Losses Losses
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $ 108,896 $ (873,980) $(18,783,001) $(21,899,527)
Short-term investments... (265) -- (775) --
Foreign currency
transactions............. (6,578) (51) -- --
----------- ------------ ------------ ------------
$ 102,053 $ (874,031) $(18,783,776) $(21,899,527)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
<CAPTION>
QUALITY EQUITY RESERVE ASSETS
FUND FUND
-------------------------- ---------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Losses
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $10,328,366 $ 13,206,594 -- --
Short-term investments... -- -- $ 1,901 $ (27,924)
Investment options
written.................. 785 2,880 -- --
Foreign currency
transactions............. 36 -- -- --
----------- ------------ ------------ ------------
$10,329,187 $ 13,209,474 $ 1,901 $ (27,924)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ----------------------------------------------------------
<CAPTION>
WORLD INCOME
FOCUS FUND
--------------------------
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Long-term investments.... $(2,735,565) $ (4,617,679)
Short-term investments... (479) --
Currency options
purchased................ -- (3,250)
Currency options
written.................. -- (1,900)
Foreign currency
transactions............. 334,364 7,152
Forward foreign exchange
contracts................ (835,023) (217,104)
----------- ------------
$(3,236,703) $ (4,832,781)
----------- ------------
----------- ------------
- ----------------------------------------------------------
</TABLE>
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<S> <C> <C>
AMERICAN BALANCED FUND
- ----------------------------------------------------------
<CAPTION>
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 4,208,232 $ 56,940,222
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 308,791 4,107,209
------------ ------------
Total issued....................................... 4,517,023 61,047,431
Shares redeemed.................................... (565,599) (7,507,172)
------------ ------------
Net increase....................................... 3,951,424 $ 53,540,259
------------ ------------
------------ ------------
</TABLE>
<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>
<S> <C> <C>
BASIC VALUE FOCUS FUND
- ----------------------------------------------------------
<CAPTION>
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 10,501,448 $115,102,779
Shares issued to shareholders in reinvestment of
dividends........................................ 87,071 928,253
------------ ------------
Total issued....................................... 10,588,519 116,031,032
Shares redeemed.................................... (99,204) (1,078,972)
------------ ------------
Net increase....................................... 10,489,315 $114,952,060
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
For the Period July 1, 1993+ to Dollar
December 31, 1993 Shares Amount
- ----------------------------------------------------------
<S> <C> <C>
Shares sold........................................ 4,116,053 $ 45,688,307
Shares issued to shareholders in reinvestment of
dividends and distributions...................... -- --
------------ ------------
Total issued....................................... 4,116,053 45,688,307
Shares redeemed.................................... (202,978) (2,154,283)
------------ ------------
Net increase....................................... 3,913,075 $ 43,534,024
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
+ Prior to July 1, 1993 (commencement of operations), the Fund issued 200,010
shares to MLAM for $2,000,100.
161
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING CAPITAL MARKETS FOCUS FUND
- ----------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 3,089,579 $ 31,702,122
Shares issued to shareholders in reinvestment of
dividends and distributions...................... -- --
------------ ------------
Total issued....................................... 3,089,579 31,702,122
Shares redeemed.................................... (33,668) (339,498)
------------ ------------
Net increase....................................... 3,055,911 $ 31,362,624
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 800,000
shares to MLAM for $8,000,000.
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 458,988,915 $458,988,915
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 11,425,228 11,425,228
------------ ------------
Total issued....................................... 470,414,143 470,414,143
Shares redeemed.................................... (277,547,347) (277,547,347)
------------ ------------
Net increase....................................... 192,866,796 $192,866,796
------------ ------------
------------ ------------
</TABLE>
<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>
EQUITY GROWTH FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 4,244,767 $ 84,908,525
Shares issued to shareholders in reinvestment of
distributions.................................... 43,323 895,916
------------ ------------
Total issued....................................... 4,288,090 85,804,441
Shares redeemed.................................... (178,315) (3,486,970)
------------ ------------
Net increase....................................... 4,109,775 $ 82,317,471
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
<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>
- ----------------------------------------------------------
FLEXIBLE STRATEGY FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 6,842,583 $103,469,524
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 708,891 10,747,143
------------ ------------
Total issued....................................... 7,551,474 114,216,667
Shares redeemed.................................... (904,823) (13,574,190)
------------ ------------
Net increase....................................... 6,646,651 $100,642,477
------------ ------------
------------ ------------
</TABLE>
<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) (12,312,814)
------------ ------------
Net increase....................................... 6,191,897 $ 92,909,143
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
GLOBAL STRATEGY FOCUS FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 22,592,355 $274,822,981
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 668,929 8,022,134
------------ ------------
Total issued....................................... 23,261,284 282,845,115
Shares redeemed.................................... (1,462,140) (17,755,958)
------------ ------------
Net increase....................................... 21,799,144 $265,089,157
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
<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>
GLOBAL UTILITY FOCUS FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 4,446,449 $ 45,407,839
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 408,041 3,993,505
------------ ------------
Total issued....................................... 4,854,490 49,401,344
Shares redeemed.................................... (1,299,696) (12,707,196)
------------ ------------
Net increase....................................... 3,554,794 $ 36,694,148
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
For the Period July 1, 1993+ to Dollar
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 Fund issued 200,010
shares to MLAM for $2,000,000.
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 10,081,695 $116,511,262
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 1,840,902 20,563,966
------------ ------------
Total issued....................................... 11,922,597 137,075,228
Shares redeemed.................................... (1,381,220) (15,761,890)
------------ ------------
Net increase....................................... 10,541,377 $121,313,338
------------ ------------
------------ ------------
</TABLE>
162
<PAGE>
- --------------------------------------------------------------------------------
<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........................................ 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>
INTERMEDIATE GOVERNMENT BOND FUND
- ----------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 1,580,746 $ 15,798,020
Shares issued to shareholders in reinvestment of
dividends........................................ 22,294 222,052
------------ ------------
Total issued....................................... 1,603,040 16,020,072
Shares redeemed.................................... (16,719) (166,738)
------------ ------------
Net increase....................................... 1,586,321 $ 15,853,334
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 200,000
shares to MLAM for $2,000,000.
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND
- ----------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 532,215 $ 5,218,763
Shares issued to shareholders in reinvestment of
dividends........................................ 27,759 271,353
------------ ------------
Total issued....................................... 559,974 5,490,116
Shares redeemed.................................... (35,652) (348,847)
------------ ------------
Net increase....................................... 524,322 $ 5,141,269
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 500,000
shares to MLAM for $5,000,000.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 15,762,751 $177,512,550
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 155,170 1,705,946
------------ ------------
Total issued....................................... 15,917,921 179,218,496
Shares redeemed.................................... (149,766) (1,678,473)
------------ ------------
Net increase....................................... 15,768,155 $177,540,023
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
For the Period July 1, 1993+ to Dollar
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 Fund issued 800,010
shares to MLAM for $8,000,100.
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 2,431,502 $ 26,836,585
Shares issued to shareholders in reinvestment of
dividends........................................ 7,751 83,948
------------ ------------
Total issued....................................... 2,439,253 26,920,533
Shares redeemed.................................... (134,053) (1,481,555)
------------ ------------
Net increase....................................... 2,305,200 $ 25,438,978
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1993 Shares Amount
- ----------------------------------------------------------
<S> <C> <C>
Shares sold........................................ 1,268,742 $ 14,115,826
Shares issued to shareholders in reinvestment of
dividends........................................ 3,674 40,449
------------ ------------
Total issued....................................... 1,272,416 14,156,275
Shares redeemed.................................... (327,587) (3,584,398)
------------ ------------
Net increase....................................... 944,829 $ 10,571,877
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRIME BOND FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 9,962,468 $118,092,307
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 2,421,862 28,191,568
------------ ------------
Total issued....................................... 12,384,330 146,283,875
Shares redeemed.................................... (2,052,800) (23,633,675)
------------ ------------
Net increase....................................... 10,331,530 $122,650,200
------------ ------------
------------ ------------
</TABLE>
<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>
- ----------------------------------------------------------
QUALITY EQUITY FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 6,335,594 $177,474,655
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 218,564 6,013,863
------------ ------------
Total issued....................................... 6,554,158 183,488,518
Shares redeemed.................................... (476,786) (13,262,021)
------------ ------------
Net increase....................................... 6,077,372 $170,226,497
------------ ------------
------------ ------------
- ----------------------------------------------------------
</TABLE>
<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>
163
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 19,180,364 $ 19,180,364
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 1,250,777 1,250,777
------------ ------------
Total issued....................................... 20,431,141 20,431,141
Shares redeemed.................................... (18,368,014) (18,368,014)
------------ ------------
Net increase....................................... 2,063,127 $ 2,063,127
------------ ------------
------------ ------------
</TABLE>
<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>
- ----------------------------------------------------------
WORLD INCOME FOCUS FUND
- ----------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
<S> <C> <C>
- ----------------------------------------------------------
Shares sold........................................ 3,613,258 $ 35,765,361
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 565,499 5,699,784
------------ ------------
Total issued....................................... 4,178,757 41,465,145
Shares redeemed.................................... (870,578) (8,296,766)
------------ ------------
Net increase....................................... 3,308,179 $ 33,168,379
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
For the Period July 1, 1993+ to Dollar
December 31, 1993 Shares Amount
- ----------------------------------------------------------
<S> <C> <C>
Shares sold........................................ 4,880,334 $ 49,656,106
Shares issued to shareholders in reinvestment of
dividends........................................ 63,693 647,784
------------ ------------
Total issued....................................... 4,944,027 50,303,890
Shares redeemed.................................... (855,476) (8,720,702)
------------ ------------
Net increase....................................... 4,088,551 $ 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, 1994, the Company had capital loss carryforwards of
approximately $634,000 in the American Balanced Fund, all of which expires in
2002; $91,000 in the Developing Capital Markets Focus Fund, all of which expires
in 2002; $1,982,000 in the Equity Growth Fund, all of which expires in 2002;
$1,462,000 in the Global Utility Focus Fund, all of which expires in 2002;
$420,000 in the High Current Income Fund, of which $119,000 expires in 1999 and
$301,000 expires in 2002; $5,000 in the Intermediate Government Bond Fund, all
of which expires in 2002; $27,000 in the International Bond Fund, all of which
expires in 2002; $15,024,000 in the Prime Bond Fund, all of which expires in
2002; and $2,008,000 in the World Income Focus Fund, all of which expires in
2002.
6. LOANED SECURITIES:
At December 31, 1994, the Prime Bond Fund held US Treasury bonds having an
aggregate value of approximately $23,421,000 as collateral for portfolio
securities loaned having a market value of approximately $22,983,000.
7. COMMITMENTS:
At December 31, 1994, the International Equity Focus Fund and World Income Focus
Fund had entered into foreign exchange contracts under which they agreed to sell
various foreign currencies with values of approximately $354,000 and $9,000,
respectively, and Global Strategy Focus Fund, International Equity Focus Fund
and Natural Resources Focus Fund had entered into foreign exchange contracts
under which it agreed to purchase various foreign currencies with values of
approximately $110,000, $253,000 and $222,000, respectively.
8. SUBSEQUENT EVENT:
On January 3, 1995, the Board of Directors declared ordinary income dividends
and long-term capital gains distributions per share payable on January 10, 1995
to shareholders of record as of December 31, 1994 as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
LONG-TERM
ORDINARY CAPITAL
FUND INCOME-NET GAINS
- ----------------------------------------------------------
<S> <C> <C>
American Balanced Fund........................... $ 0.271394 --
Basic Value Focus Fund........................... 0.570135 $0.015911
Developing Capital Markets Focus Fund............ 0.086102 --
Domestic Money Market Fund....................... -- --
Equity Growth Fund............................... 0.043408 --
Flexible Strategy Fund........................... 0.189923 0.270745
Global Strategy Focus Fund....................... 0.174053 0.004539
Global Utility Focus Fund........................ 0.102569 --
High Current Income Fund......................... -- --
Intermediate Government Bond Fund................ -- --
International Bond Fund.......................... -- --
International Equity Focus Fund.................. 0.330050 0.080300
Natural Resources Focus Fund..................... 0.077104 0.031612
Prime Bond Fund.................................. -- --
Quality Equity Fund.............................. 0.281519 0.512323
Reserve Assets Fund.............................. -- --
World Income Focus Fund.......................... -- --
</TABLE>
164
<PAGE>
PROSPECTUS
APRIL 28, 1995
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 may also be sold in the future to Separate
Accounts of insurance companies other than MLLIC or ML of New York (together
with MLLIC and ML of New York, 'Insurance Companies') to fund Contracts issued
by them. 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:
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.
For more information on the Funds' investment objectives and policies,
please see 'Investment Objectives and Policies of the Funds,' page 7.
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 28, 1995, 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>
Finanical Highlights........................... 3
The Insurance Companies........................ 7
Investment Objectives and Policies of the
Funds........................................ 7
Directors...................................... 25
Investment Adviser............................. 26
Portfolio Transactions and Brokerage........... 28
Purchase of Shares............................. 28
Redemption of Shares........................... 28
Dividends, Distributions and Taxes............. 28
Performance Data............................... 29
Additional Information......................... 30
Appendix A..................................... A-1
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Funds. The table has been audited by Deloitte & Touche
LLP, independent auditors, in connection with their annual audits of the
Company's financial statements. Financial statements for the year ended December
31, 1994 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>
DEVELOPING
CAPITAL
BASIC VALUE MARKETS
The following per share data and FOCUS FUND FOCUS FUND
ratios have been derived from ---------------------------------------- ----------------------
information provided in the FOR THE YEAR FOR THE PERIOD JULY 1, FOR THE PERIOD
financial statements. ENDED 1993+ TO MAY 2 1994+ TO
INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31, DECEMBER 31,
VALUE: 1994 1993 1994
------------ ----------------------- ----------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.95 $ 10.00 $ 10.00
------------ ------ ------
Investment income--net............. .17 .04 .09
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ .08 .91 (.58)
------------ ------ ------
Total from investment operations... .25 .95 (.49)
------------ ------ ------
Less dividends and distributions:
Investment income--net.......... (.10) -- --
Realized gain on
investments--net................ -- -- --
------------ ------ ------
Total dividends and
distributions..................... (.10) -- --
------------ ------ ------
Net asset value, end of period..... $ 11.10 $ 10.95 $ 9.51
------------ ------ ------
------------ ------ ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 2.36% 9.50%++ (4.90)%++
------------ ------ ------
------------ ------ ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .72% .86%* 1.29%*
------------ ------ ------
------------ ------ ------
Expenses........................... .72% .86%* 1.35%*
------------ ------ ------
------------ ------ ------
Investment income--net............. 2.08% 1.69%* 2.18%*
------------ ------ ------
------------ ------ ------
Investment income--net, and
realized gain (loss) on
investments--net.................. -- -- --
------------ ------ ------
------------ ------ ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $164,307 $47,207 $ 36,676
------------ ------ ------
------------ ------ ------
Portfolio turnover................. 60.55% 30.86% 29.79%
------------ ------ ------
------------ ------ ------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ The Basic Value 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
-----------------------------
The following per share data FOR THE
and ratios have been derived PERIOD
from information provided in FOR THE JULY 1,
the financial statements. YEAR ENDED 1993+ TO
INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31,
ASSET VALUE: 1994 1993
------------ ------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.66 $ 10.00
------------ ------------
Investment income--net........ .35 .04
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (1.25) .64
------------ ------------
Total from investment
operations................... (.90) .68
------------ ------------
Less dividends and
distributions:
Investment income--net..... (.29) (.02)
Realized gain on
investments--net......... -- --
In excess of realized gain
on investments--net...... (.02) --
------------ ------------
Total dividends and
distributions................ (.31) (.02)
------------ ------------
Net asset value, end of
period....................... $ 9.45 $ 10.66
------------ ------------
------------ ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ (8.51)% 6.85%++
------------ ------------
------------ ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .73% .89%*
------------ ------------
------------ ------------
Expenses...................... .73% .89%*
------------ ------------
------------ ------------
Investment income--net........ 3.68% 2.84%*
------------ ------------
------------ ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $126,243% $104,517
------------ ------------
------------ ------------
Portfolio turnover............ 9.52% 1.72%
------------ ------------
------------ ------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL
BOND FUND INTERNATIONAL EQUITY FOCUS FUND
------------ -------------------------------
The following per share data FOR THE FOR THE
and ratios have been derived PERIOD PERIOD
from information provided in MAY 2, FOR THE YEAR JULY 1,
the financial statements. 1994+ TO ENDED 1993+ TO
INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31, DECEMBER 31,
ASSET VALUE: 1994 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.00 $ 11.03 $ 10.00
----- ------------ ------
Investment income--net........ .38 .19 .01
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.35) (.13) 1.02
----- ------------ ------
Total from investment
operations................... .03 .06 1.03
----- ------------ ------
Less dividends and
distributions:
Investment income--net..... (.33) (.18) --
Realized gain on
investments--net........... -- (.01) --
In excess of realized gain
on investments--net........ -- -- --
----- ------------ ------
Total dividends and
distributions................ (.33) (.19) --
----- ------------ ------
Net asset value, end of
period....................... $ 9.70 $ 10.90 $ 11.03
----- ------------ ------
----- ------------ ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 0.37%++ 0.55% 10.30%++
----- ------------ ------
----- ------------ ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .00%* .97% 1.14%*
----- ------------ ------
----- ------------ ------
Expenses...................... 1.08%* .97% 1.14%*
----- ------------ ------
----- ------------ ------
Investment income--net........ 6.34%* 1.09% 0.30%*
----- ------------ ------
----- ------------ ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $9,933 $247,884 $ 76,906
----- ------------ ------
----- ------------ ------
Portfolio turnover............ 152.20% 58.84% 17.39%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
---------------------------
FOR THE
PERIOD
The following per share data and ratios have FOR THE YEAR JULY 1,
been derived from information provided in ENDED 1993+ TO
the financial statements. DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 10.38 $ 10.00
------------
Investment income--net....................... .76
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... (1.19) .33
------------ ------------
Total from investment operations............. (.43) .58
------------ ------------
Less dividends and distributions
Investment income--net.................... (.76) (.20)
Realized gain on investments--net......... -- --
In excess of realized gain on
investments--net.......................... (.02) --
------------ ------------
Total dividends and distributions............ (.78) (.20)
------------ ------------
Net asset value, end of period............... $ 9.17 $ 10.38
------------ ------------
------------ ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... (4.21)% 5.90%++
------------ ------------
------------ ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............... .75% .94%*
------------ ------------
------------ ------------
Expenses..................................... .75% .94%*
------------ ------------
------------ ------------
Investment income--net....................... 8.01% 6.20%*
------------ ------------
------------ ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 75,150 $ 50,737
------------ ------------
------------ ------------
Portfolio turnover........................... 117.58 54.80%
------------ ------------
------------ ------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ 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.
6
<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 and International 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 ML&Co., as is the Investment Adviser.
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 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 Rating Group ('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.
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.
7
<PAGE>
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 U.S. government
and government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, 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 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
8
<PAGE>
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
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
9
<PAGE>
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.
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, 1994.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------------------------------------------- ----------- -------------
<S> <C> <C>
A............................................ 0.35% 0.44%
AA........................................... 1.60 2.03
BBB.......................................... 0.04 0.09
BB........................................... 17.88 22.53
B............................................ 38.59 48.54
CCC.......................................... 3.15 3.83
NR........................................... 12.06 15.19
NA........................................... 5.42 6.85
UR........................................... 0.28 0.50
-------------
100.00%
</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.
10
<PAGE>
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 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 rated '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
11
<PAGE>
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.
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
jurisdictions, 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
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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.
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
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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 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.
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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.
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
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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 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. At
March 31, 1995, those countries' equity market capitalizations totalled
approximately 78% 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 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.
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
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markets. 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.
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 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. 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 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
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's 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.
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
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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.
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.
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.
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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 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 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, 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
21
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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 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 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 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.
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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' or 'the
Act'), the Developing Capital Markets Focus and International Equity Focus Funds
each may invest up to 10% of its total assets in securities of such 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 a 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. A 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 a 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 or securities issued or guaranteed by the U.S. Government 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.
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
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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
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 Developing Capital
Markets Focus 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 Developing Capital Markets Focus 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.
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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 six individuals, five 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 of the Investment Adviser; Executive Vice
President of Merrill Lynch & Co., Inc. ('ML&Co.'); Executive Vice President
of Merrill Lynch; Director of the Distributor.
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--Member of the Committee on Investment of Employee Benefits
Assets of the Financial Executives Institute.
HARRY WOOLF--Professor and former Director of the Institute for
Advanced Study (private institution devoted to the encouragement, support
and patronage of learning).
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* 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 130 other registered
investment companies. MLAM also offers portfolio management and portfolio
analysis services to individuals and institutions. In the aggregate, as of March
31, 1995, MLAM and FAM had a total of approximately $170.3 billion in investment
company and other portfolio assets under management including accounts of
certain affiliates of FAM.
MLAM (the general partner of which is Princeton Services, Inc., a
wholly-owned subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned
affiliate of Merrill Lynch & Co., Inc. and has its principal place of business
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
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 (certain of which it may delegate to third parties) 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, 1994, the advisory fees
expense incurred by the Company totalled $16,313,767 of which $683,107 related
to the Basic Value Focus Fund (representing .60% of its average net assets),
$429,608 related to the World Income Focus Fund (representing .60% of its
average net assets), $777,517 related to the Global Utility Focus Fund
(representing .60% of its average net assets), $1,355,159 related to the
International Equity Focus Fund (representing .75% of its average net assets),
$30,838 related to the International Bond Fund (representing (.60%) of its
average net assets), and $151,621 related to the Developing Capital Markets
Focus Fund (representing 1.00% of its average net assets). Although the 1.00%
investment advisory fee of the Developing Capital Markets Focus Fund is higher
than that of many other mutual funds, the Fund believes it is justified by the
high degree of care that must be given to the initial selection and continuous
supervision of the types of portfolio securities in which the Fund invests.
During the Company's fiscal year ended December 31, 1994, 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: $814,168 related to the Basic Value Focus Fund (representing
.72% of its average net assets), $535,498 related to the World Income Focus Fund
(representing .75% of its average net assets), $943,233 related to the Global
Utility Focus Fund (representing .73% of its net assets), $1,758,567 related to
the International Equity Focus Fund (representing .97% of its net assets),
$204,274 related to the Developing Capital Markets Focus Fund (representing
1.35% of its average net assets), and $55,475 related to the International Bond
Fund (representing 1.08% of its average 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.
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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, 1994, the Developing Capital
Markets Focus Fund and International Bond Fund were reimbursed for operating
expenses. Such reimbursements amounted to $8,915 and $55,475, respectively. See
'Investment Advisory Arrangements' in the Statement of Additional Information.
MLLA sells the Contracts described in the Prospectus for the Contracts.
The Investment Adviser has entered into an Administrative Services
Agreement with MLLIC and ML of New York pursuant to which the Investment Adviser
compensates such companies for administrative responsibilities relating to the
Company which are performed by MLLIC and ML of New York. The Investment Adviser
may enter into similar agreements with other Insurance Companies in the future.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Adviser
(together, the 'Codes'). The Codes significantly restrict the personal investing
activities of all employees of the Adviser and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a 'hot' initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Adviser.
Furthermore, the Codes provide for trading 'blackout periods' which prohibit
trading by investment personnel of the Company within periods of trading by the
Company in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
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.
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.
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
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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 has served as the Developing Capital Markets Focus Fund's
Portfolio Manager since 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 has served as the International Bond Fund's Portfolio Manager
since 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. During the year
ended December 31, 1994, the Company engaged in 33 transactions pursuant to such
order involving $154.9 million of securities. For the year ended December 31,
1994, the Company paid brokerage commissions of $3,526,815, of which $219,686
was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company will offer shares in the Funds, without sales charge, only for
purchase by the Insurance Companies for the Separate Accounts to fund benefits
under the Contracts. Shares of the 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 are currently sold only
to MLLIC and ML of New York, but may be sold to other Insurance Companies if the
Company is granted an exemptive order by the Securities and Exchange Commission
permitting such sales. 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, 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).
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.
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.
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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 offering price per
share on the last day of the period. The yield for the 30-day period ending
December 31, 1994 was 9.96% for the World Income Fund and 7.62% for the
International Bond 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 as of fifteen minutes following the close of trading 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 Fund is 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
(regular way) as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
in the over-the-counter market prior to the time of valuation. 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. When a Portfolio writes a call option, the amount of
the premium received is recorded on the books as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options being traded in
the over-the-counter market, the last asked price. Options purchased are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the over-the-counter market, the last bid price. 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.
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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 Fund
and International Bond Fund commenced operations on 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 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, 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. MLLIC purchased, 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 LLP, 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.
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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.
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 28, 1995, 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
For temporary or defensive purposes, each of the Funds 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
For temporary or defensive purposes, each of the Funds 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
For temporary or defensive purposes, each of the 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.
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.
For temporary or defensive purposes, the World Income Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets
Focus Fund and International Bond 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.
For temporary or defensive purposes, the World Income Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets
Focus Fund and International Bond Fund may also invest in U.S.
dollar-denominated obligations of foreign depository institutions and their
foreign branches and
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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
obligation or by government regulation.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may 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
a Fund (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
For temporary or defensive purposes, each of the 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. Because 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.
For temporary or defensive purposes, the World Income Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets
Focus Fund and International Bond 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
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements or purchase and sale
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contracts. Nevertheless, if the seller were to default on its obligation to
repurchase a security under a repurchase agreement or purchase and sale contract
and the market value of the underlying security at such time was less than the
Fund had paid to the seller, the Fund would realize a loss. Repurchase
agreements and purchase and sale contracts maturing in more than seven days will
be considered 'illiquid securities.'
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.
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.
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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 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
A-4
<PAGE>
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 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
A-5
<PAGE>
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 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
A-6
<PAGE>
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 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.
A-7
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights:
American Balanced Fund for each of the years in the six-year period
ended December 31, 1994 and the period June 1, 1988 (commencement of
operations) to December 31, 1988.
Basic Value Focus Fund for the year ended December 31, 1994 and the
period July 1, 1993 (commencement of operations) to December 31, 1993.
Developing Capital Markets Focus Fund for the period May 2, 1994
(commencement of operations) to December 31, 1994.
Domestic Money Market Fund for each of the years in the two-year
period ended December 31, 1994 and the period February 20, 1992
(commencement of operations) to December 31, 1992.
Equity Growth Fund for each of the years in the ten-year period
ended December 31, 1994.
Flexible Strategy Fund for each of the years in the eight-year
period ended December 31, 1994 and the period May 1, 1986 (commencement
of operations) to December 31, 1986.
Global Strategy Focus Fund for each of the years in the two-year
period ended December 31, 1994 and the period February 28, 1992
(commencement of operations) to December 31, 1992.
Global Utility Focus Fund for the year ended December 31, 1994 and
the period July 1, 1993 (commencement of operations) to December 31,
1993.
High Current Income Fund for each of the years in the ten-year
period ended December 31, 1994.
International Bond Fund for the period May 2, 1994 (commencement of
operations) to December 31, 1994.
International Equity Focus Fund for the year ended December 31,
1994 and for the period July 1, 1993 (commencement of operations) to
December 31, 1993.
Intermediate Government Bond Fund for the period May 2, 1994
(commencement of operations) to December 31, 1994.
Natural Resources Focus Fund for each of the years in the six-year
period ended December 31, 1994 and the period June 1, 1988 (commencement
of operations) to December 31, 1988.
Prime Bond Fund for each of the years in the ten-year period ended
December 31, 1994.
Quality Equity Fund for each of the years in the ten-year period
ended December 31, 1994.
Reserve Assets Fund for each of the years in the ten-year period
ended December 31, 1994.
World Income Focus Fund for the year ended December 31, 1994 and
for the period July 1, 1993 (commencement of operations) to December 31,
1993.
Contained in Part B:
Schedules of Investments as of December 31, 1994.
Statements of Assets and Liabilities as of December 31, 1994.
Statements of Operations for the year ended December 31, 1994.
Statements of Changes in Net Assets for the years ended December
31, 1994 and 1993.
C-1
<PAGE>
Financial Highlights:
American Balanced Fund for each of the years in the five-year
period ended December 31, 1994.
Basic Value Focus Fund for the year ended December 31, 1994 and the
period July 1, 1993 (commencement of operations) to December 31, 1993.
Developing Capital Markets Focus Fund for the period May 2, 1994
(commencement of operations) to December 31, 1994.
Domestic Money Market Fund for each of the years in the two-year
period ended December 31, 1994 and the period February 20, 1992
(commencement of operations) to December 31, 1992.
Equity Growth Fund for each of the years in the five-year period
ended December 31, 1994.
Flexible Strategy Fund for each of the years in the five-year
period ended December 31, 1994.
Global Strategy Focus Fund for each of the years in the two-year
period ended December 31, 1994 and the period February 28, 1992
(commencement of operations) to December 31, 1992.
Global Utility Focus Fund for the year ended December 31, 1994 and
the period July 1, 1993 (commencement of operations) to December 31,
1993.
High Current Income Fund for each of the years in the five-year
period ended December 31, 1993.
Intermediate Government Bond Fund for the period May 2, 1994
(commencement of operations) to December 31, 1994.
International Bond Fund for the period May 2, 1994 (commencement of
operations) to December 31, 1994.
International Equity Focus Fund for the year ended December 31,
1994 and the period July 1, 1993 (commencement of operations) to
December 31, 1993.
Natural Resources Focus Fund for each of the years in the five-year
period ended December 31, 1994.
Prime Bond Fund for each of the years in the five-year period ended
December 31, 1994.
Quality Equity Fund for each of the years in the five-year period
ended December 31, 1994.
Reserve Assets Fund for each of the years in the five-year period
ended December 31, 1994.
World Income Focus Fund for the year ended December 31, 1994 and
the period July 1, 1993 (commencement of operations) to December 31,
1993.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------
<S> <C>
1(a) --Articles of Incorporation of Registrant (a)
1(b) --Form of Articles Supplementary of Registrant (b)
1(c) --Form of Articles of Amendment of Registrant (c)
1(d) --Form of Articles Supplementary of Registrant (d)
1(e) --Form of Articles Supplementary of Registrant (e)
1(f) --Form of Articles Supplementary of Registrant (f)
1(g) --Articles Supplementary to Registrant's Articles of
Incorporation relating to the redesignation of shares of
common stock as Merrill Lynch Basic Value Focus Fund
Common Stock, Merrill Lynch World Income Focus Fund Common
Stock, Merrill Lynch Global Utility Focus Fund Common
Stock and Merrill Lynch International Equity Focus Fund
Common Stock (s)
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------
1(h) --Articles Supplementary to Registrant's Articles of
Incorporation relating to the designation of shares of
common stock as 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 (u)
<S> <C>
2 --By-Laws of Registrant, as amended (g)
3 --None
4 --Specimen certificate for shares of common stock of
Registrant (h)
5(a) --Investment Advisory Agreement for Merrill Lynch Reserve
Assets Fund (i)
5(b) --Investment Advisory Agreement for the Merrill Lynch Prime
Bond Fund, Merrill Lynch High Current Income Fund, Merrill
Lynch Quality Equity Fund and Merrill Lynch Equity Growth
Fund (j)
5(c) --Investment Advisory Agreement for Merrill Lynch Flexible
Strategy Fund (k)
5(d) --Form of Investment Advisory Agreement for Merrill Lynch
Natural Resources Focus Fund and Merrill Lynch American
Balanced Fund (l)
5(e) --Form of Investment Advisory Agreement for Merrill Lynch
Domestic Money Market Fund and Merrill Lynch Global
Strategy Focus Fund (m)
5(f) --Form of Investment Advisory Agreement for Merrill Lynch
Basic Value Focus Fund, Merrill Lynch World Income Focus
Fund, Merrill Lynch Global Utility Focus Fund and Merrill
Lynch International Equity Focus Fund (t)
5(g) --Form of Investment Advisory Agreement for Merrill Lynch
Developing Capital Markets Focus Fund, Merrill Lynch
International Bond Fund and Merrill Lynch Intermediate
Government Bond Fund (u)
6(a) --Form of Distribution Agreement (n)
7 --None
8 --Form of Custodian Agreement (o)
9(a) --Form of Transfer Agency, and Dividend Disbursing Agreement
(p)
9(b) --Form of Agreement relating to the use of the 'Merrill
Lynch' name (q)
10 --Opinion of Counsel (filed with Rule 24f-2 Notice on
February 24, 1993)
11 --Consent of Deloitte & Touche LLP
12 --None
13 --None
14 --None
15 --None
16 --Calculation of Performance Data (r)
27 --Financial Data Schedules (filed herewith)
</TABLE>
- ------------------
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form N-1 (the 'Registration Statement').
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment
No. 1 to the Registration Statement.
(c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment
No. 7 to the Registration Statement.
(d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment
No. 10 to the Registration Statement.
C-3
<PAGE>
(e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment
No. 12 to the Registration Statement.
(f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment
No. 16 to the Registration Statement ('Post-Effective Amendment No. 16').
(g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No.
11 to the Registration Statement ('Post-Effective Amendment No. 11').
(h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No.
4 to the Registration Statement ('Post-Effective Amendment No. 4').
(i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment
No. 8 to the Registration Statement ('Post-Effective Amendment No. 8').
(j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment
No. 8.
(k) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment
No. 9 to Registrant's Registration Statement.
(l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment
No. 11.
(m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment
No. 16.
(n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to
Registrant's Registration Statement ('Amendment No. 1').
(o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No.
4.
(p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment
No. 4.
(q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1.
(r) Incorporated by reference to Exhibit 16 to Post-Effective Amendment No.
13 to the Registration Statement.
(s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment
No. 20 to the Registration Statement.
(t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment
No. 20 to the Registration Statement.
(u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment
No. 21 to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant does not control any other person. Except that all of
Registrant's issued and outstanding shares are and will be held by Merrill Lynch
Life Insurance Company, ML Life Insurance Company of New York and Family Life
Insurance Company for their Separate Accounts, the Registrant is not under
common control with any other person.
ITEM 26. NUMBERS OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD
HOLDERS AT
TITLE OF CLASS 1993 MARCH 31, 1995
- ------------------------------------------------------------ --------------
<S> <C>
Common stock, par value $0.10 per share, Merrill Lynch
Domestic Money Market Fund Class.......................... 2
Common stock, par value $0.10 per share, Merrill Lynch
Reserve Assets Fund Class................................. 8
Common stock, par value $0.10 per share, Merrill Lynch Prime
Bond Fund Class........................................... 8
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
RECORD
HOLDERS AT
TITLE OF CLASS 1993 MARCH 31, 1995
- ------------------------------------------------------------ --------------
<S> <C>
Common stock, par value $0.10 per share, Merrill Lynch High
Current Income Fund Class................................. 8
Common stock, par value $0.10 per share, Merrill Lynch
Quality Equity Fund Class................................. 8
Common stock, par value $0.10 per share, Merrill Lynch
Equity Growth Fund Class.................................. 12
Common stock, par value $0.10 per share, Merrill Lynch
Flexible Strategy Fund Class.............................. 8
Common stock, par value $0.10 per share, Merrill Lynch
Natural Resources Focus Fund Class........................ 7
Common stock, par value $0.10 per share, Merrill Lynch
American Balanced Fund Class.............................. 6
Common stock, par value $0.10 per share, Merrill Lynch
Global Strategy Focus Fund Class.......................... 2
Common stock, par value $0.10 per share, Merrill Lynch Basic
Value Focus Fund Class.................................... 6
Common stock, par value $0.10 per share, Merrill Lynch World
Income Focus Fund Class................................... 6
Common stock, par value $0.10 per share, Merrill Lynch
Global Utility Focus Fund Class........................... 6
Common stock, par value $0.10 per share, Merrill Lynch
International Equity Focus Fund Class..................... 6
Common stock, par value $0.10 per share, Merrill Lynch
Developing Capital Markets Focus Fund Class............... 7
Common stock, par value $0.10 per share, Merrill Lynch
Global Bond Focus Fund Class.............................. 7
Common stock, par value $0.10 per share, Merrill Lynch
Intermediate Government Bond Fund Class................... 3
</TABLE>
ITEM 27. INDEMNIFICATION.
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a 'corporate representative') of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the corporate representative in connection with the proceeding, if: (i) he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant; and (ii) with respect to any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the Maryland
General Corporation Law to indemnify a corporate representative under certain
circumstances against expenses incurred in connection with the defense of a suit
or action by or in the right of the Registrant. Under the Distribution
Agreement, the Registrant has agreed to indemnify the Distributor against any
loss, liability, claim, damage or expense arising out of any untrue statement of
a material fact, or an omission to state a material fact, in any registration
statement, prospectus or report to shareholders of the Registrant. Reference is
made to Article VI of Registrant's Certificate of Incorporation, Article VI of
Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and
Section 9 of the Distribution Agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management 'MLAM' or the 'Investment Adviser' acts as
investment adviser for the following registered investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Merrill Lynch Asset Builder Program Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Convertible Holdings, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets, Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability
requirements), Merrill Lynch High Income Municipal Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Institutional
C-5
<PAGE>
Intermediate Fund, Merrill Lynch Global Holdings, Inc., Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Merrill Lynch
Middle East/Africa Fund, Merrill Lynch Municipal Series Trust, Merrill Lynch
Global Resources Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Merrill Lynch Variable Series Funds, Inc.,
Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money
Fund. Fund Asset Management, L.P. ('FAM'), an affiliate of the Investment
Adviser, acts as the investment adviser for the following registered investment
companies: Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., The Municipal Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, Inc., MuniYield Arizona Fund, Inc., MuniYield Arizona
Fund II, Inc., MuniYield California Insured Fund II, Senior High Income
Portfolio, Senior High Income Portfolio II, MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., Apex Municipal Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Insured Fund, Inc., MuniYield Insured
Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund,
Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield Pennsylvania Fund, Inc.,
MuniYield Fund, Inc., MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc.,
Merrill Lynch World Income Fund, Inc. and Worldwide DollarVest, Inc. The address
of each of these investment companies is Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds for Institutions Series and
Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2665. The address of the Investment Adviser
and FAM is also Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch') and Merrill
Lynch & Co., Inc. ('ML & Co.') is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since October
31, 1987 for his own account or in the capacity of director, officer, partner or
trustee. In addition, Mr. Zeikel is President and Mr. Richard is Treasurer of
all or substantially all of the investment companies described in the preceding
paragraph. Messrs. Durnin, Giordano, Glenn, Harvey, Hewitt, Kirstein and Monagle
are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS,
POSITION WITH PROFESSION, VOCATION OR
NAME INVESTMENT ADVISER EMPLOYMENT
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
Arthur Zeikel............ President and Director President and Director of
FAM; President and
Director of Princeton
Services; Executive
Vice President of
Merrill Lynch & Co. and
Merrill Lynch; and
Director of MLFD.
Terry K. Glenn........... Executive Vice President Executive Vice President
and Director and Director of FAM;
President and Director
of MLFD; Executive Vice
President of Princeton
Services; President of
Princeton
Administrators, Inc.
and Director of
Financial Data
Services, Inc.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS,
POSITION WITH PROFESSION, VOCATION OR
NAME INVESTMENT ADVISER EMPLOYMENT
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
Robert W. Crook.......... Senior Vice President Senior Vice President of
MLFD since 1990; Vice
President of MLAM and
MLFD.
Bernard J. Durnin........ Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
Vincent R. Giordano...... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
Elizabeth Griffen........ Senior Vice President
Norman R. Harvey......... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
N. John Hewitt........... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
Philip L. Kirstein....... Senior Vice President, Senior Vice President,
General Counsel, General Counsel, Director
Director and Secretary and Secretary of FAM;
Senior Vice President
of Princeton Services
since 1993.
Ronald M. Kloss.......... Senior Vice President Senior Vice President and
Controller of FAM; Senior
Vice President of
Princeton Services
since 1993.
Stephen M. M. Miller..... Senior Vice President Executive Vice President
of Princeton
Administrators, Inc.
since 1989; Senior Vice
President of Princeton
Services since 1993;
Vice President and
Secretary of Merrill
Lynch from 1982 to
1989; Secretary of
Merrill Lynch & Co.
from 1982 to 1989.
Joseph T. Monagle........ Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
Gerald M. Richard........ Senior Vice President and Senior Vice President and
Treasurer Treasurer of FAM; Senior
Vice President of
Princeton Services
since 1993; Vice
President and Treasurer
of MLFD.
Ronald Welburn........... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
Anthony Wiseman.......... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services since 1993.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Fund, MuniYield Arizona Fund, MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
C-7
<PAGE>
MuniYield Quality Fund II, Inc., Senior High Income Portfolio Inc., Senior High
Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holdings, Inc. and Worldwide DollarVest, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Officers Crook, Aldrich,
Graczyk, Brady, Breen, Fatseas, Wasel, Maguire and Schena is One Financial
Center, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn........... President Executive Vice President
Arthur Zeikel............ Director President and Director
Philip L. Kirstein....... Director None
William E. Aldrich....... Senior Vice President None
Robert W. Crook.......... Senior Vice President None
Kevin Boman.............. Vice President None
Michael J. Brady......... Vice President None
William M. Breen......... Vice President None
Sharon Creveling......... Vice President and None
Assistant Treasurer
Mark A. DeSario.......... Vice President None
James T. Fatseas......... Vice President None
Stanley Graczyk.......... Vice President None
Debra W.
Landsman-Yaros........... Vice President None
Michelle T. Lau.......... Vice President None
Gerald M. Richard........ Vice President and Treasurer
Treasurer
Sal Venezia.............. Vice President None
William Wasel............ Vice President None
Mark E. Maguire.......... Assistant Vice President None
Patricia A. Schena....... Assistant Vice President None
Robert Harris............ Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
will be maintained at the offices of the Registrant, its Investment Adviser and
its Custodian and Transfer Agent.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions 'Directors' and 'Investment
Adviser' in the Prospectus constituting Part A of the Registration Statement and
under the captions 'Management of the Company' and 'Investment Advisory
Arrangements' in the Statement of Additional Information constituting Part B of
the Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request, and without charge.
C-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT TO
ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW
JERSEY, ON THE 19TH DAY OF APRIL, 1995.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(Registrant)
By /s/ ARTHUR ZEIKEL
---------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------- --------------------
<S> <C> <C>
/S/ ARTHUR ZEIKEL President and Director April 19, 1995
- ------------------------------ (Principal Executive
(ARTHUR ZEIKEL) Officer)
/S/ GERALD M. RICHARD Treasurer (Principal April 19, 1995
- ------------------------------ Financial and
(GERALD M. RICHARD) Accounting Officer)
* Director
- ------------------------------
(WALTER MINTZ)
* Director
- ------------------------------
(MELVIN R. SEIDEN)
* Director
- ------------------------------
(STEPHEN B. SWENSRUD)
* Director
- ------------------------------
(JOE GRILLS)
* Director
- ------------------------------
(HARRY WOOLF)
*By /S/ GERALD M. RICHARD Attorney-in-Fact April 19, 1995
- ------------------------------
(GERALD M. RICHARD)
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ---- ------------
<S> <C> <C>
11 * -- Consent of Deloitte & Touche LLP.
27 * -- Financial Data Schedule.
</TABLE>
- ------------------
* Filed herewith
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
We consent to the use in Post-Effective Amendment No. 23 to Registration
Statement No. 2-74452 of our report dated February 17, 1995, appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption 'Financial Highlights'
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 27, 1995
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<NAME> RESERVE ASSETS FUND
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<TOTAL-ASSETS> 32813851
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<ARTICLE> 6
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<SERIES>
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<NAME> PRIME BOND FUND
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<INTEREST-INCOME> 26769262
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<NUMBER-OF-SHARES-SOLD> 9962468
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<PER-SHARE-NAV-BEGIN> 12.64
<PER-SHARE-NII> .77
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<PER-SHARE-NAV-END> 11.12
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000355916
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
<SERIES>
<NUMBER> 4
<NAME> HIGH CURRENT INCOME FUND
<S> <C>
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<PERIOD-START> JAN-01-1994
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<TOTAL-ASSETS> 255947192
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<SHARES-COMMON-PRIOR> 13556613
<ACCUMULATED-NII-CURRENT> 2509688
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<ACCUMULATED-NET-GAINS> (2036293)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (24346157)
<NET-ASSETS> 255718740
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<NET-INVESTMENT-INCOME> 21977178
<REALIZED-GAINS-CURRENT> (1918504)
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<ARTICLE> 6
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000355916
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<SERIES>
<NUMBER> 6
<NAME> EQUITY GROWTH FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1994
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<EXPENSES-NET> 1181790
<NET-INVESTMENT-INCOME> 383328
<REALIZED-GAINS-CURRENT> (1981763)
<APPREC-INCREASE-CURRENT> (8755921)
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<DISTRIBUTIONS-OF-GAINS> 895916
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ARTICLES OF INCORPORATION
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
ARTICLE I
THE UNDERSIGNED, Edward Gwisdalla, whose post office
address is 1633 Broadway, New York, New York 10019, being at
least 18 years of age, does hereby act as an incorporator,
under and by virtue of the General Corporation Law of the State
of Maryland authorizing the formation of corporations and with
the intention of forming a corporation.
ARTICLE II
NAME
The name of the corporation is MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
ARTICLE III
PURPOSE AND POWERS
The purpose or purposes for which the Corporation is
formed and the business or objects to be transacted, carried on
and promoted by it are as follows:
(1) To conduct and carry on the business of an in-
vestment company of the management type.
<PAGE>
(2) To hold, invest and reinvest its assets in secur-
ities, and in connection therewith to hold part or all of its
assets in cash.
(3) To issue and sell shares of its own capital stock
in such amounts and on such terms and conditions, for such pur-
poses and for such amount or kind of consideration now or here-
after permitted by the General Corporation Law of the State of
Maryland and by these Articles of Incorporation, as its Board
of Directors may determine, provided, however, that the value
of the consideration per share to be received by the Corpora-
tion upon the sale or other disposition of any shares of its
capital stock shall be not less than the net asset value per
share of such capital stock outstanding at the time of such
event.
(4) To redeem, purchase or otherwise acquire, hold,
dispose of, resell, transfer, reissue or cancel (all without
the vote or consent of the stockholders of the Corporation)
shares of its capital stock, in any manner and to the extent
now or hereafter permitted by the General Corporation Law of
the State of Maryland and by these Articles of Incorporation.
(5) To do any and all such further acts or things and
to exercise any and all such further powers or rights as may be
necessary, incidental, relative, conducive, appropriate or desirable
for the accomplishment, carrying out or attainment of
any of the foregoing purposes or objects.
2
<PAGE>
The Corporation shall be authorized to exercise and
enjoy all the powers, rights and privileges granted to, or con-
ferred upon, corporations by the General Corporation Law of the
State of Maryland now or hereafter in force, and the enumera-
tion of the foregoing shall not be deemed to exclude any pow-
ers, rights or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post-office address of the principal office of the
Corporation in this state is c/o The Corporation Trust Incor-
porated, First Maryland Building, 25 South Charles Street,
Baltimore, Maryland 21201. The name of the resident agent of
the Corporation in this State is The Corporation Trust Incor-
porated, a corporation of this State, and the post-office ad-
dress of the resident agent is First Maryland Building, 25
South Charles Street, Baltimore, Maryland 21201.
ARTICLE V
CAPITAL STOCK
The total number of shares of capital stock which the
Corporation shall have authority to issue is ONE BILLION
(1,000,000,000) shares of the par value of Ten Cents ($0.10)
per share and of the aggregate par value of $100,000,000. The
shares shall be divided into ten classes of Common Stock, each
of which is to consist of One Hundred Million (100,000,000)
3
<PAGE>
shares. These classes are hereby designated as Merrill Lynch
Reserve Assets Fund Common Stock, and nine classes of Common
Stock that are designated Classes A, B, C, D, E, F, G, H, and
I, respectively.
(a) The holders of each share of stock of the Corpo-
ration shall be entitled to one vote for each full share, and a
fractional vote for each fractional share of stock, ir-
respective of the class, then standing in his name on the books
of the Corporation. On any matter submitted to a vote of
Stockholders, all shares of the Corporation then issued and
outstanding and entitled to vote shall be voted in the
aggregate and not by class except that (1) when otherwise
expressly required by the Maryland General Corporation Law or
the Investment Company Act of 1940, as amended, shares shall be
voted by individual class; (2) only shares of the respective
classes are entitled to vote on matters concerning only that
class; and (3) fundamental policies, as specified in Article
XIV of the by-laws, may not be changed, unless a change affects
only one class, without the approval of the holders of a
majority of the Fund's outstanding voting shares, including a
majority (as defined under the Investment Company Act of 1940)
of the shares of each class.
(b) Each class of stock of the Corporation shall have
the following powers, preferences or other special rights, and
the qualifications, restrictions, and limitations thereof shall
be as follows:
4
<PAGE>
(1) The shares of each class, when issued, will
be fully paid and non-assessable, have no preference,
preemptive, conversion, exchange, or similar rights, and
will be freely transferable.
(2) The Board of Directors may from time to time
declare and pay dividends or distributions, in stock or in
cash, on any or all classes of stock, the amount of such
dividends and distributions and the payment of them being
wholly in the discretion of the Board of Directors.
(i) Dividends or distributions on shares of
any class of stock shall be paid only out of earned
surplus or other lawfully available assets belonging
to such class.
(ii) Inasmuch as one goal of the Corporation
is to qualify as a "regulated investment company"
under the Internal Revenue Code of 1954, as amended,
or any successor or comparable statute thereto, and
Regulations promulgated thereunder, and inasmuch as
the computation of net income and gains for Federal
income tax purposes may vary from the computation
thereof on the books of the Corporation, the Board of
Directors shall have the power in its discretion to
distribute in any fiscal years as dividends, including
dividends designated in whole or in part as capital
gains distributions, amounts sufficient in the opinion
5
<PAGE>
of the Board of Directors, to enable the Corporation
to qualify as a regulated investment company and to
avoid liability for the Corporation for Federal income
tax in respect of that year. In furtherance, and not
in limitation of the foregoing, in the event that a
class of shares has a net capital loss for a fiscal
year, and to the extent that a net capital loss for a
fiscal year offsets net capital gains from one or more
of the other classes, the amount to be deemed avail-
able for distribution to the class or classes with the
net capital gain may be reduced by the amount offset.
(3) The assets belonging to any class of stock
shall be charged with the liabilities in respect to such
class, and shall also be charged with its share of the
general liabilities of the Corporation in proportion to the
asset values of the respective classes. The determination
of the Board of Directors shall be conclusive as to the
amount of liabilities, the allocation of the same as to a
given class, and as to whether the same or general assets
of the Corporation are allocable to one or more classes.
(4) Prior to the issuance of any shares of a class,
the Board of Directors may by resolution change the
designation of such class to the name of the Fund of the
Corporation with respect to which such shares will be
issued.
6
<PAGE>
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING, AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF
THE DIRECTORS AND STOCKHOLDERS
(1) The number of directors of the Corporation shall
be one (l), which number may be increased pursuant to the
by-laws of the Corporation but shall never be less than one
(1) The name of the director who shall act until the first
annual meeting or until his successor is duly elected and
qualifies is:
William W. Hewitt, Jr.
(2) The Board of Directors of the Corporation is
hereby empowered to authorize the issuance from time to time of
shares of capital stock, whether now or hereafter authorized,
for such consideration as the Board of Directors may deem
advisable, subject to such limitations as may be set forth in
these Articles of Incorporation or in the by-laws of the Cor-
poration or in the General Corporation Law of the State of
Maryland.
(3) No holder of stock of the Corporation shall, as
such holder, have any right to purchase or subscribe for any
shares of the cacital stock of the Corporation or any other
security of the Corporation which it may issue or sell (whether
out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the
7
<PAGE>
Corporation acquired by it after the issue thereof, or other-
wise) other than such right, if any, as the Board of Direc-
tors, in its discretion, may determine.
(4) Each director and each officer of the Corporation
shall be indemnified by the Corporation to the full extent per-
mitted by the General Laws of the State of Maryland.
(5) The Board of Directors of the Corporation may
make, alter or repeal from time to time any of the by-laws of
the Corporation except any particular by-law which is specified
as not subject to alteration or reveal by the Board of Direc-
tors, subject to the requirements of the Investment Company Act
of 1940, as amended.
ARTICLE VII
REDEMPTION
Each holder of shares of capital stock of the Corpora-
tion shall be entitled to require the Corporation to redeem all
or any part of the shares of capital stock of the Corporation
standing in the name of such holder on the books of the Corpo-
ration, and all shares of capital stock issued by the Corpora-
tion shall be subject to redemption by the Corporation, at the
redemption price of such shares as in effect from time to time
as may be determined by the Board of Directors of the Corpora-
tion in accordance with the provisions hereof, subject to the
right of the Board of Directors of the Corporation to suspend
8
<PAGE>
the right of redemption of shares of capital stock of the Cor-
poration or postpone the date of payment of such redemption
price in accordance with provisions of applicable law. The
redemption price of shares of capital stock of the Corporation
shall be the net asset value thereof as determined by the Board
of Directors of the Corporation from time to time in accordance
with the provisions of applicable law, less such redemption fee
or other charge, if any, as may be fixed by resolution of the
Board of Directors of the Corporation. Payment of the redemp-
tion price shall be made in cash by the Corporation at such
time and in such manner as may be determined from time to time
by the Board of Directors of the Corporation.
ARTICLE VIII
DETERMINATION BINDING
Any determination made in good faith, so far as ac-
counting matters are involved, in accordance with accepted ac-
counting practice by or pursuant to the direction of the Board
of Directors, as to the amount of assets, obligations or lia-
bilities of the Corporation, as to the amount of net income of
the Corporation from dividends and interest for any period or
amounts at any time legally available for the payment of divi-
dends, as to the amount of any reserves or charges set up and
the propriety thereof, as to the time of or purpose for creat-
ing reserves or as to the use, alteration or cancellation of
9
<PAGE>
any reserves or charges (whether or not any obligation or lia-
bility for which such reserves or charges shall have been
created has been paid or discharged or shall be then or there-
after required to be paid or discharged), as to the price of
any security owned by the Corporation or as to any other
matters relating to the issuance, sale, redemption or other
acquisition or disposition of securities or shares of capital
stock of the Corporation, and any reasonable determination made
in good faith by the Board of Directors as to whether any
transaction constitutes a purchase of securities on "margin", a
sale of securities "short", or an underwriting of the sale of,
or a participation in any underwriting or selling group in con-
nection with the public distribution of, any securities, shall
be final and conclusive, and shall be binding upon the Corpora-
tion and all holders of its capital stock, past, present and
future, and shares of the capital stock of the Corporation are
issued and sold on the condition and understanding, evidenced
by the purchase of shares of capital stock or acceptance of
share certificates, that any and all such determinations shall
be binding as aforesaid. No provision of these Articles of
Incorporation shall be effective to (a) require a waiver of
compliance with any provision of the Securities Act of 1933, as
amended, or the Investment Company Act of 1940, as amended, or
of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder or (b) protect or purport to
10
<PAGE>
protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which
he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE IX
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
The Corporation reserves the right from time to time
to make any amendment of its charter, now or hereafter author-
ized by law, including any amendment which alters the contract
rights, as expressly set forth in its charter, of any outstand-
ing stock.
IN WITNESS WHEREOF, the undersigned incorporator of
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. hereby executes the
foregoing Articles of Incorporation and acknowledges the same
to be his act and further acknowledges that, to the best of his
knowledge, the matters and facts set forth therein are true in
all material respects under the penalties of perjury.
Dated the 14th day of October, 1981.
/s/ Edward Gwisdalla
-------------------------------
1633 Broadway
New York, N.Y. 10019
11
<PAGE>
ARTICLES SUPPLEMENTARY TO THE ARTICLES
OF INCORPORATION
OF
MERRILL LYNCH VARIABLE SERIES FUNDS,INC.
Merrill Lynch Variable Series Funds, Inc., a
Maryland corporation having its principal office in Baltimore
City, Maryland (hereinafter referred to as the "Company"),
hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: Pursuant to authority expressly vested in
the Board of Directors of the Company by Article V of the
Articles of Incorporation of the Company, the Board of
Directors has duly redesignated the Class E, F, G, H and
I Common Stock of the Company as, respectively, Merrill
Lynch U. S. Government Money 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 and Merrill Lynch Equity Growth Fund Common
Stock.
SECOND: Except to change, the designations of
such classes of the Company's Common Stock, the preferences,
conversions and other rights, voting powers, restrictions
as to dividends and qualifications of such classes of the
Company's Common Stock remain as stated in Article V of the
Articles of Incorporation of the Company.
IN WITNESS WHEREOF, Merrill Lynch Variable Series
Funds, Inc. has caused these presents to be signed in its
name and on its behalf by its President or one of its Vice
Presidents and its corporate seal to be hereunto affixed and
attested by its Secretary on the 11th day of February, 1982.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
By: /s/
---------------------------------
[SEAL]
Attest:
/s/ Philip L. Kirstein
----------------------------
Secretary
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.,
a Maryland corporation having its principal office in the City of
Baltimore, Maryland (hereinafter called the Corporation),
hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby
amended by striking out in its entirety ARTICLE V and inserting
in lieu thereof the following:
ARTICLE V
CAPITAL STOCK
The total number of shares of capital
stock which the Corporation shall have
authority to issue is TWO BILLION
(2,000,000,000) shares of par value of Ten
Cents ($0.10) per share and of the aggregate
par value of $200,000,000. The shares shall
be divided into ten classes of Common Stock
designated as follows: Merrill Lynch Reserve
Assets Fund Common Stock, Merrill Lynch U.S.
Government Money 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 and classes A, B, C, and D
Common Stock. The class designated as
Merrill Lynch Reserve Assets Fund Common
Stock shall consist of ONE BILLION ONE
HUNDRED MILLION (1,100,000,000) shares and
each of the remaining nine classes shall
consist of ONE HUNDRED MILLION (100,000,000)
shares.
(a) The holders of each share of stock
of the Corporation shall be entitled to one
vote for each full share, and a fractional
vote for each fractional share of stock,
irrespective of the class, then standing in
his name on the books of the Corporation.
On any matter submitted to a vote of
Stockholders, all shares of the Corporation
<PAGE>
then issued and outstanding and entitled to
vote shall be voted in the aggregate and not
by class except that (1) when otherwise
expressly required by the Maryland General
Corporation Law or the Investment Company
Act of 1940, as amended, shares shall be
voted by individual class; (2) only shares
of the respective classes are entitled to
vote on matters concerning only that class;
and (3) fundamental policies, as specified
in Article XIV of the by-laws, may not be
changed, unless a change affects only one
class, without the approval of the holders
of a majority of the Fund's outstanding
voting shares, including a majority (as
defined under the Investment Company Act of
1940) of the shares of each class.
(b) Each class of stock of the
Corporation shall have the following powers,
preferences or other special rights, and the
qualifications, restrictions, and
limitations thereof shall be as follows:
(1) The shares of each class,
when issued, will be fully paid and
non-assessable, have no preference,
preemptive, conversion, exchange, or similar
rights, and will be freely transferable.
(2) The Board of Directors may
from time to time declare and pay dividends
or distributions, in stock or in cash, on
any or all classes of stock, the amount of
such dividends and distributions and the
payment of them being wholly in the
discretion of the Board of Directors.
(i) Dividends or distribu-
tions on shares of any class of stock shall
be paid only out of earned surplus or other
lawfully available assets belonging to such
class.
(ii) Inasmuch as one goal of
the Corporation is to qualify as a
"regulated investment company" under the
Internal Revenue Code of 1954, as amended,
2
<PAGE>
or any successor or comparable statute
thereto, and Regulations promulgated
thereunder, and inasmuch as the computation
of net income and gains for Federal income
tax purposes may vary from the computation
thereof on the books of the Corporation, the
Board of Directors shall have the power in
its discretion to distribute in any fiscal
years as dividends, including dividends
designated in whole or in part as capital
gains distributions, amounts sufficient in
the opinion of the Board of Directors, to
enable the Corporation to qualify as a
regulated investment company and to avoid
liability for the Corporation for Federal
income tax in respect of that year. In
furtherance, and not in limitation of the
foregoing, in the event that a class of
shares has a net capital loss for a fiscal
year, and to the extent that a net capital
loss for a fiscal year offsets net capital
gains from one or more of the other classes,
the amount to be deemed available for
distribution to the class or classes with
the net capital gain may be reduced by the
amount offset.
(3) The assets belonging to any
class of stock shall be charged with the
liabilities in respect to such class, and
shall also be charged with its share of the
general liabilities of the Corporation in
proportion to the asset values of the
respective classes. The determination of
the Board of Directors shall be conclusive
as to the amount of liabilities, the
allocation of the same as to a given class,
and as to whether the same or general assets
of the Corporation are allocable to one or
more classes.
(4) Prior to the issuance of any
shares of a class, the Board of Directors
may by resolution change the designation of
such class to the name of the Fund of the
Corporation with respect to which such
shares will be issued.
3
<PAGE>
(c) The board of directors may
classify or reclassify any unissued capital
stock of the Corporation from time to time
by setting or changing the preferences,
conversion or other rights, voting powers,
restrictions, limitations as to dividends,
qualifications, or terms or conditions of
redemption of such stock.
SECOND: The charter of the Corporation is further
amended by adding a Paragraph (6) to ARTICLE VI which shall
read as follows:
(6) These Articles of Incorporation
may be amended by the affirmative vote of a
majority of the shares of the Corporation
entitled to vote on any such amendment.
THIRD: The amendment of the charter of the
Corporation as hereinabove set forth has been duly advised by
the board of directors and approved by the stockholder of the
Corporation.
FOURTH: (a) The total number of; shares of all
classes of stock of the Corporation heretofore authorized, and
the number and par value of the shares of each class, are as
follows:
One Billion (1,000,000,000) shares of
capital stock divided into ten classes of
Common Stock each of which consists of One
Hundred Million (100,000,000) shares of the
par value of Ten Cents ($0.10) per share in
an aggregate par value amount of all classes
of $100,000,000.
(b) The total number of shares of all classes of
stock of the Corporation as increased, and the number and par
value of the shares of each class, are as follows:
Two billion (2,000,000,000) shares of
capital stock divided into ten classes of
Common Stock. The class designated as
Merrill Lynch Reserve Assets Fund Common
Stock consists of One Billion One Hundred
Million (1,100,000,000) shares of the par
value of Ten Cents ($0.l0) per share and the
nine remaining classes of Common Stock
4
<PAGE>
consist of One Hundred Million (100,000,000)
shares each of the par value of Ten Cents
($0.10) per share in an aggregate par value
amount of all classes of $200,000,000.
(c) The information required pursuant to
Section 2-607(b)(2)(i) of the General Corporation Law of Maryland
was not changed by the foregoing amendment.
IN WITNESS WHEREOF: Merrill Lynch Variable Series
Funds, Inc. has caused these presents to be signed in its name
and on its behalf by its President and attested by its
Secretary on July 19, 1984.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
By: /s/ Arthur Zeikel
---------------------
Arthur Zeikel
President
5
<PAGE>
Attest:
/s/ Michael J. Hennewinkel
---------------------------------
Michael J. Hennewinkel, Secretary
The undersigned, President of MERRILL LYNCH VARIABLE
SERIES FUNDS, INC., who executed on behalf of said Corporation
the foregoing Articles of Amendment, of which this certificate
is made a part, hereby acknowledges, in the name and on behalf
of said Corporation, the foregoing Articles of Amendment to be
the corporate act of said Corporation and further certifies
that, to the best of his knowledge, information and belief, the
matters and facts set forth therein with respect to the
approval thereof are true in all material respects, under the
penalties of perjury.
/s/ Arthur Zeikel
---------------------------
Arthur Zeikel
President
6
ARTICLES SUPPLEMENTARY TO THE ARTICLES
OF INCORPORATION
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Variable Series Funds, Inc. , a Maryland
corporation having its principal office in Baltimore City, Maryland
(hereinafter referred to as the "Company") , hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in
the Board of Directors of the Company by Article V of the Articles
of Incorporation of the Company, the Board of Directors has duly
redesignated the Class D Common Stock as Flexible Strategy Fund
Common Stock.
SECOND: Except to change the designation of such class
of the Company's Common Stock, the preferences, conversions and
other rights, voting powers, restrictions as to the dividends and
qualifications of such class of the Company's Common Stock remain
as stated in Article V of the Articles of Incorporation of the
Company.
IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds,
Inc. has caused these presents to be signed in its name and on its
behalf by its President or one of its Vice Presidents and its
corporate seal to be hereunto affixed and attested by its Secretary
on the 21st day of April, 1986.
MERRILL LYNCH VARIABLE SERIES FUNDS,
INC.
By: /s/Arthur Zeikel
-----------------------------
President
Arthur Zeikel
(SEAL)
Attest:
/s/ Michael J. Hennewinkel
---------------------------
Secretary
Michael J. Hennewinkel
<PAGE>
THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE
SERIES FUNDS, INC., who executed on behalf of said corporation the
foregoing Articles Supplementary to the Charter, of which this
certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles Supplementary to
the Charter to be the corporate act of said corporation and further
certifies that, to the best of his knowledge, information and
belief, the matters and facts set forth therein with respect to the
approval thereof are true in all material respects, under the
penalties of perjury.
/s/Arthur Zeikel
------------------------
Arthur Zeikel
President
2
ARTICLES SUPPLEMENTARY TO THE ARTICLES
OF INCORPORATION
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Variable Series Funds, Inc. (the
"Company"), a Maryland corporation having its principal office
in the City of Baltimore, Maryland, hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in
the Board of Directors of the Company by Article V of the
Articles of Incorporation of the Company, the Board of
Directors has duly redesignated the shares of Merrill Lynch
U.S. Government Money Fund Common Stock and Class C Common
Stock as shares of Merrill Lynch Natural Resources Focus Fund
Common Stock and Merrill Lynch American Balanced Fund Common
Stock, respectively.
SECOND: Except to change the designation of such
classes of the Company's Common Stock, the preferences,
conversions and other rights, voting powers, restrictions as to
dividends and qualifications of such classes of the Company's
Common Stock remain as stated in Article V of the Articles of
Incorporation of the Company.
IN WITNESS WHEREOF, Merrill Lynch Variable Series
Funds, Inc. has caused these presents to be signed in its name
and on its behalf by its President and attested by its
Secretary on the 11 day of April, 1988.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
By: /s/ Arthur Zeikel
---------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
--------------------------
Michael J. Hennewinkel
Secretary
<PAGE>
THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE
SERIES FUNDS, INC., who executed on behalf of said corporation
the foregoing Articles Supplementary to the Charter, of which
this certificate is made a part, hereby acknowledges, in the
name and on behalf of said corporation, the foregoing Articles
Supplementary to the Charter to be the corporate act of said
corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set
forth therein with respect to the approval thereof are true in
all material respects, under the penalties of perjury.
/s/ Arthur Zeikel
-------------------------
Arthur Zeikel
President
FORM OF
ARTICLES SUPPLEMENTARY TO THE ARTICLES
OF INCORPORATION
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Variable Series Funds, Inc. (the
"Company"), a Maryland corporation having its principal office in
the City of Baltimore, Maryland, hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested
in the Board of Directors of the Company, the Board of Directors has
duly redesignated the shares of Class A Common Stock and Class B
Common Stock as shares of Merrill Lynch Global Strategy Focus Fund
Common Stock and Domestic Money Market Fund Common Stock,
respectively.
SECOND: Except to change the designation of such
classes of the Company's Common Stock, the preferences, conversions
and other rights, voting powers, restrictions as to the dividends
and qualifications of such classes of the Company's Common Stock
remain as stated in Article V of the Articles of Incorporation of
the Company.
IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds,
Inc. has caused these presents to be signed in its name and on its
behalf by its President and attested by its Secretary on the 31st
day of December, 1991.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
By: /s/Arthur Zeikel
--------------------------
President
Arthur Zeikel
(SEAL)
Attest:
/s/ Michael J. Hennewinkel
--------------------------
Michael J. Hennewinkel
Secretary
<PAGE>
THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE
SERIES FUNDS, INC., who executed on behalf of said corporation the
foregoing Articles Supplementary to the Charter, of which this
certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles Supplementary to
the Charter to be the corporate act of said corporation and further
certifies that, to the best of his knowledge, information and
belief, the matters and facts set forth therein with respect to the
approval thereof are true in all material respects, under the
penalties of perjury.
/s/Arthur Zeikel
------------------------------
Arthur Zeikel
President
2
ARTICLES SUPPLEMENTARY
TO THE
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Variable Series Funds, Inc.(the
"Company"), a Maryland corporation having its principal office in
the City of Baltimore, Maryland, hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in the
Board of Directors of the Company by Section 2-208 of the Maryland
General Corporation Law and Article V, Section (c) of the Articles
of Incorporation of the Company, the Board of Directors has duly
reclassified 400,000,000 of the authorized but unissued shares of
Merrill Lynch Reserve Assets Fund Common Stock as follows:
100,000,000 shares have been reclassified as a new class designated
Merrill Lynch Basic Value Focus Fund Common Stock; 100,000,000
shares have been reclassified as a new class designated Merrill
Lynch World Income Focus Fund Common Stock; 100,000,000 shares have
been reclassified as a new class designated Merrill Lynch Global
Utility Focus Fund Common Stock; and 100,000,000 shares have been
reclassified as a new class designated Merrill Lynch International
Equity Focus Fund Common Stock.
SECOND: All of the shares of the Company's Common Stock,
as reclassified and redesignated, continue to have the preferences,
conversions and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in Article V of the Articles
of Incorporation of the Company.
IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds,
Inc. has caused these presents to be signed in its name and on its
behalf by its President and attested by its Secretary on the 24th
day of June, 1993.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
By:/s/Arthur Zeikel
------------------------
Name: Arthur Zeikel
Title: President
Attest:
/s/ Michael J. Hennewinkel
-------------------------------
Michael J. Hennewinkel
Secretary
<PAGE>
THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE
SERIES FUNDS, INC., who executed on behalf of said corporation the
foregoing Articles Supplementary to the Articles of Incorporation
of said corporation, of which this certificate is made a part,
hereby acknowledges, in the name and on behalf of said corporation,
the foregoing Articles Supplementary to the Articles of
Incorporation of said corporation to be the corporate act of said
corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
/s/ Arthur Zeikel
-------------------------------
Name: Arthur Zeikel
Title: President
FORM OF AMENDED BY-LAWS
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office
of the Corporation shall be in the City of Baltimore, State of
Maryland.
Section 2. Principal Executive Office. The
principal executive office of the Corporation shall be at 800
Scudders Mill Road, Township of Plainsboro, State of New Jersey.
Section 3. Other Offices. The Corporation may have
such other offices in such places as the Board of Directors may
from time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Annual Meeting. The annual meeting of
the stockholders of the Corporation for the election of
directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on such day
in July of each year as shall be designated annually by the
Board of Directors; provided, however, that anything in these
By-Laws to the contrary notwithstanding, unless otherwise
prohibited by law, so long as the Corporation is registered as
an investment company under the Investment Company Act of 1940,
as amended, the Corporation shall not be required to hold an
annual meeting in any year in which none of the following is
required to be acted on by the stockholders of the Corporation
<PAGE>
under the Investment Company Act of 1940, as amended: (1) election
of directors, (2) approval of the Investment Advisory Agreement,
(3) ratification of the election of independent public
accountants, and (4) approval of a Distribution Agreement. Any
business of the Corporation may be transacted at the annual
meeting without being specifically designated in the notice,
except such business as is specifically required by statute to be
stated in the notice.
Section 2. Special Meetings. Special meetings of
the stockholders, unless otherwise provided by law or by the
Articles of Incorporation, may be called for any purpose or
purposes by a majority of the Board of Directors, the President,
or on the written request of the holders of at least 25% of the
outstanding capital stock of the Corporation entitled to vote at
such meeting.
Section 3. Place of Meetings. The annual meeting
and any special meeting of the stockholders shall be held at
such place within the United States as the Board of Directors may
from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice.
Notice of the place, date and time of the holding of each annual
and special meeting of the stockholders and the purpose or
purposes of each special meeting shall be given personally or by
mail, not less than ten nor more than sixty days before the date
of such meeting, to each stockholder entitled to vote at such
meeting and to each other stockholder entitled to notice of the
meeting. Notice by mail shall be deemed to be duly given when
2
<PAGE>
deposited in the United States mail addressed to the stockholder
at his address as it appears on the records of the Corporation,
with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed
waived by any stockholder who shall attend such meeting in person
or by proxy, or who shall, either before or after the meeting,
submit a signed waiver of notice which is filed with the records
of the meeting. When a meeting is adjourned to another time and
place, unless the Board of Directors, after the adjournment, shall
fix a new record date for an adjourned meeting, or the adjournment
is for more than thirty days, notice of such adjourned meeting need not
be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment
is taken.
Section 5. Quorum. At all meetings of the
stockholders, the holders of a majority of the shares of stock of
the Corporation entitled to vote at the meeting, present in person
or by proxy, shall constitute a quorum for the transaction
of any business, except as otherwise provided by statute or by the
Articles of Incorporation or these By-Laws. In the absence of a
quorum no business may be transacted, except that the holders of a
majority of the shares of stock present in person or by proxy and
entitled to vote may adjourn the meeting from time to time,
without notice other than announcement thereat except as otherwise
required by these By-Laws, until the holders of the requisite
amount of shares of stock shall be so present. At any such
adjourned meeting at which a quorum
3
<PAGE>
may be present any business may be transacted which might have been
transacted at the meeting as originally called. The absence from any
meeting, in person or by proxy, of holders of the number of shares of
stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of
Maryland, the Investment Company Act of 1940, as amended, or other
applicable statute, the Articles of Incorporation, or these By-Laws,
for action upon any given matter shall not prevent action at such
meeting upon any other matter or matters which may properly come before
the meeting, if there shall be present thereat, in person or by proxy,
holders of the number of shares of stock of the Corporation required
for action in respect of such other matter or matters.
Section 6. Organization. At each meeting of the
stockholders, the Chairman of the Board (if one has been desig-
nated by the Board), or in his absence or inability to act, the
President, or in the absence or inability to act of the Chairman
of the Board and the President, a Vice President, shall act as
chairman of the meeting. The Secretary, or in his absence or
inability to act, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep the
minutes thereof.
Section 7. Order of Business. The order of business
4
<PAGE>
at all meetings of the stockholders shall be as determined by the
chairman of the meeting.
Section 8. Voting. Except as otherwise provided by
statute or the Articles of Incorporation, each holder of record of
shares of stock of the Corporation having voting power shall be
entitled at each meeting of the stockholders to one vote for every
share of such stock standing in his name on the record of
stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall
not have been so fixed, then at the later of (i) the close of
business on the day on which notice of the meeting is mailed or
(ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of
stockholders may authorize another person or persons to act for
him by a proxy signed by such stockholder or his attorney-in-
fact. No proxy shall be valid after the expiration of eleven
months from the date thereof, unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy
states that it is irrevocable and where an irrevocable proxy is
permitted by law. Except as otherwise provided by statute,
the Articles of Incorporation or these By-Laws, any corporate
action to be taken by vote of the stockholders shall be authorized
by a majority of the total votes cast at a
5
<PAGE>
meeting of stockholders by the holders of shares present in
person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then
unless required by statute or these By-Laws, or determined by the
chairman of the meeting to be advisable, any such vote need not be
by ballot. On a vote by ballot, each ballot shall be signed by
the stockholder voting, or by his proxy, if there be such proxy,
and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board
of Directors may fix, in advance, a record date not more than
sixty nor less than ten days before the date then fixed for the
holding of any meeting of the stockholders. All persons who were
holders of record of shares at such time, and no others, shall be
entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board may, in advance
of any meeting of stockholders, appoint one or more inspectors to
act at such meeting or any adjournment thereof. If the inspec-
tors shall not be so appointed or if any of them shall fail to
appear or act, the chairman of the meeting may, and on the request
of any stockholder entitled to vote thereat shall, appoint
inspectors. Each inspector, before entering upon the
6
<PAGE>
discharge of his duties, shall take and sign an oath to execute
faithfully the duties of inspector at such meeting with strict
impartiality and according to the best of his ability.
The inspectors shall determine the number of shares outstanding
and the voting number of each, the number of shares represented at
the meeting, the existence of a quorum, the validity and effect of
proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to
conduct the election or vote in fairness to all stockholders.
On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in
writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be
stockholders.
Section 11. Consent of Stockholders in Lieu of
Meeting. Except as otherwise provided by statute or the Arti-
cles of Incorporation, any action required to be taken at any
annual or special meeting of stockholders, or any action which may
be taken at any annual or special meeting of such stockholders,
may be taken without a meeting, without prior notice
7
<PAGE>
and without a vote, if the following are filed with the records of
stockholders meetings: (i) a unanimous written consent which
sets forth the action and is signed by each stockholder entitled
to vote on the matter and (ii) a written waiver of any right to
dissent signed by each stockholder entitled to notice of the
meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise pro-
vided in the Articles of Incorporation, the business and affairs
of the Corporation shall be managed by the Board of Directors.
The Board may exercise all the powers of the Corporation and do
all such lawful acts and things as are not by statute or the
Articles of Incorporation directed or required to be exercised or
done by the stockholders.
Section 2. Number of Directors. The number of direc-
tors shall be fixed from time to time by resolution of the Board
of Directors adopted by a majority of the Directors then in
office; provided, however, that the number of directors shall in
no event be less than one nor more than fifteen. Any vacancy
created by an increase in directors may be filled in accordance
with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any
8
<PAGE>
director from office prior to the expiration of his term unless
such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors.
Directors shall be elected annually, by written ballot at the
annual meeting of stockholders or a special meeting held for that
purpose. The term of office of each director shall be from the
time of his election and qualification until the annual election
of directors next succeeding his election and until his successor
shall have been elected and shall have qualified, or until his
death, or until he shall have resigned, or have been removed as
hereinafter provided in these By-Laws, or as otherwise provided
by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corpora-
tion may resign at any time by giving written notice of his
resignation to the Board or the Chairman of the Board or the
President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately
upon its receipt; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it
effective.
9
<PAGE>
Section 5. Removal of Directors. Any director of the
Corporation may be removed by the stockholders by a vote of a
majority of the votes entitled to be cast on the matter at any
meeting of stockholders, duly called and at which a quorum is
present.
Section 6. Vacancies. Any vacancies in the
Board, whether arising from death, resignation, removal, an
increase in the number of directors or any other cause, shall be
filled by a vote of the majority of the Board of Directors then in
office even though such majority is less than a quorum, provided
that no vacancies shall be filled by action of the remaining
directors, if after the filling of said vacancy or vacancies, less
than two-thirds of the directors then holding office shall have
been elected by the stockholders of the Corporation. In the
event that at any time there is a vacancy in any office of a
director which vacancy may not be filled by the remaining
directors, a special meeting of the stockholders shall be held as
promptly as possible and in any event within sixty days, for the
purpose of filling said vacancy or vacancies. Any directors
elected or appointed to fill a vacancy shall hold office only
until the next annual meeting of stockholders of the Corporation
and until a successor shall have been chosen and qualifies or
until his earlier resignation and removal.
10
<PAGE>
Section 7. Place of Meetings. Meetings of the Board
may be held at such place as the Board may from time to time
determine or as shall be specified in the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the
Board may be held without notice at such time and place as may be
determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the
Board may be called by two or more directors of the Corporation or
by the Chairman of the Board or the President.
Section 10. Annual Meeting. The annual meeting of
each newly elected Board of Directors shall be held as soon as
practicable after the meeting of stockholders at which the
directors were elected. No notice of such annual meeting shall be
necessary if held immediately after the adjournment, and at the
site, of the meeting of stockholders. If not so held, notice
shall be given as hereinafter provided for special meetings of the
Board of Directors.
Section 11. Notice of Special Meetings. Notice
of each special meeting of the Board shall be given by the Secre-
tary as hereinafter provided, in which notice shall be stated the
time and place of the meeting. Notice of each such meeting shall
be delivered to each director, either personally or by telephone,
telegraph, cable or wireless, at least twenty-four
11
<PAGE>
hours before the time at which such meeting is to be held, or by
first-class mail, postage prepaid, addressed to him at his
residence or usual place of business, at least three days before
the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of
any special meeting need not be given to any director who shall,
either before or after the meeting, sign a written waiver of
notice or who shall attend such meeting. Except as otherwise
specifically required by these By-Laws, a notice or waiver of
notice of any meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not
less than two, of the members of the entire Board shall be present
in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and except
as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act of 1940,
as amended, or other applicable statute, the act of a majority of
the directors present at any meeting at which a quorum is present
shall be the act of the Board; provided, however, that the
approval of any contract with an investment adviser or principal
underwriter, as such terms are defined in the Investment Company
Act of 1940, as amended, which the Corporation enters into or any
renewal or amendment
12
<PAGE>
thereof, the approval of the fidelity bond required by the
Investment Company Act of 1940, as amended, and the selection of
the Corporation's independent public accountants shall each
require the affirmative vote of a majority of the directors who
are not parties to any such contract or interested persons of any
such party. In the absence of a quorum at any meeting of the
Board, a majority of the directors present thereat may adjourn
such meeting to another time and place until a quorum, shall be
present thereat. Notice of the time and place of any such
adjourned meeting shall be given to the directors who were not
present at the time of the adjournment and, unless such time and
place were announced at the meeting at which the adjournment was
taken, to the other directors. At any adjourned meeting at
which a quorum is present, any business may be transacted which
might have been transacted at the meeting as originally called.
Section 14. Organization. The Board may, by resolu-
tion adopted by a majority of the entire Board, designate a
Chairman of the Board, who shall preside at each meeting of the
Board. In the absence or inability of the Chairman of the Board
to preside at a meeting, the President, or, in his absence or
inability to act, another person chosen by a majority of the
directors present, shall act as chairman of the meeting and
preside thereat. The Secretary (or, in his absence
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or inability to act, any person appointed by the chairman) shall
act as secretary of the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a
Meeting. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of the pro-
ceedings of the Board or committee.
Section 16. Compensation. Directors may receive
compensation for services to the Corporation in their capacities
as directors or otherwise in such manner and in such amounts as
may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty
of the Board of Directors to ensure that the purchase, sale,
retention and disposal of portfolio securities and the other
investment practices of the Corporation are at all times
consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the Corpora-
tion, as recited in the current Prospectus of the Corporation
filed from time to time with the Securities and Exchange Com-
mission and as required by the Investment Company Act of 1940, as
amended. The Board, however, may delegate the duty of
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management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or
investment adviser pursuant to a written contract or contracts
which have obtained the requisite approvals, including the
requisite approvals of renewals thereof, of the Board of Directors
and/or the stockholders of the Corporation in accordance with the
provisions of the Investment Company Act of 1940, as amended.
ARTICLE IV
Committees
Section 1. Executive Committee. The Board may, by
resolution adopted by a majority of the entire Board, designate an
Executive Committee consisting of two or more of the direc-
tors of the Corporation, which committee shall have and may
exercise all the powers and authority of the Board with respect to
all matters other than:
(a) the submission to stockholders of any action
requiring authorization of stockholders pursuant to statute or
the Articles of Incorporation;
(b) the filling of vacancies on the Board of Direc-
tors;
(c) the fixing of compensation of the directors for
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<PAGE>
serving on the Board or on any committee of the Board, includ-
ing the Executive Committee;
(d) the approval or termination of any contract with
an investment adviser or principal underwriter, as such terms
are defined in the Investment Company Act of 1940, as amended,
or the taking of any other action required to be taken by the
Board of Directors by the Investment Company Act of 1940, as
amended;
(e) the amendment or repeal of these By-Laws or the
adoption of new By-Laws;
(f) the amendment or repeal of any resolution of the
Board which by its terms may be amended or repealed only by the
Board; and
(g) the declaration of dividends and the issuance of
capital stock of the Corporation.
The Executive Committee shall keep written minutes of its
proceedings and shall report such minutes of the Board. All
such proceedings shall be subject to revision or alteration by
the Board; provided, however, that third parties shall not be
prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board
of Directors may from time to time, by resolution adopted by a
majority of the whole Board, designate one or more other com-
16
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mittees of the Board, each such committee to consist of such
number of directors and to have such powers and duties as the
Board of Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than
two, of the members of any committee shall be present in person at
any meeting of such committee in order to constitute a quorum for
the transaction of business and at such meeting, and the act of a
majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any
two members of any committee may fix the time and place of its
meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any committee, the
member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or
disqualified member. The Board
shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members
to replace any absent or disqualified member, or to dissolve any
such committee. Nothing herein shall be deemed to prevent the
Board from appointing one or more committees consisting in whole
or in part of persons who are not directors of the Corporation;
provided, however, that no such committee
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shall have or may exercise any authority or power of the Board
in the management of the business or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
Section 1. Number and Qualifications. The officers
of the Corporation shall be a President, who shall be a direc-
tor of the Corporation, a Secretary and a Treasurer each of
whom shall be elected by the Board of Directors. The Board of
Directors may elect or appoint one or more Vice Presidents and
may also appoint such other officers, agents and employees as
it may deem necessary or proper. Any two or more offices may
be held by the same person, except the offices of President and
Vice President, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity. Such officers
shall be elected by the Board of Directors each year at its
first meeting held after the annual meeting of stockholders,
each to hold office until the meeting of the Board following
the next annual meeting of the stockholders and until his
successor shall have been duly elected and shall have quali-
fied, or until his death, or until he shall have resigned, or
have been removed, as hereinafter provided in these By-Laws.
The Board may from time to time elect, or delegate to the
President the power to appoint, such officers (including one or
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more Assistant Vice Presidents, one or more Assistant Treasurers
and one or more Assistant Secretaries) and such agents, as may be
necessary or desirable for the business of the Corporation.
Such other officers and agents shall have such duties and shall
hold their offices for such terms as may be prescribed by the
Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corpora-
tion may resign at any time by giving written notice of his
resignation to the Board, the Chairman of the Board, the President
or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee.
Any officer, agent or employee of the Corporation may be removed
by the Board of Directors with or without cause at any time, and
the Board may delegate such power of removal as to agents and
employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer,
agent or employee of the Corporation shall not of itself create
contract rights.
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Section 4. Vacancies. A vacancy in any office,
whether arising from death, resignation, removal or any other
cause, may be filled for the unexpired portion of the term of the
office which shall be vacant, in the manner prescribed in these
By-Laws for the regular election or appointment to such office.
Section 5. Compensation. The compensation of the
Officers of the Corporation shall be fixed by the Board of
Directors, but this power may be delegated to any officer in
respect of other officers under his control.
Section 6. Bonds or other Security. If required by
the Board, any officer, agent or employee of the Corporation
shall give a bond or other security for the faithful performance
of his duties, in such amount and with such surety or sureties as
the Board may require.
Section 7. President. The President shall be the
chief executive officer of the Corporation. In the absence of the
Chairman of the Board (or if there be none), he shall preside at
all meetings of the stockholders and of the Board of Directors.
He shall have, subject to the control of the Board of Directors,
general charge of the business and affairs of the Corporation.
He may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and
he may delegate these powers.
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Section 8. Vice President. Each Vice President shall
have such powers and perform such duties as the Board of Direc-
tors or the President may from time to time prescribe.
Section 9. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible
for, all the funds and securities of the Corporation, except those
which the Corporation has placed in the custody of a bank or trust
company or member of a national securities exchange (as that term
is defined in the Securities Exchange Act of 1934) pursuant to a
written agreement designating such bank or trust company or member
of a national securities exchange as custodian of the property of
the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuables to be depo-
sited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due and
payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and super-
vise the investment of its funds as ordered or authorized by the
Board, taking proper vouchers therefor; and
(f) in general, perform all the duties incident to
the office of Treasurer and such other duties as from time to
time may be assigned to him by the Board or the President.
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Section 11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books
provided for the purpose, the minutes of all meetings of the Board,
the committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock certifi-
cates of the Corporation (unless the seal of the Corporation on
such certificates shall be a facsimile, as hereinafter provided)
and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates
and other documents and records required by law to be kept and
filed are properly kept and filed; and
(e) in general, perform all the duties incident to the office
of Secretary and such other duties as from time to time may be
assigned to him by the Board or the President.
Section 12. Delegation of Duties. In case of the
absence of any officer of the Corporation, or for any other reason
that the Board may deem sufficient, the Board may confer for the
time being the powers or duties, or any of them, of such officer
upon any other officer or upon any director.
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ARTICLE VI
Indemnification
Each officer, director, employee or agent of the
Corporation shall be indemnified by the Corporation to the full
extent permitted under the General Laws of the State of Maryland
and the Investment Company Act of 1940, as amended, except that
such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which
such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his
office.
ARTCLE VII
Capital Stock
Section 1. Stock Certificates. Each holder of stock of
the Corporation shall be entitled upon request to have a
certificate or certificates, in such form as shall be approved
by the Board, representing the number of shares of stock of the
Corporation owned by him, provided, however, that certificates for
fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in
the name of the Corporation by the President or a Vice President
and by the Secretary or an Assistant Secretary or the
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<PAGE>
Treasurer or an Assistant Treasurer and sealed with the seal of
the Corporation. Any or all of the signatures or the seal on
the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to
be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or
registrar were still in office at the date of issue.
Section 2. Books of Account and Record of Stock-
holders. There shall be kept at the principal executive office of
the Corporation correct and complete books and records of account
of all the business and transactions of the Corporation. There
shall be made available upon request of any stockholder, in
accordance with Maryland law, a record containing the number of
shares of stock issued during a specified period not to exceed
twelve months and the consideration received by the Corporation
for each such share.
Section 3. Transfers of Shares. Transfers of shares
of stock of the Corporation shall be made on the stock records
of the Corporation only by the registered holder thereof, or by
his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary or with a transfer agent
or transfer clerk, and on surrender of the certificate or cer-
24
<PAGE>
tificates, if issued, for such shares properly endorsed or
accompanied by a duly executed stock transfer power and the
payment of all taxes thereon. Except as otherwise provided by
law, the Corporation shall be entitled to recognize the exclu-
sive right of a person in whose name any share or shares stand
on the record of stockholders as the owner of such share or
shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote
as such owner, and the Corporation shall not be bound to recog-
nize any equitable or legal claim to or interest in any such
share or shares on the part of any other person.
Section 4. Regulations. The Board may make such
additional rules and regulations, not inconsistent with these
By-Laws, as it may deem expedient concerning the issue, trans-
fer and regstration of certficates for shares of stock of the
Corporation. It may apoint, or authorize any officer or offi-
cers to appoint, one or more transfer agents or one or more
transfer clerks and one or more registrars and may require all
certificates for shares of stock to bear the signature or sig-
natures of any of them.
Section 5. Lost, Destroyed or Mutilated Certifi-
cates. The holder of any certificate representing shares of
stock of the Corporation shall immediately notify the Corpora-
tion of any loss, destruction or or mutilation of such certifi-
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<PAGE>
cate, and the Corporation may issue a new certificate of stock
in the place of any certificate theretofore issued by it which
the owner thereof shall allege to have been lost or destroyed
or which shall have been mutilated, and the Board may, in its
discretion, require such owner or his legal representatives to
give to the Corporation a bond in such sum, limited or unlim-
ited, and in such form and with such surety or sureties, as the
Board in its absolute discretion shall determine, to indemnify
the Corporation against any claim that may be made against it
on account of the alleged loss or destruction of any such cer-
tificate, or issuance of a new certificate. Anything herein to
the contrary notwithstanding, the Board, in its absolute
discretion, may refuse to issue any such new certificate, ex-
cept pursuant to legal proceedings under the laws of the State
of Maryland.
Section 6. Fixing of a Record Date for Dividends and
Distributions. The Board may fix, in advance, a date not more
than sixty days preceding the date fixed for the payment of any
dividend or the making of any distribution or the allotment of
rights to subscribe for securities of the Corporation, or for
the delivery of evidences of rights or evidences of interests
arising out of any change, conversion or exchange of common
stock or other securities, as the record date for the determi-
nation of the stockholders entitled to receive any such divi-
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<PAGE>
dend, distribution, allotment, rights or interests, and in such
case only the stockholders of record at the time so fixed shall be
entitled to receive such dividend, distribution, allotment, rights
or interests.
Section 7. The corporaion shall be entitled to re-
cognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such
owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be
bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as
otherwise provided by the laws of Maryland.
Section 8. Information to Stockholders and Others.
Any stockholder of the Corporation or his agent may inspect and
copy during usual business hours the Corporation's By-Laws,
minutes of the proceedings of its stockholders, annual state-
ments of its affairs, and voting trust agreements on file at its
principal office.
Section 9. Involuntary Redemption of Shares. Subject
to policies established by the Board of Directors, the Corpora-
tion shall have the right to involuntarily redeem shares of its
common stock if at any time the value of a stockholder's in-
vestment in the Corporation is less than $500.
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ARTICLE VIII
Seal
The seal of the Corporation shall be circular in form
and shall bear, in addition to any other emblem or device ap-
proved by the Board of Directors, the name of the Corporation, the
year of its incorporation and the words "Corporate Seal" and
"Maryland". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal
year of the Corporation shall end on the 31st day of December in
each year.
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corpora-
tion shall be deposited with such banks or other depositories as
the Board of Directors of the Corporation may from time to time
determine.
Section 2. Custodians. All securities and
other investments shall be deposited in the safekeeping of such
banks or other companies as the Board of Directors of the
Corporation
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<PAGE>
may from time to time determine. Every arrangement entered
into with any bank or other company for the safekeeping of the
securities and investments of the Corporation shall contain
provisions complying with the Investment Company Act of 1940, as
amended, and the general rules and regulations thereunder.
ARTICLE XI
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks,
notes drafts, acceptances, bills of exchange and other orders or
obligations for the payment of money shall be signed by such
officer or officers or person or persons as the Board of Direct-
tors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock
certificates, bonds or other securities at any time owned by the
Corporation may be held on behalf of the Corporation or sold,
transferred or otherwise disposed of subject to any limits
imposed by Article XIV or these By-Laws and pursuant to
authorization by the Board and, when so authorized to be held on
behalf of the Corporation or sold, transferred or otherwise
disposed of, may be transferred from the name of the Corpora-
tion by the signature of the President or a Vice President or the
Treasurer or the Assistant Treasurer or the Secretary or the
Assistant Secretary.
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ARTICLE XII
Independent Public Accountants
The firm of independent public accountants which
shall sign or certify the financial statements of the Corporation
which are filed with the Securities and Exchange Commission shall
be selected annually by the Board of Directors and ratified by
the stockholders in accordance with the provisions of the
Investment Company Act of 1940, as amended.
ARTICLE XIII
Annual Statement
The books of account of the Corporation shall be
examined by an independent firm of public accountants at the
close of each annual period of the Corporation and at such other
times as may be directed by the Board. A report to the stock-
holders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect
to each report as may be determined by the Board, at his address
as the same appears on the books of the Corporation. Such
annual statement shall also be available at the annual meeting
of stockholders and be placed on file at the Corporation's
principal office in the State of Maryland. Each such report shall
show the assets and liabilities of the Corporation as of the
close of the annual or quarterly period
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covered by the report and the securities in which the funds of
the Corporation were then invested. Such report shall also
show the Corporation's income and expenses for the period from
the end of the Corporation's preceding fiscal year to the close
of the annual or quarterly period covered by the report and any
other information required by the Investment Company Act of
1940, as amended, and shall set forth such other matters as the
Board or such firm of independent public accountants shall
determine.
ARTICLE XIV
Fundamental Policies
Section 1. Policies Applicable to All Funds.
(a) It is the fundamental policy of the Corporation to
follow the investment objectives for a Fund that are set forth in
the Prospectus contained in the Registration Statement of the
Corporation, or Post-Effective Amendment thereto, at the time
such Registration Statement, or Post-Effective Amendment, setting
forth such objectives for such Fund initially is declared
effective.
(b) It is the fundamental policy of the Corporation
NOT to:
1. Issue senior securities.
2. Act as an underwriter of securities.
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Section 2. Policies Applicable to Particular Funds.
(a) The Corporation has adopted the following fundamental
policies with respect to its Merrill Lynch Reserve Assets Fund
(the "Reserve Assets Fund"); The Corporation's Reserve Assets
Fund may not:
1. Purchase any securities other than money market and
other securities described under "Definitions of Investments" in
the Prospectus contained in the Corporation's Registration
Statement at the time such Registration Statement initially is
declared effective.
2. Invest more that 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 United States
government securities, government agency securities, or bank
money instruments).
3. (a) Invest more than 5% of its total assets (taken
at market value at the time of each investment) in the securities
(other than United States 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
Reserve Assets Fund's total assets may be invested without regard
to such 5% limitation but shall instead be subject to a 10%
limitation; and
(b) purchase more than 10% of the outstanding
securities of an issuer except that such restriction shall not
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apply to United States government or goverment agency secur-
ities, bank money instruments or repurchase agreements.
4. Make investments for the purpose of exercising control
or management.
5. Purchase securities of other investment companies,
except in connection with a merger, consolidation, acquistion or
reorganization.
6. Purchase or sell real estate (other than money market
securities secured by real estate or interests therein or money
market securites issued by companies which invest in real estate,
or interests therein) commodities or commodity contracts, interests
in oil, gas or other mineral exploration or development programs.
7. Purchase any securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities.
8. Make short sales of securities or maintain a short
position or write, purchase or sell puts, calls straddles,
spreads or combinations thereof.
9. Make loans to other persons, provided that the Reserve
Assets Fund may purchase money market securities or enter into
repurchase agreements and lend securities owned or held by it
pursuant to paragraph 10 below.
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10. Lend its portfolio securities in excess of 20% of its
total assets, taken at market value, provided that such loans are
made according to the guidelines of the Securities Exchange
Commission and the Corporation's Board of Directors, including
maintaining collateral from the borrower equal at all times to
the current market value of the securities loaned.
11. 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, with
respect to which paragraph 16 below applies); however, the
Reserve Assets Fund will not borrow to increase income but only
to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities.
12. Mortgage, pledge, hypothecate or in any manner
transfer (except as provided in paragraph 10 above), as security
for indebtedness any securites owned or held by the Reserve
Assets Fund except as may be necessary in connection
with borrowings mentioned in paragraph 11 above, and then such
mortgaging, pledging or hypothecating may not exceed 25% of the
Reserve Assets Fund's total assets, taken at market value.
13. Invest in securities (except for repurchase
agreements or variable amount master notes) with legal or
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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
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 Reserve Assets 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 Reserve Assets Fund's obligations with respect
to reverse repurchase agreements would exceed one-third of the
Reserve Assets Fund's net assets (defined to be total assets,
taken at market value, less liabilities other than reverse
repurchase agreements).
(b) The Corporation has adopted the
following fundamental policies with respect to its Merrill Lynch
U.S. Government Money Fund ("Government Money Fund"), Merrill
Lynch Prime Bond Fund ("Prime Bond Fund"), Merrill Lynch High
Current Income Fund ("High Current Income Fund"), Merrill Lynch
Quality Equity Fund ("Quality Equity Fund") and Merrill Lynch
Equity Growth Fund ("Equity Growth Fund"). Each such Fund may
not:
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(1) invest more than 5% of its total assets (taken at
market value at the time of each investment) in the securities
(other than United States government or government agency
securities or, with respect to the Quality Equity Fund and the
Equity Growth Fund, securities issued by instrumentalities of the
United States Government) of any one issuer (including repurchase
agreements with any one bank);
(2) alone, or together with any other such Fund or Funds
or the Reserve Assets Fund, 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 Prime Bond
Fund and the High Current Income Fund may purchase securities of
issuers which invest or deal in any of the above and the other
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such Funds may invest in securities secured by real estate or
interests therein or securities issued by companies which invest
in real estate or interests 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, provided, however, the Quality
Equity Fund may write "covered call coptions";
(7) make loans to other persons, provided that the
Government Money Fund may purchase securities issued or
guaranteed by the U.S. government or its agencies; each other such
Fund may lend securities owned or held by it pursuant to (8)
below; and the Prime Bond Fund and High Current Income 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 (and, with respect to the Quality Equity Fund,
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,
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<PAGE>
provided that such loans are made according to the guidelines set
forth in (c) 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 Quality Equity 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 20% in the case of the
Government Money Fund, or 5% in the case of the other such Funds,
of its total assets, taken at market value (or, in the case of
the Quality Equity Fund, acquisition cost if it is lower), and
then only from banks as a temporary measure for extraordinary or
emergency purposes; the Government Money Fund will not borrow to
increase income but only to meet redemption requests which might
otherwise require untimely dispositions of portfolio securities;
or
(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)
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above, and then such mortgaging, pledging or hypothecating may not
exceed 25% in the case of the Government Money Fund, 15% in the
case of the Quality Equity Fund, or 10% in the case of each of the
other Funds, of such Fund's total assets, taken at market value
(the deposit in escrow by the Quality Equity Fund of underlying
securities in connection with the writing of call options is not
deemed to be a pledge).
(c) Lending of Portfolio Securities. Subject to the
restriction set forth in (b)(8) above, each Fund named in (b)
above, other than the Reserve Assets Fund, may from time to time
loan securities from its portfolio to brokers, dealers and
financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States government
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 collateral must be
invested in short-term securities, the income from which will
increase the return to the Fund. The Fund must 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 must be terminable at any time.
(d) The Corporation has adopted the
following fundamental policies with respect to its Government
Money Fund.
39
<PAGE>
The Government Money Fund may not purchase any securities other
than short-term marketable securities which are issued or
guaranteed by the U.S. Government or its agencies and repurchase
agreements pertaining to such securities and may not 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.
(e) The Corporation has adopted the following
fundamental policies with respect to its Prime Bond Fund, High
Current Income Fund, Quality Equity Fund and Equity Growth Fund.
Each of the Prime Bond Fund, High Current Income Fund, Quality
Equity Fund and Equity Growth Fund may not:
(1) invest in securities of foreign issuers if at
the time of acquisition more than 10% (20% in the case of the
Equity Growth Fund) of its total assets, taken at market value
at the time of the investment, would be invested in such
securities; however, up to 25% of the total assets of the Prime
Bond Fund or High Current Income Fund may be invested in
securities (a) issued, assumed or guaranteed by foreign
governments, or political subdivisions or instrumentalities
thereof, (b) assumed or guaranteed by domestic
issuers, including Eurodollar securities, or (c) issued, assumed
or guaranteed by foreign issuers having a class of securities
listed for trading on the New York Stock Exchange;
40
<PAGE>
(2) 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 in such securities;
(3) except for the Quality Equity Fund, 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% (5% in the case of the Equity Growth Fund)
of the total assets of such Fund, taken at market value, would be
invested in such securities. In the case of the Prime Bond Fund
or High Current Income Fund, if through the appreciation
of restricted securities or the depreciation of unrestricted
securities held by a Fund, more than 10% of the assets of such
Fund should be invested in restricted securities, such Fund will
consider appropriate steps to assure maximum flexibility. (The
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 marketable
market if at the time of acquisition more than 5% of its total
assets would be invested in such securities.); or
(4) purchase or retain the securities of any issuer,
if those individual officers and directors of the Corporation,
41
<PAGE>
Merrill Lynch Asset Management, Inc. 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.
(f) The Corporation has adopted the following
fundamental policies with respect to the Prime Bond Fund and
High Current Income Fund. Each of the Prime Bond Fund and High
Current Income Fund may not:
(1) 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;
(2) 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 Corporation's 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); or
(3) purchase 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
42
<PAGE>
restriction shall not apply to United States Government or
Government Agency Securities, bank money instruments or bank
repurchase agreements.
(g) The Corporation has adopted the
following fundamental policies with respect to the Quality Equity
Fund. The Quality Equity Fund may not:
(1) 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;
(2) invest 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; or
(3) 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.)
(h) The Corporation has adopted the
following fundamental policies with respect to the Equity Growth
Fund. The Equity Growth Fund may not:
(1) 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;
43
<PAGE>
(2) invest 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 each issuer would be owned by the Fund; or
(3) 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.)
(i) The Corporation has adopted the
following fundamental policies with respect to its Merrill Lynch
Flexible Strategy Fund ("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 United States government or government agency
securities or securities issued by instrumentalities of the United
States Goverment) 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
44
<PAGE>
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 brokers commission, is involved, and only if
immediately thereafter not more than 10% of the Flexible Strategy
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 Flexible
Strategy Fund may invest in securities secured by real estate or
interests therein or securities issued by companies which invest
in real estate or interests 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, provided, however, that the
Flexible Strategy Fund may write "covered call options";
(7) make loans to other persons, provided that the
Flexible Strategy 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
45
<PAGE>
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 in (j) 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;
(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 Flexible
Strategy 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 Flexible
Strategy Fund's total assets, taken at market value (the deposit
in escrow by the Flexible Strategy Fund of underlying securities
in connection with the writing of call options is not deemed to be
a pledge);
(11) invest in securities of issuers having a record,
together with predecessors, of less than three years of
46
<PAGE>
continuous operation if more than 5% of the total assets of the
Flexible Strategy Fund, taken at market value at the time of
investment, would be invested in 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 the Flexible
Strategy Fund, more than 10% of its total assets, taken at market
value, would be invested in such securities;
(13) purchase or retain the securities of any issuer, if
those individual officers and directors of the Corporation,
Merrill Lynch Asset Management, Inc. or any subsidiary thereof
such 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 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 Flexible Strategy
Fund; or
(16) invest in warrants if at the time of acquisition
more than 2% of its total assets, taken at market value, would
47
<PAGE>
be invested in warrants. (For purposes of this restriction,
warrants acquired by the Flexible Strategy Fund in units or
attached to securities may be deemed to be without value.)
(j) Lending of Portfolio Securities. Subject to
the restriction set forth in (i)(8) above, the Flexible Strategy
Fund may from time to time loan securities from its portfolio to
brokers, dealers and financial institutions and
receive collateral in cash or securities issued or guaranteed by
the United States Government 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
collateral must be invested in short-term securities, the income
from which will increase the return to the Flexible Strategy Fund.
The Flexible Strategy Fund must 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 must
be terminable at any time.
(k) The Corporation has adopted the following
fundamental policies with respect to its Merrill Lynch Resources
Focus Fund ("Resources Focus Fund") and its Merrill Lynch
American Balanced Fund ("American Balanced Fund"). Each of the
Resources Focus Fund and the American Balanced Fund may not:
48
<PAGE>
(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 Resources
Focus Fund and the American Balanced Fund may each purchase
securities of issuers which invest or deal in any of the above,
and except further, that the Resources Focus 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
Resources Focus Fund at present does not intend to engage in
transactions in commodities or commodities contracts, other than
in foreign currency, futures contracts and options on futures
contracts);
49
<PAGE>
(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 Resources Focus 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 Resources Focus Fund may
maintain short positions in forward currency contracts, options,
futures and options on futures contracts);
(6) make loans to other persons, provided that the
Resources Focus Fund and the American Balanced Fund may each
lend securities owned or held by it pursuant to (8) below and
the Resources Focus 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 in (n) below and the guidelines of the
Securities and Exchange Commission and the Company's Board of
50
<PAGE>
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%, in the case of
the Resources Focus Fund, or 5%, in the case of the American
Balanced Fund, of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or
emergency purposes;
(9) except as may be necessary for the Resource
Focus Fund 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 (8) above), as security for
indebtedness, any securities owned or held by the Resources
Focus Fund or the American Balanced Fund, as the case may be,
except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 15%, in the case of the American
Balanced Fund, or 10%, in the case of the Resources Focus Fund,
of such Fund's total assets, taken at market value (the deposit
in escrow by the Resource Focus Fund and the American Balanced
Fund of underlying securities in connection with the writing of
call options is not deemed to be a pledge);
(10) invest in securities of issuers having a
record, together with predecessors, of less than three years of
51
<PAGE>
continuous operation if more than 5% of the total assets of the
Resources Focus Fund or the American Balanced Fund, as the case
may be, taken at market value at the time of investment, would be
invested in such securities;
(11) 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 the Resources
Focus Fund or the American Balanced Fund, as the case may be, more
than 10% of total assets of such Fund, taken at market value,
would be invested in such securities; or
(12) purchase or retain the securities of any
issuer, if those individual officers and directors of the
Corporation, Merrill Lynch Asset Management, Inc. or any
subsidiary thereof such 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.
(1) The Corporation has adopted the
following fundamental policies with respect to the American
Balanced Portfolio. The American Balanced Portfolio may not:
(1) 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;
(2) invest, either alone or together with any other
Fund or Funds, in securities of any one issuer (other than the
52
<PAGE>
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 American
Balanced Fund;
(3) 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 American Balanced Fund in
units or attached to securities may be deemed to be without
value.)
(4) invest more than 5% of its total assets (taken
at market value at the time of each investment) in the
securities (other than United States government or government
agency securities or securities issued by instrumentalities of the
United States Government) of any one issuer (including repurchase
agreements with any one bank);
(5) write, purchase or sell puts, calls, straddles,
spreads or combinations thereof, provided, however, that the
American Balanced Fund may write "covered call options";
(m) The Corporation has adopted the
following fundamental policies with respect to the Resources Focus
Fund. The Resources Focus Fund may not 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
53
<PAGE>
the same industry, except that when management anticipates
significant economic, political or financial instability, the
Resources Focus Fund may, invest more than 25% of its total
assets in gold-related companies. In determining compliance by
the 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.
(n) Lending of Portfolio Securities. Subject to the
restriction set forth in (k)(7) above, the Resources Focus Fund
and the American Balanced Fund may each from time to time loan
securities from its portfolio to brokers, dealers and financial
institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government
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 collateral must
be invested in short-term securities, the income from which will
increase the return to the Resources Focus Fund or the American
Balanced Fund, as the case may be. The Resources Focus Fund and
the American Balanced Fund must 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
54
<PAGE>
securities to exercise such beneficial rights. Such loans must be
terminable at any time.
ARTICLE XV
Amendments
These By-Laws or any of them may be amended, altered or
repealed at any regular meeting of the stockholders or at any
special meeting of the stockholders at which a quorum is present
or represented, provided that notice of the proposed amendment,
alteration or repeal be contained in the notice of such special
meeting. These By-Laws, except Article XIV hereof, may also be
amended, altered or repealed by the affirmative vote of a majority
of the Board of Directors at any regular or special meeting of the
Board of Directors. The By-Laws, or any of them, set forth in
Article XIV of these By-Laws, may be amended, altered or repealed
only by the affirmative vote of a majority of the outstanding
shares (as defined below) of capital stock of each Fund affected
by such amendment, at a regular meeting or special meeting of the
stockholders, the notice of which contains the proposed
amendment, alteration or repeal. For the purpose of amending
Article XIV of these By-Laws, a majority of the outstanding shares
shall be 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
55
<PAGE>
outstanding shares. A certified copy of these By-Laws, as they may
be amended from time to time, shall be kept at the principal
office of the corporation in the State of
Maryland. Notwithstanding any other provision of this
Article XV, Section 2 of Article XIV hereof may be
amended by the affirmative vote of a majority of the Board of
Directors at any regular or special meeting of the Board of
Directors to set forth a restriction applicable only to a
particular Fund or particular Funds of the Corporation provided
such amendment is adopted prior to the time a Registration
Statement of the Corporation, or Post-Effective Amendment thereto,
setting forth the investment objective or objectives of such Fund
or Funds initially is declared effective.
56
AMENDMENT TO
AND RESTATEMENT OF
INVESTMENT ADVISORY AGREEMENT
W I T N E S S E T H:
WHEREAS, Merrill Lynch Variable Series Funds, Inc., a
Maryland corporation (the "Company"), and Merrill Lynch Asset
Management, Inc., a Delaware corporation (the "Adviser"), entered
into the Investment Advisory Agreement (the "Agreement") on
November 9, 1981; and
WHEREAS, the Company is engaged in business as a
diversified open-end management investment company and is
registered as such under the Investment Company Act of 1940 (the
"Investment Company Act"); and
WHEREAS, the Agreement has continued to be in effect at
all times from November 9, 1981 through and including the date
hereof; and
WHEREAS, the Company initially issued shares of only one
class of its Common Stock, its Merrill Lynch Reserve Assets Fund
Common Stock, but has issued shares of one or more additional
classes, and the shareholders of each class will have an interest
in the assets of a Fund, which assets and Fund will be separate and
distinct from the assets and Fund in which shareholders of any
other class have an interest; and
WHEREAS, each Fund will pursue its investment objective
through separate investment policies; and
B-1
<PAGE>
WHEREAS, the Adviser is engaged principally in rendering
advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Company desires to retain the Adviser to
render investment supervisory and corporate administrative services
to the Company with respect to its Merrill Lynch Reserve Assets
Fund in the manner and on the terms hereinafter set forth; and
WHEREAS, the Company and the Adviser desire to amend
Article 3, Section (b) of the Agreement;
NOW, THEREFORE, in consideration of the foregoing, of
mutual promises of the parties hereto and of other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the
investment adviser to and manager of the Company's Merrill Lynch
Reserve Assets Fund (the "Fund") and to manage the investment and
reinvestment of the assets of and to administer the Fund's affairs,
subject to the supervision of the Board of Directors of the
Company, for the period and on the terms and conditions set forth
in this Agreement. The Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render the
services and to assume the obligations herein set forth for the
compensation provided for herein. The Adviser shall for all
purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no
B-2
<PAGE>
authority to act for or represent the Company in any way or
otherwise be deemed an agent of the Company.
(a) Investment Advisory Services. In acting as
investment adviser for the Fund, the Adviser shall regularly
provide the Fund with such investment research, advice and
supervision as the latter may from time to time consider necessary
for the proper supervision of its portfolio and shall furnish
continuously an investment program and shall determine from time to
time what securities shall be purchased, sold or exchanged and what
portion of the assets of the Fund's portfolio shall be held in the
various securities in which it may invest, subject always to the
restrictions of the Company's Articles of Incorporation and
By-Laws, as amended from time to time, the provisions of the
Investment Company Act, and the statements relating to the Fund's
investment objectives, investment policies and investment
restrictions as the same are set forth in the currently effective
prospectus of the Company relating to the Fund under the Securities
Act of 1933 (the "Prospectus"). Should the Board of Directors of
the Company at any time, however, make any definite determination
as to investment policy with respect to the Fund and notify the
Adviser thereof, the Adviser shall be bound by such determination
for the period, if any, specified in such notice or until similarly
notified that such determination has been revoked. The Adviser
shall take, on behalf of the Company, all actions which it deems
necessary to implement the investment policies of the Fund
determined as provided above, and in particular to place all orders
for the purchase or sale of portfolio securities for the Fund with
B-3
<PAGE>
brokers or dealers selected by it. In connection with the
selection of such brokers or dealers and the placing of such
orders, the Adviser is directed at all times to seek to obtain for
the Fund the most favorable net results for the Fund as determined
by the Board of Directors and set forth in the Prospectus. Subject
to this requirement and the provisions of the Investment Company
Act, the Securities Exchange Act of 1934, and other applicable
provisions of law, nothing shall prohibit the Adviser from
selecting brokers or dealers with which it or the Company is
affiliated.
(b) Administrative Services. In addition to the
performance of investment advisory services, the Adviser shall
perform, or supervise the performance of, administrative services
in connection with the management of the Company insofar as such
services relate to and are required by the Fund. In this
connection, the Adviser agrees to (i) assist in supervising all
aspects of the Company's operations relating to the Fund, including
the coordination of all matters relating to the functions of the
custodian, transfer agent, other shareholder service agents,
accountants, attorneys and other parties performing services or
operational functions for the Company relating to the Fund, (ii)
provide the Company, at the Adviser's expense, with services of
persons competent to perform such administrative and clerical
functions as are necessary in order to provide effective
administration of the Company to the extent required by the Fund,
including duties in connection with shareholder relations, reports,
redemption requests and account adjustments and the maintenance of
B-4
<PAGE>
certain books and records of the Company insofar as they relate to
the Fund, and (iii) provide the Company, at the Adviser's expense,
with adequate office space and related services necessary for its
operations as contemplated in this Agreement.
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay for
maintaining the staff and personnel, and shall at its own expense
provide the equipment, office space and facilities necessary to
perform its obligations under this Agreement, and shall pay all
compensation of officers of the Company and the fees of all
directors of the Company who are affiliated persons of Merrill
Lynch & Co. Inc. or its subsidiaries, and shall pay the
organization costs of the Company.
(b) The Company. The Company assumes and shall pay all
expenses of the Fund, including, without limitation: insurance,
taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates and shareholder reports, charges of the
Custodian and Transfer Agent, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering
the shares under Federal and state securities laws, fees and
expenses of directors who are not interested persons of the
Company, accounting and pricing costs (including the daily
calculation of net asset value), interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and
other expenses properly payable by the Company.
B-5
<PAGE>
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services
rendered, the facilities furnished and expenses assumed by the
Adviser, the Company shall pay to the Adviser at the end of each
calendar month a fee based upon the average daily value of the
net assets of the Fund during such month, as determined and
computed in accordance with the description of the method of
determination of net asset value contained in the Prospectus, at
the annual rate of 0.50% of the average daily value of the net
assets of the Fund up to $500,000,000, and at the following
annual rates on amounts of the daily net assets of the Fund in
excess of $500,000,000:
Average Daily Net Assets Annual Rate
------------------------ -----------
Over $500,000,000 up to $750,000,000 . . . 0.425 percent
Over $750,000,000 up to $1,000,000,000 . . 0.375 percent
Over $1,000,000,000 up to $1,500,000,000 . 0.350 percent
Over $1,500,000,000 up to $2,000,000,000 . 0.325 percent
Over $2,000,000,000 up to $2,500,000,000 . 0.300 percent
Over $2,500,000,000 . . . . . . . . . . . 0.275 percent
During any period when the determination of net asset value
of the Fund is suspended by the Board of Directors of the Company,
the net asset value of a share of the Fund as of the last business
day prior to such suspension shall for this purpose be deemed to
be the net asset value at the close of each succeeding business
day until it is again determined.
(b) Expense Limitations. In the event the operating
expenses of the Fund, including the investment advisory fee
B-6
<PAGE>
applicable to the Fund payable to the Adviser pursuant to
subsection (a) hereof, for any fiscal year ending on a date on
which this Agreement is in effect exceed the most restrictive
expense limitation under state securities laws or published
regulations thereunder, as such limitations may be raised or
lowered from time to time, the Adviser shall reduce its investment
advisory fee by the extent of such excess and, if required under
any such laws or regulations, will reimburse the Fund in the amount
of such excess; provided, however, to the extent permitted under
law, there shall be excluded from such expenses the amount of any
interest, taxes, brokerage commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and
litigation costs and any indemnification related thereto) paid or
payable by the Company and allocated to the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of the applicable
annual expense limitations, the estimated amounts of reimbursement
under such limitations shall be applicable as an offset against the
monthly payment of the advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Company in
connection with any investment policy or the purchase, sale or
redemption of any securities on the recommendation of the Adviser.
Nothing herein contained shall be construed to protect the Adviser
against any liability to the Company or its security holders to
which the Adviser shall otherwise be subject by reason of willful
B-7
<PAGE>
misfeasance, bad faith, gross negligence in the performance of its
duties on behalf of the Company, reckless disregard of the
Adviser's obligations and duties under this Agreement or the
violation of any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are not
to be deemed exclusive, and the Adviser shall be free to render
services to others so long as its services hereunder are not
impaired thereby. It is understood that directors, officers,
employees and shareholders of the Company are or may become
interested in the Adviser, as directors, officers, employees or
shareholders or otherwise and that directors, officers, employees
or shareholders of the Adviser are or may become similarly
interested in the Company, and that the Adviser is or may become
interested in the Company as shareholder or otherwise.
ARTICLE 6.
Duration and Termination of this Agreement.
This Agreement shall become effective as of April 1, 1985
and shall remain in force until April 1, 1987 and thereafter, but
only so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company, or by the
vote of a majority of the outstanding shares of the Fund, and (ii)
a majority of those directors who are not parties to this Agreement
or interested persons of any such party cast in person at a meeting
called for the purposes of voting on such approval.
B-8
<PAGE>
This Agreement may be terminated at any time, without the
payment of any penalty, by the Board of Directors of the Company or
by vote of a majority of the outstanding shares of the Fund, or by
the Adviser, on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
ARTICLE 7.
Definitions.
The terms "assignment", "affiliated person" and
"interested person", when used in this Agreement, shall have the
respective meanings specified in the Investment Company Act. As
used with respect to the Company or the Fund, the term "majority
of the outstanding shares" means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the Board of Directors of
the Company, or by the vote of a majority of outstanding shares of
the Fund, and (ii) a majority of those directors of the Company who
are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting
on such approval.
B-9
<PAGE>
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as
at the time in effect and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of
the State of New York, or any of the provisions herein, conflict
with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have hereunto
affixed their signatures as of the 23 day of April, 1985.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
ATTEST:
By:
---------------------------------
President
- ----------------------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT,
INC.
ATTEST:
By:
---------------------------------
Vice President
- ----------------------------------
Secretary
B-10
<PAGE>
AMENDMENT TO AND RESTATEMENT OF
INVESTMENT ADVISORY AGREEMENT
W I T N E S S E T H:
WHEREAS, Merrill Lynch Variable Series Funds, Inc., a
Maryland corporation (the "Company"), and Merrill Lynch Asset
Management, Inc., a Delaware corporation (the "Adviser"), entered
into the Investment Advisory Agreement (the "Agreement") on
March 16, 1982; and
WHEREAS, the Company is engaged in business as a
diversified open-end management investment company and is
registered as such under the Investment Company Act of 1940 (the
"Investment Company Act"); and
WHEREAS, the Agreement has continued to be in effect at
all times from March 16, 1982 through and including the date
hereof; and
WHEREAS, the Company is comprised of six separate funds,
each of which pursues its investment objectives through separate
investment policies; and
WHEREAS, the Adviser is engaged principally in rendering
advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Company desires to retain the Adviser to
render, in the manner and on the terms hereinafter set forth,
investment supervisory and corporate administrative services to the
Company with respect to its Merrill Lynch U.S. Government Money
Fund (the "Government Money Fund"), Merrill Lynch Prime Bond Fund
(the "Prime Bond Fund"), Merrill Lynch High Current Income Fund
B-11
<PAGE>
(the "High Current Income Fund"), Merrill Lynch Quality Equity
Fund (the "Quality Equity Fund") and Merrill Lynch Equity Growth
Fund (the "Equity Growth Fund," and together with the other
Funds named in this paragraph the "Funds"); and
WHEREAS, the Company and the Adviser desire to amend
Article 3, Section (b) of the Agreement.
NOW, THEREFORE, in consideration of the foregoing, of
mutual promises of the parties hereto and of other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the
investment adviser to and manager of the Funds and to manage the
investment and reinvestment of the assets of and to administer
the Funds' affairs, subject to the supervision of the Board of
Directors of the Company, for the period and on the terms and
conditions set forth in this Agreement. The Adviser hereby
accepts such employment and agrees during such period, at its own
expense, to render the services and to assume the obligations
herein set forth for the compensation provided for herein. The
Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent
the Company in any way or otherwise be deemed an agent of the
Company.
(a) Investment Advisory Services. In acting as
investment adviser for the Funds, the Adviser shall regularly
B-12
<PAGE>
provide the Funds with such investment research, advice and
supervision as the latter may from time to time consider necessary
for the proper supervision of the portfolio of each Fund and shall
furnish continuously an investment program and shall determine
from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of each Fund's portfolio
shall be held in the various securities in which it may invest,
subject always to the restrictions of the Company's Articles of
Incorporation and By-Laws, as amended from time to time, the
provisions of the Investment Company Act, and the statements
relating to each Fund's investment objectives, investment policies
and investment restrictions as the same are set forth in the
currently effective prospectus of the Company relating to each Fund
under the Securities Act of 1933 (the "Prospectus"). Should the
Board of Directors of the Company at any time, however, make any
definite determination as to investment policy with respect to a
Fund and notify the Adviser thereof, the Adviser shall be bound by
such determination for the period, if any, specified in such notice
or until similarly notified that such determination has been
revoked. The Adviser shall take, on behalf of the Company, all
actions which it deems necessary to implement the investment
policies of each Fund determined as provided above, and in
particular to place all orders for the purchase or sale of
portfolio securities for each Fund with brokers or dealers selected
by it. In connection with the selection of such brokers or dealers
and the placing of such orders, the Adviser is directed at all
times to seek to obtain for each Fund the most favorable net
B-13
<PAGE>
results for such Fund as determined by the Board of Directors and
set forth in the Prospectus. Subject to this requirement and the
provisions of the Investment Company Act, the Securities Exchange
Act of 1934, and other applicable provisions of law, nothing shall
prohibit the Adviser from selecting brokers or dealers with which
it or the Company is affiliated.
(b) Administrative Services. In addition to the
performance of investment advisory services, the Adviser shall
perform, or supervise the performance of, administrative services
in connection with the management of the Company insofar as such
services relate to and are required by the Funds. In this
connection, the Adviser agrees to (i) assist in supervising all
aspects of the Company's operations relating to the Funds,
including the coordination of all matters relating to the
functions of the custodian, transfer agent, other shareholder
service agents, accountants, attorneys and other parties
performing services or operational functions for the Company
relating to the Funds, (ii) provide the Company, at the Adviser's
expense, with services of persons competent to perform such
administrative and clerical functions as are necessary in order to
provide effective administration of the Company to the extent
required by the Funds, including duties in connection with
shareholder relations, reports, redemption requests and account
adjustments and the maintenance of certain books and records of
the Company insofar as they relate to the Funds, and (iii) provide
the Company, at the Adviser's expense, with adequate office space
and related services necessary for its operations as contemplated
in this Agreement.
B-14
<PAGE>
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay for
maintaining the staff and personnel, and shall at its own expense
provide the equipment, office space and facilities necessary to
perform its obligations under this Agreement, and shall pay all
compensation of officers of the Company and the fees of all
directors of the Company who are affiliated persons of Merrill
Lynch & Co. Inc. or its subsidiaries, and shall pay the
organization costs of the Company.
(b) The Company. The Company assumes and shall pay all
expenses of the Funds, including, without limitation: insurance,
taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates and shareholder reports, charges of the
Custodian and Transfer Agent, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering
the shares under Federal and state securities laws, fees and
expenses of directors who are not interested persons of the
Company, accounting and pricing costs (including the daily
calculation of net asset value), interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and
other expenses properly payable by the Company.
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services rendered,
the facilities furnished and expenses assumed by the Adviser, the
Company shall pay to the Adviser at the end of each calendar month
B-15
<PAGE>
a fee based upon the average daily value of the net assets of
each Fund during such month, as determined and computed in
accordance with the description of the method of determination of
net asset value contained in the Prospectus, at the annual rate
of 0.75% of the average daily value of the net assets of the
Equity Growth Fund and at the following annual rates for the
following levels of average daily value of the net assets of the
following Funds:
Average Daily Net Assets Annual Rate
------------------------ -----------
Government Money Fund
Not exceeding $500 million . . . . . . . . 0.50%
Over $500,000,000 up to $750,000,000 . . . . . 0.425%
Over $750,000,000 up to $1,000,000,000 . . . . 0.375%
Over $1,000,000,000 up to $1,500,000,000 . . . 0.35%
Over $1,500,000,000 up to $2,000,000,000 . . . 0.325%
Over $2,000,000,000 up to $2,500,000,000 . . . 0.30%
Over $2,500,000,000 . . . . . . . . . . 0.275%
Quality Equity Fund
Not exceeding $250 million . . . . . . . 0.50%
In excess of $250 million but not exceeding
$300 million . . . . . . . . . . . 0.45%
In excess of $300 million but not exceeding
$400 million . . . . . . . . . . . 0.425%
In excess of $400 million . . . . . ... 0.40%
B-16
<PAGE>
Prime Bond Fund and High Current Income Fund
High Current
Income Fund Prime Bond
Fund
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
The advisory fee rates for the Prime Bond Fund and the
High Current Income Fund shall be subject to reduction to the
extent that the aggregate average daily net assets of those Funds
exceeds $250 million, $500 million or $750 million, as the case may
be. The reductions will be applicable to each such 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.
During any period when the determination of net asset
value of a Fund is suspended by the Board of Directors of the
Company, the net asset value of a share of such Fund as of the last
business day prior to such suspension shall for this purpose be
deemed to be the net asset value at the close of each succeeding
business day until it is again determined.
(b) Expense Limitations. In the event the operating
expenses of any Fund, including the investment advisory fee
B-17
<PAGE>
applicable to such Fund payable to the Adviser pursuant to
subsection (a) hereof, for any fiscal year ending on a date on
which this Agreement is in effect exceed the most restrictive
expense limitation under state securities laws or published
regulations thereunder, as such limitations may be raised or
lowered from time to time, the Adviser shall reduce its investment
advisory fee by the extent of such excess and, if required under
any such laws or regulations, will reimburse such Fund in the
amount of such excess; provided, however, to the extent permitted
under law, there shall be excluded from such expenses the amount
of any interest, taxes, brokerage commissions and extraordinary
expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Company and allocated to such
Fund. Whenever the expenses of any Fund exceed a pro rata portion
of the applicable annual expense limitations, the estimated
amounts of reimbursement under such limitations shall be
applicable as an offset against the monthly payment of the
advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company
in connection with any investment policy or the purchase, sale or
redemption of any securities on the recommendations of the
Adviser. Nothing herein contained shall be construed to protect
the Adviser against any liability to the Company or its security
holders to
B-18
<PAGE>
which the Adviser shall otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence in the performance of its
duties on behalf of the Company, reckless disregard of the
Adviser's obligations and duties under this Agreement or the
violation of any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are not
to be deemed exclusive, and the Adviser shall be free to render
services to others so long as its services hereunder are not
impaired thereby. It is understood that directors, officers,
employees and shareholders of the Company are or may become
interested in the Adviser, as directors, officers, employees or
shareholders or otherwise and that directors, officers, employees
or shareholders of the Adviser are or may become similarly
interested in the Company, and that the Adviser is or may become
interested in the Company as shareholder or otherwise.
ARTICLE 6.
Duration and Termination of this Agreement.
This Agreement shall become effective as of April 1, 1985
and shall remain in force until April 1, 1987 and thereafter, but
only so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company, or by the
vote of a majority of the outstanding shares of the Funds,
including a majority of the shares of each Fund, and (ii) a
majority of those directors who are not parties to this Agreement
B-19
<PAGE>
or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time as to a
Fund, without the payment of any penalty, by the Board of
Directors of the Company or by vote of a majority of the
outstanding shares of such Fund, or by the Adviser, on sixty days'
written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
ARTICLE 7.
Definitions.
The terms "assignment", "affiliated person"
and "interested person", when used in this Agreement, shall have
the respective meanings specified in the Investment Company Act.
As used with respect to the Company or a Fund, the term "majority
of the outstanding shares" means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if
such amendment is specifically approved by (i) the Board of
Directors of the Company, or by the vote of a majority of
outstanding shares of the Funds, including a majority of the
outstanding shares of each Fund, and (ii) a majority of those
directors of the Company who are not parties to this Agreement or
interested persons of any such
B-20
<PAGE>
party cast in person at a meeting called for the purpose of voting
on such approval.
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as
at the time in effect and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of
the State of New York, or any of the provisions herein, conflict
with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have hereunto
affixed their signatures as of the 23 day of April, 1985.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
ATTEST:
By: /s/ Arthur Zeikel
------------------------------
President
- -------------------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT,
INC.
ATTEST:
By: /s/ Terry K. Glenn
------------------------------
Executive Vice President
- -------------------------------
Secretary
B-21
FORM OF INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this day of April, 1988 between
Merrill Lynch Variable Series Funds, Inc., a Maryland
corporation (the "Company"), and Merrill Lynch Asset Management,
Inc., a Delaware corporation (the "Adviser");
W I T N E S S E T H:
WHEREAS, the Company is engaged in business as a
diversified open-end management investment company and is
registered as such under the Investment Company Act of 1940 (the
"Investment Company Act"); and
WHEREAS, the Company is comprised of eight separate
Funds, each of which pursues its investment objective through
separate investment policies; and
WHEREAS, the Adviser is engaged principally in
rendering advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940; and
WHEREAS, the Adviser is currently serving as the
Investment Adviser to the Company's Reserve Assets Fund pursuant
to an Investment Advisory Agreement dated November 10, 1981 as
amended on April 23, 1985; to the Company's Prime Bond Fund,
High Current Income Fund, Quality Equity Fund and Equity Growth
Fund pursuant to an Investment Advisory Agreement dated
April 21, 1982 as amended on April 23, 1985; and to the
<PAGE>
Company's Flexible Strategy Fund pursuant to an Investment
Advisory Agreement dated April 16, 1986; and
WHEREAS, the Company desires to retain the Adviser to
render investment supervisory and corporate administrative
services to the Company's Resources Focus and American Balanced
Funds (the "Funds" and individually a "Fund"), in the manner and
on the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and
the covenants hereinafter contained, the Company and the Adviser
hereby agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the
investment adviser to and manager of the Funds and to manage the
investment and reinvestment of the assets of the Funds, and to
administer their respective affairs, subject to the supervision
of the Board of Directors of the Company, for the period and on
the terms and conditions set forth in this Agreement. The
Adviser hereby accepts such employment and agrees during such
period, at its own expense, to render the services and to assume
the obligations herein set forth for the compensation provided
for herein. The Adviser shall for all purposes herein be deemed
to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for
2
<PAGE>
or represent the Company in any way or otherwise be deemed an
agent of the Company.
(a) Investment Advisory Services. In acting as
investment adviser to the Funds, the Adviser shall regularly
provide the Funds with such investment research, advice and
supervision as the Adviser may from time to time consider
necessary for the proper supervision of the Funds and shall
furnish continuously an investment program and shall determine
from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of each Fund's
portfolio shall be held in the various securities in which it
may invest, subject always to the restrictions of the Company's
Articles of Incorporation and By-Laws, as amended from time to
time, the provisions of the Investment Company Act of 1940 (the
"Act") and the statements relating to each Fund's investment
objectives, investment policies and investment restrictions set
forth in the currently effective prospectus of the Company
relating to such Fund under the Securities Act of 1933 (the
"Prospectus"). Should the Board of Directors of the Company at
any time, however, make any definitive determination as to the
investment policy of a Fund and notify the Adviser thereof, the
Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that
such determination has been revoked. The Adviser shall take, on
behalf of the Company, all actions which it deems necessary to
3
<PAGE>
implement the investment policies determined as provided above,
and in particular to place all orders for the purchase or sale
of portfolio securities for each Fund with brokers or dealers
selected by it. In connection with the selection of such
brokers or dealers and the placing of such orders, the Adviser
is directed at all times to seek to obtain for each Fund the
most favorable net results for such Fund as determined by the
Board of Directors and set forth in the Prospectus. Subject to
this requirement and the provisions of the Act, the Securities
Exchange Act of 1934, and other applicable provisions of law,
nothing shall prohibit the Adviser from selecting brokers or
dealers with which it or the Company is affiliated.
(b) Administrative Services. In addition to the
performance of investment advisory services, the Adviser shall
perform, or supervise the performance of, administrative
services in connection with the management of the Company
insofar as such services relate to and are required by the
Funds. In this connection, the Adviser agrees to (i) assist in
supervising all aspects of the Company's operations relating to
the Funds, including the coordination of all matters relating to
the functions of the custodian, transfer agent, other
shareholder service agents, accountants, attorneys and other
parties performing services or operational functions for the
Company relating to the Funds, (ii) provide the Company, at the
Adviser's expense, with services of persons competent to perform
4
<PAGE>
such administrative and clerical functions as are necessary in
order to provide effective administration of the Company to the
extent required by the Funds, including duties in connection
with shareholder relations, reports, redemption requests and
account adjustments and the maintenance of certain books and
records of the Company insofar as they relate to the Funds, and
(iii) provide the Company, at the Adviser's expense, with
adequate office space and related services necessary for its
operations as contemplated in this Agreement.
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay
for maintaining the staff and personnel, and shall at its own
expense provide the equipment, office space and facilities,
necessary to perform its obligations under this Agreement, and
shall pay all compensation of officers of the Company and the
fees of all directors of the Company who are affiliated persons
of Merrill Lynch & Co., Inc. or its subsidiaries, and shall pay
the organization costs of the Funds.
(b) The Company. The Company assumes and shall pay
all expenses of the Funds, including, without limitation:
insurance, taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder
reports and prospectuses (except to the extent paid by the
Distributor), charges of the Custodian and Transfer Agent,
5
<PAGE>
expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under
Federal and state securities laws, fees and expenses of
directors who are not affiliated persons of Merrill Lynch & Co.,
Inc. or its subsidiaries, accounting and pricing costs
(including the daily calculation of net asset value), interest,
brokerage costs, litigation and other extraordinary or
non-recurring expenses, and other expenses properly payable by
the Company.
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services
rendered, facilities furnished and expenses assumed by the
Adviser, the Company shall pay to the Adviser at the end of each
calendar month a fee based upon the average daily value of the
aggregate net assets of each Fund, as determined and computed in
accordance with the description of the method of determination
of net assset value contained in the Prospectus, at the annual
rate of 0.65% of the average daily value of the aggregate net
assets of the Resources Focus Fund and at the annual rate of
0.55% of the average daily value of the aggregate net assets of
the American Balanced Fund.
(b) Expense Limitations. In the event the
operating expenses of any Fund, including the
investment advisory fee applicable to such Fund payable to the Adviser
6
<PAGE>
pursuant to subsection (a) hereof, for any fiscal year ending on
a date on which this Agreement is in effect, exceed the expense
limitations under state securities laws or published regulations
thereunder, as such limitations may be raised or lowered from
time to time, the Adviser shall reduce its investment advisory
fee by the extent of such excess and, if required under any such
laws or regulations, will reimburse such Fund the amount of such
excess; provided, however, to the extent permitted under law,
there shall be excluded from such expenses the amount of any
interest, taxes, brokerage commissions and
extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Company
and allocated to such Fund. Whenever the expenses of any Fund
exceed a pro rata portion of the applicable annual expense
limitations, the estimated amounts of reimbursement under such
limitations shall be applicable as an offset against the monthly
payment of the advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the
Company in connection with any investment policy or the
purchase, sale or redemption of any securities on the
recommendation of the Adviser. Nothing herein contained shall
7
<PAGE>
be construed to protect the Adviser against any liability to the
Company or its security holders to which the Adviser shall
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of its duties on
behalf of the Company, reckless disregard of the Adviser's
obligations and duties under this Agreement or the violation of
any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are
not to be deemed exclusive, and the Adviser shall be free to
render similar services to others so long as its services
hereunder are not impaired thereby. It is understood that
directors, officers, employees and shareholders of the Company
are or may become interested in the Adviser, as directors,
officers, employees or shareholders or otherwise and that
directors, officers, employees or shareholders of the Adviser
are or may become similarly interested in the Company, and that
the Adviser is or may become interested in the Company as
shareholder or otherwise.
ARTICLE 6.
Duration and Termination of this Agreement.
This Agreement shall become effective as of May 1,
1988 and shall remain in force until May 1, 1990 and thereafter,
but only so long as such continuance is specifically approved at
8
<PAGE>
least annually by (i) the Board of Directors of the Company, or
by the vote of a majority of the outstanding shares of the
Funds, including a majority of the outstanding shares of each
Fund, and (ii) a majority of those directors who are not parties
to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, as to a
Fund, without the payment of any penalty, by the Board of
Directors of the Company or by vote of a majority of the
outstanding shares of such Fund, or by the Adviser, on sixty
days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
ARTICLE 7.
Definitions.
The terms "assignment," "affiliated person" and
"interested person," when used in this Agreement, shall have the
respective meanings specified in the Act. As used with respect
to the Company or a Fund, the term "majority of the outstanding
shares" means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if
such amendment is specifically approved by (i) the Board of
9
<PAGE>
Directors of the Company, or by the vote of a majority of
outstanding shares of each of the Funds, and (ii) a majority of
those directors of the Company who are not parties to this
Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of the State of New
York as at the time in effect and the applicable provisions of
the Act. To the extent that the applicable law of the State of
New York, or any of the provisions herein, conflict with the
applicable provisions of the Act, the latter shall control.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
By
---------------------------------
President
Attest:
- -------------------------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT, INC.
By
---------------------------------
President
Attest:
- -------------------------------------
Secretary
10
FORM OF INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 20 day of April, 1988 between
Merrill Lynch Variable Series Funds, Inc., a Maryland
corporation (the "Company"), and Merrill Lynch Asset Management,
Inc., a Delaware corporation (the "Adviser");
W I T N E S S E T H:
WHEREAS, the Company is engaged in business as a
diversified open-end management investment company and is
registered as such under the Investment Company Act of 1940 (the
"Investment Company Act"); and
WHEREAS, the Company is comprised of eight separate
Funds, each of which pursues its investment objective through
separate investment policies; and
WHEREAS, the Adviser is engaged principally in
rendering advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940; and
WHEREAS, the Adviser is currently serving as the
Investment Adviser to the Company's Reserve Assets Fund pursuant
to an Investment Advisory Agreement dated November 10, 1981 as
amended on April 23, 1985; to the Company's Prime Bond Fund,
High Current Income Fund, Quality Equity Fund and Equity Growth
Fund pursuant to an Investment Advisory Agreement dated
April 21, 1982 as amended on April 23, 1985; and to the
<PAGE>
Company's Flexible Strategy Fund pursuant to an Investment
Advisory Agreement dated April 16, 1986; and
WHEREAS, the Company desires to retain the Adviser to
render investment supervisory and corporate administrative
services to the Company's Resources Focus and American Balanced
Funds (the "Funds" and individually a "Fund"), in the manner and
on the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and
the covenants hereinafter contained, the Company and the Adviser
hereby agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the
investment adviser to and manager of the Funds and to manage the
investment and reinvestment of the assets of the Funds, and to
administer their respective affairs, subject to the supervision
of the Board of Directors of the Company, for the period and on
the terms and conditions set forth in this Agreement. The
Adviser hereby accepts such employment and agrees during such
period, at its own expense, to render the services and to assume
the obligations herein set forth for the compensation provided
for herein. The Adviser shall for all purposes herein be deemed
to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for
2
<PAGE>
or represent the Company in any way or otherwise be deemed an
agent of the Company.
(a) Investment Advisory Services. In acting as
investment adviser to the Funds, the Adviser shall regularly
provide the Funds with such investment research, advice and
supervision as the Adviser may from time to time consider
necessary for the proper supervision of the Funds and shall
furnish continuously an investment program and shall determine
from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of each Fund's
portfolio shall be held in the various securities in which it
may invest, subject always to the restrictions of the Company's
Articles of Incorporation and By-Laws, as amended from time to
time, the provisions of the Investment Company Act of 1940 (the
"Act") and the statements relating to each Fund's investment
objectives, investment policies and investment restrictions set
forth in the currently effective prospectus of the Company
relating to such Fund under the Securities Act of 1933 (the
"Prospectus"). Should the Board of Directors of the Company at
any time, however, make any definitive determination as to the
investment policy of a Fund and notify the Adviser thereof, the
Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that
such determination has been revoked. The Adviser shall take, on
behalf of the Company, all actions which it deems necessary to
3
<PAGE>
implement the investment policies determined as provided above,
and in particular to place all orders for the purchase or sale
of portfolio securities for each Fund with brokers or dealers
selected by it. In connection with the selection of such
brokers or dealers and the placing of such orders, the Adviser
is directed at all times to seek to obtain for each Fund the
most favorable net results for such Fund as determined by the
Board of Directors and set forth in the Prospectus. Subject to
this requirement and the provisions of the Act, the Securities
Exchange Act of 1934, and other applicable provisions of law,
nothing shall prohibit the Adviser from selecting brokers or
dealers with which it or the Company is affiliated.
(b) Administrative Services. In addition to the
performance of investment advisory services, the Adviser shall
perform, or supervise the performance of, administrative
services in connection with the management of the Company
insofar as such services relate to and are required by the
Funds. In this connection, the Adviser agrees to (i) assist in
supervising all aspects of the Company's operations relating to
the Funds, including the coordination of all matters relating to
the functions of the custodian, transfer agent, other
shareholder service agents, accountants, attorneys and other
parties performing services or operational functions for the
Company relating to the Funds, (ii) provide the Company, at the
Adviser's expense, with services of persons competent to perform
4
<PAGE>
such administrative and clerical functions as are necessary in
order to provide effective administration of the Company to the
extent required by the Funds, including duties in connection
with shareholder relations, reports, redemption requests and
account adjustments and the maintenance of certain books and
records of the Company insofar as they relate to the Funds, and
(iii) provide the Company, at the Adviser's expense, with
adequate office space and related services necessary for its
operations as contemplated in this Agreement.
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay
for maintaining the staff and personnel, and shall at its own
expense provide the equipment, office space and facilities,
necessary to perform its obligations under this Agreement, and
shall pay all compensation of officers of the Company and the
fees of all directors of the Company who are affiliated persons
of Merrill Lynch & Co., Inc. or its subsidiaries, and shall pay
the organization costs of the Funds.
(b) The Company. The Company assumes and shall pay
all expenses of the Funds, including, without limitation:
insurance, taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder
reports and prospectuses (except to the extent paid by the
Distributor), charges of the Custodian and Transfer Agent,
5
<PAGE>
expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under
Federal and state securities laws, fees and expenses of
directors who are not affiliated persons of Merrill Lynch & Co.,
Inc. or its subsidiaries, accounting and pricing costs
(including the daily calculation of net asset value), interest,
brokerage costs, litigation and other extraordinary or
non-recurring expenses, and other expenses properly payable by
the Company.
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services
rendered, facilities furnished and expenses assumed by the
Adviser, the Company shall pay to the Adviser at the end of each
calendar month a fee based upon the average daily value of the
aggregate net assets of each Fund, as determined and computed in
accordance with the description of the method of determination
of net assset value contained in the Prospectus, at the annual
rate of 0.65% of the average daily value of the aggregate net
assets of the Resources Focus Fund and at the annual rate of
0.55% of the average daily value of the aggregate net assets of
the American Balanced Fund.
(b) Expense Limitations. In the event the
operating expenses of any Fund, including the investment
advisory fee applicable to such Fund payable to the Adviser
6
<PAGE>
pursuant to subsection (a) hereof, for any fiscal year ending on
a date on which this Agreement is in effect, exceed the expense
limitations under state securities laws or published regulations
thereunder, as such limitations may be raised or lowered from
time to time, the Adviser shall reduce its investment advisory
fee by the extent of such excess and, if required under any such
laws or regulations, will reimburse such Fund the amount of such
excess; provided, however, to the extent permitted under law,
there shall be excluded from such expenses the amount of any
interest, taxes, brokerage commissions and extraordinary
expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Company and allocated to such
Fund. Whenever the expenses of any Fund exceed a pro rata
portion of the applicable annual expense limitations, the
estimated amounts of reimbursement under such limitations shall
be applicable as an offset against the monthly payment of the
advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the
Company in connection with any investment policy or the
purchase, sale or redemption of any securities on the
recommendation of the Adviser. Nothing herein contained shall
7
<PAGE>
be construed to protect the Adviser against any liability to the
Company or its security holders to which the Adviser shall
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of its duties on
behalf of the Company, reckless disregard of the Adviser's
obligations and duties under this Agreement or the violation of
any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are
not to be deemed exclusive, and the Adviser shall be free to
render similar services to others so long as its services
hereunder are not impaired thereby. It is understood that
directors, officers, employees and shareholders of the Company
are or may become interested in the Adviser, as directors,
officers, employees or shareholders or otherwise and that
directors, officers, employees or shareholders of the Adviser
are or may become similarly interested in the Company, and that
the Adviser is or may become interested in the Company as
shareholder or otherwise.
ARTICLE 6.
Duration and Termination of this Agreement.
This Agreement shall become effective as of May 1,
1988 and shall remain in force until May 1, 1990 and thereafter,
but only so long as such continuance is specifically approved at
8
<PAGE>
least annually by (i) the Board of Directors of the Company, or
by the vote of a majority of the outstanding shares of the
Funds, including a majority of the outstanding shares of each
Fund, and (ii) a majority of those directors who are not parties
to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, as to a
Fund, without the payment of any penalty, by the Board of
Directors of the Company or by vote of a majority of the
outstanding shares of such Fund, or by the Adviser, on sixty
days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
ARTICLE 7.
Definitions.
The terms "assignment," "affiliated person" and
"interested person," when used in this Agreement, shall have the
respective meanings specified in the Act. As used with respect
to the Company or a Fund, the term "majority of the outstanding
shares" means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if
such amendment is specifically approved by (i) the Board of
9
<PAGE>
Directors of the Company, or by the vote of a majority of
outstanding shares of each of the Funds, and (ii) a majority of
those directors of the Company who are not parties to this
Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of the State of New
York as at the time in effect and the applicable provisions of
the Act. To the extent that the applicable law of the State of
New York, or any of the provisions herein, conflict with the
applicable provisions of the Act, the latter shall control.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
By
------------------------------
President
Attest:
- ----------------------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT, INC.
By
------------------------------
President
Attest:
- ----------------------------------
Secretary
10
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 16th day of
October, 1991 between Merrill Lynch Variable Series Funds, Inc., a Maryland
corporation ("the Company"), and Merrill Lynch Asset Management, Inc., a
Delaware corporation (the "Adviser");
WITNESSETH:
WHEREAS, the Company is engaged in
business as a diversified open-end management investment company and is
registered as such under the Investment Company Act of 1940 (the "Investment
Company Act"); and
WHEREAS, the Company is currently comprised
of ten separate Funds, each of which pursues its investment objective through
separate investment policies; and
WHEREAS, the Adviser is engaged principally
in rendering advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Adviser is currently serving as the Investment Adviser to the
Company's Reserve Assets Fund pursuant to an Investment Advisory Agreement
dated November 10, 1981 as amended on April 23, 1985; to the Company's Prime
Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund
pursuant to an Investment Advisory Agreement dated April 21, 1982 as amended on
April 23, 1985; to the Company's Flexible Strategy Fund pursuant to an
Investment Advisory Agreement dated April 16, 1986; and to the Company's
Resources Focus Fund and American Balanced Fund pursuant to an Investment
Advisory Agreement dated April 20, 1988; and
WHEREAS, the Company desires to retain the Adviser to render investment
supervisory and corporate administrative services to the Company's Domestic
Money Market and Global Strategy Focus Funds (the "Funds" and individually a
"Fund"), in the manner and on the terms hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the covenants hereinafter
contained, the Company and the Adviser hereby agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the investment adviser to
and manager of the Funds and to manage the investment and reinvestment of the
assets of the Funds, and to administer their respective affairs, subject to the
supervision of the Board of Directors of the Company, for the period and on the
terms and conditions set forth in this Agreement. The Adviser hereby accepts
such employment and agrees during such period, at its own expense, to render
the services and to assume the obligations herein set forth for the
compensation provided for herein. The Adivser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Company in
any way or otherwise be deemed an agent of the Company.
(a) Investment Advisory Services. In acting as investment adviser to
the Funds, the Adviser shall regularly provide the Funds with such investment
research, advice and supervision as the latter may from time to time consider
necessary for the proper supervision of the Funds and shall furnish continuously
an investment program and shall determine from time to time what securities
shall be purchased, sold or exchanged and what portion of the assets of each
Fund's portfolio shall be held in the various securities in which
2
<PAGE>
it may invest, subject always to the restrictions of the Company's Articles of
Incorporation and By-Laws, as amended from time to time, the provisions of the
Investment Company Act of 1940 (the "Act") and the statements relating to each
Fund's investment objectives, investment policies and investment restrictions
set forth in the currently effective prospectus of the Company relating to such
Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of
Directors of the Company at any time, however, make any definitive determination
as to the investment policy of a Fund and notify the Adviser thereof, the
Adviser shall be bound by such determination for the period, if any, specified
in such notice or until similarly notified that such determination has been
revoked. The Adviser shall take, on behalf of the Company, all actions which it
deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
portfolio securities for each Fund with brokers or dealers selected by it. In
connection with the selection of such brokers or dealers and the placing of
such orders, the Adviser is directed at all times to seek to obtain for each
Fund the most favorable net results for such Fund as determined by the Board of
Directors and set forth in the Prospectus. Subject to this requirement and the
provisions of the Investment Company Act, the Securities Exchange Act of 1934,
and other applicable provisions of law, nothing shall prohibit the Adviser from
selecting brokers or dealers with which it or the Company is affiliated.
(b) Administrative Services. In addition to the performance of investment
advisory services, the Adviser shall perform, or supervise the performance of,
administrative services in connection with the management of the Company
insofar as such services relate to and are required by the Funds. In this
connection, the Adviser agrees to (i) assist in supervising all aspects of the
Company's operations relating to the Funds, including the
3
<PAGE>
coordination of all matters relating to the functions of the custodian,
transfer agent, other shareholder service agents, accountants, attorneys and
other parties performing services or operational functions for the Company
relating to the Funds, (ii) provide the Company, at the Adviser's expense, with
services of persons competent to perform such administrative and clerical
functions as are necessary in order to provide effective administration of the
Company to the extent required by the Funds, including duties in connection with
shareholder relations, reports, redemption requests and account adjustments and
the maintenance of certain books and records of the Company insofar as they
relate to the Fund, and (iii) provide the Company, at the Adviser's expense,
with adequate office space and related services necessary for its operations as
contemplated in the Agreement.
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay for maintaining the
staff and personnel, and shall at its own expense provide the equipment, office
space and facilities, necessary to perform its obligations under this
Agreement, and shall pay all compensation of officers of the Company and the
fees of all directors of the Company who are affiliated persons of Merrill
Lynch & Co. Inc. or its subsidiaries, and shall pay the organization costs of
the Company.
(b) The Company. The Company assumes and shall pay all expenses
of the Funds, including, without limitation: insurance, taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses (except to the extent paid by the
Distributor), charges of the Custodian and Transfer Agent,
4
<PAGE>
expenses of redemption of shares, Securities and Exchange Commission fees,
expenses of registering the shares under Federal and state securities laws, fees
and expenses of directors who are not affiliated persons of Merrill Lynch & Co.,
Inc. or its subsidiaries, accounting and pricing costs (including the daily
calculation of net asset value), interest, brokerage costs, litigation and
other extraordinary or nonrecurring expenses, and other expenses properly
payable by the Company.
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services rendered, the
facilities furnished and expenses assumed by the Adviser, the Company shall pay
to the Adviser at the end of each calendar month a fee of .50% of the average
daily net assets of the Domestic Money Market Fund and .65% of the average daily
net assets of the Global Strategy Focus Fund, as determined and computed in
accordance with the description of the method of determination of net asset
value contained in the Prospectus.
(b) Expense Limitations. In the event the operating expenses of any
Fund, including the investment advisory fee applicable to such Fund payable to
the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a
date on which this Agreement is in effect, exceed the expense limitations under
state securities laws or published regulations thereunder, as such limitations
may be raised or lowered from time to time, the Adviser shall reduce its
investment advisory fee by the extent of such excess and, if required under any
such laws or regulations, will reimburse such Fund in the amount of such excess;
provided, however, to the extent permitted under law, there shall be excluded
from
5
<PAGE>
such expenses the amount of any interest, taxes, brokerage commissions and
extraordinary expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related thereto) paid
or payable by the Company and allocated to such Fund. Whenever the expenses of
any Fund exceed a pro rata portion of the applicable annual expense
limitations, the estimated amounts of reimbursement under such limitations
shall be applicable as an offset against the monthly payment of the advisory
fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Company in connection with any investment
policy or the purchase, sale or redemption of any securities on the
recommendation of the Adviser. Nothing herein contained shall be construed to
protect the Adviser against any liability to the Company or its security holders
to which the Adviser shall otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence in the performance of its duties on
behalf of the Company, reckless disregard of the Adviser's obligations and
duties under this Agreement or the violation of any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are not to be deemed
exclusive, and the Adviser shall be free to render similar services to others
so long as its services hereunder are not impaired thereby. It is understood
that directors, officers,
6
<PAGE>
employees and shareholders of the Company are or may become interested in the
Adviser, as directors, officers, employees or shareholders or otherwise and
that directors, officers, employees or shareholders of the Adviser are or may
become similarly interested in the Company, and that the Adviser is or may
become interested in the Company as shareholder or otherwise.
ARTICLE 6
Duration and Termination of this Agreement.
This Agreement shall become effective as of the effective date of the
Company's Post-Effective Amendment No. 16 to its Registration Statement, and
shall remain in force until May 1, 1993 and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Board of
Directors of the Company, or by the vote of a majority of the outstanding shares
of the Funds, including a majority of the outstanding shares of each Fund, and
(ii) a majority of those directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purposes of voting on such approval.
This Agreement may be terminated at any time, as to a Fund, without the
payment of any penalty, by the Board of Directors of the Company or by vote of a
majority of the outstanding shares of such Fund, or by the Adviser, on sixty
days' written notice to the other party. This Agreement shall automatically
terminate in the event of its assignment.
7
<PAGE>
ARTICLE 7.
Definitions.
The terms "assignment," "affiliated person" and "interested person,"
when used in this Agreement, shall have the respective meanings specified in
the Act. As used with respect to the Company or a Fund, the term "majority of
the outstanding shares" means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Board of Directors of the Company, or by the
vote of the majority of outstanding shares of each of the Funds, and (ii) a
majority of those directors of the Company who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Act. To the extent that the applicable laws
of the State of New York, or any of the provisions herein, conflict with the
applicable provisions of the Act, the latter shall control.
8
<PAGE>
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
ATTEST:
By:
--------------------------
President
- ----------------------------------
Secretary
MERRILL LYNCH ASSET
MANAGEMENT, INC.
ATTEST:
By:
--------------------------
Vice President
- ----------------------------------
Secretary
9
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 14th day of June, 1993 between
Merrill Lynch Variable Series Funds, Inc., a Maryland corporation
(the "Company") , and Merrill Lynch Asset Management, Inc. , a
Delaware corporation (the "Advisor");
W I T N E S S E T H:
WHEREAS, the Company is engaged in business as a
diversified open-end management investment company and is
registered as such under the Investment Company Act of 1940 (the
"Investment Company Act"); and
WHEREAS, the Company is currently comprised of fourteen
separate Funds, each of which pursues its investment objective
through separate investment policies; and
WHEREAS, the Adviser is engaged in principally in
rendering advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940; and
WHEREAS, the Adviser is currently serving as the
Investment Adviser to the Company's Reserve Assets Fund pursuant to
an Investment Advisory Agreement dated November 10, 1981 as amended
on April 23, 1985; to the Company's Prime Bond Fund, High Current
Income Fund, Quality Equity Fund and Equity Growth Fund pursuant to
an Investment Advisory Agreement dated April 21, 1982 as amended on
April 23, 1985; to the Company's Flexible Strategy Fund pursuant to
an Investment Advisory Agreement dated April 16, 1986; to the
Company's Natural Resources Focus Fund and American Balanced Fund
pursuant to an Investment Advisory Agreement dated April 20, 1988;
<PAGE>
and to the Company's Domestic Money Market Fund and Global Strategy
Focus Fund pursuant to an Investment Advisory Agreement Dated
October 16, 1991; and
WHEREAS, the Company desires to retain the Adviser to
render investment supervisory and corporate administrative services
to the Company's Basic Value Focus Fund, World Income Focus Fund,
Global Utility Focus Fund and International Equity Focus Fund (the
"Funds" and individually a "Fund"), in the manner and on the terms
hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the
covenants hereinafter contained, the Company and the Adviser hereby
agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the
investment adviser to and manager of the Funds and to manage the
investment and reinvestment of the assets of the Funds, and to
administer their respective affairs, subject to the supervision of
the Board of Directors of the Company, for the period and on the
terms and conditions set forth in this Agreement. The Adviser
hereby accepts such employment and agrees during such period, at
its own expense, to render the services and to assume the
obligations herein set forth for the compensation provided for
herein. The Adviser shall for all purposes herein be deemed to be
an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent
2
<PAGE>
the Company in any way or otherwise be deemed an agent of the
Company.
(a) Investment Advisory Services. In acting as
investment adviser to the Funds, the Adviser shall regularly
provide the Funds with such investment research, advice and
supervision as the latter may from time to time consider necessary
for the proper supervision of the Funds and shall furnish
continuously an investment program and shall determine from time to
time what securities shall be purchased, sold or exchanged and what
portion of the assets of each Fund's portfolio shall be held in the
various securities in which it may invest, subject always to the
restrictions of the Company's Articles of Incorporation and By-
Laws, as amended from time to time, the provisions of the
Investment Company Act of 1940 (the "Act") and the statements
relating to each Fund's investment objectives, investment policies
and investment restrictions set forth in the currently effective
prospectus of the Company relating to such Fund under the
Securities Act of 1933 (the "Prospectus"). Should the Board of
Directors of the Company at any time, however, make any definitive
determination as to the investment policy of a Fund and notify the
Adviser thereof, the Adviser shall be bound by such determination
for the period, if any, specified in such notice or until similarly
notified that such determination has been revoked. The Adviser
shall take, on behalf of the Company, all actions which it deems
necessary to implement the investment policies determined as
provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for each Fund with brokers
3
<PAGE>
or dealers selected by it. In connection with the selection of
such brokers or dealers and the placing of such orders, the Adviser
is directed at all times to seek to obtain for each Fund the most
favorable net results for such Fund as determined by the Board of
Directors and set forth in the Prospectus. Subject to this
requirement and the provisions of the Investment Company Act, the
Securities Exchange Act of 1934, and other applicable provisions of
law, nothing shall prohibit the Adviser from selecting brokers or
dealers with which it or the Company is affiliated.
(b) Administrative Services. In addition to the
performance of investment advisory services, the Adviser shall
perform, or supervise the performance of, administrative services
in connection with the management of the Company insofar as such
services relate to and are required by the Funds. In this
connection, the Adviser agrees to (i) assist in supervising all
aspects of the Company's operations relating to the Funds,
including the coordination of all matters relating to the functions
of the custodian, transfer agent, other shareholder service agents,
accountants, attorneys and other parties performing services or
operational functions for the Company relating to the Funds, (ii)
provide the Company, at the Adviser's expense, with services of
persons competent to perform such administrative and clerical
functions as are necessary in order to provide effective
administration of the Company to the extent required by the Funds,
including duties in connection with shareholder relations, reports,
redemption requests and account adjustments and the maintenance of
certain books and records of the Company insofar as they relate to
4
<PAGE>
the Fund, and (iii) provide the Company, at the Adviser's expense,
with adequate office space and related services necessary for its
operations as contemplated in the Agreement.
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay for
maintaining the staff and personnel, and shall at its own expense
provide the equipment, office space and facilities, necessary to
perform its obligations under this Agreement, and shall pay all
compensation of officers of the Company and the fees of all
directors of the Company who are affiliated persons of Merrill
Lynch & Co., Inc. or its subsidiaries, and shall pay the
organization costs of the Company.
(b) The Company. The Company assumes and shall pay all
expenses of the Funds, including, without limitation: insurance,
taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses
(except to the extent paid by the Distributor), charges of the
Custodian and Transfer Agent, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering
the shares under federal and state securities laws, fees and
expenses of directors who are not affiliated persons of Merrill
Lynch & Co. , Inc. or its subsidiaries, accounting and pricing costs
(including the daily calculation of net asset value), interest,
brokerage costs, litigation and other extraordinary or nonrecurring
expenses, and other expenses properly payable by the Company.
5
<PAGE>
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services rendered
the facilities furnished and expenses assumed by the Adviser, the
Company shall pay to the Adviser at the end of each calendar month
a fee of .60% of the average daily net assets of each of the Basic
Value Focus Fund, World Income Focus Fund, and Global Utility Focus
Fund and .75% of the average daily net assets of the International
Equity Focus Fund, as determined and computed in accordance with
the description of the method of determination of net asset value
contained in the Prospectus.
(b) Expense Limitations. In the event the operating
expenses of any Fund, including the investment advisory fee
applicable to such Fund payable to the Adviser pursuant to
subsection (a) hereof, for any fiscal year ending on a date on
which this Agreement is in effect, exceeds the expense limitations
under state securities laws or published regulations thereunder, as
such limitations may be raised or lowered from time to time, the
Adviser shall reduce its investment advisory fee by the extent of
such excess and, if required under any such laws or regulations,
will reimburse such Fund in the amount of such excess; provided,
however, to the extent permitted under law, there shall be excluded
from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited
to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Company and
allocated to such Fund. Whenever the expenses of any Fund exceed
6
<PAGE>
a pro rata portion of the applicable annual expense limitations,
the estimated amounts of reimbursement under such limitations shall
be applicable as an offset against the monthly payment of the
advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Company in
connection with any investment policy or the purchase, sale or
redemption of any securities on the recommendation of the Adviser.
Nothing herein contained shall be construed to protect the Adviser
against any liability to the Company or its security holders to
which the Adviser shall otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence in the performance of its
duties on behalf of the Company, reckless disregard of the
Adviser's obligations and duties under this Agreement or the
violation of any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are not
to be deemed exclusive, and the Adviser shall be free to render
similar services to others so long as its services hereunder are
not impaired thereby. It is understood that directors, officers,
employees and shareholders of the Company are or may become
interested in the Adviser, as directors, officers, employees or
7
<PAGE>
shareholders or otherwise and that directors, officers, employees
or shareholders of the Adviser are or may become similarly
interested in the Company, and that the Adviser is or may become
interested in the Company as shareholder or otherwise.
ARTICLE 6.
Duration and Termination of this Agreement.
This Agreement shall become effective as of the effective
date of the Company's Post Effective Amendment No. 20 to its
Registration Statement, and shall remain in force until May 1, 1995
and thereafter, but only so long as such continuance is
specifically approved at least annually by (i) the Board of
Directors of the Company, or by the vote of a majority of the
outstanding shares of the Funds, including a majority of the
outstanding shares of each Fund, and (ii) a majority of those
directors who are not parties to this Agreement or interested
persons of any such party cast in person at a meeting called for
the purposes of voting on such approval.
This Agreement may be terminated at any time, as to a
Fund, without the payment of any penalty, by the Board of Directors
of the Company or by vote of a majority of the outstanding shares
of such Fund, or by the Adviser, on sixty days' written notice to
the other party. This Agreement shall automatically terminate in
the event of its assignment.
8
<PAGE>
ARTICLE 7.
Definitions.
The terms "assignment", "affiliated person" and
"interested person", when used in this Agreement, shall have the
respective meanings specified in the Act. As used with respect to
the Company or a Fund, the term "majority of the outstanding
shares" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the Board of Directors of
the Company, or by the vote of the majority of outstanding shares
of each of the Funds, and (ii) a majority of those directors of the
Company who are not parties to this Agreement or interested persons
of any such party cast in person at a meeting called for the
purpose of voting on such approval.
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as
at the time in effect and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of
the State of New York, or any of the provisions herein, conflict
9
<PAGE>
with the applicable provisions of the Investment Company Act, the
latter shall control.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
ATTEST:
By:
-----------------------------
President
- --------------------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT,
INC.
ATTEST:
By:
----------------------------
President
- --------------------------------
Secretary
10
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made this 7th day of April, 1994, between
MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corporation
organized under the laws of Maryland (the "Company"), and
Merrill Lynch Funds Distributor, Inc., a Delaware corporation
(the "Distributor");
W I T N E S S E T H:
WHEREAS, the Company is registered under the Investment
Company Act of 1940, as amended to date (the "Investment Company
Act"), as a diversified open-end investment company and it is
affirmatively in the interest of the Company to offer its shares
for sale continuously to certain insurance companies for their
respective separate accounts pursuant to a currently effective
prospectus (the "Prospectus") under the Securities Act of 1933 (the
"Securities Act"); and
WHEREAS, the Company currently is comprised of seventeen
Funds, but may be comprised of additional separate funds, each of
which existing or additional funds will pursue its investment
objective through separate investment policies (such existing funds
and any additional fund being referred to as "Funds"); and
WHEREAS, the Distributor is a securities firm engaged in
the business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Company and the Distributor wish to enter
into an agreement with each other with respect to the continuous
<PAGE>
offering to certain insurance companies for their respective
separate accounts of shares of the Common Stock, par value $.10 per
share, of the Funds (the "shares"), in order to promote the growth
of the Funds and facilitate the distribution of their shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The
Company hereby appoints the Distributor as the principal
underwriter and distributor of the Funds to sell their respective
shares to such insurance companies as the Company may designate in
writing from time to time for their respective separate accounts,
and the Distributor hereby accepts such appointment. The Company
during the term of this Agreement shall sell its shares to the
Distributor upon the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties. The
Distributor shall be the exclusive representative of the Company to
act as principal underwriter and distributor of the shares.
Section 3. Purchase of Shares from the Company.
(a) The Company will offer its shares and the
Distributor shall have the right to buy from the Company the shares
needed, but not more than the shares needed (except for clerical
errors in transmission) to fill unconditional orders for the shares
placed with the Distributor by the designated insurance companies
for their separate accounts. The price which the Distributor shall
pay for the shares so purchased from the Company shall be the net
asset value per share, determined as set forth in Section 3(c)
hereof.
2
<PAGE>
(b) The shares of each Fund are to be resold by the
Distributor to the designated insurance companies for their
separate accounts at the net asset value per share of such Fund.
(c) The net asset value of the shares of each Fund
shall be determined by the Company or any agent of the Company at
such time and on such days as is designated in the Prospectus, in
accordance with the method set forth in the Prospectus of the
Company and guidelines established by the Board of Directors of the
Company. The Company may also cause the net asset value of the
shares to be determined in substantially the same manner or
estimated in such manner and as of such other hour or hours as may
from time to time be agreed upon in writing by the Company and the
Distributor. All payments to the Company hereunder shall be made
in the manner set forth in Section 3(e).
(d) The Company shall have the right to suspend the
sale of the shares at times when redemption of any such shares is
suspended pursuant to the condition set forth in Section 4(b)
hereof. The Company shall also have the right to suspend the sale
of the shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other extraordinary event, which, in the judgment of the Company,
makes it impracticable to sell any such shares.
(e) The Company, or any agent of the Company
designated in writing by the Company, shall be promptly advised of
all purchase orders for the shares received by the Distributor.
The Company (or its agent) will confirm orders upon their receipt,
3
<PAGE>
will make appropriate book entries and upon receipt by the Company
(or its agent) of payment therefor, will deliver deposit receipts
or certificates for such shares pursuant to the instructions of the
Distributor. Payment shall be made to the Company in New York
Clearing House funds. The Distributor agrees to cause such payment
and such instructions to be delivered promptly to the Company (or
its agent).
Section 4. Repurchase or Redemption of Shares by the
Company.
(a) Any of the outstanding shares may be tendered
for redemption at any time, and the Company agrees to repurchase or
redeem any such shares so tendered in accordance with its
obligations as set forth in Article VII of its Articles of
Incorporation, as amended from time to time, and in accordance with
the applicable provisions set forth in the Prospectus of the
Company. The price to be paid to redeem or repurchase shares shall
be equal to the net asset value per shares calculated in accordance
with the provisions of Section 3(c) hereof. All payments by the
Company hereunder shall be made in the manner set forth below.
The Company shall pay the total amount of the
redemption price as defined in the above paragraph pursuant to the
instructions of the Distributor in New York Clearing House funds on
or before the fourth business day subsequent to its having received
the notice of redemption in proper form.
(b) Redemption of shares of a Fund or payment
therefor may be suspended at times when the New York Stock Exchange
is closed, when trading on said Exchange is closed, when trading on
4
<PAGE>
said Exchange is restricted, when an emergency exists as a result
of which disposal by the Company of securities owned by it for such
Fund is not reasonably practicable or its is not reasonably
practicable for the Company fairly to determine the value of the
net assets of the Fund, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Company.
(a) The Company shall furnish to the Distributor
copies of all information, financial statements and other papers
which the Distributor may reasonably request for use in connection
with the distribution of shares of the Company, and this shall
include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Company by independent public
accountants. The Company shall make available to the Distributor
such number of copies of its Prospectus as the Distributor shall
reasonably request.
(b) The Company shall take, from time to time, but
subject to any necessary approval of its shareholders, all
necessary action to fix the number of its authorized shares and to
register shares under the Securities Act, to the end that there
will be available for sale such number of shares as investors may
reasonably be expected to purchase.
(c) The Company shall use its best efforts to
qualify and maintain the qualification of an appropriate number of
the shares for sale under the securities laws of such states as the
Distributor and the Company may approve, if such qualification is
required by such securities laws. Any such qualification may be
5
<PAGE>
withheld, terminated or withdrawn by the Company at any time in its
discretion. The expense of qualification and maintenance of
qualification of the shares shall be borne by the Company. The
Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the
Company in connection with such qualification.
(d) The Company will furnish, in reasonable
quantities upon request by the Distributor, copies of annual and
interim reports of the Company.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time
and effort to effect sales of shares of the Company, but shall not
be obligated to sell any specific number of shares. The services
of the Distributor hereunder are not to be deemed exclusive and
nothing herein contained shall prevent the Distributor from
entering into distribution arrangements with other investment
companies so long as the performance of its obligations hereunder
is not impaired thereby.
(b) In selling the shares of the Company, the
Distributor shall use its best efforts in all respects duly to
conform with the requirements of all federal and state laws and
regulations and the regulations of the National Association of
Securities Dealers, Inc. (the "NASD"), relating to the sale of such
securities. Neither the Distributor nor any Selected Dealer nor
any other person is authorized by the Company to give any
information or to make any representations, other than those
6
<PAGE>
contained in the registration statement or related Prospectus and
any sales literature specifically approved by the Company.
Section 7. Payment of Expenses.
(a) The Company shall bear all costs and expenses
of the Company relating to the Fund, including fees and
disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and
prospectuses under the Investment Company Act and the Securities
Act, and all amendments and supplements thereto and the expense of
preparing, printing, mailing and otherwise distributing
prospectuses, annual or interim reports to shareholders and proxy
materials.
(b) The Company shall bear the costs and expenses
of qualification of the shares for sale, and, if necessary or
advisable in connection therewith, the Company shall bear the cost
and expense of qualifying the Company as a broker or dealer, in
such states of the United States or other jurisdictions as shall be
selected by the Company and the Distributor pursuant to Section
5(c) hereof and the cost and expenses payable to each such state
for continuing qualification therein until the Company decides to
discontinue such qualification pursuant to Section 5(c) hereof.
Section 8. Indemnification.
(a) The Company shall indemnify and hold harmless
the Distributor and each person, if any, who controls the
Distributor against any loss, liability, claim, damage or expense
(including the reasonable cost of investigating or defending any
alleged loss, liability, claim, damage or expense and reasonable
7
<PAGE>
counsel fees incurred in connection therewith) arising by reason of
any person acquiring any shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the
ground that the registration statement or related prospectus, as
from time to time amended and supplemented, or the annual or
interim reports to shareholders of the Company relating to the
Fund, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity
with, information furnished to the Company in connection therewith
by or on behalf of the Distributor; provided, however, that in no
case (i) is the indemnity of the Company in favor of the
Distributor and any such controlling persons to be deemed to
protect the Distributor or any such controlling persons thereof
against any liability to the Company or its security holders to
which the Distributor or any such controlling persons would
otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Company to be liable under its indemnity
agreement contained in this paragraph with respect to any claim
made against the Distributor or such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Company in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
8
<PAGE>
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Company
of any such claim shall not relieve it from any liability which it
may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Company will be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Company elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Company elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them, but, in case the Company does
not elect to assume the defense of any such suit, it will reimburse
the Distributor or such controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Company shall promptly notify the
Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with
the issuance or sale of the shares.
(b) The Distributor shall indemnify and hold
harmless the Company and each of its directors and officers and
each person, if any, who controls the Company against loss,
9
<PAGE>
liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and
in conformity with, information furnished to the Company in writing
by or on behalf of the Distributor for use in connection with the
registration statement or related prospectus, as from time to time
amended, or the annual or interim reports to shareholders. In case
any action shall be brought against the Company or any persons so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Company, and the Company and each persons so
indemnified shall have the rights and duties given to the
Distributor by the provisions of subsection (a) of this Section 8.
Section 9. Duration and Termination of This
Agreement. This Agreement shall become effective as of the date
first above written and shall remain in force until April , 1996
and, as to each Fund, thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the
Board of Directors of the Company, or by the vote of a majority of
the outstanding voting securities of such Fund, cast in person or
by proxy, and (ii) a majority of those directors who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting upon
such approval.
This Agreement may be terminated as to any Fund at any
time without the payment of any penalty, by the Board of Directors
of the Company or by vote of a majority of the outstanding voting
10
<PAGE>
securities of such Fund, or by the Adviser, on sixty days' written
notice to the other party. This Agreement shall automatically
terminate in the event of its assignment.
The term "vote of a majority of the outstanding voting
securities," "assignment," "affiliated persons" and "interested
person," when used in this Agreement, shall have the respective
meaning specified in the Investment Company Act.
Section 10. Amendments of This Agreement. This
Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Board of Directors of the Company,
or by the vote of a majority of outstanding voting securities of
each Fund affected by the amendment, and (ii) a majority of those
directors of the Company who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
Section 11. Governing Law. This Agreement shall be
construed in accordance with the laws of the State of New York and
the applicable provisions of the Investment Company Act. To the
extent the applicable law of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above written
in New York, New York.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
By
----------------------------
President
MERRILL LYNCH FUNDS
DISTRIBUTOR, INC.
By
----------------------------
President
12
CUSTODY AGREEMENT
AGREEMENT made this 15th day of March, 1982,
between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corpo-
ration organized and existing under the laws of the State of
Maryland, having its principal office and place of business
at 165 Broadway, New York, New York 10080 (hereinafter
called the "Company"), and THE BANK OF NEW YORK, a corpora-
tion organized and existing under the laws of the State of
New York, having its principal office and place of business
at 48 Wall Street, New York, New York 10015 (hereinafter
called the "Custodian").
W I T N E S S E T H:
That for and in consideration of the mutual promises
hereinafter set forth the parties hereto covenant and agree
as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words
and phrases shall have the following meanings:
1. "Authorized Person" shall be deemed to include the
Treasurer, the Controller or any other person, whether or
not any such person is an Officer or employee of the Com-
pany, duly authorized by the Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Com-
pany and listed in the Certificate annexed hereto as
Appendix A or such other Certificate may be received by the
Custodian from time to time.
2. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for the United States
government and federal agency securities, its successor or
successors and its nominee or nominees.
3. "Certificate" shall mean any notice, instructions,
or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian which is actu-
ally received by the Custodian and signed, or reasonably
believed by the Custodian to have been signed, on behalf of
the Company by any two Officers of the Company.
4. "Depository" shall mean The Depository Trust Com-
pany ("DTC"), a clearing agency registered with the Secu-
rities and Exchange Commission, its successor or successors
and its nominee or nominees, provided the Custodian has
received a certified copy of a resolution of the Company's
Board of Directors specifically approving deposits in DTC.
The term "Depository" shall further mean and include any
other person authorized to act as a depository under the
Investment Company Act of 1940, its successor or successors
and its nominee or nominees, specifically identified in a
certified copy of a resolution of the Company's Board of
Directors approving deposits therein by the Custodian.
5. "Money Market Security" shall be deemed to
include, without limitation, short term United States
government securities, government agency securities, certif-
icates of deposit, bankers' acceptances, non-convertible
corporate debt instruments, commercial paper, and repurchase
and reverse repurchase agreements.
6. "Officers" shall be deemed to include the Presi-
dent, any Vice President, the Secretary, the Treasurer, the
Controller, any Assistant Controller, any Assistant Treas-
2
<PAGE>
urer, or any other person or persons duly authorized by the
Board of Directors of the Company to execute any Certifi-
cate, instruction, notice or other instrument on behalf of
the Company and listed in the Certificate annexed hereto as
Appendix B or such other Certificate as may be received by
the Custodian from time to time.
7. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Authorized Person
or from a person reasonably believed by the Custodian to be
an Authorized Person.
8. "Security" shall be deemed to include, without
limitation, Money Market Securities and such other secu-
rities which the Company is authorized to invest in pursuant
to its current prospectus.
9. "Series" shall mean the various funds of the Com-
pany as described from time to time in the Company's current
prospectus including, but not limited to, the Merrill Lynch
Reserve Asset Fund.
10. "Shares" shall mean the classes of capital stock
of the Company, each of which is specifically allocated to a
particular Series.
11. "Written Instructions" shall mean written communi-
cations actually received by the Custodian from an Author-
ized Person or from a person reasonably believed by the
Custodian to be an Authorized Person by telex or any other
such system whereby the receiver of such communications is
able to verify by codes or otherwise with a reasonable
degree of certainty the authenticity of the sender of such
communication.
3
<PAGE>
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Company hereby constitutes and appoints the
Custodian as custodian of Securities and moneys owned by the
Company during the period of this Agreement.
2. The Custodian hereby accepts appointment as said
custodian and agrees to perform the duties thereof as here-
inafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. The Company will deliver or cause to be delivered
to the Custodian Securities and moneys owned by it, includ-
ing cash received for the issuance of Shares, during the
period of this Agreement and shall specify the Series to
which the same are specifically allocated. The Custodian
shall segregate, keep, and maintain the assets of the Series
separate and apart. The Custodian will not be responsible
for such Securities and such moneys until actually received
by it. The Custodian will be entitled to reverse any
credits made for a Series on the Company's behalf where such
credits have been previously made and moneys are not finally
collected. The Company shall deliver to the Custodian a
certified resolution of the Board of Directors of the Com-
pany approving, authorizing and instructing the Custodian on
a continuous and on-going basis to deposit in the Book-Entry
System all Securities eligible for deposit therein, regard-
less of the Series to which the same are specifically allo-
cated, and to utilize the Book-Entry System to the extent
4
<PAGE>
possible with respect to such Securities in connection with
settlements of purchases and sales of Securities, loans of
Securities and deliveries and returns of Securities collat-
eral, regardless of the Series to which the same are speci-
fically allocated. Prior to the deposit of Securities
specifically allocated to a Series in the Depository, the
Company shall have received a certified resolution of the
Board of Directors of the Company specifically approving
deposits by the Custodian on behalf of the Company of the
Securities specifically allocated to such Series in the
Depository. Securities and moneys of a Series deposited in
either the Book-Entry System or the Depository will be
represented in accounts which include only assets held by
the Custodian for customers, including, but not limited to,
accounts in which the Custodian acts in a fiduciary or
representative capacity and shall be specifically allocated
on the Custodian's books to the separate account for such
Series.
2. The Custodian shall establish and maintain sepa-
rate accounts, each in the name of the Company and each for
a particular Series only, and shall credit to the separate
account established and maintained for a particular Series
all moneys received by it for the account of the Company
with respect to such Series. Moneys credited to a separate
account for a Series shall be disbursed by the Custodian
only:
(a) In payment for Securities purchased for such
Series, as provided in Article IV hereof;
(b) In payment of dividends or distributions with
respect to Shares of such Series, as provided in Article V
hereof;
5
<PAGE>
(c) In payment of original issue or other taxes
with respect to the Shares of such Series, as provided in
Article VI hereof;
(d) In payment for Shares of such Series
redeemed by it, as provided in Article VI hereof;
(e) Pursuant to a Certificate, setting forth the
name and address of the person to whom the payment is to be
made, the amount to be paid, the Series account from which
the payment is to be made, and the purpose for which payment
is to be made; or
(f) In payment of the fees and in reimbursement
of the expenses and liabilities of the Custodian attribut-
able to such Series, as provided in Article IX hereof.
3. Promptly after the close of business on each day
the Custodian shall furnish the Company with a written
statement (i) summarizing all transactions and entries for
the account of the Company during said day and specifying
the Series to which each transaction and entry relates, and
(ii) confirming any purchase or sale of Securities during
said day and specifying the Series to which each purchase or
sale relates. Where Securities are transferred to the
account of the Company for a Series, the Custodian shall
also by book entry or otherwise identify as belonging to the
Company and specifically allocated to such Series a quantity
of Securities in a fungible bulk of Securities registered in
the name of the Custodian (or its nominee) or shown on the
Custodian's account on the books of the Book-Entry System or
the Depository. At least monthly and from time to time, the
Custodian shall furnish the Company with a detailed state-
ment of the Securities and moneys held for the Company under
this Agreement with respect to each Series.
6
<PAGE>
4. All Securities held for the Company, which are
issued or issuable only in bearer form, except such Secu-
rities as are held in the Book-Entry System, shall be held
by the Custodian in that form; all other Securities held for
the Company may be registered in the name of the Company, in
the name of any duly appointed registered nominee of the
Custodian as the Custodian may from time to time determine,
or in the name of the Book-Entry System or the Depository,
or their successor or successors, or their nominee or nomi-
nees. The Company agrees to furnish to the Custodian appro-
priate instruments to enable the Custodian to hold or
deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-
Entry System or the Depository any Securities which it may
hold for the account of the Company and which may from time
to time be registered in the name of the Company. The Cus-
todian shall hold all such Securities which are specifically
allocated to a Series and not held in the Book-Entry System
or in the Depository in a separate account in the name of
the Company for such Series physically segregated at all
times from those of any other person or persons.
5. Unless otherwise instructed to the contrary by a
Certificate, the Custodian by itself, or through the use of
the Book-Entry System or the Depository with respect to
Securities therein deposited, shall with respect to all
Securities held for the Company in accordance with this
Agreement:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount
payable upon all Securities which may mature or be called,
redeemed, or retired, or otherwise become payable;
7
<PAGE>
(c) Surrender Securities in temporary form for
definitive Securities;
(d) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing
authority now or hereafter in effect;
(e) Hold directly, or through the Book-Entry Sys-
tem or the Depository with respect to Securities therein
deposited, for the account of the Company and the particular
Series all rights and similar securities issued with respect
to any Securities held by the Custodian for such Series
hereunder; and
(f) Deliver to the Company all notices of meet-
ings of Shareholders and proxies received relating to Secu-
rities held by the Custodian hereunder.
6. Upon receipt of a Certificate and not otherwise,
the Custodian, directly or through the use of the Book-Entry
System or the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of
the Company as owner of any Securities held for the Series
specified in such Certificate may be exercised;
(b) Deliver any Securities held for the Series
specified in such Certificate in exchange for other Securi-
ties or cash issued or paid in connection with the liquida-
tion, reorganization, or refinancing, merger, consolidation
or recapitalization of any corporation, or exercise of any
conversion privilege and receive and hold hereunder specifi-
8
<PAGE>
cally allocated to such Series any cash or other Securities
received in exchange;
(c) Deliver any Securities held for the Series
specified in the Certificate to any protective committee,
reorganization committee or other person in connection with
the reorganization, refinancing, merger, consolidation, re-
capitalization or sale of assets of any corporation, and
receive and hold under the terms of this Agreement specifi-
cally allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be
issued to it to evidence such delivery; and
(d) Make such transfers or exchanges of the
assets of the Series specified in such Certificate and take
such other steps as shall be stated in said Certificate to
be for the purpose of effectuating any duly authorized plan
of liquidation reorganization, merger consolidation or re-
capitalization of the Company.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
1. Promptly after each purchase of Securities by the
Company, the Company shall deliver to the Custodian a Cer-
tificate, or with respect to a purchase of Money Market
Securities, a Certificate, Written Instructions or Oral
Instructions, specifying with respect to each such purchase:
(a) the Series to which the purchased Securities are to be
specifically allocated, (b) the name of the issuer and the
title of the Securities, (c) the number of shares or the
principal amount purchased and accrued interest, if any, (d)
the date of purchase and settlement, (e) the purchase price
9
<PAGE>
per unit, including accrued interest, if any, (f) the total
amount payable upon such purchase, including accrued inter-
est, if any, and (g) the name of the person from whom or the
broker through whom the purchase was made. The Custodian
shall upon receipt of Securities purchased by or for the
Company pay out of the moneys held for the account of the
Series to which the purchased Securities are to be specifi-
cally allocated the total amount payable to the person from
whom or the broker through whom the purchase was made, pro-
vided that the same conforms to the total amount payable as
set forth in such Certificate, Written Instructions, or Oral
Instructions.
2. Promptly after each sale of Securities by the Com-
pany, the Company shall deliver to the Custodian a Certifi-
cate, or with respect to a sale of Money Market Securities,
a Certificate, Written Instructions or Oral Instructions,
specifying with respect to each sale: (a) Series to
which such Securities were specifically allocated, (b) the
name of the issuer and the title of the Security, (c) the
principal amount sold, and accrued interest, if any, (f) the
total amount payable to the Fund upon such sale, including
accrued interest, if any, and (g) the name of the broker
through whom or the person to whom the sale was made. The
Custodian shall deliver the Securities upon receipt of the
total amount payable to the Company upon such sale, provided
that the same conforms to the total amount payable as set
forth in such Certificate, Written Instructions or Oral
Instructions. Subject to the foregoing, the Custodian may
accept payment in such form as shall be satisfactory to it,
and may deliver Securities and arrange for payment in
accordance with the customs prevailing among dealers in
Securities.
10
<PAGE>
ARTICLE V
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Company shall furnish to the Custodian a copy
of the resolution of the Board of Directors, certified by
the Secretary or any Assistant Secretary, either (i) setting
forth with respect to the Series specified therein the date
of the declaration of a dividend or distribution, the date
of payment thereof, the record date as of which shareholders
entitled to payment shall be determined, the amount payable
per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Transfer Agent
of the Company on the payment date, or (ii) authorizing with
respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing
the Custodian to rely on Oral Instructions, Written Instruc-
tions, or a Certificate setting forth the date of the decla-
ration of such dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per Share
of such Series to the shareholders of record as of that date
and the total amount payable to the Transfer Agent on the
payment date.
2. Upon the payment date specified in such resolu-
tion, Oral Instructions, Written Instructions, or Certifi-
cate, as the case may be, the Custodian shall pay out of the
moneys held for the account of the Company the total amount
payable to the Transfer Agent of the Company.
11
<PAGE>
ARTICLE VI
SALE AND REDEMPTION OF SHARES
1. Whenever the Company shall sell any Shares, it
shall deliver to the Custodian a Certificate duly specify-
ing:
(a) The Series and number of Shares sold, trade
date, and price; and
(b) The amount of money to be received by the
Custodian for the sale of such Shares and specifically allo-
cated to the separate account in the name of the Company for
such Series.
2. Upon receipt of such money from the Transfer
Agent, the Custodian shall credit such money to the separate
account in the name of the Company for the Series for which
such money was received.
3. Upon issuance of any Shares in accordance with the
foregoing provisions of this Article, the Custodian shall
pay, out of the money held in the separate account in the
name of the Company for the Series of Shares issued, all
original issue or other taxes required to be paid by the
Company in connection with such issuance upon the receipt of
a Certificate specifying the amount to be paid.
4. Whenever the Company shall hereafter redeem any
Shares it shall furnish to the Custodian a Certificate
specifying:
(a) The Series and number of Shares redeemed; and
12
<PAGE>
(b) The amount to be paid for the Shares of such
Series redeemed.
5. Upon receipt from the Transfer Agent of an advice
setting forth the Series and number of Shares received by
the Transfer Agent for redemption and stating that such
Shares are valid and in good form for redemption, the Custo-
dian shall make payment to the Transfer Agent out of the
moneys held in the separate account in the name of the Com-
pany for such Series of the total amount specified in the
Certificate issued pursuant to the foregoing paragraph 4 of
this Article.
ARTICLE VII
OVERDRAFTS OR INDEBTNESS
1. If the Custodian should in its sole discretion
advance funds on behalf of the Company for a Series which
results in an overdraft because the moneys held by the Cus-
todian in the separate account in the name of the Company
for such Series shall be insufficient to pay the total
amount payable upon purchase of Securities to be specifi-
cally allocated to such Series as set forth in a Certifi-
cate, Written Instructions or Oral Instructions issued pur-
suant to Article IV, or which results in an overdraft in the
account for such Series for some other reason, or if the
Company is for any other reason indebted to the Custodian
with respect to a Series, such overdraft or indebtedness
shall be deemed to be a loan made by the Custodian to the
Company for such Series payable on demand and shall bear
interest from the date incurred at a rate per annum (based
on a 360-day year from the actual number of days involved)
equal to 1/2% over Custodian's prime commercial lending rate
13
<PAGE>
in effect from time to time, such rate to be adjusted on the
effective date of any change in such prime commercial lend-
ing rate but in no event to be less than 6% per annum. In
addition thereto the Company hereby agrees that the Custo-
dian shall have a continuing lien and security interest in
and to any property specifically allocated to such Series at
any time held by it for the benefit of the Company or in
which the Company may have an interest which is then in the
Custodian's possession or control or in possession or
control of any third party acting in the Custodian's
behalf. The Company authorizes the Custodian, in its sole
discretion, at any time to charge any such overdraft or
indebtedness together with interest due thereon against any
balance of account standing to the Company's credit on the
Custodian's books and specifically allocated to such Series.
2. The Company will cause to be delivered to the Cus-
todian by any bank (including the Custodian) from which it
borrows money for temporary or emergency purposes using
Securities as collateral for such borrowings, a notice or
undertaking in the form currently employed by any such bank
setting forth the amount which such bank will loan to the
Company against delivery of a stated amount of collateral.
The Company shall promptly deliver to the Custodian a Cer-
tificate specifying with respect to each such borrowing:
(a) the Series to which such borrowing relates, (b) the name
of the bank, (c) the amount and terms of the borrowing,
which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or
other loan agreement, (d) the time and date, if known, on
which the loan is to be entered into (the "borrowing date"),
(e) the date on which the loan becomes due and payable, (f)
the total amount payable to the Company on the borrowing
date, (g) the market value of Securities specifically allo-
cated to such Series to be delivered as collateral for such
14
<PAGE>
loan, including the name of the issuer, the title and the
number of shares or the principal amount of any particular
Securities, (h) whether the Custodian is to deliver such
collateral through the Depository, and (i) a statement that
such loan for temporary or emergency purposes is in conform-
ance with the Investment Company Act of 1940 and the Com-
pany's current prospectus. The Custodian shall deliver on
the borrowing date such specified collateral and the
executed promissory note, if any, against delivery by the
lending bank of the total amount of the loan payable, pro-
vided that the same conforms to the total amount payable as
set forth in the Certificate. The Custodian may, at the
option of the lending bank, keep such collateral in its pos-
session, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver in the
manner directed by the Company from time to time such Secu-
rities as additional collateral as may be specified in a
Certificate to collateralize further any transaction
described in this paragraph. The Company shall cause all
Securities released from collateral status to be returned
directly to the Custodian, and the Cutodian shall receive
from time to time such returns of collateral as may be
tendered to it. In the event the Custodian fails to specify
in a Certificate the name of the issuer, the title and num-
ber of Shares or the principal amount of any particular
Securities to be delivered as collateral by the Custodian,
the Custodian shall not be under any obligation to deliver
any Securities. Collateral returned to the Custodian shall
be held hereunder as it was prior to being used as collat-
eral.
- 15 -
<PAGE>
ARTICLE VIII
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. If the Company is permitted by the terms of its
Articles of Incorporation and as disclosed in its most
recent and currently effective prospectus to lend portfolio
Securities specifically allocated to a Series, within 24
hours after each loan of portfolio Securities the Fund shall
deliver or cause to be delivered to the Custodian a Certifi-
cate specifying with respect to each such loan: (a) the
name of the issuer and the title of the Securities, (b) the
number of shares or the principal amount loaned, (c) the
date of loan and delivery, (d) the total amount to be deliv-
ered to the Custodian against the loan of the Securities,
including the amount of cash collateral and the premium, if
any, separately identified, (e) the name of the broker,
dealer, or financial institution to which the loan was made,
and (f) the name of the Series to which the loaned Secu-
rities are specifically allocated. The Custodian shall
deliver the Securities thus designated to the broker, dealer
or financial institution to which the loan was made upon
receipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept
payment in connection with a delivery otherwise than through
the Book Entry System or Depository only in the form of a
certified or bank cashier's check payable to the order of
the Company or the Custodian drawn on New York Clearing
House funds and may deliver Securities in accordance with
the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of
Securities by the Company, the Company shall deliver or
cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan termination and
16
<PAGE>
return of securities: (a) the name of the issuer and the
title of the Securities to be returned, (b) the number of
shares or the principal amount to be returned, (c) the date
of termination, (d) the total amount to be delivered by the
Custodian (including the cash collateral for such Securities
minus any offsetting credits as described in said Certifi-
cate), (e) the name of the broker, dealer, or financial
institution from which the Securities will be returned, and
(g) the name of the Series to which the loaned Securities
are specifically allocated. The Custodian shall receive all
Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon
receipt thereof shall pay, out of the moneys held for the
account of the Company, the total amount payable upon such
return of Securities as set forth in the Certificate.
ARTICLE IX
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, neither the Custo-
dian nor its nominee shall be liable for any loss or damage
including counsel fees, resulting from its action or omis-
sion to act or otherwise, except for any such loss or damage
arising out of its own negligence or willful misconduct.
The Custodian may, with respect to questions of law, apply
for and obtain the advice and opinion of counsel to the Com-
pany or of its own counsel, at the expense of the Company,
and shall be fully protected with respect to anything done
or omitted by it in good faith in conformity with such
advice or opinion. The Custodian shall be liable to the
Company for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any
negligence, misfeasance or misconduct on the part of the
Custodian or any of its employees or agents.
17
<PAGE>
2. Without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased by or for the Company, the legality of the pur-
chase thereof or the propriety of the amount paid thereof;
(b) The legality of the sale of any Securities by
or for the Company, or the propriety of the amount for which
the same are sold;
(c) The legality of the issue or sale of any
shares of the capital stock of the Company, or the suffi-
ciency of the amount to be received therefor;
(d) The legality of the redemption of any shares
of capital stock of the Fund, or the propriety of the amount
to be paid therefor;
(e) The legality of the declaration or payment of
any dividend by the Company;
(f) The legality of any borrowing by the Company
using Securities as collateral; or
(g) The legality of any loan of portfolio Securi-
ties pursuant to Article VIII of this Agreement, nor shall
the Custodian be under any duty or obligation to see to it
that any collateral delivered to it by a broker, dealer, or
financial institution or held by it at any time as a result
of such loan of portfolio Securities of the Company is ade-
quate collateral for the Company against any loss it might
sustain as a result of such loan. The Custodian speci-
fically, but not by way of limitation, shall not be under
18
<PAGE>
any duty or obligation periodically to check or notify the
Company that the amount of such collateral held by it for
the Company is sufficient collateral for the Company, but
such duty or obligation shall be the sole responsibility of
the Company. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer or finan-
cial institution to which porfolio Securities of the Company
are lent pursuant to Article VIII of this Agreement makes
payment to it of any dividends or interest which are payable
to or for the account of the Company during the period of
such loan or at the termination of such loan, provided, how-
ever, that the Custodian shall promptly notify the Company
in the event that such dividends or interest are not paid
and received when due.
3. The Custodian shall not be liable for, or consid-
ered to be the Custodian of, any money, whether or not
represented by any check, draft, or other instrument for the
payment of money, received by it on behalf of the Company
until the Custodian actually receives and collects such
money directly or by the final crediting of the account
representing the Company's interest at the Book-Entry System
or the Depository.
4. The Custodian shall not be under any duty or obli-
gation to take action to effect collection of any amount due
to the Company from the Transfer Agent of the Company nor to
take any action to effect payment or distribution by the
Transfer Agent of the Company of any amount paid by the Cus-
todian to the Transfer Agent of the Company in accordance
with this Agreement.
5. The Custodian shall not be under any duty or obli-
gation to take action to effect collection of any amount, if
the Securities upon which such amount is payable are in de-
19
<PAGE>
fault, or if payment is refused after due demand or presen-
tation, unless and until (i) it shall be directed to take
such action by a Certificate and (ii) it shall be assured to
its satisfaction of reimbursement of its costs and expenses
in connection with any such action.
6. The Custodian may appoint one or more banking in-
stitution as Depository or Depositories or as Sub-Custodian
or Sub-Custodians, including, but not limited to, banking
institutions located in foreign countries, of Securities and
moneys at any time owned by the Company, upon terms and con-
ditions approved in a Certificate.
7. The Custodian shall not be under any duty or obli-
gation to ascertain whether any Securities at any time de-
livered to or held by it for the account of the Company and
specifically allocated to a Series are such as properly may be
held by the Company and allocated to such Series under
the provisions of its Articles of Incorporation or its pro-
spectus.
8. The Custodian shall be entitled to receive and the
Company agrees to pay to the Custodian with respect to each
Series such compensation as may be agreed upon from time to
time between the Custodian and the Company. The Custodian
may charge such compensation and any expenses incurred by
the Custodian in the performance of its duties with respect
to a Series pursuant to such agreement against any moneys
specifically allocated to such Series. Unless and until the
Company instructs the Custodian by a Certificate to appor-
tion any loss, damage, liability or expenses among the
Series in a different manner, the Custodian shall also be
entitled to charge against any money held by it for the
account of a Series such Series' pro-rata share (based on
the relationship of such Series' net asset value at the time
20
<PAGE>
of the change to the aggregate net asset value of all Series
at that time) the amount of any loss, damage, liability or
expense (including counsel fees) for which it shall be
entitled to reimbursement under the provisions of this
agreement. The expenses which the Custodian may charge
against the account of a Series include, but are not limited
to, the expenses of Sub-Custodians and foreign branches of
the Custodian incurred in setting outside of New York City
transactions involving the purchase and sale of Securities
of such Series.
9. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received
by the Custodian and reasonably believed by the Custodian to
be genuine and to be a Certificate. The Custodian shall be
entitled to rely upon any Oral Instructions and any Written
Instructions actually received by the Custodian pursuant to
Articles IV and V hereof and reasonably believed by the Cus-
todian to be genuine and to be given by an Authorized
Person. The Fund agrees to forward to the Custodian a Cer-
tificate or facsimile thereof confirming such Oral Instruc-
tions or Written Instructions in such a matter so that such
Certificate or facsimile there is received by the Custodian,
whether by hand delivery, telecopier or other similar
devices, or otherwise by the close of business on the same
day that such Oral Instructions or Written Instructions are
given to the Custodian. The Company agrees that the fact
that such confirming Certificate or facsimile thereof is not
received by the Custodian shall in no way affect the
validity or enforceability of the transactions, hereby
authorized by the Company. The Company agrees that the Cus-
todian shall incur no liability to the Company in acting
upon Oral Instructions or Written Instructions given to the
Custodian hereunder concerning such transactions provided
such instructions reasonably appear to have been received
from an Authorized Person.
21
<PAGE>
10. The Books and records of the Custodian shall be
open to inspection and audit at reasonable times by Officers
and auditors employed by the Company.
11. The Custodian shall provide the Company with any
report obtained by the Custodian on the system of internal
accounting control of the Book-Entry System and the Deposi-
tory and with such reports on its own systems of internal
accounting control as the Company may reasonably request
from time to time.
12. The Custodian shall have no duties or responsibil-
ities whatsoever except such duties and responsibilities as
are specifically set forth in this Agreement, and no cove-
nant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE X
TERMINATION
1. Either of the parties herto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Company,
it shall be accompanied by a copy of a resolution of the
Board of Directors of the Company, certified by the Secre-
tary or any Assistant Secretary, electing to terminate this
Agreement and designating a successor custodian or custo-
dians, each of which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and
undivided profits. In the event such notice is given by the
Custodian, the Company shall, on or before the termination
22
<PAGE>
date, deliver to the Custodian a copy of a resolution of its
Board of Directors, certified by the Secretary of any Assis-
tant Secretary, designating a successor custodian or custo-
dians. In the absence of such designation by the Company,
the Custodian may designate a successor custodian which
shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus, and undivided pro-
fits. Upon the date set forth in such notice this Agreement
shall terminate, and the Custodian shall upon receipt of a
notice of acceptance by the successor custodian on that date
deliver directly to the successor custodian all Securities
and moneys then owned by the Company and held by it as Cus-
todian, after deducting all fees, expenses and other amounts
for the payment of reimbursement of which it shall then be
entitled.
2. If a successor custodian is not designated by the
Company or the Custodian in accordance with the preceding
paragraph, the Company shall, upon the date specified in the
notice of termination of this Agreement and upon the deliv-
ery by the Custodian to the Company of all Securities (other
than Securities held in the Book-Entry System which cannot
be delivered to the Company) and moneys then owned by the
Company, be deemed to be its own custodian and the Custodian
shall thereby be relieved of all duties and responsibilities
pursuant to this Agreement, other than the duty with respect
to Securities held in the Book-Entry Systems which cannot be
delivered to the Company to hold such Securities hereunder
in accordance with this Agreement.
23
<PAGE>
ARTICLE XI
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate
signed by two of the present Officers of the Company under
its corporate seal, setting forth the names of the signa-
tures of the present Authorized Persons. The Company agrees
to furnish to the Custodian a new Certificate in similar
form in the event that any such present Authorized Person
ceases to be an Authorized Person or in the event that other
or additional Authorized Persons are elected or appointed.
Until such new Certificate shall be received, the Custodian
shall be fully protected in acting under the provisions of
this Agreement upon Oral Instructions, Written Instructions
or signatures of the present Authorized Persons as set forth
in the last delivered Certificate.
2. Annexed hereto as Appendix B is a Certificate
signed by two of the present Officers of the Company under
its corporate seal, setting forth the names and the signa-
tures of the present Officers of the Company. The Company
agrees to furnish to the Custodian a new Certificate in
similar form in the event that any such present Officer
ceases to be an Officer of the Company, or in the event that
other or additional Officers of the Company, are elected or
appointed . Until such new Certificate shall be received, the
Custodian shall be fully protected in acting under the pro-
visions of this Agreement upon the signatures of the
Officers as set forth in the last delivered Certificate.
3. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Custo-
dian, shall be sufficiently given if addressed to the Custo-
dian and mailed or delivered to it at its offices at 90
24
<PAGE>
Washington Street, New York, New York 10015, or at such
other place as the Custodian may from time to time designate
in writing.
4. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Com-
pany shall be sufficiently given if addressed to the Company
and mailed or delivered to it at its office 165 Broadway,
New York, New York 10080, or at such other place as the Com-
pany may from time to time designate in writing.
5. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both
parties with the same formality as this Agreement, and
authorized and approved by a resolution of the Board of
Directors of the Company.
6. This Agreement shall extend to and shall be bind-
ing upon the parties hereto, and their respective successors
and assigns; provided, however, that this Agreement shall
not be assignable by the Company without the written consent
of the Custodian or by the Custodian without the written
consent of the Company, authorized or approved by a resolu-
tion of its Board of Directors.
7. This Agreement shall be construed in accordance
with the laws of the State of New York.
8. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an origi-
nal, but such counterparts shall, together, constitute only
one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective corporate
25
<PAGE>
Officers, thereunto duly authorized and their respective cor-
porate seals to be hereunto affixed, as of the day and year
first above written.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
By: /s/ Harold R. Groom Jr.
-------------------------
Attest: /s/ Philip L. Kirstein
----------------------
THE BANK OF NEW YORK
By:
------------------------
Attest:
/s/
- -----------------------------------
26
<PAGE>
APPENDIX A
I, , President and I,
, Secretary of MERRILL LYNCH
VARIABLE SERIES FUNDS, INC., a Maryland Corporation (the
"Company"), do hereby certify that:
The following individuals have been duly authorized in
conformity with the Company's Articles of Incorporation and
ByLaws to give Oral Instructions and Written Instructions on
behalf of the Company, and the signatures set forth opposite
their respective names are their true and correct signa-
tures:
Name Signature
<PAGE>
APPENDIX B
I, ,President and I,
Secretary of MERRILL LYNCH VARIABLE SERIES FUNDS, INC. , a
Maryland Corporation (the "Company"), do hereby certify
that:
The following individuals serve in the following posi-
tions with the Company and each individual has been duly
elected or appointed to each such position and qualified
therefor in conformity with the Company's Articles of Incor-
poration and By-Laws, and the signatures set forth opposite
their respective names and are their true and correct signa-
tures:
Name Position Signature
TRANSFER AGENCY AGREEMENT
TRANSFER AGENCY AGREEMENT made this 15th day of
March, 1982 between MERRILL LYNCH VARIABLE SERIES
FUNDS, INC., a corporation organized and existing under the
laws of the State of Maryland, having its principal office
and place of business at 165 Broadway, New York, New York
10080 (hereinafter called the "Company"), and THE BANK OF
NEW YORK, a corporation organized and existing under the
laws of the State of New York, having its principal office
and place of business at 48 Wall Street, New York, New York
10015 (hereinafter called the "Transfer Agent").
W I T N E S S E T H:
that for and in consideration of the mutual promises herein-
after set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words
and phrases shall have the following meanings:
1. "Certificate" shall mean any notice, instruction,
or other instrument in writing, authorized or required by
this Agreement to be given to the Transfer Agent by the Com-
pany which is signed by any Authorized Officer, as herein-
after defined.
2. "Custodian" shall mean the custodian of all of the
securities and all moneys owned by the Company.
<PAGE>
3 "Authorized Officer" shall be deemed to be the
Company's President, any Vice President of the Company, the
Company's Secretary, the Company's Treasurer, the Company's
Controller, any Assistant Controller of the Company, any
Assistant Treasurer of the Company, and any other person
duly authorized by the Board of Directors of the Company to
execute any Certificate, instruction, notice or other
instrument on behalf of the Company and named in Appendix A
hereto as such Appendix may from time to time be amended,
and any person believed by the Transfer Agent to be such a
person.
4. "Series" shall mean the various funds of the Com-
pany as described in the Company's prospectus from time to
time, including, but not limited to, the Merrill Lynch
Reserve Asset Fund.
5. "Shares" shall mean the classes of Capital Stock
of the Fund, each of which is allocated to a particular
Series.
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Company hereby constitutes and appoints the
Transfer Agent as transfer agent for all of the authorized
Shares of the Company during the period of this Agreement as
the same shall from time to time be constituted.
2. The Transfer Agent hereby accepts appointment as
such transfer agent and agrees to perform the duties thereof
as hereinafter set forth.
2
<PAGE>
3. In connection with its appointment, there shall be
filed with the Transfer Agent the following documents:
(a) A certified copy of the Certificate of Incor-
poration or other document evidencing the Company's form of
organization (such document being hereinafter referred to as
"the Charter") and all amendments thereto;
(b) A certified copy of the by-laws of the Com-
pany;
(c) A certified copy of a resolution of the Board
of Directors of the Company appointing the Transfer Agent
and appointing an authorized officer of the Company to
execute this Transfer Agency Agreement;
(d) A certificate of the Secretary of the Company
specifying by Series the number of authorized Shares and the
number of such authorized Shares currently outstanding, the
address of the Company, the names and specimen signatures of
the officers of the Company and the name and address of the
legal counsel for the Company;
(e) Specimen share certificates for each Series
in the form approved by the Board of Directors of the Com-
pany, with the certificate of the Secretary of the Company
as to such approval;
(f) Copies of the Company's Registration State-
ment, as amended to date, and the most recently filed Post-
Effective Amendment thereto, filed by the Company with the
Securities and Exchange Commission under the Securities Act
of 1933, as amended, and the Registration Statement, as
amended to date, filed with the Securities and Exchange Com-
mission under the Investment Company Act of 1940, as
3
<PAGE>
amended, together with any application filed in connection
therewith,
(g) Opinion of counsel for the Company with
respect to the validity of the authorized and outstanding
Shares and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable federal or
state law or regulation, and
(h) A signature card bearing the signatures of
the authorized officers of the Company who will sign Share
certificates or sign written instructions or requests.
4. The Company shall furnish the Transfer Agent with
a sufficient supply of blank Share certificates of each
Series and from time to time will renew such supply upon
request of the Transfer Agent. Such blank Share certifi-
cates shall be properly signed by officers of the Company
authorized by law or by the by-laws to sign Share certifi-
cates, and, if required, shall bear the corporate seal or
facsimile thereof. The Company agrees to indemnify and
exonerate, save and hold the Transfer Agent harmless, from
and against any and all claims or demands that may be
asserted against the Transfer Agent concerning the genuine-
ness of any Share certificates supplied to the Transfer
Agent pursuant to this Agreement.
5. Notwithstanding anything elsewhere contained in
this Agreement to the contrary, the Transfer Agent shall be
the Transfer Agent hereunder for a particular Series of
Shares only when it shall have received the documents speci-
fying such particular Series of Share listed in Section 3c
through 3h and Section 4 of this Article.
4
<PAGE>
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. In connection with the appointment of the Transfer
Agent for all of the authorized Shares, where there is any
increase or decrease in the total number of authorized
Shares of any Series, the Fund shall file with the Transfer
Agent:
(a) A certified copy of the amendment to the
Charter giving effect to such increase or decrease;
(b) In the case of an increase, an opinion of
counsel for the Company with respect to the validity of the
Shares of such Series and the status of such Shares under
the Securities Act of 1933, as amended and any other appli-
cable federal or state law or regulation; and
(c) In the case of an increase, if the Authority
of the Transfer Agent was theretofore expressly limited to a
specified number of Shares, a certified resolution of the
Board of Directors of the Company modifying the authority of
the Transfer Agent.
2. In the case of the issuance of any additional
Shares, pursuant to stock dividends and stock splits, the
Company shall file with the Transfer Agent:
(a) A certified copy of the resolution(s) adopted
by the Board of Directors and/or the shareholders of the
Company authorizing such issuance of additional Shares; and
(b) An opinion of counsel for the Company with
respect to the validity of the Shares and the status of such
5
<PAGE>
Shares under the Securities Act of 1933, as amended, and any
other applicable Federal or State law or regulation.
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
1. In the case of any recapitalization or other capi-
tal adjustments requiring a change in the form of Share cer-
tificates for any Series, the Transfer Agent will issue
Share certificates in the new form in exchange for, or upon
transfer of, outstanding Share certificates in the old form,
upon receiving:
(a) A Certificate authorizing the issuance of
Share certificates in the new form;
(b) A certified copy of the amendment to the
Charter effecting the change;
(c) Specimen Share certificates in the new form
approved by the Board of Directors of the Company, with a
Certificate of the Secretary of the Company as to such
approval; and
(d) An opinion of counsel for the Company with
respect to the validity of the Shares in the new form and
the status of such Shares under the Securities Act of 1933,
as amended, and any other applicable federal or state law or
regulation.
2. The Company shall furnish the Transfer Agent with
a sufficient supply of blank Share certificates in the new
form, and from time to time will replenish such supply upon
6
<PAGE>
the request of the Transfer Agent. The Company agrees to
indemnify and exonerate, save and hold the Transfer Agent
harmless, from and against any and all claims or demands
that may be asserted against the Transfer Agent concerning
the genuineness of any Share certificate supplied to the
Transfer Agent pursuant to this Agreement.
ARTICLE V
ISSUANCE, TRANSFER AND REDEMPTION OF SHARES OF THE FUND
1. Whenever the Company shall sell or cause to be
sold any Shares, it shall cause to be delivered to the
Transfer Agent written notification signed by an Authorized
Officer specifying:
(a) The name of the purchaser, the number and
Series of Shares sold, the trade date and price per Share of
such Series; and
(b) The amount of money to be delivered to the
Custodian of the Company for the sale of such Shares.
2. Upon notification from the Custodian that such
money has been received by it, together with the notifica-
tion required under paragraph 1 hereof, the Transfer Agent
shall issue to the purchaser or his authorized agent, such
Shares of such Series as he is entitled to receive, based on
the appropriate net asset value of the Shares of such
Series, determined in accordance with applicable Federal law
or regulation. In issuing Shares to a purchaser or his
authorized agent, the Transfer Agent shall be entitled to
rely upon the latest written instructions, if any, previ-
ously received by the Transfer Agent from the purchaser or
his authorized agent concerning the delivery of such Shares.
7
<PAGE>
3. The Transfer Agent shall not be required to issue
any Shares where it has received from an authorized officer
of the Company or from any appropriate Federal or state
authority, written notification that the sale of the Shares
has been suspended or discontinued, and the Transfer Agent
shall be entitled to rely upon such written notification.
4. Upon the issuance of any Shares in accordance with
the foregoing provisions of this Article, the Transfer Agent
shall not be responsible for the payment of any original
issue or other taxes required to be paid by the Company in
connection with such issuance.
5. Shares will be transferred or redeemed upon pre-
sentation to the Transfer Agent of Share certificates or
instructions properly endorsed for transfer or redemption,
accompanied by such documents as the Transfer Agent may deem
necessary to evidence the authority of the person making
such transfer or redemption and bearing satisfactory evi-
dence of the payment of stock transfer taxes. In the case
of small estates, where no administration is contemplated,
the Transfer Agent may, when furnished with an appropriate
surety bond, and without further approval of the Company,
transfer or redeem Shares registered in the name of a dece-
dent where the current market value of the Shares being
transferred does not exceed $2,000.00 or such amount as may
be prescribed by the various states. The Transfer Agent
reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the endorsement on the Share cer-
tificate or instructions is valid and genuine, and for that
purpose it will require a guarantee of signature by a member
firm of a national securities exchange or by a bank or trust
company acceptable to the Transfer Agent. The Transfer
Agent also reserves the right to refuse to transfer or
8
<PAGE>
redeem Shares until it is satisfied that the requested
transfer or redemption is legally authorized, and it shall
incur no liability for the refusal, in good faith, to make
transfers or redemptions which the Transfer Agent, in its
judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to
such transfer or redemption. The Transfer Agent may, in
effecting transfers, rely upon the Uniform Act for the Sim-
plification of Fiduciary Security Transfers or the Uniform
Commercial Code, as the same may be amended from time to
time, which in the opinion of legal counsel for the Company
or of its own legal counsel protect it in not requiring cer-
tain documents in connection with the transfer or redemption
of Shares of the Company, and the Company shall indemnify
the Transfer Agent for any act done or omitted by it in
reliance upon such laws or opinions of counsel of the Com-
pany or of its own counsel.
6. Where Shares of the Company are redeemed, the
Transfer Agent shall upon receipt of the instructions and
documents in proper form, required pursuant to paragraph 5
of this Article IV, deliver to the Custodian and the Company
a notification setting forth the number and Series of Shares
to be redeemed and stating that such Shares are in good form
for redemption.
7. The Transfer Agent shall, upon receipt of the
moneys paid to it by the Custodian for the redemption of
Shares, pay to the shareholder, his authorized agent, or
legal representative, such moneys received from the Custo-
dian.
8. Shares which are subject to restriction on trans-
fer or redemption (e.g., Shares acquired pursuant to an
9
<PAGE>
investment representation, Shares held by controlling
persons, Shares subject to shareholder's agreements, etc.)
must be issued in Share certificate form and must be stamped
on the face thereof with a legend describing the extent and
conditions of the restriction or referring to the source of
such restriction. Such Shares may not be transferred or
redeemed except upon receipt by the Transfer Agent of an
opinion of counsel for the Company stating that such trans-
fer or redemption is rightful and may be properly effected.
The Transfer Agent shall be entitled to rely upon such opin-
ion and shall be indemnified by the Company for the transfer
or redemption made in reliance upon any such opinion.
9. Notwithstanding the foregoing, in connection with
the issuance, redemption and transfer of Shares, the Trans-
fer Agent, upon receipt of a Certificate, shall accept, from
any person or entity believed by the Transfer Agent to be a
person or entity specified in such Certificate, computer
tape instructions in a form satisfactory to the Transfer
Agent. After receipt of such computer tape instructions and
such Certificate and other documentation or information as
the Transfer Agent deems necessary to effect transactions,
the Transfer Agent shall effect the transactions specified
in the computer tape instructions, provided, however, that
the Transfer Agent shall not be required to inquire into the
actual authority of the person or entity furnishing any
instructions to give such instructions or the legality or
propriety of the transactions specified in such instruc-
tions. The Transfer Agent shall be fully protected in
effecting any transaction in accordance with computer tape
instructions and written instructions received pursuant to
this paragraph 9.
10
<PAGE>
ARTICLE VI
CONCERNING THE COMPANY
1. The Company shall promptly file with the Transfer
Agent written notice of any change in the officers autho-
rized to sign Share certificates, Certificates, written
instructions or requests, together with a specimen signature
of each newly Authorized Officer. In case any officer of
the Company who shall have signed manually or whose fac-
simile signature shall have been affixed to blank Share cert-
tificates shall die, resign or be removed prior to issuance
of such Share certificates, the Transfer Agent may issue
such Share certificates of the Company notwithstanding such
death, resignation or removal, and the Company shall
promptly file with the Transfer Agent such approval, adop-
tion or ratification as may be required by law.
2. At any time the Transfer Agent may apply to an
Authorized Officer of the Company for instructions, and may
consult counsel for the Company or its own counsel at the
expense of the Company with respect to any matter arising in
connection with its appointment or its duties or responsi-
bilities as Transfer Agent. The Transfer Agent shall not be
liable for any action taken or omitted by it in good faith
in accordance with such instructions or such counsel consul-
tation.
3. The copy of the Company's Charter and copies of
all amendments thereto shall be certified by the Secretary
of State (or other appropriate official) of the state of
incorporation, and if such Charter and/or amendments are
required by law to be also filed with a county or other
officer or official body, a certificate of such filing shall
be filed with a certified copy submitted to the Transfer
11
<PAGE>
Agent. The copy of the By-Laws and copies of all amendments
thereto, and copies of resolutions of the Board of Directors
of the Company, shall be certified by the Secretary of the
Company under the corporate seal.
ARTICLE VII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent shall be protected in acting
upon any paper or document believed by it to be genuine and
to have been signed by the proper person or persons and
shall not be held to have any notice of any change of autho-
rity of any person until receipt of written notice thereof
from the Company. It shall also be protected in processing
Share certificates which it reasonably believes to bear the
proper manual or facsimile signatures of the officers of the
Company and the proper counter-signature of the Transfer Agent.
2. The Transfer Agent may establish such additional
rules and regulations governing the transfer or registration
of Share certificates as it may deem advisable and consis-
tent with such rules and regulations generally adopted by
bank transfer agents.
3. The Transfer Agent shall keep such records in the
form and manner as it may deem advisable but not inconsis-
tent with the rules and regulations of appropriate govern-
ment authorities. The Company, or the Company's authorized
representatives, shall have access to such records during
the Transfer Agent's normal business hours. Upon the rea-
sonable request of the Company, copies of any such records
shall be provided by the Transfer Agent to the Company or
12
<PAGE>
the Company's authorized representative at the Company's
expense.
4. In addition to the duties that the Transfer Agent
assumes under this Agreement, the Transfer Agent shall per-
form the duties and functions as set forth in Appendix B
hereto which is incorporated herein and made a part hereof.
The duties and functions to be performed by the Transfer
Agent as set forth in Appendix B may be amended from time to
time as agreed upon by the Company and the Transfer Agent.
In consideration for all of the services to be performed by
the Transfer Agent as set forth herein and in Appendix B
hereto the Transfer Agent shall be entitled to receive reim-
bursement for all out-of-pocket expenses and such compensa-
tion as may be agreed upon from time to time between the
Company and the Transfer Agent. As of the date of this
Agreement such compensation shall be in the amounts set
forth in Appendix B hereto and shall be full compensation
for all the services to be rendered by the Transfer Agent
hereunder and pursuant to Appendix B hereto.
5. The Transfer Agent may, in connection with the
appointment as Transfer Agent, employ agents or attorneys-
in-fact at the expense of the Company, and shall not be
liable for any loss or expense arising out of or in connec-
tion with its actions or the actions or omissions to act of
its agents or attorneys-in-fact so long as the Transfer
Agent acts in good faith and is not negligent or guilty of
any willful misconduct.
6. The Company hereby agrees to indemnify and exoner-
ate, save and hold harmless the Transfer Agent from and
against any and all claims, demands, expenses (including
attorneys' fees) and liabilities (whether with or without
13
<PAGE>
basis in fact or law) of any and every nature which the
Transfer Agent may sustain or incur or which may be asserted
against the Transfer Agent by any person by reason of or as
a result of any action taken or omitted to be taken by the
Transfer Agent without bad faith, negligence or willful mis-
conduct or in good faith in reliance upon any Certificate,
instruction, notice, computer tape, order, opinion of coun-
sel or Share certificate believed by it to be genuine and,
to be signed, countersigned or executed by any duly author-
ized person or persons. The Company further agrees to
indemnify and exonerate, save and hold the Transfer Agent
harmless from and against any and all claims, demands,
expenses (including attorneys fees) and liabilities (whether
with or without basis in fact or law) of any and every
nature which the Transfer Agent may sustain or incur or
which may be asserted against the Transfer Agent by any
person by reason of or as a result of any action taken or
omitted to be taken by the Transfer Agent in good faith in
reliance upon the Company's prospectus, any law, act or
regulation, or interpretation of the same, even though the
same may thereafter have been altered, changed, amended or
repealed.
7. Specifically, but not by way of limitation, the
Company agrees to indemnify and exonerate, save and hold the
Transfer Agent harmless from and against any and all claims,
demands, expenses (including attorneys fees) and liabilities
(whether with or without basis in fact or law) of any and
every nature which the Transfer Agent may sustain or incur
or which may be asserted against the Transfer Agent by any
person in connection with the genuineness of a Share certi-
ficate, the Transfer Agent's capacity and authorization to
issue Shares, and the form and amount of authorized Shares.
14
<PAGE>
8. When mail is used for delivery of non-negotiable
Share certificates, the value of which does not exceed the
limits of the Transfer Agent's Blanket Bond, the Transfer
Agent will send such non-negotiable certificates by first
class mail, and such deliveries will be covered while in
transit by the Transfer Agent's Blanket Bond. Non-negoti-
able Share certificates, the value of which exceeds the
limits of the Transfer Agent's Blanket Bond will be sent by
insured registered mail. Negotiable Share certificates will
be sent by insured registered mail.
9. The Transfer Agent may issue new Share certifi-
cates in place of Share certificates represented to have
been lost, stolen, seized or destroyed upon receiving writ-
ten instructions from the Company and indemnity satisfactory
to the Transfer Agent and the Company. Such instructions
from the Company shall be in such form as approved by the
Board of Directors of the Company in accordance with the
provisions of the law or of the By-Laws of the Company governing
such matters. If the Transfer Agent receives written noti-
fication from the owner of the lost, destroyed, seized or
stolen Share certificate within a reasonable time after he
has notice of it, the Transfer Agent shall promptly notify
the Company and shall act pursuant to the written instruc-
tions of the Company. If the Company receives such written
notification from the owner of the lost, destroyed, seized
or stolen Share certificate it shall promptly send written
instructions to the Transfer Agent. The Transfer Agent
shall not be liable for any act done or omitted by it pursu-
ant to or while awaiting the written instructions of the
Company. The Transfer Agent may issue new Share certifi-
cates in exchange for, and upon surrender of, mutilated
Share certificates.
15
<PAGE>
10. The Transfer Agent will issue and mail subscrip-
tion warrants for Shares, Shares representing stock divi-
dends, exchanges or splits, or act as conversion agent upon
receiving written instructions from an Authorized Officer of
the Company and such other documents as the Transfer Agent
may deem necessary.
11. The Transfer Agent will supply shareholder lists
to the Company from time to time upon receiving a request
therefor from an Authorized Officer of the Company.
12. At the request of an Authorized Officer of the
Company, the Transfer Agent will address and mail such
appropriate notices to shareholders as the Company may
direct.
13. The Transfer Agent may deliver from time to time
at its discretion, to the Company, for safekeeping or dispos-
sition by the Company in accordance with law, such records,
papers, Share certificates which have been cancelled in
transfer, exchange or redemption, or documents accumulated
in the execution of its duties as such Transfer Agent, as
the Transfer Agent may deem expedient, and the Company
assumes all responsibility for any failure thereafter to
produce any record, paper, cancelled Share certificates, or
document so returned, if and when required.
The records maintained by the Transfer Agent pursuant
to Section 3 of this Article, including the records
described in Appendix B which is attached hereto and made a
part hereof, which have not been previously delivered to the
Company pursuant to the foregoing provisions of this Sec-
tion, shall be considered to be the property of the Company
and such records shall be delivered to the Company on the
16
<PAGE>
date of termination of this Agreement, as specified in
Article IX hereof, in the form and manner kept by the Trans-
fer Agent on such date of termination.
14. In case of any request or demand for the inspec-
tion of the shareholder records of the Company, the Transfer
Agent will endeavor to notify the Company and to secure
instructions from an Authorized Officer of the Company as to
such inspection. The Transfer Agent reserves the right,
however, to exhibit the shareholder records to any person
whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the shareholder records to
such person.
ARTICLE VIII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Company shall furnish to the Transfer Agent a
copy of a resolution of its Board of Directors, certified
by the Secretary or any Assistant Secretary, either (i)
setting forth with respect to a Series of Shares the date of
the declaration of a dividend or distribution, the date of
payment thereof, the record date as of which shareholders
entitled to payment shall be determined, the amount payable
per Share to the shareholders of record as of that date, the
total amount payable to the Transfer Agent on the payment
date and whether such dividend or distribution is to be paid
in Shares of such class at net asset value, or (ii) author-
izing with respect to a Series of Shares the declaration of
dividends and distributions on a daily basis, and authoriz-
ing the Transfer Agent to rely on a Certificate setting forth
with respect to such Series of Shares the date of the
declaration of a dividend of distribution, the date of pay-
17
<PAGE>
ment therefor, the record date as of which shareholders
entitled to payment shall be determined, the amount per
Share of such dividend or distribution, and the total amount
payable to the Transfer Agent on the payment date.
2. Upon the payment date specified in accordance with
Section 1 of this Article, the Company shall cause the Cus-
todian of the Company to pay to the Transfer Agent suffi-
cient cash to make payment to the shareholders of record of
such Series as of such payment date. The Transfer Agent
will, upon receipt of such cash, make payment of such divi-
dends or distributions to the shareholders of record of such
Series as of the record date. The Transfer Agent shall not
be liable for any payments made in accordance with the reso-
lution of the Board of Directors of the Company or a Certif-
icate. If the Transfer Agent shall not receive from the
Custodian sufficient cash to make payment to all share-
holders of a Series as of the record date, the Transfer
Agent shall upon notifying the Company, withhold payment to
all shareholders of record of such Series as of the record
date until such sufficient cash is provided to the Transfer
Agent.
3. It is understood that the Transfer Agent shall in
no way be responsible for the determination of the rate of
any dividend or capital gains distributions due to the
shareholders of any Series.
4. It is understood that the Transfer Agent shall
file such appropriate information returns concerning the
payment of dividends and capital gains distributions with
the proper Federal, State and local authorities as are
required by law to be filed by the Company but shall in no
way be responsible for the. collection or withholding of
18
<PAGE>
taxes due on such dividends or distributions due to share-
holders unless required of it by applicable law.
ARTICLE IX
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than 90 days after the date of receipt of such notice.
In the event such notice is given by the Company, it shall
be accompanied by a copy of a resolution of the Board of
Directors of the Company, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement
and designating a successor transfer agent or transfer
agents. In the event such notice is given by the Transfer
Agent, the Company shall, on or before the termination date,
deliver to the Transfer Agent a copy of a resolution of its
Board of Directors certified by the Secretary or any Assis-
tant Secretary designating a successor transfer agent or
transfer agents. In the absence of such designation by the
Company, the Transfer Agent may designate a successor trans-
fer agent. If the Company fails to designate a successor
transfer agent and if the Transfer Agent is unable to find a
successor transfer agent, the Company shall upon the date
specified in the notice of termination of this Agreement be
deemed to be its own transfer agent and the Transfer Agent
shall thereby be relieved of all duties and responsibilities
pursuant to this Agreement.
19
<PAGE>
ARTICLE X
MISCELLANEOUS
1. Notwithstanding any of the foregoing provisions of
this Agreement, the Transfer Agent shall be under no duty or
obligation to inquire into, and shall not be liable for:
(a) The legality of the issue or sale of any
Shares of any Series, or the sufficiency of the amount to be
received therefor;
(b) The legality of the redemption of any Shares
of any Series, or the propriety of the amount to be paid
therefor;
(c) The legality of the declaration of any divi-
dend by the Company, or the legality of the issue of any
Share of any Series in payment of any stock dividend;
(d) The legality of any recapitalization or read-
justment of the Shares of any Series.
2. Any notice or other instrument in writing author-
ized or required by this Agreement to be given to the Com-
pany shall be sufficiently given if addressed to the Company
and mailed or delivered to it at its office at
or at such other place
as the Company may from time to time designate in writing.
3. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Trans-
fer Agent shall be sufficiently given if addressed to the
Transfer Agent and mailed or delivered to it at its office
at 48 Wall Street, New York, New York 10015 or at such other
20
<PAGE>
place as the Transfer Agent may from time to time designate
in writing.
4. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both
parties with the formality of this Agreement, and authorized
or approved by a resolution of the Board of Directors of the
Company.
5. This Agreement shall extend to and shall be bind-
ing upon the parties hereto, and their respective successors
and assigns; provided, however, that this Agreement shall
not be assignable by the Company without the written consent
of the Transfer Agent.
6. This Agreement shall be construed in accordance
with the laws of the State of New York.
7. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an origi-
nal; but such counterparts shall, together, constitute only
one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective corporate
officers, thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and
year first above written.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.
By: /s/ Harold R. Groom Jr.
--------------------------
21
<PAGE>
ATTEST: /s/ Philip L. Kirstein
----------------------
THE BANK OF NEW YORK
By:
--------------------
ATTEST:
----------------------------
22
<PAGE>
TRANSFER AGENCY AGRREEMENT
APPENDIX A
I, , President and I,
, Secretary of
(the "Company"), do hereby
certify that:
The following individuals have been duly authorized by
the Board of Directors of the Company in conformity with the
Company's Articles of Incorporation and By-Laws to execute
any certificate, instruction, notice or other instrument or
to give oral instructions on behalf of the Company, and the
signatures set forth opposite their respective names are
their true and correct signatures:
Name Signature
---- ---------
- ----------------------------------- -------------------------------
- ----------------------------------- -------------------------------
<PAGE>
TRANSFER AGENCY AGREEMENT
APPENDIX B
The Transfer Agent shall keep the following records on
behalf of the Company on an ongoing basis, except as other-
wise indicated:
1. Daily Journals consisting of the following:
1.1 All new accounts subsequent payments, all types
of liquidations and transfers
1.2 All code changes
1.3 All address changes
2. Daily Dividend Journal
2.1 All dividends accrued daily for each account
3. Application File
3.1 Applications
3.2 Redemption correspondence with copy of redemption
check
4. General Correspondence File
5. Company Daily Recap Letters
5.1 The Company record of all daily transactions that
either increased or decreased the Company's out-
standing shares
6. Master File Disc
6.1 Name and address
6.2 Balance of shares (Certificate and Book form)
<PAGE>
(Appendix-B continued)
6.3 Expedited redemption address
6.4 All applicable plan coding
7. Year-end ledger on microfilm
7.1 All transactions per year for each shareholder
8. Payment correspondence (Six Months)
9. Address changes (Three Months)
10. Blue Sky reports (Yearly)
11. T-Load report (Yearly)
11.1 Daily analysis of accounts by beneficial owner
code
11.2 Daily share analysis by state
11.3 Daily share range analysis
11.4 Daily type plan report
11.5 Daily new account report
11.6 Daily ten largest shareholder report
2
<PAGE>
LICENSE AGREEMENT RELATING TO USE OF NAME
AGREEMENT made as of the 16th day of October 1981,
by, between and among MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, a Delaware corporation ("Merrill Lynch"),
MERRILL LYNCH ASSET MANAGEMENT, INC., a Delaware corporation
("MLAM") and MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a
Maryland corporation (the "Company");
W I T N E S S E T H :
WHEREAS, Merrill Lynch was incorporated under the
laws of the State of Delaware on November 10, 1958 under the
corporate name "Merrill Lynch, Pierce, Fenner & Smith
Incorporated" and has used such name at all times thereafter;
WHEREAS; Merrill Lynch was duly qualified as a
foreign corporation under the laws of the State of New York
on January 2, 1959 and has remained so qualified at all times
thereafter;
WHEREAS, MLAM was incorporated under the laws of
the State of Delaware on March 22, 1976 under the corporate
name "Merrill Lynch Money Management Services, Inc." which
name was changed on April 13, 1976, pursuant to an amendment
of MLAM's Certificate of Incorporation, to "Merrill Lynch
Asset Management, Inc." and MLAM has used such name at all
times thereafter;
<PAGE>
WHEREAS, MLAM was duly qualified as a foreign
corporation under the laws of the State of New York on
April 26, 1976 and has remained so qualified at all times
thereafter;
WHEREAS, the Company was incorporated under the
laws of the State of Maryland on October 16, 1981 as a
series company which may consist of one or more funds (the
"Funds"); and
WHEREAS, the Company desires to qualify as a
foreign corporation under the laws of the State of New York
and has requested Merrill Lynch and MLAM to give their con-
sent to the use of the name "Merrill Lynch" in the Company's
corporate name or in the name of any of its Funds.
NOW, THEREFORE, in consideration of the premises
and of the covenants hereinafter contained, Merrill Lynch,
MLAM and the Company hereby agree as follows:
1. Merrill Lynch and MLAM hereby grant the
Company a non-exclusive license to use the words "Merrill
Lynch" in its corporate name or in the name of any of its
Funds.
2. Merrill Lynch hereby consents to the qualifi-
cation of the Company as a foreign corporation under the
laws of the State of New York with the words "Merrill Lynch"
in its corporate name and agrees to execute, or to cause
its affiliates to execute, such formal consents as may be
2
<PAGE>
necessary in connection with such filing; and MLAM joins
in such consent.
3. The non-exclusive license hereinabove referred
to has been given and is given by Merrill Lynch and MLAM on
the condition that they may at any time, in their sole and
absolute discretion, withdraw the non-exclusive license to
the use of the words "Merrill Lynch" in the name of the
Company or any of its Funds; and, as soon as practicable
after receipt by the Company of written notice of the with-
drawal of such non-exclusive license, and in no event later
than ninety days thereafter, the Company will change its
name and the names of any of its Funds that include the words
"Merrill Lynch" so that such names will not thereafter include
the words "Merrill Lynch" or any variation thereof.
4. Merrill Lynch reserves and shall have the right
to grant to any other company, including without limitation,
any other investment company, the right to use the words
"Merrill Lynch" or variations thereof in its name and no
consent or permission of the Company shall be necessary; but,
if required by any applicable laws of any state, the Company
will forthwith grant all requisite consents.
5. The Company will not grant to any other company
the right to use a name similar to that of the Company or
Merrill Lynch without the written consent of Merrill Lynch.
3
<PAGE>
6. Regardless of whether the Company should
hereafter change its name or the names of any of its Funds
that include the words "Merrill Lynch" and eliminate the
words "Merrill Lynch" or any variation thereof from such
names, the Company hereby grants to Merrill Lynch and MLAM
the right to cause the incorporation of other corporations
or the organization of voluntary associations which may
have names similar to that of the Company or any of its
Funds or to that to which the Company may change its name
or the names of any of its Funds and to own all or any portion
of the shares of such other corporations or associations and
to enter into contractual relationships with such other
corporations or associations, subject to any requisite appro-
val of a majority of the Company's shareholders and the
Securities and Exchange Commission and subject to the payment
of a reasonable amount to be determined at the time of use,
and the Company agrees to give and execute any such formal
consents or agreements as may be necessary in connection
therewith.
7. This Agreement may be amended at any time by
4
<PAGE>
a writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the day and year first above
written.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By /s/ George Y. Bromwell
--------------------------------------
Vice President
MERRILL LYNCH ASSET MANAGEMENT, INC.
By /s/ Harold R. Groom Jr.
--------------------------------------
Vice President
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
BY /s/
--------------------------------------
President
5
