<PAGE>
Rule 497(c)
Registration No. 2-74452
PROSPECTUS
APRIL 26, 1996
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 are sold to separate accounts ('Separate Accounts')
of certain insurance companies (the 'Insurance Companies'), including Merrill
Lynch Life Insurance Company ('MLLIC') and ML Life Insurance Company of New York
('ML of New York'), to fund benefits under variable annuity contracts ('Variable
Annuity Contracts') and/or variable life insurance contracts (together with the
Variable Annuity Contracts, the 'Contracts') issued by such companies. 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.
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 its investment policies and prudent investment management,
and capital appreciation to the extent consistent with the foregoing
objective. The Fund invests principally in fixed-income securities that 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 26, 1996, 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 multinational 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.............................................................. 46
Investment Adviser..................................................... 47
Portfolio Transactions and Brokerage................................... 50
Purchase of Shares..................................................... 50
Redemption of Shares................................................... 50
Dividends, Distributions and Taxes..................................... 50
Performance Data....................................................... 52
Additional Information................................................. 52
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, 1995 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
information provided in
the financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN -------------------------------------------------------------------------------------------
NET ASSET VALUE: 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 13.08 $ 14.08 $ 12.85 $ 12.82 $11.26 $11.74 $10.41
-------- -------- -------- ------- ------ ------ ------
Investment income--net... .59 .48 .32 .31 .47 .47 .44
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... 2.06 (1.06) 1.37 .37 1.76 (.35) 1.40
-------- -------- -------- ------- ------ ------ ------
Total from investment
operations.............. 2.65 (.58) 1.69 .68 2.23 .12 1.84
-------- -------- -------- ------- ------ ------ ------
Less dividends and
distributions:
Investment
income--net......... (.56) (.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........... (.56) (.42) (.46) (.65) (.67) (.60) (.51)
-------- -------- -------- ------- ------ ------ ------
Net asset value, end of
period.................. $ 15.17 $ 13.08 $ 14.08 $ 12.85 $12.82 $11.26 $11.74
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 20.81% (4.19)% 13.49% 5.72% 20.65% 1.22% 18.11%
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .61% .63% .70% .97% 1.20% 1.25% 1.25%
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
Expenses................. .61% .63% .70% .97% 1.20% 1.50% 2.29%
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
Investment income--net... 4.22% 3.95% 3.20% 3.71% 4.16% 4.71% 4.71%
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $212,912 $158,951 $115,420 $24,918 $7,937 $5,675 $3,854
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
Portfolio turnover....... 38.40% 35.36% 12.55% 36.34% 50.82% 23.52% 37.60%
-------- -------- -------- ------- ------ ------ ------
-------- -------- -------- ------- ------ ------ ------
<CAPTION>
AMERICAN
BALANCED FUND
The following per share --------------
data and ratios have FOR THE
been derived from PERIOD
information provided in JUNE 1,
the financial statements. 1988+ TO
INCREASE (DECREASE) IN DEC. 31,
NET ASSET VALUE: 1988
--------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $10.00
-----
Investment income--net... .29
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... .12
-----
Total from investment
operations.............. .41
-----
Less dividends and
distributions:
Investment
income--net......... --
Realized gain on
investments--net.... --
In excess of realized
gain on
investments--net.... --
-----
Total dividends and
distributions........... --
-----
Net asset value, end of
period.................. $10.41
-----
-----
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 4.10%#
-----
-----
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... 1.25%*
-----
-----
Expenses................. 1.25%*
-----
-----
Investment income--net... 5.13%*
-----
-----
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $2,276
-----
-----
Portfolio turnover....... 2.04%
-----
-----
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share data BASIC VALUE FOCUS FUND
and ratios have been derived -------------------------------------------------------------------------------------------
from information provided in FOR THE PERIOD JULY 1,
the financial statements. FOR THE YEAR ENDED DECEMBER 31, 1993+ TO
INCREASE (DECREASE) IN NET ----------------------------------------------------------------- DECEMBER 31,
ASSET VALUE: 1995 1994 1993
--------------- --------------- -----------------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 11.10 $ 10.95 $ 10.00
------- ------- ------
Investment income--net......... .18 .17 .04
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. 2.49 .08 .91
------- ------- ------
Total from investment
operations.................... 2.67 .25 .95
------- ------- ------
Less dividends and
distributions:
Investment income--net...... (.19) (.10) --
Realized gain on
investments--net.......... (.48) -- --
------- ------- ------
Total dividends and
distributions................. (.67) (.10) --
------- ------- ------
Net asset value, end of
period........................ $ 13.10 $ 11.10 $ 10.95
------- ------- ------
------- ------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 25.49% 2.36% 9.50%#
------- ------- ------
------- ------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. .66% .72% .86%*
------- ------- ------
------- ------- ------
Expenses....................... .66% .72% .86%*
------- ------- ------
------- ------- ------
Investment income--net......... 1.68% 2.08% 1.69%*
------- ------- ------
------- ------- ------
Investment income--net, and
realized gain (loss) on
investments--net***........... -- -- --
------- ------- ------
------- ------- ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $ 306,463 $ 164,307 $47,207
------- ------- ------
------- ------- ------
Portfolio turnover****......... 74.10% 60.55% 30.86%
------- ------- ------
------- ------- ------
<CAPTION>
The following per share data DEVELOPING CAPITAL MARKETS FOCUS FUND DOMESTIC MONEY MARKET FUND
and ratios have been derived ------------------------------------- -------------------------------
from information provided in FOR THE YEAR FOR THE PERIOD
the financial statements. ENDED MAY 2 1994+ TO FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31, -------------------------------
ASSET VALUE: 1995 1994 1995
------------ ---------------------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 9.51 $ 10.00 $ 1.00
------ ------ -------
Investment income--net......... .20 .09 .0547
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. (.30) (.58) .0012
------ ------ -------
Total from investment
operations.................... (.10) (.49) .0559
------ ------ -------
Less dividends and
distributions:
Investment income--net...... (.09) -- (.0547)
Realized gain on
investments--net.......... -- -- (.0002)
------ ------ -------
Total dividends and
distributions................. (.09) -- (.0549)
------ ------ -------
Net asset value, end of
period........................ $ 9.32 $ 9.51 $ 1.00
------ ------ -------
------ ------ -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... (1.08)% (4.90)%# 5.64%
------ ------ -------
------ ------ -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 1.25% 1.29%* .55%
------ ------ -------
------ ------ -------
Expenses....................... 1.36% 1.35%* .55%
------ ------ -------
------ ------ -------
Investment income--net......... 2.73% 2.18%* --
------ ------ -------
------ ------ -------
Investment income--net, and
realized gain (loss) on
investments--net***........... -- -- 5.50%
------ ------ -------
------ ------ -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $ 55,209 $ 36,676 $ 303,912
------ ------ -------
------ ------ -------
Portfolio turnover****......... 62.53% 29.79% --
------ ------ -------
------ ------ -------
<CAPTION>
DOMESTIC MONEY MARKET FUND
----------------------------------------------------------------------
The following per share data FOR THE
and ratios have been derived PERIOD
from information provided in FEBRUARY 20,
the financial statements. FOR THE YEAR ENDED DECEMBER 31, 1992+ TO
INCREASE (DECREASE) IN NET -------------------------------------------- DECEMBER 31,
ASSET VALUE: 1994 1993 1992
---------- ---------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 1.00 $ 1.00 $ 1.00
------- ------- ------
Investment income--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% 3.65%#
------- ------- ------
------- ------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. .50% .36% .32%*
------- ------- ------
------- ------- ------
Expenses....................... .57% .63% .88%*
------- ------- ------
------- ------- ------
Investment income--net......... -- -- --
------- ------- ------
------- ------- ------
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
------- ------- ------
------- ------- ------
Portfolio turnover****......... -- -- --
------- ------- ------
------- ------- ------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** Applicable to the Domestic Money Market Fund only.
**** Not applicable to the Domestic Money Market Fund.
+ 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>
The following per share
data and ratios have
been derived from
information provided in EQUITY GROWTH FUND
the financial --------------------------------------------------------------------------------------------
statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN --------------------------------------------------------------------------------------------
NET ASSET VALUE: 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988
-------- -------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47
-------- -------- --------- ------- ------- ------- ------- -------
Investment income--net... .17 .05 (.01) .01 .09 .05 (.07) (.10)
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net........ 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60
-------- -------- --------- ------- ------- ------- ------- -------
Total from investment
operations.............. 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50
-------- -------- --------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment
income--net......... (.09) -- --++ (.07) (.02) -- -- --
Realized gain on
investments--net.... -- (.19) -- -- -- -- -- (.22)
-------- -------- --------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (.09) (.19) -- (.07) (.02) -- -- (.22)
-------- -------- --------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN*:
Based on net asset value
per share............... 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)% 16.60% 4.25%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .81% .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
Expenses................. .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
Investment income
(loss)--net............. .72% .27% (.05)% .04% .51% .14% (.68)% (.56)%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $339,921 $170,044 $ 98,976 $23,167 $11,318 $ 6,851 $ 6,811 $ 5,521
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
Portfolio turnover....... 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
<CAPTION>
The following per share
data and ratios have
been derived from EQUITY GROWTH FUND
information provided in -------------------
the financial FOR THE YEAR ENDED
statements. DECEMBER 31,
INCREASE (DECREASE) IN -------------------
NET ASSET VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 18.42 $ 15.56
------- -------
Investment income--net... (.09) .04
Realized and unrealized
gain (loss) on
investments and foreign
curency
transactions--net....... (4.01) 2.86
------- -------
Total from investment
operations.............. (4.10) 2.90
------- -------
Less dividends and
distributions:
Investment
income--net......... (.03) (.04)
Realized gain on
investments--net.... (2.82) --
------- -------
Total dividends and
distributions........... (2.85) (.04)
------- -------
Net asset value, end of
year.................... $ 11.47 $ 18.42
------- -------
------- -------
TOTAL INVESTMENT RETURN*:
Based on net asset value
per share............... (22.29)% 18.68%
------- -------
------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... 1.24% 1.25%
------- -------
------- -------
Expenses................. 1.24% 1.44%
------- -------
------- -------
Investment income
(loss)--net............. (.60)% .24%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $ 6,707 $ 4,955
------- -------
------- -------
Portfolio turnover....... 94.91% 80.52%
------- -------
------- -------
</TABLE>
- ------------------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average number of shares outstanding during the year.
++ Amount is less than $.01 per share.
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>
The following per share FLEXIBLE STRATEGY FUND
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: 1995++ 1994++ 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 $ 9.97
-------- -------- -------- ------- ------- ------- ------- -------
Investment income--net... .47 .37 .28 .33 .47 .65 .48 .52
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... 1.99 (1.02) 1.94 .25 2.52 (.08) 1.67 .60
-------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations.............. 2.46 (.65) 2.22 .58 2.99 .57 2.15 1.12
-------- -------- -------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment
income--net......... (.42) (.30) (.15) (.54) (.66) (.46) (.55) (.25)
Realized gain on
investments-- net... (.27) (.54) (.03) (.68) (.09) -- -- --
-------- -------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (.69) (.84) (.18) (1.22) (.75) (.46) (.55) (.25)
-------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 16.47 $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 17.40% (4.20)% 15.80% 4.25% 24.98% 4.81% 20.29% 11.26%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. .71% .73% .80% .90% .96% 1.08% 1.19% 1.09%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
Investment income--net... 3.07% 2.52% 2.26% 2.62% 3.51% 5.19% 3.94% 4.37%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $320,234 $274,498 $194,777 $82,549 $55,221 $47,428 $47,837 $46,662
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
Portfolio turnover....... 135.83% 65.54% 56.42% 55.25% 67.13% 52.95% 83.31% 80.07%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
<CAPTION>
The following per share FLEXIBLE STRATEGY FUND
data and ratios have ------------------------
been derived from FOR THE FOR THE
information provided in YEAR PERIOD
the financial ENDED MAY 1,
statements. DECEM- 1986+ TO
INCREASE (DECREASE) IN BER 31, DEC. 31,
NET ASSET VALUE: 1987 1986
------- --------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 10.22 $ 10.00
------- ------
Investment income--net... .24 .11
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... .03 .11
------- ------
Total from investment
operations.............. .27 .22
------- ------
Less dividends and
distributions:
Investment
income--net......... (.34) --
Realized gain on
investments-- net... (.18) --
------- ------
Total dividends and
distributions........... (.52) --
------- ------
Net asset value, end of
period.................. $ 9.97 $ 10.22
------- ------
------- ------
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 2.43% 2.20%#
------- ------
------- ------
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 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.
+ Commencement of Operations.
++ Based on average shares outstanding during the year.
# Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share GLOBAL STRATEGY FOCUS FUND GLOBAL UTILITY FOCUS FUND
data and ratios have ----------------------------------------------------- ------------------------------------------
been derived from FOR THE FOR THE
information provided in PERIOD PERIOD
the financial FOR THE YEAR ENDED FEBRUARY 28, FOR THE YEAR ENDED JULY 1,
statements. DECEMBER 31, 1992+ TO DECEMBER 31, 1993+ TO
INCREASE (DECREASE) IN -------------------------------------- DECEMBER 31, --------------------------- DECEMBER 31,
NET ASSET VALUE: 1995 1994 1993 1992 1995 1994 1993
------------ -------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.73 $ 12.17 $ 10.22 $ 10.00 $ 9.45 $ 10.66 $ 10.00
------------ -------- ------------ ------ ------------ ------------ ------------
Investment income--net... .39 .30 .16 .13 .45 .35 .04
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... .82 (.48) 1.96 .13 1.79 (1.25) .64
------------ -------- ------------ ------ ------------ ------------ ------------
Total from investment
operations.............. 1.21 (.18) 2.12 .26 2.24 (.90) .68
------------ -------- ------------ ------ ------------ ------------ ------------
Less dividends and
distributions:
Investment
income--net......... (.39) (.21) (.17) (.04) (.39) (.29) (.02)
Realized gain on
investments--net.... -- (.04) -- -- -- -- --
In excess of realized
gain on
investments--net.... --++ (.01) -- -- -- (.02) --
------------ -------- ------------ ------ ------------ ------------ ------------
Total dividends and
distributions........... (.39) (.26) (.17) (.04) (.39) (.31) (.02)
------------ -------- ------------ ------ ------------ ------------ ------------
Net asset value, end of
period.................. $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 11.30 $ 9.45 $ 10.66
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 10.60% (1.46)% 21.03% 2.62%# 24.33% (8.51)% 6.85%#
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .72% .77% .88% 1.25%* .66% .73% .89%*
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
Expenses................. .72% .77% .88% 1.35%* .66% .73% .89%*
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
Investment income--net... 3.33% 2.85% 2.41% 2.66%* 4.44% 3.68% 2.84%*
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $540,242 $515,407 $269,627 $ 15,527 $148,225 $126,243 $104,517
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
Portfolio turnover....... 27.23% 21.03% 17.07% 14.47% 11.05% 9.52% 1.72%
------------ -------- ------------ ------ ------------ ------------ ------------
------------ -------- ------------ ------ ------------ ------------ ------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# 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 ratios have
been derived from
information provided in HIGH CURRENT INCOME FUND
the financial --------------------------------------------------------------------------------------------
statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN --------------------------------------------------------------------------------------------
NET ASSET VALUE: 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year... $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55
-------- -------- -------- ------- ------ ------ ------- -------
Investment
income--net......... 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net... .65 (1.47) .95 .90 2.10 (2.08) (.64) .20
-------- -------- -------- ------- ------ ------ ------- -------
Total from investment
operations.......... 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41
-------- -------- -------- ------- ------ ------ ------- -------
Less dividends and
distributions:
Investment
income--net......... (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11)
Realized gain on
investments--net.... -- -- -- -- -- -- -- --
-------- -------- -------- ------- ------ ------ ------- -------
Total dividends and
distributions........... (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11)
-------- -------- -------- ------- ------ ------ ------- -------
Net asset value, end of
year.................... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset
value per share..... 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
Investment
income--net......... 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
SUPPLEMENTAL DATA:
Net assets, end of
year (in
thousands).......... $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942 $13,960
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
Portfolio turnover.... 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
<CAPTION>
The following per share
data and ratios have HIGH CURRENT
been derived from INCOME FUND
information provided in -------------------
the financial FOR THE YEAR ENDED
statements. DECEMBER 31,
INCREASE (DECREASE) IN -------------------
NET ASSET VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year... $ 11.42 $ 11.39
------- -------
Investment
income--net......... 1.23 1.25
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net... (.79) .03
------- -------
Total from investment
operations.......... .44 1.28
------- -------
Less dividends and
distributions:
Investment
income--net......... (1.23) (1.25)
Realized gain on
investments--net.... (.08) --
------- -------
Total dividends and
distributions........... (1.31) (1.25)
------- -------
Net asset value, end of
year.................... $ 10.55 $ 11.42
------- -------
------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset
value per share..... 3.82% 11.74%
------- -------
------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. 1.01% 1.12%
------- -------
------- -------
Investment
income--net......... 10.88% 10.65%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of
year (in
thousands).......... $13,075 $12,577
------- -------
------- -------
Portfolio turnover.... 56.07% 22.44%
------- -------
------- -------
</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
The following per share GOVERNMENT BOND FUND BOND FUND INTERNATIONAL EQUITY FOCUS FUND
data and ratios have --------------------------- --------------------------- ---------------------------------
been derived from FOR THE FOR THE FOR THE
information provided in PERIOD PERIOD PERIOD
the financial FOR THE YEAR MAY 2, FOR THE YEAR MAY 2, FOR THE YEAR ENDED JULY 1,
statements. ENDED 1994+ TO ENDED 1994+ TO DECEMBER 31, 1993+ TO
INCREASE (DECREASE) IN DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------- DECEMBER 31,
NET ASSET VALUE: 1995 1994 1995 1994 1995 1994 1993
------------ ------------ ------------ ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 9.97 $ 10.00 $ 9.70 $10.00 $10.90 $11.03 $ 10.00
------ ------ ------ ----- -------- -------- ------
Investment income--net... .62 .25 .72 .38 .20 .19 .01
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... .81 (.07) .82 (.35) .37 (.13) 1.02
------ ------ ------ ----- -------- -------- ------
Total from investment
operations.............. 1.43 .18 1.54 .03 .57 .06 1.03
------ ------ ------ ----- -------- -------- ------
Less dividends and
distributions:
Investment
income--net......... (.61) (.21) (.72) (.33) (.01) (.18) --
Realized gain on
investments--net...... -- -- -- -- (.17) (.01) --
In excess of realized
gain
on investments--net... -- -- -- -- (.23) -- --
------ ------ ------ ----- -------- -------- ------
Total dividends and
distributions........... (.61) (.21) (.72) (.33) (.41) (.19) --
------ ------ ------ ----- -------- -------- ------
Net asset value, end of
period.................. $ 10.79 $ 9.97 $ 10.52 $ 9.70 $11.06 $10.90 $ 11.03
------ ------ ------ ----- -------- -------- ------
------ ------ ------ ----- -------- -------- ------
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 14.83% 1.79%# 16.35% 0.37%# 5.48% .55% 10.30%#
------ ------ ------ ----- -------- -------- ------
------ ------ ------ ----- -------- -------- ------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .00% .00%* .00% .00%* .89% .97% 1.14%*
------ ------ ------ ----- -------- -------- ------
------ ------ ------ ----- -------- -------- ------
Expenses................. .66% .80%* .95% 1.08%* .89% .97% 1.14%*
------ ------ ------ ----- -------- -------- ------
------ ------ ------ ----- -------- -------- ------
Investment income--net... 6.28% 4.66%* 7.05% 6.34%* 1.95% 1.09% .30%*
------ ------ ------ ----- -------- -------- ------
------ ------ ------ ----- -------- -------- ------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $ 40,996 $ 17,811 $ 18,121 $9,933 $265,602 $247,884 $ 76,906
------ ------ ------ ----- -------- -------- ------
------ ------ ------ ----- -------- -------- ------
Portfolio turnover....... 45.39% 103.03% 2.23% 152.20% 100.02% 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.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share NATURAL RESOURCES FOCUS 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: 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 $10.00
------- ------- ------- ------ ------ ------ ------ -----
Investment income--net... .20 .17 .11 .18 .25 .22 .24 .12
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net....... 1.15 (.02) .92 (.05) (.11) (.90) 1.49 (.54)
------- ------- ------- ------ ------ ------ ------ -----
Total from investment
operations.............. 1.35 .15 1.03 .13 .14 (.68) 1.73 (.42)
------- ------- ------- ------ ------ ------ ------ -----
Less dividends and
distributions:
Investment
income--net......... (.19) (.15) (.05) (.29) (.25) (.24) (.22) --
Realized gain on
investments--net.... (.03) -- -- (.06) -- -- -- --
------- ------- ------- ------ ------ ------ ------ -----
Total dividends and
distributions........... (.22) (.15) (.05) (.35) (.25) (.24) (.22) --
------- ------- ------- ------ ------ ------ ------ -----
Net asset value, end of
period.................. $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58
------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------ ------ ------ ------ -----
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 12.65% 1.44% 10.47% 1.36% 1.36% (6.21)% 18.23% (4.20)%#
------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------ ------ ------ ------ -----
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .78% .87% 1.13% 1.25% 1.25% 1.25% 1.25% 1.24%*
------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------ ------ ------ ------ -----
Expenses................. .78% .87% 1.13% 1.27% 1.30% 1.38% 1.74% 1.24%*
------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------ ------ ------ ------ -----
Investment income--net... 1.75% 1.91% 1.34% 2.00% 2.31% 2.26% 2.26% 2.59%*
------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------ ------ ------ ------ -----
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $43,102 $39,715 $14,778 $4,144 $3,084 $3,247 $2,704 $2,371
------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------ ------ ------ ------ -----
Portfolio turnover....... 30.15% 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.
+ 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.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
The following per share
data and ratios have
been derived from
information provided in PRIME BOND FUND
the financial ----------------------------------------------------------------------------------------------
statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN ----------------------------------------------------------------------------------------------
NET ASSET VALUE: 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year... $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89
-------- -------- -------- ------- ------- ------- ------- -------
Investment
income--net......... .82 .77 .70 .79 .90 .88 .90 .87
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net... 1.34 (1.36) .71 .04 .84 (.12) .48 (.15)
-------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations.......... 2.16 (.59) 1.41 .83 1.74 .76 1.38 .72
-------- -------- -------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment
income--net......... (.83) (.76) (.70) (.81) (.90) (.87) (.90) (.80)
Realized gain on
investments--net...... -- -- (.11) -- -- -- -- --
In excess of realized
gain on
investments--net...... -- (.17) -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (.83) (.93) (.81) (.81) (.90) (.87) (.90) (.80)
-------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset
value per share..... 20.14% (4.80)% 12.02% 7.27% 16.41% 7.13% 13.29% 6.75%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. .50% .54% .63% .78% .78% 1.06% 1.16% 1.07%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
Investment
income--net......... 7.00% 6.74% 5.86% 6.76% 7.94% 8.01% 8.12% 8.05%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of
year (in
thousands).......... $489,838 $391,234 $314,091 $84,810 $39,743 $34,655 $29,593 $22,499
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
Portfolio turnover.... 90.12% 139.89% 115.26% 82.74% 152.18% 155.17% 144.52% 225.81%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
<CAPTION>
The following per share
data and ratios have
been derived from PRIME BOND FUND
information provided in -------------------
the financial FOR THE YEAR ENDED
statements. DECEMBER 31,
INCREASE (DECREASE) IN -------------------
NET ASSET VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year... $ 12.04 $ 11.50
------- -------
Investment
income--net......... .87 .99
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net... (1.00) .54
------- -------
Total from investment
operations.......... (.13) 1.53
------- -------
Less dividends and
distributions:
Investment
income--net......... (.87) (.99)
Realized gain on
investments--net...... (.15) --
In excess of realized
gain on
investments--net...... -- --
------- -------
Total dividends and
distributions........... (1.02) (.99)
------- -------
Net asset value, end of
year.................... $ 10.89 $ 12.04
------- -------
------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset
value per share..... (1.10)% 13.75%
------- -------
------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. 1.07% 1.12%
------- -------
------- -------
Investment
income--net......... 7.66% 7.98%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of
year (in
thousands).......... $17,385 $20,869
------- -------
------- -------
Portfolio turnover.... 129.46% 103.63%
------- -------
------- -------
</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 and QUALITY EQUITY FUND
ratios have been derived from ---------------------------------------------------------------------------------------
information provided in the
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET ---------------------------------------------------------------------------------------
VALUE: 1995+ 1994+ 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.............................. $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00
-------- -------- -------- ------- ------- ------- ------- -------
Investment income--net............. .58 .38 .24 .34 .43 .47 .50 .43
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ 5.48 (.74) 3.46 .32 5.75 (.38) 4.96 1.73
-------- -------- -------- ------- ------- ------- ------- -------
Total from investment operations... 6.06 (.36) 3.70 .66 6.18 .09 5.46 2.16
-------- -------- -------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net.......... (.45) (.25) (.12) (.58) (.50) (.41) (.52) (.22)
Realized gain on
investments--net................ (.59) (.67) (.04) (.95) (1.05) (.84) -- --
-------- -------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions..................... (1.04) (.92) (.16) (1.53) (1.55) (1.25) (.52) (.22)
-------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of year....... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset value per
share............................. 22.61% (1.20)% 14.57% 2.69% 30.18% .66% 30.77% 13.54%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... .51% .54% .62% .74% .79% .94% 1.05% 1.02%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
Investment income--net............. 1.94% 1.39% 1.07% 1.54% 1.87% 2.36% 2.58% 2.25%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................ $644,551 $464,360 $309,420 $87,977 $55,005 $39,470 $31,467 $20,055
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
Portfolio turnover................. 140.32% 60.57% 88.25% 62.54% 55.83% 69.05% 44.23% 32.53%
-------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- ------- -------
<CAPTION>
QUALITY EQUITY
The following per share data and FUND
ratios have been derived from ------------------
information provided in the FOR THE YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET ------------------
VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.............................. $ 20.15 $ 17.14
------- -------
Investment income--net............. .42 .43
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ (.35) 3.01
------- -------
Total from investment operations... .07 3.44
------- -------
Less dividends and distributions:
Investment income--net.......... (.60) (.43)
Realized gain on
investments--net................ (3.62) --
------- -------
Total dividends and
distributions..................... (4.22) (.43)
------- -------
Net asset value, end of year....... $ 16.00 $ 20.15
------- -------
------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset value per
share............................. (.70)% 20.38%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... .93% 1.09%
------- -------
------- -------
Investment income--net............. 2.31% 2.41%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................ $23,986 $16,704
------- -------
------- -------
Portfolio turnover................. 65.58% 50.96%
------- -------
------- -------
</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 and
ratios have been derived from RESERVE ASSETS FUND
information provided in the ------------------------------------------------------------------------------------
financial statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET ------------------------------------------------------------------------------------
VALUE: 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- -------
<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............. .0543 .0371 .0268 .0320 .0546 .0730 .0822 .0661
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ .0018 (.0009) .0005 .0007 .0014 .0019 .0012 .0002
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations... .0561 .0362 .0273 .0327 .0560 .0749 .0834 .0663
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net.......... (.0543) (.0362) (.0268) (.0320) (.0546) (.0730) (.0822) (.0661)
Realized gain on
investments--net................ (.0004) -- (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions..................... (.0547) (.0362) (.0273) (.0325) (.0560) (.0749) (.0834) (.0663)
------- ------- ------- ------- ------- ------- ------- -------
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............................. 5.63% 3.80% 2.77% 3.29% 5.68% 7.65% 8.62% 6.85%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... .61% .65% .70% .79% .79% .97% 1.03% 1.01%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net, and
realized gain (loss) on
investments--net................... 5.47% 3.75% 2.73% 3.36% 5.64% 7.46%+ 8.34%+ 6.65%+
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................ $25,550 $32,196 $30,168 $26,767 $34,362 $35,871 $29,311 $24,951
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
RESERVE ASSETS
The following per share data and FUND
ratios have been derived from ------------------
information provided in the FOR THE YEAR ENDED
financial statements. DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET ------------------
VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.............................. $ 1.00 $ 1.00
------- -------
Investment income--net............. .0574 .0560
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ .0005 .0027
------- -------
Total from investment operations... .0579 .0587
------- -------
Less dividends and distributions:
Investment income--net.......... (.0574) (.0560)
Realized gain on
investments--net................ (.0005)+ (.0027)+
------- -------
Total dividends and
distributions..................... (.0579) (.0587)
------- -------
Net asset value, end of year....... $ 1.00 $ 1.00
------- -------
------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset value per
share............................. 5.96% 6.05%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.04% 1.18%
------- -------
------- -------
Investment income--net, and
realized gain (loss) on
investments--net................... 5.86%+ 5.89%+
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................ $23,068 $17,214
------- -------
------- -------
</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 (CONCLUDED)
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
--------------------------------------
FOR THE
PERIOD
The following per share data and ratios have FOR THE YEAR ENDED JULY 1,
been derived from information provided in DECEMBER 31, 1993+ TO
the financial statements. --------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994 1993
-------- -------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 9.17 $ 10.38 $ 10.00
-------- -------- ------------
Investment income--net....................... .85 .76 .25
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... .61 (1.19) .33
-------- -------- ------------
Total from investment operations............. 1.46 (.43) .58
-------- -------- ------------
Less dividends and distributions
Investment income--net.................... (.84) (.76) (.20)
Realized gain on investments--net......... -- -- --
In excess of realized gain on
investments--net.......................... (.02) --
-------- -------- ------------
Total dividends and distributions............ (.84) (.78) (.20)
-------- -------- ------------
Net asset value, end of period............... $ 9.79 $ 9.17 $ 10.38
-------- -------- ------------
-------- -------- ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 16.69% (4.21)% 5.90%#
-------- -------- ------------
-------- -------- ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................... .68% .75% .94%*
-------- -------- ------------
-------- -------- ------------
Investment income--net....................... 8.99% 8.01% 6.20%*
-------- -------- ------------
-------- -------- ------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 81,845 $ 75,150 $ 50,737
-------- -------- ------------
-------- -------- ------------
Portfolio turnover........................... 132.57% 117.58% 54.80%
-------- -------- ------------
-------- -------- ------------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# 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 Insurance Company ('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 its Contracts were
transferred to MLLIC and ML of New York, two wholly-owned subsidiaries of ML&Co.
Shares of the Funds currently are sold to Separate Accounts of Family Life,
MLLIC and ML of New York as well as other insurance companies not affiliated
with Family Life, MLLIC or ML of New York (together with MLLIC, ML of New York
and Family Life, 'Insurance Companies') to fund certain variable life insurance
contracts and/or 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, 1995,
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 MARKET FUND
--------- ---------------
<S> <C> <C>
Annualized Yield:
Including gains and losses................... 5.34% 5.28%
Excluding gains and losses................... 5.33% 5.28%
Compounded Annualized Yield....................... 5.47% 5.42%
Average maturity of portfolio at end of period.... 84 days 79 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, International Equity 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 and insurance company funding agreements), variable
amount master demand notes, repurchase and reverse repurchase agreements of U.S.
issuers and other money market instruments. 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
and insurance company funding agreements), 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 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
17
<PAGE>
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 that 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-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
18
<PAGE>
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'.
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, 1995.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------- ----------- -------------
<S> <C> <C>
BBB...... 2.5% 2.6%
BB....... 32.1 34.0
B........ 50.0 53.0
CCC...... 2.1 2.4
NR**..... 7.2 8.0
-------------
100.00%
</TABLE>
- ---------------
* A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any other organizations.
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 of 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 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.
21
<PAGE>
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.
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.
22
<PAGE>
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, 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
23
<PAGE>
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 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.
24
<PAGE>
The major producers of gold include the Republic of South Africa, Russia,
the United States, Australia, Canada, the People's Republic of China and the
Philippines. Sales of gold by Russia and the People's Republic of China are
largely unpredictable and often relate to political and economic considerations
rather than to market forces. The Republic of South Africa produces
approximately 38% of the gold mined in non-Communist nations. Economic, social
and political developments within Russia, the People's Republic of China and The
Republic of South Africa may affect significantly gold production in those
countries.
See 'Other Portfolio Strategies--Foreign Securities' for special
considerations in investments in foreign securities.
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.
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.
25
<PAGE>
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'.
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.
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
26
<PAGE>
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 rated
investment grade 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
multinational 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'. 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').
27
<PAGE>
International Investing. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of a
multinational currency unit is the European Currency Unit ('ECU') which is a
'basket' consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities (described further below), in particular, issue
ECU-denominated obligations. The Fund may invest in securities denominated in
the currency of one nation although issued by a governmental entity, corporation
or financial institution of another nation. For example, the Fund may invest in
a British pound sterling-denominated obligation issued by a United States
corporation. Such investments involve credit risks associated with the issuer
and currency risks associated with the currency in which the obligation is
denominated.
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well as
in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at least
three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States
dollar-denominated obligations only for temporary defensive purposes.
United States Government securities include:
(i) U.S. Treasury obligations (bills, notes and bonds), which differ
in their interest rates, maturities and times of issuance, all of which are
backed by the full faith and credit of the United States; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related or
asset-backed securities, some of which are backed by the full faith and
credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association), some of which are supported by
the right of the issuer to borrow from the U.S. Government (e.g.,
obligations of Federal Home Loan Banks) and some of which are backed only
by the credit of the issuer itself (e.g., obligations of the Student Loan
Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
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.
28
<PAGE>
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'.
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, 1995.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------- ----------- -------------
<S> <C> <C>
AAA...... 17.14% 17.68%
A........ .16% .16%
BB....... 14.16% 14.60%
B........ 25.89% 26.70%
CCC...... 2.11% 2.18%
D........ .25% .26%
NR**..... 37.25% 38.42%
-------------
100.00%
</TABLE>
- ---------------
*A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
**Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any other organization.
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
29
<PAGE>
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'.
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 temporary
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,
(i.e., securities rated at least BBB by Standard & Poor's or Baa by Moody's) or
deemed to be of equivalent quality 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.
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A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of common
stocks issued by domestic utility companies historically have significantly
exceeded those of industrial companies' common stocks, while the prices of
domestic utility stocks have tended to be less volatile than stocks of
industrial companies. Total returns on domestic utility stocks have also
generally exceeded those on stocks of industrial companies. Debt securities of
domestic utility companies historically also have yielded slightly more than
similar debt securities of industrial companies, and have had higher total
returns. For certain periods, the total return of utility companies' securities
has underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in the
future. The Investment Adviser believes that the average dividend yields of
common stocks issued by foreign utility companies have also historically
exceeded those of foreign industrial companies' common stocks. To meet its
objective of capital appreciation, the Fund may invest in foreign utility
companies which pay lower than average dividends, but have a greater potential
for capital appreciation.
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
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products outside their traditional geographic areas and lines of business,
creating new areas of competition within the industries. In some instances,
utility companies are operating on an unregulated basis. Because of trends
toward deregulation and the evolution of independent power producers as well as
new entrants to the field of telecommunications, non-regulated providers of
utility services have become a significant part of their respective industries.
The Investment Adviser believes that the emergence of competition and
deregulation will result in certain utility companies being able to earn more
than their traditional regulated rates of return, while others may be forced to
defend their core businesses from increased competition and may be less
profitable. The Investment Adviser seeks to take advantage of favorable
investment opportunities that are expected to arise from these structural
changes. Of course, there can be no assurance that favorable developments will
occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The Global Utility Focus Fund's investment policies are designed to enable
it to capitalize on evolving investment opportunities throughout the world. For
example, the rapid growth of certain foreign economies will necessitate
expansion of capacity in the utility industries in those countries. Although
many foreign utility companies currently are government-owned, thereby limiting
current investment opportunities for the Fund, the Investment Adviser believes
that, in order to attract significant capital for growth, foreign governments
are likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership
of assets rather than government ownership, is expected to occur in newer,
faster-growing economies and in mature economies. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. The Investment Adviser will take into account anticipated economic
growth rates and other economic developments when selecting securities of
utility companies. The principal sectors of the global utility industries are
discussed below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates have
declined, many utilities have refinanced high cost debt and in doing so have
improved their fixed charges coverage. Regulators, however, have lowered allowed
rates of return as interest rates have declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of, the
Nuclear Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for decommissioning of such plants.
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In October 1993, S&P stiffened its debt-ratings formula for the electric
utility industry, stating that the industry is in long-term decline. In
addition, Moody's stated that it expected a drop in the next three years in its
average credit ratings for the industry. Reasons set forth for these outlooks
included slowing demand and increasing cost pressures as a result of competition
from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access to
the telephone networks comprise the greatest portion of this segment. Telephone
companies in the United States are still experiencing the effects of the breakup
of American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone communication services have expanded their
non-regulated activities into other businesses, including cellular telephone
services, data processing, equipment retailing, computer software and hardware
services, and financial services. This expansion has provided significant
opportunities for certain telephone companies to increase their earnings and
dividends at faster rates than had been allowed in traditional regulated
businesses. Increasing competition, technological innovations and other
structural changes, however, could adversely affect the profitability of such
utilities. Technological breakthroughs and the merger of telecommunications with
video and entertainment is now associated with the expansion of the role of
cable companies as providers of utility services in the telecommunications
industry and the competitive response of traditional telephone companies. Given
mergers and certain marketing tests currently underway, it is likely that both
traditional telephone companies and cable companies will soon provide a greatly
expanded range of utility services, including two-way video and informational
services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decades, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Investment
Adviser, however, environmental considerations could improve the gas industry
outlook in the future. For example, natural gas is the cleanest of the
hydrocarbon fuels, and this may result in incremental shifts in fuel consumption
toward natural gas and away from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic companies.
The Investment Adviser believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Investment Outside the Utility Industries. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that are
outside the utility industries. Such investments may include common stocks, debt
securities or preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies. 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
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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'. 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.
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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, convertible debt securities and other
instruments the return on which is linked to the performance of a common stock
or a basket or index of common stocks (collectively, 'equity securities'). The
fund may also invest in non-equity securities, including debt securities, cash
or cash equivalents denominated in U.S. dollars or foreign currencies and
short-term securities, including money market instruments. Under certain adverse
investment conditions, for defensive purposes, the Fund may restrict the markets
in which its assets will be invested and may increase the proportion of assets
invested in short-term 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.
The Fund also may invest up to 35% of its net assets in longer-term,
non-convertible debt securities emphasizing debt securities which offer the
opportunity for capital appreciation. 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. 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
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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.
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'. 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
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countries. The Fund will not necessarily seek to diversify investments on a
geographical basis or on the basis of the level of economic development of any
particular country.
In its investment decision-making, the Investment Adviser will emphasize
the allocation of assets among certain countries' capital markets, rather than
the selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. See 'Risks of High Yield Securities' below.
Such income can be used, however, to offset the operating expenses of the Fund.
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 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.
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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'. 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.
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.
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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.
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.
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.
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A regulation of the Securities and Exchange Commission limits 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 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
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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, 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
of the Company 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 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.
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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
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, International Equity
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-
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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, International Equity 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, International Equity 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,
International Equity 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 High Current Income Fund, World Income Focus Fund, International Equity
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.
Sovereign Debt. The junk bonds in which the High Current Income Fund,
World Income Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may invest include junk bonds issued by sovereign entities.
Investment in such sovereign debt involves a high degree of risk. The
governmental entity that controls the repayment of sovereign 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 governmental entity'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, 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, the
governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend
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funds to the governmental entity, which may further impair such debtor's ability
or willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the High Current Income Fund, World
Income Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund, may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. In the event of a
default by a governmental entity, there may be few or no effective legal
remedies available to a Fund and there can be no assurance a Fund will be able
to collect on defaulted sovereign debt in whole or in part.
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 and its affiliate,
Fund Asset Management, L.P. ('FAM'); President and Director of Princeton
Services, Inc. ('Princeton Services'); Executive Vice President of ML&Co.;
and Director of the Merrill Lynch Funds Distributor, Inc. (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 Benefit
Assets of the Financial Executives Institute ('CIEBA'); Member of CIEBA's
Executive Committee; and Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund.
ROBERT S. SALOMON, JR.--Principal of STI Management (investment
adviser).
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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., an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The general
partner of the Investment Adviser is Princeton Services, Inc., a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. 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. The Investment
Adviser also offers portfolio management and portfolio analysis services to
individuals and institutions. In the aggregate, as of March 31, 1996, MLAM and
FAM had a total of approximately $207.7 billion in investment company and other
portfolio assets under management including accounts of certain affiliates of
FAM.
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, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742, of which $144,618 related
to the Reserve Assets Fund (representing .50% of its average net assets),
$1,964,869 related to the Prime Bond Fund (representing .45% of its average net
assets), $1,551,098 related to the High Current Income Fund (representing .50%
of its average net assets), $2,505,030 related to the Quality Equity Fund
(representing .46% of its average net assets), $1,852,641 related to the Equity
Growth Fund (representing .75% of its average net assets), $1,941,598 related to
the Flexible Strategy Fund (representing .65% of its average net assets),
$277,494 related to the Natural Resources Focus Fund (representing .65% of its
average net assets), $1,045,146 related to the American Balanced Fund
(representing .55% of its average net assets), $1,598,551 related to the
Domestic Money Market Fund (representing .50% of its average net assets),
$3,348,535 related to the Global Strategy Focus Fund (representing .65% of its
average net assets), $1,414,380 related to the Basic Value Focus Fund
(representing .60% of its average net assets), $464,049 related to the World
Income Focus Fund (representing .60% of its average net assets), $803,260
related to the Global Utility Focus Fund (representing .60% of its average net
assets), $1,817,721 related to the International Equity Focus Fund (representing
.75% of its average net assets), $70,573 related to the International Bond Fund
(representing .60% of its average net assets), $434,062 related to the
Developing Capital Markets Focus Fund (representing 1.00% of its average net
assets), and $143,117 related to the Intermediate Government Bond Fund
(representing .50% of its average net assets). Although the .75% and the 1.00%
investment advisory fees 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.
During the Company's fiscal year ended December 31, 1995, 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: $176,421 by the Reserve Assets Fund (representing .61% of its
average net assets), $2,187,989 by the Prime Bond Fund (representing .50% of its
average net assets), $1,727,859 by the High Current Income Fund (representing
.55% of its average net assets), $2,787,884 by the Quality Equity Fund
(representing .51% of its average net assets), $2,007,667 by the Equity Growth
Fund (representing .81% of its average net assets), $2,128,925 by the Flexible
Strategy Fund (representing .71% of its average net assets), $335,073 by the
Natural Resources Focus Fund (representing .78% of its average net assets)
$1,150,888 by the American Balanced Fund (representing .61% of its average net
assets), $1,768,774 by the Domestic Money Market Fund (representing .55% of its
average net assets), $3,719,425 by the Global Strategy Focus Fund
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(representing .72% of its average net assets), $1,565,649 related to the Basic
Value Focus Fund (representing .66% of its average net assets), $527,752 related
to the World Income Focus Fund (representing .68% of its average net assets),
$890,100 related to the Global Utility Focus Fund (representing .66% of its
average net assets), $2,163,036 related to the International Equity Focus Fund
(representing .89% of its average net assets), $592,329 related to the
Developing Capital Markets Focus Fund (representing 1.36% of its average net
assets), $112,261 related to the International Bond Fund (representing .95% of
its average net assets), and $190,005 related to the Intermediate Government
Bond Fund (representing .66% 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, 1995, the Developing Capital
Markets Focus Fund, International Bond Fund, and Intermediate Government Bond
Fund were reimbursed for operating expenses. Such reimbursements amounted to
$49,477, $112,261 and $190,005, 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 administrative services agreements
with certain Insurance Companies, including 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 such Insurance
Companies.
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 Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
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PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
Thomas R. Robinson has served as the Portfolio Manager of the American
Balanced Fund, Flexible Strategy Focus Fund, Global Strategy Focus Fund
and Quality Equity Fund since November 1995, and is primarily responsible
for each such Fund's day-to-day management. He has served as a Senior Portfolio
Manager of MLAM since November 1995.
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.
Walter Rogers has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and employee of
the Investment Adviser since 1986.
Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have served
as the International Equity Focus Fund's Portfolio Managers since July 1993, and
are primarily responsible for the Fund's day-to-day management. Andrew Bascand
has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global
Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P.
Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior
Research Officer of the Bank of England's International Department from 1986 to
1987. Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993;
Vice President from 1990 to 1993; and an employee since 1987. Grace Pineda and
Steve Silverman have served as Vice Presidents of MLAM since 1989 and 1983,
respectively.
Peter Lehman has served as the Natural Resources Focus Fund's Portfolio
Manager since January 1994, and is primarily responsible for the Fund's
day-to-day management. He has served as Vice President of MLAM since 1994;
Senior Fund Analyst for an international fund managed by the Investment Adviser
from 1992 to 1994; Director and Senior Portfolio Manager for Prudential
Insurance Company of America from 1989 to 1991.
Jay Harbeck has served as the Prime Bond Fund's Portfolio Manager since
July 1992, and is primarily responsible for the Fund's day-to-day management. He
has served as Vice President of MLAM since 1986.
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.
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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.
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, 1995, the Company engaged in 22
transactions pursuant to such order involving $82.1 million of securities. For
the year ended December 31, 1995, the Company paid brokerage commissions of
$5,789,335, of which $264,999 was paid to Merrill Lynch.
PURCHASE OF SHARES
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.'
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
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
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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 (as of June 1, 1996, declared daily and reinvested
monthly) in additional full and fractional shares of such Fund. Dividends from
net investment income of the Prime Bond, the High Current Income, World Income
Focus, International Bond and Intermediate Government Bond Funds are declared
and reinvested monthly in additional full and fractional shares of the
respective Funds at net asset value. Dividends from net investment income of the
Global Utility Focus Fund are declared and reinvested quarterly in additional
full and fractional shares of the Fund. Dividends from net investment income of
the Quality Equity, Equity Growth, Flexible Strategy, National Resources Focus,
American Balanced, Global Strategy Focus, International Equity Focus, Basic
Value Focus and Developing Capital Markets Focus Funds are declared and
reinvested at least annually in additional full and fractional shares of the
respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, other than short-term capital gains of the Domestic Money Market and
Reserve Assets Funds, are declared and distributed annually after the close of
the Company's fiscal year to the shareholders of the Fund or Funds to which such
gains are attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
'Code'). Under such provisions, a Fund will not be subject to federal income tax
on such part of its net ordinary income and net realized capital gains which it
distributes to shareholders. One of the requirements to qualify for treatment as
a regulated investment company under the Code is that a Fund, among other
things, derive less than 30% of its gross income in each taxable year from gains
(without deduction of losses) from the sale or other disposition of stocks,
securities and certain options, futures or forward contracts held for less than
three months. This requirement may limit the ability of certain Funds to 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.
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PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the offering price per
share on the last day of the period. The yield for the 30-day period ending
December 31, 1995 was 5.92% for the Prime Bond Fund, 10.05% for the High Current
Income Fund, 8.50% for the World Income Fund, 6.08% for the International Bond
Fund and 5.56% 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 indicative 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
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'Dividends, Distributions and Taxes'), the net asset value per share of the
Funds normally remains at $1.00 per share immediately after each such
determination and dividend declaration.
Except with respect to securities held by the Domestic Money Market and
Reserve Assets Funds having a remaining maturity of 60 days or less, securities
held by each Fund will be valued as follows: Portfolio securities which are
traded on stock exchanges are valued at the last sale price (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 Mark) 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, 1995, American Balance Fund, Flexible
Strategy Fund, Global Utility Focus Fund, High Current Income Fund, Intermediate
Government Bond Fund, Prime Bond Fund and World Income Focus Fund paid MLSPS
$473, $368, $38, $10,932, $439, $7,041 and $4,613, respectively.
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,
International Bond Fund and Intermediate Government Bond Fund commenced
operations on May 2, 1994. The authorized capital stock of the Company consists
of 3,300,000,000 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,
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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 1,300,000,000 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.
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.
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TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's
transfer agent and is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. MLFDS will
receive an annual fee of $5,000 per 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 26, 1996, 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 and insurance company funding
agreements), 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
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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 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.
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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.
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.
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TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
Options on Portfolio Securities. Each of the Quality Equity, Flexible
Strategy, Natural Resources Focus, American Balanced, Global Strategy Focus,
Basic Value Focus, World Income Focus, Global Utility Focus, International
Equity Focus, International Bond and Developing Capital Markets Focus Funds may
from time to time sell ('write') covered call options on its portfolio
securities in which it may invest and may engage in closing purchase
transactions with respect to such options. A covered call option is an option
where the Fund, in return for a premium, gives another party a right to buy
particular securities held by the Fund at a specified future date and at a price
set at the time of the contract. The principal reason for writing call options
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. By writing covered call options, a
Fund gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction. A closing purchase transaction cancels out the Fund's position as
the writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered call
options serve as a partial hedge against the price of the underlying security
declining. The Quality Equity Fund and the Basic Value Focus Fund may not write
covered call options on underlying securities exceeding 15% of the value of its
total assets.
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.
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Options on Stock Indices. The Natural Resources Focus, Global Strategy
Focus, World Income Focus, International Equity Focus, International Bond and
Developing Capital Markets Focus Funds may purchase and write call options and
put options on stock indices traded on a national securities exchange to seek to
reduce the general market risk of their securities or specific industry sectors
which the Fund invests in. Options on indices are similar to options on
securities except that, on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Funds may invest in index options based on a broad market index,
e.g., the S&P 500, or on a narrow index representing an industry or market
segment, e.g., the Amex Oil & Gas Index. The effectiveness of a hedge employing
stock index options will depend primarily on the degree of correlation between
movements in the value of the index underlying the option and in the portion of
the portfolio being hedged. For further discussion concerning such options, see
'Risk Factors in Options, Futures and Currency Transactions' below and the
Company's Statement of Additional Information.
Stock Index and Financial Futures Contracts. The Natural Resources Focus,
Global Strategy Focus, World Income Focus, International Equity Focus,
International Bond and Developing Capital Markets Focus Funds may purchase and
sell stock index futures contracts and financial futures contracts to hedge
their portfolios. The Funds may sell stock index futures contracts and financial
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Funds' securities portfolios that
might otherwise result. When the Funds are not fully invested in the securities
market and anticipate a significant market advance, they may purchase stock
index or financial futures in order to gain rapid market exposure that may in
part or entirely offset increases in the cost of securities that the Funds
intend to purchase. A stock index or 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 and the United States dollar. 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-6
<PAGE>
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 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 financial
institutions 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-
A-7
<PAGE>
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-8
<PAGE>
PROSPECTUS
APRIL 26, 1996
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 are 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 also are sold 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 Variable Life Contracts and/or variable
annuity contracts, (together with the Variable Life Contracts, the '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 multinational 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 26, 1996, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET
FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights........................................ 3
The Insurance Companies..................................... 7
Investment Objectives and Policies of the Funds............. 7
Directors................................................... 27
Investment Adviser.......................................... 28
Portfolio Transactions and Brokerage........................ 30
Purchase of Shares.......................................... 30
Redemption of Shares........................................ 30
Dividends, Distributions and Taxes.......................... 30
Performance Data............................................ 31
Additional Information...................................... 32
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, 1995 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
FOCUS FUND FOCUS FUND
------------------------------------------ --------------------------------
The following per share data and ratios have been FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
derived from information provided in the DECEMBER 31, JULY 1, 1993+ TO ENDED MAY 2 1994+ TO
financial statements. --------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1995 1994
--------- --------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.10 $ 10.95 $ 10.00 $ 9.51 $ 10.00
--------- --------- ------ ------------- ------
Investment income--net............................ .18 .17 .04 .20 .09
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net........... 2.49 .08 .91 (.30) (.58)
--------- --------- ------ ------------- ------
Total from investment operations.................. 2.67 .25 .95 (.10) (.49)
--------- --------- ------ ------------- ------
Less dividends and distributions:
Investment income--net......................... (.19) (.10) -- (.09) --
Realized gain on investments--net.............. (.48) -- -- -- --
--------- --------- ------ ------------- ------
Total dividends and distributions................. (.67) (.10) -- (.09) --
--------- --------- ------ ------------- ------
Net asset value, end of period.................... $ 13.10 $ 11.10 $ 10.95 $ 9.32 $ 9.51
--------- --------- ------ ------------- ------
--------- --------- ------ ------------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................ 25.49% 2.36% 9.50%# (1.08)% (4.90)%#
--------- --------- ------
--------- --------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................... .66% .72% .86%* 1.25% 1.29%*
--------- --------- ------ ------------- ------
--------- --------- ------ ------------- ------
Expenses.......................................... .66% .72% .86%* 1.36% 1.35%*
--------- --------- ------ ------------- ------
--------- --------- ------ ------------- ------
Investment income--net............................ 1.68% 2.08% 1.69%* 2.73% 2.18%*
--------- --------- ------ ------------- ------
--------- --------- ------ ------------- ------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $306,463 $164,307 $ 47,207 $ 55,209 $ 36,676
--------- --------- ------ ------------- ------
--------- --------- ------ ------------- ------
Portfolio turnover................................ 74.10% 60.55% 30.86% 62.53% 29.79%
--------- --------- ------ ------------- ------
--------- --------- ------ ------------- ------
</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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
--------------------------------------
FOR THE
PERIOD
The following per share data and ratios FOR THE YEAR ENDED JULY 1,
have been derived from information DECEMBER 31, 1993+ TO
provided in the financial statements. ---------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993
---------- ---------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.45 $ 10.66 $ 10.00
---------- ---------- -------
Investment income--net.................. .45 .35 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... 1.79 (1.25) .64
---------- ---------- -------
Total from investment operations........ 2.24 (.90) .68
---------- ---------- -------
Less dividends and distributions:
Investment income--net............... (.39) (.29) (.02)
In excess of realized gain on
investments--net................... -- (.02) --
---------- ---------- -------
Total dividends and distributions....... (.39) (.31) (.02)
---------- ---------- -------
Net asset value, end of period.......... $ 11.30 $ 9.45 $ 10.66
---------- ---------- -------
---------- ---------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 24.33% (8.51)% 6.85%#
---------- ---------- -------
---------- ---------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .66% .73% .89%*
---------- ---------- -------
---------- ---------- -------
Investment income--net.................. 4.44% 3.68% 2.84%*
---------- ---------- -------
---------- ---------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 148,225 $ 126,243% $ 104,517
---------- ---------- -------
---------- ---------- -------
Portfolio turnover...................... 11.05% 9.52% 1.72%
---------- ---------- -------
---------- ---------- -------
</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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL
BOND FUND INTERNATIONAL EQUITY FOCUS FUND
--------------------------- ------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR MAY 2, FOR THE YEAR ENDED JULY 1,
The following per share data and ratios have been derived from ENDED 1994+ TO DECEMBER 31, 1993+ TO
information provided in the financial statements. DECEMBER 31, DECEMBER 31, --------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1995 1994 1993
------------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 9.70 $10.00 $ 10.90 $ 11.03 $10.00
------ ----- --------- --------- ------
Investment income--net......................................... .72 .38 .20 .19 .01
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................... .82 (.35) .37 (.13) 1.02
------ ----- --------- --------- ------
Total from investment operations............................... 1.54 .03 .57 .06 1.03
------ ----- --------- --------- ------
Less dividends and distributions:
Investment income--net...................................... (.72) (.33) (.01) (.18) --
Realized gain on investments--net........................... -- -- (.17) (.01) --
In excess of realized gain on investments--net.............. -- -- (.23) -- --
------ ----- --------- --------- ------
Total dividends and distributions.............................. (.72) (.33) (.41) (.19) --
------ ----- --------- --------- ------
Net asset value, end of period................................. $10.52 $ 9.70 $ 11.06 $ 10.90 $11.03
------ ----- --------- --------- ------
------ ----- --------- --------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................. 16.35% 0.37%# 5.48% .55% 10.30%#
------ ----- --------- --------- ------
------ ----- --------- --------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................. .00% .00%* .89% .97% 1.14%*
------ ----- --------- --------- ------
------ ----- --------- --------- ------
Expenses....................................................... .95% 1.08%* .89% .97% 1.14%*
------ ----- --------- --------- ------
------ ----- --------- --------- ------
Investment income--net......................................... 7.05% 6.34%* 1.95% 1.09% .30%*
------ ----- --------- --------- ------
------ ----- --------- --------- ------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................... $18,121 $ 9,933 $265,602 $247,884 $76,906
------ ----- --------- --------- ------
------ ----- --------- --------- ------
Portfolio turnover............................................. 2.23% 152.20% 100.02% 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 (CONCLUDED)
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
--------------------------------------
FOR THE
PERIOD
The following per share data and ratios FOR THE YEAR ENDED JULY 1,
have been derived from information DECEMBER 31, 1993+ TO
provided in the financial statements. ---------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994 1993
---------- ---------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.17 $ 10.38 $ 10.00
---------- ---------- -------
Investment income--net.................. .85 .76 .25
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... .61 (1.19) .33
---------- ---------- -------
Total from investment operations........ 1.46 (.43) .58
---------- ---------- -------
Less dividends and distributions
Investment income--net............... (.84) (.76) (.20)
Realized gain on investments--net.... -- -- --
In excess of realized gain on
investments--net..................... -- (.02) --
---------- ---------- -------
Total dividends and distributions....... (.84) (.78) (.20)
---------- ---------- -------
Net asset value, end of period.......... $ 9.79 $ 9.17 $ 10.38
---------- ---------- -------
---------- ---------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 16.69% (4.21)% 5.90%#
---------- ---------- -------
---------- ---------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .68% .75% .94%*
---------- ---------- -------
---------- ---------- -------
Investment income--net.................. 8.99% 8.01% 6.20%*
---------- ---------- -------
---------- ---------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 81,845 $ 75,150 $ 50,737
---------- ---------- -------
---------- ---------- -------
Portfolio turnover...................... 132.57% 117.58% 54.80%
---------- ---------- -------
---------- ---------- -------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# 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, International Equity 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 rated
investment grade 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
multinational 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'. 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 Development Bank. The government
members, or 'stockholders,' usually make initial capital contributions to
9
<PAGE>
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'.
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, 1995.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------- ----------- -------------
<S> <C> <C>
AAA....... 17.14% 17.68%
A........ .16 .16
BB....... 14.16 14.60
B........ 25.89 26.70
CCC...... 2.11 2.18
D........ .25 .26
NR**..... 37.25 38.42
-------------
100.00%
</TABLE>
- ---------------
* A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any other organization.
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'.
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 temporary
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
(i.e., securities rated at least BBB by Standard & Poor's or Baa by Moody's), or
deemed to be of equivalent quality 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
11
<PAGE>
issued by domestic utility companies historically have significantly exceeded
those of industrial companies' common stocks, while the prices of domestic
utility stocks have tended to be less volatile than stocks of industrial
companies. Total returns on domestic utility stocks have also generally exceeded
those on stocks of industrial companies. Debt securities of domestic utility
companies historically also have yielded slightly more than similar debt
securities of industrial companies, and have had higher total returns. For
certain periods, the total return of utility companies' securities has
underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in the
future. The Investment Adviser believes that the average dividend yields of
common stocks issued by foreign utility companies have also historically
exceeded those of foreign industrial companies' common stocks. To meet its
objective of capital appreciation, the Fund may invest in foreign utility
companies which pay lower than average dividends, but have a greater potential
for capital appreciation.
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
12
<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.
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.
13
<PAGE>
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 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.
14
<PAGE>
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'. 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,
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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, convertible debt securities and other
instruments the return on which is linked to the performance of a common stock
or a basket or index of common stocks (collectively, 'equity securities'). The
Fund may also invest in non-equity securities, including debt securities, cash
or cash equivalents denominated in U.S. dollars or foreign currencies and
short-term securities, including money market instruments. Under certain adverse
investment conditions, for defensive purposes, the Fund may restrict the markets
in which its assets will be invested and may increase the proportion of assets
invested in short-term 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.
The Fund also may invest up to 35% of its net assets in longer-term,
non-convertible debt securities emphasizing debt securities which offer the
opportunity for capital appreciation. 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. 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.
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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 'Risk of High Yield Securities' below.
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'. 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 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 markets. With respect to
certain countries, there may be the possibility of expropriation of assets,
confiscatory
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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'. 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 relevant to its operations. In terms of foreign governmental
obligations, the Investment Adviser will review the
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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 investment companies under the Internal Revenue Code. To
qualify as a regulated investment company, a Fund,
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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 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
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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
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investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms than securities of the company
available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the 'Investment Company Act' 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.
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TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
The Basic Value Focus, World Income Focus, Global Utility Focus,
International Equity Focus, Developing Capital Markets Focus and International
Bond Funds may engage in certain of the options, futures and currency
transactions discussed in Appendix A to this Prospectus. A Fund may engage in
transactions in futures contracts, options on futures contracts, forward foreign
exchange contracts, currency options and options on portfolio securities and on
stock indexes only for hedging purposes and not for speculation. A Fund may
write call options on portfolio securities and on stock indexes for the purpose
of achieving, through receipt of premium income, a greater average total return
than it would otherwise realize from holding portfolio securities alone. There
can be no assurance that the objectives sought to be obtained from the use of
these instruments will be achieved. A Fund's use of such instruments may be
limited by certain Internal Revenue Code requirements for qualification of the
Fund for the favorable tax treatment afforded investment companies. There can be
no assurance that a Fund's hedging transactions will be effective. Furthermore,
a Fund will only engage in hedging activities from time to time and will not
necessarily engage in hedging transactions in all the smaller capital markets in
which certain of the Funds may be invested at any given time.
RISKS OF HIGH YIELD SECURITIES
The World Income Focus Fund, International Equity 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, International Equity 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, International Equity 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, International Equity 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
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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, International Equity 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.
Sovereign Debt. The junk bonds in which the World Income Focus Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign 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
governmental entity'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, 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, the governmental entity's policy
towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be dependent
on expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities may
default on their sovereign debt.
Holders of sovereign debt, including the World Income Focus Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund, may
be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. In the event of a default by a
governmental entity, there may be few or no effective legal remedies available
to a Fund and there can be no assurance a Fund will be able to collect on
defaulted sovereign debt in whole or in part.
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.
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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 and its affiliate,
Fund Asset Management, L.P. ('FAM'); President and Director of Princeton
Services, Inc. ('Princeton Services'); Executive Vice President of ML&Co.;
and Director of Merrill Lynch Funds Distributor, Inc. (the 'Distributor');
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 Benefit
Assets of the Financial Executives Institute ('CIEBA'); member of CIEBA's
Executive Committee; and member of the Investment Advisory Committee of the
State of New York Retirement Fund.
ROBERT SALOMON, JR.--Principal of STI Management (investment adviser).
- ---------------
* 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., (the 'Investment Adviser'), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the investment
adviser for the Fund. The general partner of the Investment Adviser is Princeton
Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc. 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. The Investment Adviser also offers portfolio management
and portfolio analysis services to individuals and institutions. In the
aggregate, as of March 31, 1996, the Investment Adviser and FAM had a total of
approximately $207.7 billion in investment company and other portfolio assets
under management including accounts of certain affiliates of FAM.
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, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742 of which $1,414,380 related
to the Basic Value Focus Fund (representing .60% of its average net assets),
$464,049 related to the World Income Focus Fund (representing .60% of its
average net assets), $803,260 related to the Global Utility Focus Fund
(representing .60% of its average net assets), $1,817,721 related to the
International Equity Focus Fund (representing .75% of its average net assets),
$70,573 related to the International Bond Fund (representing .60% of its average
net assets), and $434,062 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, 1995, 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: $1,565,649 related to the Basic Value Focus Fund (representing
.66% of its average net assets), $527,752 related to the World Income Focus Fund
(representing .68% of its average net assets), $890,100 related to the Global
Utility Focus Fund (representing .66% of its average net assets), $2,163,036
related to the International Equity Focus Fund (representing .89% of its average
net assets), $592,329 related to the Developing Capital Markets Focus Fund
(representing 1.36% of its average net assets), and $112,261 related to the
International Bond Fund (representing .95% 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, 1995, the Developing Capital
Markets Focus Fund and International Bond Fund were reimbursed for operating
expenses. Such reimbursements amounted to $49,477 and $112,261 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 administrative services agreements
with certain Insurance Companies, including 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 such Insurance
Companies.
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 Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
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, 1995, the Company engaged in 22 transactions pursuant to such
order involving $82.1 million of securities. For the year ended December 31,
1995, the Company paid brokerage commissions of $5,789,335, of which $264,999
was paid to Merrill Lynch.
PURCHASE OF SHARES
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.'
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
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. 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
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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 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.
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
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of the period. The yield for the 30-day period ending December 31, 1995 was
8.50% for the World Income Fund and 6.08% 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 indicative 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.
The Company has used pricing services, including Merrill Lynch Securities
Pricing(Service Mark) Service ('MLSPS'), to value bonds held by certain 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
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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,
1995, Global Utility Focus Fund and World Income Focus Fund paid MLSPS $38 and
$4,613, respectively.
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 3,300,000,000 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 1,300,000,000 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.
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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.
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
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), 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. MLFDS 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 26, 1996, 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 and insurance
company funding agreements), 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
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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 and the United States
dollar. 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
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securities, the sale and redemption of shares of the Funds or the payment of
dividends and distributions by the Funds. Position hedging is the sale of
forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Funds will not speculate in
forward foreign exchange. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such transactions also preclude
the opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Funds to hedge against a devaluation
that is so generally anticipated that the Funds are not able to contract to sell
the currency at a price above the devaluation level they anticipate.
The Funds are also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency options provide
the holder thereof the right to buy or to sell a currency at a fixed price on or
before a future date. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Such transactions may be effected with respect to hedges
on non-U.S. dollar-denominated securities (including securities denominated in
multi-national currency units) owned by the Funds, sold by the Funds but not yet
delivered, or committed or anticipated to be purchased by the Funds. As an
illustration, the Funds may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese yen-denominated security.
In such circumstances, for example, the Funds may purchase a foreign currency
put option enabling them to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Funds may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a 'straddle'). By
selling such call option in this illustration, the Funds give up the opportunity
to profit without limit from increases in the relative value of the yen to the
dollar.
The Funds will not speculate in foreign currency options or futures.
Accordingly, the Funds will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which they own, the
expected acquisition price of securities which they have committed or anticipate
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Funds but not yet delivered, the proceeds
thereof in its denominated currency. Further, if a security with respect to
which a currency hedging transaction has been executed should subsequently
decrease in value, the Funds will direct their custodian to segregate liquid,
high-grade debt securities having a market value equal to such decrease in
value, less any initial or variation margin held in the account of their broker.
As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
Options on Futures Contracts. The World Income Focus, Global Utility Focus
and International Equity Focus Funds may also purchase and write call and put
options on futures contracts in connection with their hedging activities.
Generally, these strategies are utilized under the same market conditions (i.e.,
conditions 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 financial
institutions 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>
PROSPECTUS
APRIL 26, 1996
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 four 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
Company's investment adviser is Merrill Lynch Asset Management, L.P. (the
'Investment Adviser').
The shares of the Funds are sold to certain insurance companies ('Insurance
Companies'), including Insurance Companies owned by Merrill Lynch & Co., Inc.,
for certain separate accounts ('Separate Accounts') to fund benefits under
variable life insurance contracts and/or variable annuities contracts
('Contracts') issued by the Insurance Companies. 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. 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.
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.
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.
HIGH CURRENT INCOME FUND. As high a level of current income as is
consistent with its investment policies and prudent investment management,
and capital appreciation to the extent consistent with the foregoing
objective. The Fund invests principally in fixed-income securities that are
rated, in the lower rating categories of the established rating services or
in unrated securities of comparable quality.
For more information on the Funds' investment objectives and policies,
please see 'Investment Objectives and Policies of the Funds,' page 6.
THE DOMESTIC MONEY MARKET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
AN INVESTMENT IN THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND INVESTS 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 26, 1996, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET
FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights........................... 3
The Insurance Companies........................ 6
Domestic Money Market Fund Yield Information... 6
Investment Objectives and Policies of the
Funds........................................ 6
Directors...................................... 16
Investment Adviser............................. 17
Portfolio Transactions and Brokerage........... 18
Purchase of Shares............................. 19
Redemption of Shares........................... 19
Dividends, Distributions and Taxes............. 19
Performance Data............................... 20
Additional Information......................... 21
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, 1995 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>
BASIC VALUE DOMESTIC MONEY
The following per share data and FOCUS FUND MARKET FUND
ratios have been derived from ------------------------------------------------- ---------------------------------------
information provided in the FOR THE YEAR ENDED FOR THE PERIOD JULY 1,
financial statements. DECEMBER 31, 1993+ TO FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET --------------------- DECEMBER 31, ---------------------------------------
VALUE: 1995 1994 1993 1995 1994 1993
-------- -------- ----------------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.10 $ 10.95 $ 10.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------ -------- -------- -------------
Investment income--net............. .18 .17 .04 .0547 .0386 .0302
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ 2.49 .08 .91 .0012 (.0007) .0005
-------- -------- ------ -------- -------- -------------
Total from investment operations... 2.67 .25 .95 .0559 .0379 .0307
-------- -------- ------ -------- -------- -------------
Less dividends and distributions:
Investment income--net.......... (.19) (.10) -- (.0547) (.0386) (.0302)
Realized gain on
investments--net................ (.48) -- -- (.0002) -- (.0005)
-------- -------- ------ -------- -------- -------------
Total dividends and
distributions..................... (.67) (.10) -- (.0549) (.0386) (.0307)
-------- -------- ------ -------- -------- -------------
Net asset value, end of period..... $ 13.10 $ 11.10 $ 10.95 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 25.49% 2.36% 9.50%# 5.64% 3.94% 3.10%
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .66% .72% .86%* .55% .50% .36%
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
Expenses........................... .66% .72% .86%* .55% .57% .63%
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
Investment income--net............. 1.68% 2.08% 1.69%* --% --% --%
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
Investment income--net, and
realized gain (loss) on
investments--net***............... -- -- -- 5.50% 4.02% 3.03%
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $306,463 $164,307 $47,207 $303,912 $363,199 $ 170,531
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
Portfolio turnover****............. 74.10% 60.55% 30.86% -- -- --
-------- -------- ------ -------- -------- -------------
-------- -------- ------ -------- -------- -------------
<CAPTION>
DOMESTIC
MONEY
MARKET FUND
------------
The following per share data and FOR THE
ratios have been derived from PERIOD
information provided in the FEBRUARY 20,
financial statements. 1992+ TO
INCREASE (DECREASE) IN NET ASSET DECEMBER 31,
VALUE: 1992
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 1.00
------
Investment income--net............. .0302
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net........ .0013
------
Total from investment operations... .0315
------
Less dividends and distributions:
Investment income--net.......... (.0302)
Realized gain on
investments--net................ (.0010)
------
Total dividends and
distributions..................... (.0312)
------
Net asset value, end of period..... $ 1.00
------
------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 3.16%#
------
------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .32%*
------
------
Expenses........................... .88%*
------
------
Investment income--net............. --%
------
------
Investment income--net, and
realized gain (loss) on
investments--net***............... 3.48%*
------
------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $ 41,128
------
------
Portfolio turnover****............. --
------
------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** Applicable to the Domestic Money Market Fund only.
**** Not applicable to the Domestic Money Market Fund.
+ 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
---------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED FEBRUARY 28,
The following per share data and ratios have been derived DECEMBER 31, 1992+ TO
from information provided in the financial statements. ---------------------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.73 $ 12.17 $ 10.22 $ 10.00
-------- -------- -------- ------
Investment income--net...................................... .39 .30 .16 .13
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net......................... .82 (.48) 1.96 .13
-------- -------- -------- ------
Total from investment operations............................ 1.21 (.18) 2.12 .26
-------- -------- -------- ------
Less dividends and distributions:
Investment income--net................................... (.39) (.21) (.17) (.04)
Realized gain on investments--net........................ -- (.04) -- --
In excess of realized gain on investments--net........... --++ (.01) -- --
-------- -------- -------- ------
Total dividends and distributions........................... (.39) (.26) (.17) (.04)
-------- -------- -------- ------
Net asset value, end of period.............................. $ 12.55 $ 11.73 $ 12.17 $ 10.22
-------- -------- -------- ------
-------- -------- -------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 10.60% (1.46)% 21.03% 2.62%#
-------- -------- -------- ------
-------- -------- -------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............................. .72% .77% .88% 1.25%*
-------- -------- -------- ------
-------- -------- -------- ------
Expenses.................................................... .72% .77% .88% 1.35%*
-------- -------- -------- ------
-------- -------- -------- ------
Investment income--net...................................... 3.33% 2.85% 2.41% 2.66%*
-------- -------- -------- ------
-------- -------- -------- ------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $540,242 $515,407 $269,627 $ 15,527
-------- -------- -------- ------
-------- -------- -------- ------
Portfolio turnover.......................................... 27.23% 21.03% 17.07% 14.47%
-------- -------- -------- ------
-------- -------- -------- ------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# 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 (CONCLUDED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
The following per share data and ratios -------------------------------------------------------------------------------------
have been derived from information FOR THE YEAR ENDED DECEMBER 31,
provided in the financial statements. -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55
-------- -------- -------- ------- ------ ------ ------- -------
Investment income--net............... 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net.................... .65 (1.47) .95 .90 2.10 (2.08) (.64) .20
-------- -------- -------- ------- ------ ------ ------- -------
Total from investment operations..... 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41
-------- -------- -------- ------- ------ ------ ------- -------
Less dividends and distributions:
Investment income--net............... (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11)
Realized gain on investments--net.... -- -- -- -- -- -- -- --
-------- -------- -------- ------- ------ ------ ------- -------
Total dividends and distributions....... (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11)
-------- -------- -------- ------- ------ ------ ------- -------
Net asset value, end of year............ $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share... 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
Investment income--net............... 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................... $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942 $13,960
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
Portfolio turnover................... 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91%
-------- -------- -------- ------- ------ ------ ------- -------
-------- -------- -------- ------- ------ ------ ------- -------
<CAPTION>
HIGH CURRENT
INCOME FUND
------------------
The following per share data and ratios FOR THE YEAR ENDED
have been derived from information DECEMBER 31,
provided in the financial statements. ------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.42 $ 11.39
------- -------
Investment income--net............... 1.23 1.25
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net.................... (.79) .03
------- -------
Total from investment operations..... .44 1.28
------- -------
Less dividends and distributions:
Investment income--net............... (1.23) (1.25)
Realized gain on investments--net.... (.08) --
------- -------
Total dividends and distributions....... (1.31) (1.25)
------- -------
Net asset value, end of year............ $ 10.55 $ 11.42
------- -------
------- -------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share... 3.82% 11.74%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.01% 1.12%
------- -------
------- -------
Investment income--net............... 10.88% 10.65%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................... $13,075 $12,577
------- -------
------- -------
Portfolio turnover................... 56.07% 22.44%
------- -------
------- -------
</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.
5
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in four Funds to certain separate
accounts (the 'Separate Accounts') of certain Insurance Companies to fund
benefits under the Contracts. Those four Funds are: the Basic Value Focus Fund,
Domestic Money Market Fund, Global Strategy Focus Fund, and High Current Income
Fund. Through separate Prospectuses, the Company offers shares in some or all of
its funds to certain other Separate Accounts of other Insurance Companies to
fund benefits under variable life and 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.
Because 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.
DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Domestic Money Market Fund for
the seven-day period ended December 31, 1995, 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>
DOMESTIC MONEY
MARKET FUND
--------------
<S> <C>
Annualized Yield:
Including gains and losses................... 5.28%
Excluding gains and losses................... 5.28%
Compounded Annualized Yield....................... 5.42%
Average maturity of portfolio at end of period.... 79 days
</TABLE>
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 (the 'Investment Company Act'), except for the Global
Strategy Focus Fund, 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 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
6
<PAGE>
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.
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 rated
investment grade 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.
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 and insurance company funding agreements), variable
amount master demand notes, repurchase and reverse repurchase agreements of U.S.
issuers and other money market instruments. As a matter of fundamental policy,
which may be changed only with the approval of a majority of the Domestic Money
7
<PAGE>
Market Fund's outstanding voting securities, as defined in the Investment
Company Act, 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.'
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'.
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 (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.
When market or financial considerations 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 Stategy 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.'
8
<PAGE>
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income 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 that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard and Poor's), or in unrated securities of comparable
quality. Securities rated below Baa by Moody's and below BBB by Standard and
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-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'.
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 and 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-
9
<PAGE>
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.
The table below shows the average monthly dollar-weighted market value, by
Standard and Poor's rating category, of the securities held by the Fund during
the year ended December 31, 1995.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- --------- ----------- -------------
<S> <C> <C>
AAA...... 0% 0%
AA....... 0 0
A........ 0 0
BBB...... 2.5 2.6
BB....... 32.1 34.0
B........ 50.0 53.0
CCC...... 2.1 2.4
CC....... 0 0
C........ 0 0
D........ 0 0
NR**..... 7.2 8.0
-------------
100.00%
</TABLE>
- ------------------
*A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
**Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any other organizations.
NON-DIVERSIFIED FUNDS
The Global Strategy Focus Fund is classified as a non-diversified
investment company under the Investment Company Act. However, the Fund will have
to limit its investments to the extent required by the diversification
requirements applicable to regulated investment companies under the Internal
Revenue Code. To qualify as a regulated investment company, a Fund, at the close
of each fiscal quarter, may not have more than 25% of its total assets invested
in the securities (except obligations of the U.S. Government, its agencies or
instrumentalities) of any one issuer and with respect to 50% of its assets, (i)
may not have more than 5% of its total assets invested in the securities of any
one issuer and (ii) may not own more than 10% of the outstanding voting
securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
10
<PAGE>
MONEY MARKET FUND PORTFOLIO RESTRICTIONS
For purposes of the investment policies of the Domestic Money Market Fund,
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 Fund 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 the Fund's portfolio assets will not exceed
90 days.
The Domestic Money Market Fund's 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. The 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 regulation of the Securities and Exchange Commission (the 'SEC') limits
investments by the Domestic Money Market Fund 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 the 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 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
11
<PAGE>
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 Basic Value Focus, Global Strategy Focus and High
Current Income 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 Global Strategy Focus Fund 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 and Global Strategy Focus Funds will purchase
only securities issued in dollar denominations.
Each of the Funds which is permitted to invest in foreign securities may
from time to time invest in securities of foreign issuers in smaller capital
markets. 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.
12
<PAGE>
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
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.
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.
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.
13
<PAGE>
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 Fund may from time
to time enter into standby commitment agreements. Such agreements commit the
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 and Global Strategy Focus Funds may engage in certain
of the options, futures and currency transactions discussed in Appendix A to
this Prospectus. A Fund may engage in transactions in futures contracts, options
on futures contracts, forward foreign exchange contracts, currency options and
options on portfolio securities and on stock indexes only for hedging purposes
and not for speculation. A Fund may write call options on portfolio securities
and on stock indexes for the purpose of achieving, through receipt of premium
income, a greater average total return than it would otherwise realize from
holding portfolio securities alone. There can be no assurance that the
objectives sought to be obtained from the use of these instruments will be
achieved. A Fund's use of such instruments may be limited by certain Internal
Revenue Code requirements for qualification of the Fund for the favorable tax
treatment afforded investment companies. There can be no assurance that a Fund's
hedging transactions will be effective. Furthermore, a Fund will only engage in
hedging activities from time to time and will not necessarily engage in hedging
transactions in all the smaller capital markets in which certain of the Funds
may be invested at any given time.
RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund may invest a substantial portion of its 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-
14
<PAGE>
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
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 the Fund purchases a particular
security, in which case the Fund may experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund will diversify its holdings among many issuers. However,
there can be no assurance that diversification will protect the 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 receives for its junk
bonds to be reduced, or the 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 the Fund's portfolio securities than in the
case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund. In addition, the 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.
Sovereign Debt. The junk bonds in which the High Current Income Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign 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
governmental entity'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, 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, the governmental entity's policy
towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be dependent
on expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities may
default on their sovereign debt.
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Holders of sovereign debt, including the High Current Income Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to governmental entities. In the event of a default by a governmental
entity, there may be few or no effective legal remedies available to the Fund
and there can be no assurance the Fund will be able to collect on defaulted
sovereign debt in whole or in part.
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. 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 investment companies by the Investment Company Act. 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 and its affiliate,
Fund Asset Management, L.P. ('FAM'); President and Director of Princeton
Services, Inc. ('Princeton Services'); Executive Vice President of Merrill
Lynch & Co., Inc. ('ML&Co.'); and Director of Merrill Lynch Funds
Distributor, Inc. (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 Benefit
Assets of the Financial Executives Institute ('CIEBA'); Member of CIEBA's
Executive Committee; and Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund.
ROBERT S. SALOMON, JR.--Principal of STI Management (investment
adviser).
- ---------------
* Interested person, as defined in the Investment Company Act, of the Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The general
partner of the Investment Adviser is Princeton Services, Inc., a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. 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. The Investment
Adviser also offers portfolio management and portfolio analysis services to
individuals and institutions. In the aggregate, as of March 31, 1996, MLAM and
FAM had a total of approximately $207.7 billion in investment company and other
portfolio assets under management including accounts of certain affiliates of
FAM.
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, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742, of which $1,414,380
related to the Basic Value Focus Fund (representing .60% of its average net
assets), $1,598,551 related to the Domestic Money Market Fund (representing .50%
of its average net assets), $3,348,535 related to the Global Strategy Focus Fund
(representing .65% of its average net assets), and $1,551,098 related to the
High Current Income Fund (representing .50% of its average net assets).
During the Company's fiscal year ended December 31, 1995, 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: $1,565,649 related to the Basic Value Focus Fund (representing
.66% of its average net assets), $1,768,774 related to the Domestic Money Market
Fund (representing .55% of its average net assets), $3,719,425 related to the
Global Strategy Focus Fund (representing .72% of its average net assets), and
$1,727,859 related to the High Current Income Fund (representing .55% 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.
See 'Investment Advisory Arrangements' in the Statement of Additional
Information. MLLA sells certain Contracts described in the Prospectus for such
Contracts.
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The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including Insurance Companies owned by ML&Co.,
pursuant to which the Investment Adviser compensates such companies for
administrative responsibilities relating to the Company which are performed by
such Insurance Companies.
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 Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
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.
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.
Thomas R. Robinson has served as the Global Strategy Focus Fund's Portfolio
Manager since November 1995, and is primarily responsible for the Fund's
day-to-day management. He has served as a Senior Portfolio Manager of MLAM since
November 1995.
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 an employee
of the Investment Adviser since 1986.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act, 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
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order allowing such transactions is obtained from the SEC. Affiliated persons of
the Company may serve as its broker in over-the-counter transactions conducted
on an agency basis. The SEC has issued an order permitting the Company to
conduct certain principal transactions with respect to the Domestic Money Market
Fund 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, 1995, the Company engaged in 22 transactions
pursuant to such order involving $82.1 million of securities. For the year ended
December 31, 1995, the Company paid brokerage commissions of $5,789,335, of
which $264,999 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. 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.'
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to the conditions in the securities markets or
otherwise.
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 Fund, will consist of
all payments of dividends or interest received by such Fund less the estimated
expenses of such Fund (including fees payable to the Investment Adviser).
Dividends on the Domestic Money Market Fund are declared and reinvested
daily (as of June 1, 1996, declared daily and reinvested monthly) in additional
full and fractional shares of such Fund. Dividends from net investment income of
the High Current Income Fund 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 Basic Value Focus and Global Strategy 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
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<PAGE>
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 SEC.
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, 1995 was 10.05% for the High Current Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost. The yield and
total return quotations
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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 indicative 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.
Because the net investment income of the Domestic Money Market Fund (including
realized and unrealized gains and losses on its portfolio securities) are
declared as a dividend each time the net income of the Fund is determined (see
'Dividends, Distributions and Taxes'), the net asset value per share of the Fund
normally remains at $1.00 per share immediately after each such determination
and dividend declaration.
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
Fund 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 Mark) Service ('MLSPS'), to value securities held by the High
Current Income Fund 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
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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, 1995, High Current Income Fund paid MLSPS $10,932.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. Operations of the High
Current Income Fund commenced on April 20, 1982. The Domestic Money Market and
Global Strategy Focus Funds commenced operations on February 20 and February 28,
1992, respectively. The Basic Value Focus Fund commenced operations on July 1,
1993. The authorized capital stock of the Company consists of 3,300,000,000
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 1,300,000,000 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 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 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.
The organizational expenses of each of the Company's Funds are paid by the
Investment Adviser. The Investment Adviser is reimbursed by its affiliate,
Merrill Lynch Life Insurance Company, 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.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of each of the Funds.
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TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's
transfer agent and is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. MLFDS will
receive an annual fee of $5,000 per 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 SEC 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 26, 1996, 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 SEC 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 Global Strategy Focus 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 Global Strategy Focus 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
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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 (and the Domestic Money Market Fund for
other than temporary or defensive purposes), each of the Funds may invest in
commercial paper (including variable amount master demand notes and insurance
company funding agreements), 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 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.
For temporary or defensive purposes, the Global Strategy Focus 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
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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.'
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
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generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
Options on Portfolio Securities. Each of the Basic Value Focus and Global
Strategy 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.
The Global Strategy Focus Fund 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. The 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. The Fund may engage in closing transactions in order to terminate
put options that it has written.
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The Global Strategy Focus Fund 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. The 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 Global Strategy Focus Fund 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 Fund 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 Global Strategy Focus
Fund may purchase and sell stock index futures contracts and financial futures
contracts to hedge its portfolio. The Fund 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 Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities market and anticipate a significant market advance,
it 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 Fund intends to purchase. A stock index or financial futures contract
is a bilateral agreement pursuant to which the Fund 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 Fund may engage in transactions in stock index
futures contracts based on broad market indexes or on indexes on industry or
market segments. The 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 Fund's 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 Global Strategy Focus Fund is
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
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currencies and the United States dollar. 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 Fund 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 their 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 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 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 they
anticipate.
The Fund is 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 Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund 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 Fund 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 Fund 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 Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar.
The Fund will not speculate in foreign currency options or futures.
Accordingly, the Fund 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 Fund 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 Fund will direct its 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 Global Strategy Focus Fund may also
purchase and write call and put options on futures contracts in connection with
its hedging activities. Generally, these strategies are utilized under the same
market conditions (i.e., conditions relating to specific types of investments)
in which the Fund enters into futures transactions. The Fund 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 Fund 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 Fund intends to purchase are denominated. Limitations on transactions in
options on futures contracts are described below.
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Over-the-Counter Options. The Global Strategy Focus Fund 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 Fund 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 Fund will engage in OTC options only with financial
institutions 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 the Global
Strategy Focus Fund's 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 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 the 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.
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APRIL 26, 1996
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 are sold to separate accounts ('Separate Accounts')
of certain insurance companies (the 'Insurance Companies') including Merrill
Lynch Life Insurance Company ('MLLIC') and ML Life Insurance Company of New York
('ML of New York') to fund benefits under variable annuity contracts (the
'Variable Annuity Contracts') and/or variable life insurance contracts (together
with the Variable Annuity Contracts, the 'Contracts') issued by such companies.
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 26, 1996 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............... 34
Investment Advisory Arrangements........ 36
Determination of Net Asset Value........ 39
Portfolio Transactions and Brokerage.... 40
Redemption of Shares.................... 42
Dividends, Distributions and Taxes...... 42
Distribution Arrangements............... 43
Performance Data........................ 43
Additional Information.................. 45
Independent Auditors' Report............ 46
Financial Statements.................... 47
</TABLE>
2
<PAGE>
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 its investment policies and prudent
investment management, and capital appreciation to the extent consistent with
the foregoing objective; the Fund invests 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 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.
3
<PAGE>
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 FUND
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 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.
4
<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 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 FUND
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 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
<PAGE>
(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 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).
6
<PAGE>
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 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
7
<PAGE>
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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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 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 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.
8
<PAGE>
(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.
(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%
9
<PAGE>
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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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 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.
10
<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; 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 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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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.
11
<PAGE>
(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).
(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
12
<PAGE>
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 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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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.
13
<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 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 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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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.)
14
<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 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).
15
<PAGE>
(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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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.
(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
16
<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 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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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 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.
17
<PAGE>
(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.
(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.
18
<PAGE>
(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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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, 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.
19
<PAGE>
(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.
(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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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
20
<PAGE>
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.
(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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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).
21
<PAGE>
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.
(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
22
<PAGE>
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. 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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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).
23
<PAGE>
(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 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, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(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).
24
<PAGE>
(2) Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under the
laws of certain countries will not be deemed the making of investments for the
purpose of exercising control or management.
(3) Purchase securities of other investment companies, except to the extent
permitted by applicable law.
(4) Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may 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:
(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
25
<PAGE>
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 Investment Adviser or any subsidiary thereof each owning beneficially
more than 1/2 of 1% of the securities of such issuer own in the aggregate more
than 5% of the securities of such issuer.
RESTRICTIONS APPLICABLE 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.)
(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.
26
<PAGE>
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 Adviser 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 THE 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.
(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.
(11) Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 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
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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.
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
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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 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
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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 basis of the security will be adjusted by the
amount of the commitment fee. In the event the security is not issued, the
commitment fee will be recorded as income on the expiration date of the standby
commitment.
Asset-Based Securities. As described in the Prospectus, the Natural
Resources Focus Fund may invest in debt securities, preferred stocks or
convertible securities, the principal amount, redemption terms or conversion
terms of which are related to the market price of some natural resource asset
such as gold bullion. These securities are referred to as 'asset-based
securities.'
The Fund will not acquire asset-based securities for which no established
secondary trading market exists if at the time of acquisition more than 5% of
its total assets are invested in securities which are not readily marketable.
The Fund may invest in asset-based securities without limit when it has the
option to put such securities to the issuer or a stand-by bank or broker and
received the principal amount or redemption price thereof less transaction costs
on no more than seven days' notice or when the Fund has the right to convert
such securities into a readily marketable security in which it could otherwise
invest upon not less than seven days' notice.
The asset-based securities in which the Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal) rates.
The Fund's holdings of such securities therefore may not generate appreciable
current income, and the return from such securities primarily will be from any
profit on the sale, maturity or conversion thereof at a time when the price of
the related asset is higher than it was when the Fund purchased such securities.
Writing of Covered Options. The Quality Equity Fund, Flexible Strategy
Fund, Natural Resources Focus Fund, American Balanced Fund, Global Strategy
Focus Fund, Basic Value Focus Fund, World Income Focus Fund, Global Utility
Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus
Fund and International Bond Fund may from time to time write covered call
options on their portfolio securities. A covered call option is an option where
the Fund owns the underlying securities. By writing a covered call option, the
Fund, in return for the premium income realized from the sale of the option, may
give up the opportunity to profit from a price increase in the underlying
security above the option exercise price. In addition, the Fund will not be able
to sell the underlying security until the option expires or is exercised or the
Fund effects a closing purchase transaction as described below. If the option
expires unexercised, or is closed out at a profit, the Fund realizes a gain
(short-term capital gain for federal income tax purposes) on the option which
may offset all or a part of a decline in the market price of the underlying
security during the option period. The Quality Equity Fund and the Basic Value
Focus Fund may not write options on underlying securities exceeding 15% of the
value of their total assets.
Each of the Natural Resources Focus, Global Strategy Focus, World Income
Focus, Global Utility Focus, International Equity Focus, International Bond and
Developing Capital Markets Focus Funds also may write put options, which give
the holder of the option the right to sell the underlying security to the Fund
at the stated exercise price. The Fund will receive a premium for writing a put
option which increases the Fund's return. A Fund will write only covered put
options which means that so long as the Fund is obligated as the writer of the
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option, it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. A Fund may engage in closing transactions in order to terminate put
options that it has written.
Exchange-traded options are issued by The Options Clearing Corporation (the
'Clearing Corporation') and are currently traded on the Chicago Board Options
Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange, and Midwest Stock Exchange. An option gives the purchaser of an option
the right to buy, and obligates the writer (seller) to sell, the underlying
security at the exercise price during the option period. The maximum term of an
option is nine months. For writing an option, the Funds receive a premium, which
is the price of such option on the Exchange on which it is traded. The exercise
price of the option may be below, equal to or above the current market value of
the underlying security at the time the option was written.
A Fund may terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
The cost of such closing purchase transaction may be greater than the premium
received upon the original option, in which case a Fund will have incurred a
loss in the transaction. An option may be closed out only on an exchange which
provides a secondary market for an option of the same series and there is no
assurance that a secondary market will exist for any particular option at any
specific time. In the event a Fund is unable to effect a closing purchase
transaction, it will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the Fund will be subject to the risk of market decline in the
underlying security during such period. A Fund will write an exchange-traded
option on a particular security only if management believes that a secondary
market will exist on an exchange for options of the same series which will
permit the Fund to make a closing purchase transaction in order to close out its
position.
Writing options involves risks of possible unforeseen events which can be
disruptive to the option markets or could result in the institution of certain
procedures including restriction of certain types of orders.
Purchasing Options. The Natural Resources Focus, Global Strategy Focus,
World Income Focus, Global Utility Focus, International Equity Focus, Developing
Capital Markets Focus and International Bond Funds, each may purchase put
options in connection with its hedging activities. By buying a put, these Funds
have the right to sell the underlying securities at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put expires. Prior to its expiration, a put option may be
sold in a closing sale transaction and profit or loss from the sale will depend
on whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options. The Natural Resources Focus, Global Strategy Focus,
World Income Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds may purchase and write exchange-traded
call options and put options on stock indexes for the purpose of hedging the
Funds' investment 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
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to correctly predict movements in the direction of the stock market generally or
of a particular industry or market segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Stock Index and Financial Futures. The Natural Resources Focus, Global
Strategy Focus, World Income Focus, Global Utility Focus, International Equity
Focus, Developing Capital Markets Focus and International Bond Funds will only
engage in transactions in stock index or financial futures to hedge its
investment portfolios. The Funds may sell stock index or financial futures
contracts in anticipation of or during a market decline in an endeavor to offset
the decrease in market value of the Funds' securities portfolio that would
otherwise result from a market decline. When the Funds are not fully invested in
the securities market and anticipate a significant market advance, they may
purchase stock index or financial futures in order to gain rapid market exposure
that may in part or entirely offset increases in the cost of the securities that
the Funds intend to purchase. No purchase of stock index or financial futures
will be made, however, unless the Funds intend to purchase securities in
approximately the amount of the market value of the stocks represented by the
stock index or financial futures purchased and the Funds have identified the
cash or cash equivalents needed to make such a purchase. An amount of cash and
cash equivalents will be deposited in a segregated account with the Company's
Custodian so that the amount so segregated, plus the initial and variation
margin held in the account of its broker, will collateralize the Funds'
positions in stock index or financial futures.
Forward Foreign Exchange Transactions. The Natural Resources Focus, Global
Strategy Focus, World Income Focus, Global Utility Focus, International Equity
Focus, Developing Capital Markets Focus and International Bond Funds are
authorized to deal in forward foreign exchange between currencies of the
different countries in which they will invest and multinational currency units
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date (up to one
year) and price at the time of the contract. A Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the purchase or
sale of one forward foreign currency for another currency with respect to
portfolio security positions denominated or quoted in such foreign currency to
offset the effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of such currency relative to the U.S. dollar. In this
situation, the Fund also may, for example, enter into a forward contract to sell
or purchase a different foreign currency for a fixed U.S. dollar amount where it
is believed that the U.S. dollar value of the currency to be sold or bought
pursuant to the forward contract will fall or rise, as the case may be, whenever
there is a decline or increase, respectively, in the U.S. dollar value of the
currency in which portfolio securities of the Fund are denominated (this
practice being referred to as a 'cross-hedge'). A Fund will not speculate in
forward foreign exchange. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such transactions also preclude
the opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for a Fund to hedge against a devaluation that
is so generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
Call Options on Futures Contracts. A call option on a futures contract
provides the purchaser with the right, but not the obligation, to enter into a
'long' position in the underlying futures contract at any time up to the
expiration of the option. The purchase of an option on a futures contract
presents more limited risk than purchasing the underlying futures contract.
Depending on the price of the option compared to either the futures contract
upon which it is based, or the underlying securities or currency, exercise of
the option may or may not be less risky than ownership of the futures contract
or underlying securities or currency. Like the purchase of a futures contract,
the National Resources Focus, Global Strategy Focus, World Income Focus, Global
Utility Focus, International Equity Focus, Developing Capital Markets Focus and
International Bond Funds will purchase a call option on a futures contract to
hedge against the appreciation of securities resulting from a market advance or
appreciation of securities denominated in foreign currencies resulting from
strengthening of the currency which the Fund intends to purchase.
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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 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.
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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 (63)--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 & Co., Inc. ('ML&Co.') since
1990; Director of the Distributor.
WALTER MINTZ (67)--Director--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982.
MELVIN R. SEIDEN (65)--Director--780 Third Avenue, Suite 2502, 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 (62)--Director--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Principal of Fernwood Associates (financial consultants).
JOE GRILLS (61)--Director--183 Soundview Lane, New Canaan, Connecticut
06840. Member of the Committee of Investment of Employee Benefit Assets of the
Financial Executives Institute ('CIEBA') since 1986, member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ('IBM') and Chief Investment
Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committee of the State of New York Common Retirement Fund; Director
Duke Management Company and LaSalle Street Fund.
ROBERT S. SALOMON, JR.(59)--Director--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman and
CEO of Salomon Brothers Asset Management from 1992 until 1995; Chariman of
Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991.
TERRY K. GLENN (55)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983, Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
NORMAN HARVEY (62)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982.
PETER A. LEHMAN (37)--Senior Vice President(1)(2)--Vice President of the
Investment Adviser since 1994 and employee of the Investment Adviser since 1992.
N. JOHN HEWITT (61)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1980.
JOSEPH T. MONAGLE, JR. (47)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser since 1990; Vice President of MLAM from 1978
to 1990.
CHRISTOPHER G. AYOUB (40)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1985; Assistant Vice President from 1984 to 1985 and an
employee since 1982.
DONALD C. BURKE (35)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
VINCENT T. LATHBURY, III (54)--Vice President(1)(2)--Vice President of the
Investment Adviser and FAM and Portfolio Manager of the Investment Adviser and
FAM since 1982.
FREDRIC LUTCHER (47)--Vice President(1)(2)--Vice President of the
Investment Adviser 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.
34
<PAGE>
THOMAS R. ROBINSON (52)--Vice President(1)(2)--Senior Portfolio Manager of
the Investment Adviser since November 1995; Manager of International Equity
Strategy of ML & Co.'s Global Securities Research and Economics Group from 1989
to 1995.
KEVIN RENDINO (29)--Vice President(1)(2)--Vice President of the Investment
Adviser since December 1993; Senior Research Analyst from 1990 to 1992;
Corporate Analyst from 1988 to 1990.
WALTER D. ROGERS (53)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1987; Vice President of Continental Insurance Asset
Management from 1984 to 1987.
GRACE PINEDA (38)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1989. Prior to joining the Investment Adviser, Ms. Pineda was a
portfolio manager with Clemente Capital, Inc.
ANDREW JOHN BASCAND (33)--Vice President(1)(2)--Director of Merrill Lynch
Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global
Asset Management Limited since 1994; Senior Economist of A.M.P. Asset Management
plc in London from 1992 to 1993 and Chief Economist of A.M.P. Investments (NZ)
in New Zealand from 1989 to 1991; Economic Adviser to the Chief Economist of the
Reserve Bank of New Zealand from 1987 to 1989.
ROBERT PARISH (40)--Vice President(1)(2)--Vice President and Portfolio
Manager of the Investment Adviser since 1991; Portfolio Manager of Templeton
International from 1986 to 1991 and Vice President thereof from 1989.
JAY C. HARBECK (61)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1986.
ALDONA A. SCHWARTZ (47)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1991 and an employee of the Investment Adviser since
1986.
GERALD M. RICHARD (46)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser 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.
IRA P. SHAPIRO (33)--Secretary(1)(2)--Attorney associated with the
Investment Adviser and FAM since 1993. Prior to 1993 Mr. Shapiro was an attorney
in private practice.
- ------------------
(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.
The following table sets forth for the fiscal year ended December 31, 1995,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies (including the Company) advised by the Investment Adviser
and its affiliate, FAM ('MLAM/FAM Advised Funds') to the non-interested
Directors:
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE PENSION OR RETIREMENT COMPANY AND MLAM/FAM
COMPENSATION BENEFITS ACCRUED AS PART ADVISED FUNDS PAID TO
NAME OF DIRECTOR FROM COMPANY OF COMPANY EXPENSE DIRECTORS(1)
------------ ------------------------ -----------------------
<S> <C> <C> <C>
Walter Mintz(1) $ 15,500 NONE $ 153,883
Melvin R. Seiden(1) 15,500 NONE 153,883
Stephen B. Swensrud(1) 15,500 NONE 161,883
Joe Grills(1) 15,500 NONE 153,883
Robert S. Salomon, Jr.(1)* --0-- NONE --0--
Harry Woolf**(1) 15,500 NONE 153,883
</TABLE>
- ------------------
* Mr. Salomon was elected as a Director of the Company on January 16, 1996
and, accordingly, received no compensation from the Company for the year
ended December 31, 1995.
** Mr. Woolf retired as a Director of the Company on December 31, 1995.
(1) In addition to the Company, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Mintz (21 funds and portfolios); Mr.
Seiden (21 funds and portfolios); Mr. Salomon (21 funds and portfolios); Mr.
Swensrud (31 funds and portfolios); Mr. Grills (21 funds and portfolios) and
Mr. Woolf prior to his retirement, effective December 31, 1995, pursuant to
the Fund's retirement policy (21 funds and portfolios).
35
<PAGE>
Mr. Zeikel and the officers of the Company owned on February 29, 1996 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 $5,000 per year plus $1,250 per quarterly
meeting of the Board of Directors attended, $5,000 per year for serving on the
Audit Committee of the Board of Directors plus $1,250 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, 1995, such fees and expenses aggregated $79,458.
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 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. 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; Terry K. Glenn, Executive Vice President; Vincent
R. Giordano, Senior Vice President; Elizabeth Griffin, Senior Vice President;
Norman R. Harvey, Senior Vice President; N. John Hewitt, Senior Vice President;
Philip L. Kirstein, Senior Vice President, General Counsel, Director and
Secretary; Ronald M. Kloss, Senior Vice President; Richard L. Reller, Senior
Vice President; Stephen M. M. Miller, Senior Vice President; Joseph T. Monagle,
Senior Vice President; Gerald M. Richard, Senior Vice President and Treasurer;
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 and International Equity Focus 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 and Intermediate Government Bond Fund, 0.60% of the average
daily net assets of the Basic Value Focus Fund, World Income Focus Fund, Global
Utility Focus Fund and International Bond Fund, 1.00% of the average daily net
assets of the Developing Capital Markets Focus Fund, and at the following annual
rates with respect to the other Funds:
36
<PAGE>
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 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%
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>
The above rates are applied to the average daily net assets of each Fund,
with reduced rates applicable to portions of the assets of each Fund to the
extent that the aggregate of the average daily net assets of the combined Funds
exceed $250 million, $500 million and $750 million (each such amount being a
breakpoint level). The portion of the assets of a Fund to which the rate at each
breakpoint level applies will be determined on a 'uniform percentage' basis. The
uniform percentage applicable to a breakpoint level is determined by dividing
the amount of the aggregate of the average daily net assets of individual Funds
that falls within that breakpoint level by the aggregate of the average daily
net assets of such Funds. The amount of the fee for a Fund at each breakpoint
level is determined by multiplying the average daily net assets of that Fund by
the uniform percentage applicable to that breakpoint level and multiplying the
product by the advisory fee rate.
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 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.
37
<PAGE>
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, 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. For the fiscal year ended December 31, 1995, the
Investment Adviser earned fees of $21,376,742 and reimbursed $49,477 for the
Developing Capital Markets Focus Fund, $190,005 for the Intermediate Government
Bond Fund, and $112,261 for the International 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 10, 1996. 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 administrative services agreements
with certain Insurance Companies, including 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 such Insurance
Companies.
Payment of Expenses. The Investment Advisory Agreements obligate the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Company connected with investment and economic research, trading and investment
management of the Funds, as well as the fees of all directors of the Company who
are affiliated persons of Merrill Lynch & Co., Inc. or any of its subsidiaries.
Each Fund will pay all other expenses incurred in its operation, including a
portion of the Company's general administrative expenses allocated on the basis
of the Fund's asset size. Expenses that will be borne directly by the Funds
include redemption expenses, expenses of portfolio transactions, shareholder
servicing costs, expenses of registering the shares under federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), interest, certain taxes, charges of the Custodian and Transfer Agent and
other expenses attributable to a particular Fund. Expenses which will be
allocated on the basis of size of the respective Funds include directors' fees,
legal expenses, state franchise taxes, auditing services, costs of printing
proxies and stock certificates, Securities and Exchange Commission fees,
accounting costs and other expenses properly payable by the Company and
allocable on the basis of size of the respective Funds. Accounting services are
provided for the Company by the Investment Adviser, and the Company reimburses
the Investment Adviser for its costs in connection with such services. For the
year ended December 31, 1995, the amount of such reimbursement was $853,161.
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.
38
<PAGE>
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 the Separate accounts of the Insurance Companies
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 the Insurance Companies 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 the Insurance Companies 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.
39
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
If the securities in which a particular Fund of the Company invests are
traded primarily in the over-the-counter market, where possible, the Fund will
deal directly with the dealers who make a market in the securities involved,
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principals for their own account.
On occasions, securities may be purchased directly from the issuer. Bonds and
money market securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. The cost of executing
portfolio securities transactions of each Fund will primarily consist of
brokerage commissions or underwriter or dealer spreads. Under the Investment
Company Act of 1940, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of the
Company's portfolio securities unless an exemptive order allowing such
transactions is obtained from the Securities and Exchange Commission. Since
over-the-counter transactions are usually principal transactions, affiliated
persons of the Company, including Merrill Lynch Government Securities Inc.
('GSI'), Merrill Lynch Money Markets Inc. ('MMI') and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ('Merrill Lynch'), may not serve as the Company's
dealer in connection with such transactions except pursuant to exemptive orders
from the Securities and Exchange Commission, such as the one described below.
However, affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis, subject to the
Company's policy of obtaining best price and execution. The Company may not
purchase securities from any underwriting syndicate of which Merrill Lynch is a
member except in accordance with rules and regulations under the Investment
Company Act of 1940.
The Securities and Exchange Commission has issued an exemptive order
permitting the Company to conduct principal transactions with respect to the
Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S.
Government and government agency securities, and certain other money market
securities, subject to a number of conditions, including conditions designed to
insure that the prices to the Funds available from GSI and MMI are equal to or
better than those available from other sources. GSI and MMI have informed the
Company that they will in no way, at any time, attempt to influence or control
the activities of the Company or the Investment Adviser in placing such
principal transactions. The exemptive order allows GSI and MMI to receive a
dealer spread on any transaction with the Company no greater than their
customary dealer spreads for transactions of the type involved. Certain court
decisions have raised questions as to whether investment companies should seek
to 'recapture' brokerage commissions and underwriting and dealer spreads by
effecting their purchases and sales through affiliated entities. In order to
effect such an arrangement, the Company would be required to seek an exemption
from the Investment Company Act so that it could engage in principal
transactions with affiliates. The Board of Directors has considered the
possibilities of seeking to recapture spreads for the benefit of the Company
and, after reviewing all factors deemed relevant, has made a determination not
to seek such recapture at this time. The Board will reconsider this matter from
time to time. The Company will take such steps as may be necessary to effect
recapture, including the filing of applications for exemption under the
Investment Company Act of 1940, if the Directors should determine that recapture
is in the best interests of the Company or otherwise required by developments in
the law.
While the Investment Adviser seeks to obtain the most favorable net results
in effecting transactions in the Funds' portfolio securities, dealers who
provide supplemental investment research of the Investment Adviser may receive
orders for transactions by the Funds. Such supplemental research services
ordinarily consist of assessments and analysis of the business or prospects of a
company, industry or economic sector. If, in the judgment of the Investment
Adviser, a particular Fund or Funds will be benefited by such supplemental
research services, the Investment Adviser is authorized to pay spreads or
commissions to brokers or dealers furnishing such services which are in excess
of spreads or commissions which another broker or dealer may charge for the same
transaction. Information so received will be in addition to and not in lieu of
the services required to be 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, 1995, the Company paid brokerage
40
<PAGE>
commissions of $5,789,335, of which $264,999 was paid to Merrill Lynch. 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.
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 stated for the Domestic Money Market and Reserve Assets
Funds.
Below are portfolio turnover rates for each of the Funds for the fiscal
years ended December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C>
American Balanced Fund.................. 38.40% 35.36%
Basic Value Focus Fund.................. 74.10% 60.55%
Developing Capital Markets Focus Fund... 62.53% 29.79%*
Equity Growth Fund...................... 96.79% 88.48%
Flexible Strategy Fund.................. 135.83% 65.54%
Global Strategy Focus Fund.............. 27.23% 21.03%
Global Utility Focus Fund............... 11.05% 9.52%
High Current Income Fund................ 41.60% 51.88%
Intermediate Government Bond Fund....... 45.39% 103.03%*
International Bond Fund................. 2.23% 152.20%*
International Equity Focus Fund......... 100.02% 58.84%
Natural Resources Focus Fund............ 30.15% 10.94%
Prime Bond Fund......................... 90.12% 139.89%
Quality Equity Fund..................... 140.32% 60.57%
World Income Focus Fund................. 132.57% 117.58%
</TABLE>
- ------------------
* For the period from May 2, 1994 (commencement of operations) to December
31, 1994.
41
<PAGE>
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.
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
shareholders in excess of the net dividend credited to such shareholders for a
period. In such a case, such shareholders' 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
42
<PAGE>
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. 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 10, 1996 and will continue in effect until June 30, 1997.
The Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreements described above.
PERFORMANCE DATA
From time to time the average annual total return and other total return
data, as well as yield, of one or more of the Company's Funds may be included in
advertisements or information furnished to present or prospective Contract
owners. Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. Average annual
total return and yield are determined in accordance with formulas specified by
the Securities and Exchange Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses.
The Reserve Assets Fund normally computes its annualized yield by
determining the net change for a seven-day base period, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, dividing the net change in account
value by the value of the account 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.
43
<PAGE>
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, 1995......... 20.14% $ 1,201.40
Five Years Ended December 31, 1995....... 9.86 1,600.10
Ten Years Ended December 31, 1995........ 8.84 2,332.10
HIGH CURRENT INCOME FUND:
One Year Ended December 31, 1995......... 17.21 1,172.10
Five Years Ended December 31, 1995....... 17.98 2,285.90
Ten Years Ended December 31, 1995........ 11.46 2,960.30
QUALITY EQUITY FUND:
One Year Ended December 31, 1995......... 22.61 1,226.10
Five Years Ended December 31, 1995....... 13.16 1,855.20
Ten Years Ended December 31, 1995........ 12.73 3,314.60
EQUITY GROWTH FUND:
One Year Ended December 31, 1995......... 45.90 1,459.00
Five Years Ended December 31, 1995....... 18.93 2,379.40
Ten Years Ended December 31, 1995........ 8.84 2,332.50
FLEXIBLE STRATEGY FUND:
One Year Ended December 31, 1995......... 17.40 1,174.00
Five Years Ended December 31, 1995....... 11.16 1,696.90
Inception* Through December 31, 1995..... 9.90 2,491.80
NATURAL RESOURCES FOCUS FUND:
One Year Ended December 31, 1995......... 12.65 1,126.50
Five Years Ended December 31, 1995....... 5.34 1,297.00
Inception* Through December 31, 1995..... 4.31 1,377.80
AMERICAN BALANCED FUND:
One Year Ended December 31, 1995......... 20.81 1,208.10
Five Years Ended December 31, 1995....... 10.88 1,675.60
Inception* Through December 31, 1995..... 10.17 2,085.30
GLOBAL STRATEGY FOCUS FUND:
One Year Ended December 31, 1995......... 10.60 1,106.00
Inception* Through December 31, 1995..... 8.20 1,353.70
BASIC VALUE FOCUS FUND:
One Year Ended December 31, 1995......... 25.49 1,254.90
Inception* Through December 31, 1995..... 14.61 1,406.50
WORLD INCOME FOCUS FUND:
One Year Ended December 31, 1995......... 16.69 1,166.90
Inception* Through December 31, 1995..... 6.98 1,183.70
</TABLE>
44
<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
----------------- ----------------
<S> <C> <C>
GLOBAL UTILITY FOCUS FUND:
One Year Ended December 31, 1995......... 24.33% $ 1,243.30
Inception* Through December 31, 1995..... 8.11 1,215.40
INTERNATIONAL EQUITY FOCUS FUND:
One Year Ended December 31, 1995......... 5.48 1,054.80
Inception* Through December 31, 1995..... 6.47 1,169.80
DEVELOPING CAPITAL MARKETS FOCUS FUND:
One Year Ended December 31, 1995......... (1.08) 989.20
Inception* Through December 31, 1995..... (3.60) 940.70
INTERNATIONAL BOND FUND:
One Year Ended December 31, 1995......... 16.35 1,163.50
Inception* Through December 31, 1995..... 9.76 1,167.80
INTERMEDIATE GOVERNMENT BOND FUND:
One Year Ended December 31, 1995......... 14.83 1,148.30
Inception* Through December 31, 1995..... 9.82 1,168.80
</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.
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.
45
<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, 1995, the related statements of operations for the year then ended and
changes in net assets for each of the periods in the two-year period then ended,
and the financial highlights for each of the periods presented. These financial
statements and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1995, by correspondence with the custodians 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, 1995, 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 20, 1996
46
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 20,000 Boeing Co.. . . . . . . . . . . . . . $ 1,465,078 $ 1,567,500 0.7%
42,000 United Technologies Corp. . . . . . . 2,368,095 3,984,750 1.9
--------------- --------------- -----------
3,833,173 5,552,250 2.6
- -------------------------------------------------------------------------------------------------------------------------------
APPLIANCES 60,000 Whirlpool Corp.. . . . . . . . . . . 3,469,400 3,195,000 1.5
- -------------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 120,000 Ford Motor Co.. . . . . . . . . . . . 3,234,604 3,480,000 1.6
- -------------------------------------------------------------------------------------------------------------------------------
BANKING 45,000 Bank of New York, Inc.. . . . . . . . 2,126,624 2,193,750 1.0
- -------------------------------------------------------------------------------------------------------------------------------
CHEMICALS 55,100 Eastman Chemical Co.. . . . . . . . . 2,468,862 3,450,638 1.6
- -------------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 40,000 General Motors Corp. (Class E). . . . 2,058,814 2,080,000 1.0
- -------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC/INSTRUMENTS 57,900 Corning Inc.. . . . . . . . . . . . . 1,598,515 1,852,800 0.9
27,000 Texas Instruments Inc.. . . . . . . . 1,621,890 1,397,250 0.7
--------------- --------------- -----------
3,220,405 3,250,050 1.6
- -------------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 14,800 +California Energy Co., Inc.. . . . . 251,600 288,600 0.1
- -------------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 197,792 Wheelabrator Technologies, Inc.. . . 3,340,872 3,313,016 1.6
- -------------------------------------------------------------------------------------------------------------------------------
HARDWARE PRODUCTS 67,700 Stanley Works Co. (The). . . . . . . 2,802,105 3,486,550 1.6
- -------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE 172,400 +Humana, Inc.. . . . . . . . . . . . . 2,449,466 4,719,450 2.2
- -------------------------------------------------------------------------------------------------------------------------------
INSURANCE 30,000 Aetna Life & Casualty Co.. . . . . . 2,232,630 2,077,500 1.0
50,000 Allstate Corp.. . . . . . . . . . . . 2,046,610 2,056,250 1.0
43,200 National Re Corp.. . . . . . . . . . 1,400,864 1,641,600 0.8
--------------- --------------- -----------
5,680,104 5,775,350 2.8
- -------------------------------------------------------------------------------------------------------------------------------
1,726,248 1,586,250 0.7
METALS 30,000 Aluminum Co. of America. . . . . . .
- -------------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 18,100 Enron Corp.. . . . . . . . . . . . . 684,228 690,062 0.3
- -------------------------------------------------------------------------------------------------------------------------------
PETROLEUM 27,000 Pennzoil Co.. . . . . . . . . . . . . 1,067,242 1,140,750 0.5
- -------------------------------------------------------------------------------------------------------------------------------
PETROLEUM & EQUIPMENT SERVICES 160,300 Dresser Industries, Inc.. . . . . . . 3,300,993 3,907,312 1.8
- -------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 90,000 Abbott Laboratories. . . . . . . . . 2,827,672 3,757,500 1.8
101,000 Merck & Co., Inc.. . . . . . . . . . 3,482,470 6,640,750 3.1
--------------- --------------- -----------
6,310,142 10,398,250 4.9
- -------------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 67,400 Eastman Kodak Co.. . . . . . . . . . 2,909,430 4,515,800 2.1
- -------------------------------------------------------------------------------------------------------------------------------
RETAIL 41,000 Sears, Roebuck & Co.. . . . . . . . . 1,634,436 1,599,000 0.8
- -------------------------------------------------------------------------------------------------------------------------------
SCIENTIFIC EQUIPMENT 80,000 Fisher Scientific International, Inc. 2,468,552 2,670,000 1.3
- -------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 67,800 AT&T Corp.. . . . . . . . . . . . . . 3,588,830 4,390,050 4.1
59,600 Bell Atlantic Corp.. . . . . . . . . 3,418,314 3,985,750 1.9
--------------- --------------- -----------
6,807,144 8,375,800 4.0
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 61,844,444 75,667,878 35.6
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT US GOVERNMENT OBLIGATIONS COST (NOTE 1A) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US TREASURY NOTES US Treasury Notes:
$ 12,550,000 6.25% due 2/15/2003. . . . . . . . . . $ 12,863,703 $ 13,093,164 6.1%
8,750,000 5.75% due 8/15/2003. . . . . . . . . . 8,756,820 8,855,263 4.2
11,300,000 7.25% due 5/15/2004. . . . . . . . . . 11,427,203 12,543,000 5.9
30,500,000 7.25% due 8/15/2004. . . . . . . . . . 30,594,766 33,916,915 15.9
10,000,000 7.875% due 11/15/2004. . . . . . . . . 10,003,750 11,575,000 5.4
19,500,000 6.50% due 8/15/2005. . . . . . . . . . 19,528,063 20,773,545 9.8
---------------- ---------------- --------------
93,174,305 100,756,887 47.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS 93,174,305 100,756,887 47.3
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* 8,837,000 General Electric Capital Corp.,
5.90% due 1/02/1996. . . . . . . . . . 8,831,207 8,831,207 4.1
2,000,000 Sandoz Corp., 5.75% due 1/29/1996. . . 1,990,097 1,990,097 0.9
---------------- ---------------- --------------
10,821,304 10,821,304 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & Federal National Mortgage Association:
AGENCY OBLIGATIONS* 17,000,000 5.44% due 1/23/1996. . . . . . . . . . 16,935,778 16,935,778 8.0
3,000,000 5.45% due 2/02/1996. . . . . . . . . . 2,984,104 2,984,104 1.4
---------------- ---------------- --------------
19,919,882 19,919,882 9.4
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 30,741,186 30,741,186 14.4
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . $ 185,759,935 207,165,951 97.3
----------------
----------------
OTHER ASSETS LESS LIABILITIES. . . . . 5,746,263 2.7
---------------- --------
NET ASSETS. . . . . . . . . . . . . . $ 212,912,414 100.0%
---------------- --------
---------------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
* 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.
48
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
DISCOUNT FROM BOOK VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
METALS--NON FERROUS 200,000 ASARCO Inc.. . . . . . . . . . . . . . $ 5,560,078 $ 6,400,001 2.1%
BANKING 115,000 Bankers Trust New York Corp.. . . . . 7,324,748 7,647,500 2.5
HOME--BUILDERS 300,000 +Beazer Homes USA, Inc.. . . . . . . . 4,726,724 6,187,500 2.0
RETAIL 1,250,000 Charming Shoppes, Inc.. . . . . . . . 4,542,678 3,515,625 1.2
SAVINGS & LOANS 425,000 +Greater N.Y. Savings Bank. . . . . . . 3,903,636 4,993,750 1.6
SAVINGS & LOANS 350,000 Klamath First Bancorp, Inc.. . . . . . 4,558,580 4,725,000 1.5
TECHNOLOGY 892,500 +Micronics Computers, Inc.. . . . . . . 3,961,500 3,123,750 1.0
TECHNOLOGY 350,000 +Storage Technology Corp.. . . . . . . 8,993,541 8,356,250 2.7
OIL--REFINERS 600,000 Total Petroleum Ltd.. . . . . . . . . 6,950,309 5,850,000 1.9
STEEL 500,000 +WHX Corp.. . . . . . . . . . . . . . . 5,555,716 5,437,500 1.8
------------- ------------- -----
56,077,510 56,236,876 18.3
- ---------------------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
- ---------------------------------------------------------------------------------------------------------------------------------
OIL--DOMESTIC 400,000 +American Exploration Co.. . . . . . . 4,320,000 4,500,000 1.5
TEXTILE 300,000 +Burlington Industries, Inc.. . . . . . 3,402,116 3,937,500 1.3
TECHNOLOGY 450,000 +Computervision Corp.. . . . . . . . . 5,182,593 6,918,750 2.2
RESTAURANTS 400,000 Darden Restaurants, Inc.. . . . . . . 4,190,320 4,750,000 1.5
FARM & CONSTRUCTION EQUIPMENT 200,000 Deere & Co.. . . . . . . . . . . . . . 5,763,000 7,050,000 2.3
RETAIL 200,000 Dillard Department Stores Inc.. . . . 5,604,050 5,700,000 1.9
CAPITAL GOODS 55,000 Eaton Corp.. . . . . . . . . . . . . . 2,768,865 2,949,375 1.0
MEDICAL SERVICES 170,000 +Foundation Health Corp.. . . . . . . . 5,212,568 7,310,000 2.4
AUTOMOTIVE 115,000 General Motors Corp.. . . . . . . . . 4,897,034 6,080,625 2.0
FOREST PRODUCTS & PAPER 200,000 International Paper Co.. . . . . . . . 7,553,471 7,575,000 2.5
OIL & GAS PRODUCERS 400,000 +Swift Energy Co.. . . . . . . . . . . 3,428,253 4,800,000 1.6
TECHNOLOGY 450,000 +SyQuest Technology, Inc.. . . . . . . 6,081,628 4,443,750 1.4
INFORMATION PROCESSING 600,000 +Tandem Computers, Inc.. . . . . . . . 7,341,921 6,375,000 2.1
INSURANCE 120,000 TIG Holdings, Ltd.. . . . . . . . . . 2,212,475 3,420,000 1.1
INSURANCE 60,000 Travelers Inc.. . . . . . . . . . . . 2,164,264 3,772,500 1.2
STEEL 200,000 USX-US Steel Group. . . . . . . . . . 6,442,753 6,150,000 2.0
TECHNOLOGY 350,000 +Western Digital Corp.. . . . . . . . . 5,776,739 6,256,250 2.0
------------- ------------- ---------
82,342,050 91,988,750 30.0
- ---------------------------------------------------------------------------------------------------------------------------------
ABOVE-AVERAGE YIELD
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST 170,000 Bay Apartment Communities, Inc.. . . . 3,289,250 4,122,500 1.3
PHARMACEUTICALS 50,000 Bristol-Myers Squibb Co.. . . . . . . 3,266,500 4,293,750 1.4
REAL ESTATE INVESTMENT TRUST 150,000 Camden Property Trust. . . . . . . . . 3,552,388 3,581,250 1.2
TELECOMMUNICATIONS 200,000 Comsat Corp.. . . . . . . . . . . . . 4,502,407 3,725,000 1.2
REAL ESTATE INVESTMENT TRUST 150,000 Evans Withycombe Residential, Inc. 3,013,687 3,225,000 1.0
REAL ESTATE INVESTMENT TRUST 200,000 Felcor Suite Hotels, Inc.. . . . . . . 4,559,750 5,550,000 1.8
AUTOMOTIVE 150,000 Ford Motor Co.. . . . . . . . . . . . 4,269,630 4,350,000 1.4
OIL/DOMESTIC 400,000 Occidental Petroleum Corp.. . . . . . 8,263,747 8,550,000 2.8
CHEMICALS 75,000 Olin Corp.. . . . . . . . . . . . . . 5,103,379 5,568,750 1.8
FINANCIAL SERVICES 120,000 Student Loan Marketing Association. . 4,600,626 7,905,000 2.6
SAVINGS & LOANS 200,000 Washington Mutual Savings Bank. . . . 4,325,030 5,725,000 1.9
OIL/INTERNATIONAL 350,000 Yacimientos Petroliferos Fiscales S.A.
(ADR) (a). . . . . . . . . . . . . . . 6,701,840 7,568,750 2.5
------------- ------------- -----
55,448,234 64,165,000 20.9
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
SPECIAL SITUATIONS
- -----------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 410,000 +ADT Ltd. (ADR)(a). . . . . . . . . . . $ 4,023,839 $ 6,150,000 2.0%
ENVIRONMENTAL SERVICES 749,000 +Allwaste, Inc.. . . . . . . . . . . . 4,019,112 3,557,750 1.2
MEDICAL SERVICES 600,000 +Applied Bioscience International Inc.. 3,131,814 4,050,000 1.3
PHOTOGRAPHY 80,000 Eastman Kodak Co.. . . . . . . . . . . 3,807,057 5,360,000 1.7
TECHNOLOGY 410,000 +Exabyte Corp.. . . . . . . . . . . . . 5,727,299 5,996,250 2.0
INFORMATION PROCESSING 73,700 International Business Machines Corp.. 6,578,580 6,761,975 2.2
HOTELS 428,600 John Q. Hammons Hotels, Inc.. . . . . 5,770,642 3,964,550 1.3
RETAIL SPECIALTY 100,000 The Limited, Inc.. . . . . . . . . . . 1,883,236 1,737,500 0.6
STEEL 550,000 +Lone Star Technologies, Inc.. . . . . 4,005,548 6,050,000 2.0
TELECOMMUNICATIONS 200,000 MCI Communications Corp.. . . . . . . 4,374,687 5,225,000 1.7
PHARMACEUTICALS 20,000 Merck & Co., Inc.. . . . . . . . . . . 604,700 1,315,000 0.4
AUTO--RELATED 375,000 +National Auto Credit, Inc.. . . . . . 4,184,203 6,093,750 2.0
SEMICONDUCTORS 100,000 +National Semiconductor Corp.. . . . . 2,292,800 2,225,000 0.7
OIL--RELATED 400,000 +TETRA Technologies, Inc.. . . . . . . 3,882,680 6,950,000 2.3
RETAIL 400,000 Woolworth Corp.. . . . . . . . . . . . 5,519,879 5,200,000 1.7
-------------- -------------- ------
59,806,076 70,636,775 23.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS 253,673,870 283,027,401 92.3
- -----------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $ 4,000,000 Ciesco L.P., 5.70% due 1/11/1996. . . 3,991,767 3,991,767 1.3
4,000,000 Daimler-Benz AG, 5.72%
due 1/26/1996. . . . . . . . . . . . . 3,982,204 3,982,204 1.3
3,778,000 General Electric Capital Corp., 5.90%
due 1/02/1996. . . . . . . . . . . . . 3,775,523 3,775,523 1.2
4,000,000 National Fleet Corp., 5.57% due
2/23/1996. . . . . . . . . . . . . . . 3,965,342 3,965,342 1.3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER 15,714,836 15,714,836 5.1
- -----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 10,000,000 Federal National Mortgage Association,
OBLIGATIONS* 5.59% due 1/18/1996. . . . . . . . . 9,968,944 9,968,944 3.3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS 9,968,944 9,968,944 3.3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 25,683,780 25,683,780 8.4
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . $279,357,650 308,711,181 100.7
--------------
LIABILITIES IN EXCESS OF OTHER ASSETS. -- ---------- (2,248,288) (0.7)
----------- ------
NET ASSETS. . . . . . . . . . . . . . $306,462,893 100.0%
-------------- ------
-- ---------- -----
- -----------------------------------------------------------------------------------------------------------------------------
</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.
(a) American Depositary Receipts (ADR).
+ Non-income producing security.
See Notes to Financial Statements.
50
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE PERCENT OF
AFRICA INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH AFRICA BEVERAGE & TOBACCO 83,700 Rembrandt Group Ltd.. . . . . $ 561,187 $ 803,814 1.5%
15,000 South African Breweries Ltd.. 344,669 549,458 1.0
-- -------- -- -------- ---- ----
905,856 1,353,272 2.5
---------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 39,000 Nedcor Ltd.. . . . . . . . . 471,036 674,167 1.2
---------------------------------------------------------------------------------------------------------------
GOLD MINING 43,700 Beatrix Mines Ltd.. . . . . . 400,616 392,694 0.7
66,000 Kinross Mines Ltd. 707,287 620,250 1.1
-------- -------- ----
1,107,903 1,012,944 1.8
---------------------------------------------------------------------------------------------------------------
MINING 18,000 De Beers Consolidated
Mines Ltd. (ADR) (a). . . . . 454,723 545,754 1.0
33,900 Driefontein Consolidated Ltd.
(ADR) (a). . . . . . . . . . 484,124 419,513 0.8
-------- -------- ----
938,847 965,267 1.8
---------------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 6,000 ASA Ltd. (ADR) (a). . . . . . 281,052 222,750 0.4
22,000 The Morgan Stanley Africa
Investment Fund, Inc. (ADR)
(a). . . . . . . . . . . . . 254,320 283,250 0.5
18,000 New South Africa Fund, Inc.
(ADR) (a). . . . . . . . . . 257,580 270,000 0.5
18,000 Southern Africa Fund, Inc.
(ADR) (a). . . . . . . . . . 264,224 294,750 0.5
-- -------- -- -------- ---- ----
1,057,176 1,070,750 1.9
---------------------------------------------------------------------------------------------------------------
STEEL 403,499 South Africa Iron & Steel
Industrial Corp., Ltd.. . . 438,274 363,144 0.7
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH AFRICA 4,919,092 5,439,544 9.9
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AFRICA 4,919,092 5,439,544 9.9
- ----------------------------------------------------------------------------------------------------------------------------
EUROPE
- ----------------------------------------------------------------------------------------------------------------------------
GREECE BEVERAGE 14,400 Hellenic Bottling Co. S.A.. . 281,725 471,622 0.8
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GREECE 281,725 471,622 0.8
- ----------------------------------------------------------------------------------------------------------------------------
HUNGARY FOOD 2,065 Pick Szeged
Reszvenytarsasag (ADR)
(a) (d). . . . . . . . . . . 141,347 76,983 0.1
---------------------------------------------------------------------------------------------------------------
HEALTH/PERSONAL CARE 26,000 Gideon Richter (GDR) (b). . . 474,500 499,200 0.9
---------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 1,100 +Magyar TavKozlesi
Reszvenytarsasag
(Ordinary). . . . . . . . . . 174,885 168,326 0.3
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HUNGARY 790,732 744,509 1.3
- ----------------------------------------------------------------------------------------------------------------------------
POLAND MULTI--INDUSTRY 182,551 +Mostostal-Export S.A.. . . . 469,280 359,323 0.7
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
POLAND 469,280 359,323 0.7
- ----------------------------------------------------------------------------------------------------------------------------
PORTUGAL ENGINEERING & 32,500 Sociedade de Construcoes
CONSTRUCTION Soares de Costa S.A.. . . . . 550,438 369,744 0.7
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 550,438 369,744 0.7
- ----------------------------------------------------------------------------------------------------------------------------
RUSSIA MULTI--INDUSTRY 134,688 +Fleming Russia Securities
Fund (ADR) (a). . . . . . . . 1,198,948 740,784 1.3
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
RUSSIA 1,198,948 740,784 1.3
- ----------------------------------------------------------------------------------------------------------------------------
SRI LANKA DIVERSIFIED 6,500 John Keells Holdings Corp.
(GDR) (b). . . . . . . . . . 65,000 34,125 0.1
---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SRI LANKA 65,000 34,125 0.1
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
EUROPE VALUE PERCENT OF
(CONCLUDED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
TURKEY BUILDING MATERIALS 1,437,165 Alarko Holdings A.S.. . . . . $ 598,650 $ 581,992 1.1%
-------------------------------------------------------------------------------------------------------------
FOOD 9,269,000 +Dardanel Onentas Gida A.S.. . 608,632 405,998 0.7
-------------------------------------------------------------------------------------------------------------
INSURANCE 116,250 +Aksigorta A.S.. . . . . . . . 23,250 9,127 0.0
-------------------------------------------------------------------------------------------------------------
METAL FABRICATING 3,800,000 Eregli Demir Ve Celik
Fabrikalari T A.S.. . . . . . 507,414 314,050 0.6
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TURKEY 1,737,946 1,311,167 2.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
EUROPE 5,094,069 4,031,274 7.3
- -------------------------------------------------------------------------------------------------------------------------
LATIN
AMERICA
-------------------------------------------------------------------------------------------------------------
ARGENTINA OIL & RELATED 103,000 Compania Naviera Perez Companc
S.A.C.F.I.M.F.A.,
Class B. . . . . . . . . . . 494,603 545,845 1.0
20,800 Yacimientos Petroliferos
Fiscales S.A. (Sponsored)
(ADR) (a). . . . . . . . . . . 398,789 449,800 0.8
-- -------- -- -------- ---- ----
893,392 995,645 1.8
-------------------------------------------------------------------------------------------------------------
STEEL 129,000 Siderca S.A.. . . . . . . . . 100,461 125,118 0.2
-------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 8,500 Telefonica de Argentina S.A.
(Class B) (ADR) (a). . . . . 245,003 231,625 0.4
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ARGENTINA 1,238,856 1,352,388 2.4
- -------------------------------------------------------------------------------------------------------------------------
BRAZIL APPLIANCES 2,985,000 Brasmotor Group S.A.
(Preferred). . . . . . . . . 959,593 592,883 1.1
-------------------------------------------------------------------------------------------------------------
BANKING 1,064,349 Banco Bradesco S.A.
(ON Shares). . . . . . . . . . 7,568 9,310 0.0
45,520,000 Banco Bradesco S.A.
(Preferred). . . . . . . . . . 412,890 398,189 0.8
-------- -------- ----
420,458 407,499 0.8
-------------------------------------------------------------------------------------------------------------
BEVERAGE 1,900,000 Companhia Cervejaria
Brahma S.A. PN
(Preferred). . . . . . . . . . 643,289 782,154 1.4
-------------------------------------------------------------------------------------------------------------
FOODS 800,000 La Bombril S.A. PN (Preferred) 19,694 12,020 0.0
-------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 32,780 Telecomunicacoes Brasileiras
S.A.--Telebras PN (ADR)
(a). . . . . . . . . . . . . . 1,337,550 1,552,953 2.8
7,155,745 Telecomunicacoes Brasileiras
S.A.--Telebras PN
(Preferred). . . . . . . . . . 267,474 344,642 0.6
-------- -------- ----
1,605,024 1,897,595 3.4
-------------------------------------------------------------------------------------------------------------
UTILITIES 29,513 Companhia Energetica de
Minas Gerais S.A. (CEMIG)
(ADR) (a). . . . . . . . . . . 558,442 630,840 1.1
20,000 Companhia Energetica de
Minas Gerais S.A. (CEMIG)
(ADR) (a) (d). . . . . . . . . 426,315 427,500 0.8
-------- -------- ----
984,757 1,058,340 1.9
-------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 117,000 Centrais Eletricas Brasileiras
S.A.--Eletrobras 'B'
(Preferred). . . . . . . . . . 40,181 31,667 0.1
1,928,000 Light--Servicios de
Electricidade S.A.. . . . . . 806,939 617,071 1.1
-------- -------- ----
847,120 648,738 1.2
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
BRAZIL 5,479,935 5,399,229 9.8
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
LATIN
AMERICA
(CONCLUDED) VALUE PERCENT OF
- ------------INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
CHILE CLOSED-END FUNDS 6,500 The Chile Fund, Inc. (ADR) (a) $ 180,636 $ 169,000 0.3%
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 7,500 Compania de Telefonos de Chile
S.A. (ADR) (a). . . . . . . . 639,600 621,563 1.1
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CHILE 820,236 790,563 1.4
- -------------------------------------------------------------------------------------------------------------------------------
ECUADOR BUILDING MATERIALS 332 La Cemento Nacional C.A. (ADR)
(a) (d). . . . . . . . . . . 100,100 56,440 0.1
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ECUADOR 100,100 56,440 0.1
- -------------------------------------------------------------------------------------------------------------------------------
MEXICO BEVERAGE 150,000 Fomento Economico
Mexicano, S.A. de C.V.
(Femsa) 'B'. . . . . . . . . . 438,253 336,576 0.6
24,000 Fomento Economico
Mexicano, S.A. de C.V.
(Femsa) 'B' (ADR) (a) (d). . . 67,488 51,000 0.1
-- --------- -- --------- --- ----
505,741 387,576 0.7
-----------------------------------------------------------------------------------
BUILDING & CONSTRUCTION 126,000 Apasco S.A. de C.V.. . . . . . 458,715 516,420 0.9
------------------------------------------ ---- ---
BUILDING MATERIALS 31,280 Cementos Mexicanos S.A. de
C.V.. . . . . . . . . . . . . 95,316 103,050 0.2
-------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 77,000 +Banca Quadrum S.A. de C.V.
(ADR) (a). . . . . . . . . . . 510,125 385,000 0.7
-------------------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL CARE 44,000 Kimberly-Clark de Mexico,
S.A. de C.V.. . . . . . . . . 461,632 664,280 1.2
-------------------------------------------------------------------------------------------------------------------
LEISURE 56,000 +Grupo Carso, S.A. de C.V.
'A1'. . . . . . . . . . . . . 562,674 302,879 0.6
-------------------------------------------------------------------------------------------------------------------
RETAIL STORES 24,000 +Sears Roebuck de Mexico,
S.A. de C.V. 'B'. . . . . . . 99,756 56,342 0.1
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 19,400 Telefonos de Mexico, S.A. de
C.V. (ADR) (a). . . . . . . . 861,114 618,375 1.1
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 3,555,073 3,033,922 5.5
- -------------------------------------------------------------------------------------------------------------------------------
VENEZUELA BUILDING MATERIALS 96,100 +Corimon C.A. S.A. (ADR)
(a). . . . . . . . . . . . . . 696,568 360,375 0.7
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN VENEZUELA
696,568 360,375 0.7
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICA 11,890,768 10,992,917 19.9
- -------------------------------------------------------------------------------------------------------------------------------
MIDDLE
EAST
- -------------------------------------------------------------------------------------------------------------------------------
ISRAEL BANKING 358,000 +Bank Leumi Israel. . . . . . . 476,621 492,273 0.9
-------------------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 5,568 Koor Industries Ltd.. . . . . 477,651 552,057 1.0
-------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 11,600 Teva Pharmaceutical
Industries Ltd. (ADR) (a). . . 474,069 536,500 1.0
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ISRAEL 1,428,341 1,580,830 2.9
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THE MIDDLE EAST 1,428,341 1,580,830 2.9
- -------------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN/ASIA
- -------------------------------------------------------------------------------------------------------------------------------
AUSTRALIA BANKING 21,000 National Australia Bank Ltd.. 192,233 188,949 0.3
-------------------------------------------------------------------------------------------------------------------
MERCHANDISING 21,400 Amway Asia Pacific Ltd.
(ADR) (a). . . . . . . . . . . 732,865 762,375 1.4
-------------------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 82,000 Pacific Dunlop Ltd.++. . . . . 198,126 192,072 0.4
-------------------------------------------------------------------------------------------------------------------
RECREATION 34,900 +Crown Casino Ltd.. . . . . . . 46,935 64,879 0.1
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 1,170,159 1,208,275 2.2
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA
(CONTINUED) SHARES HELD/ VALUE PERCENT OF
- ------------INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
HONG KONG AUTOMOTIVE 254,000 Sime Darby (Hong Kong) Ltd. $ 406,139 $ 244,736 0.4%
-----------------------------------------------------------------------------------------------------------------
BANKING 88,000 HSBC Holdings PLC (Warrants)
(c). . . . . . . . . . . . . 31,319 35,851 0.1
76,000 HSBC Holdings PLC (Warrants)
(c). . . . . . . . . . . . . 30,860 34,402 0.1
61,000 HSBC Holdings PLC (Warrants)
(c). . . . . . . . . . . . . 35,297 38,658 0.1
20,000 Hang Seng Bank Ltd. (Warrants)
(c). . . . . . . . . . . . . 5,250 6,079 0.0
500,000
JCG Holdings, Ltd.. . . . . . 371,726 365,365 ---- 0.7
-------- -------- ----
474,452 480,355 1.0
-----------------------------------------------------------------------------------------------------------------
CONGLOMERATES 270,000 Citic Pacific Ltd. (Warrants)
(c). . . . . . . . . . . . . 25,014 31,079 0.1
60,000 Citic Pacific Ltd. (Warrants)
(c). . . . . . . . . . . . . 6,374 7,760 0.0
440,000 Hutchison Whampoa Ltd.
(Warrants) (c). . . . . . .. 90,202 106,415 0.2
90,000 Hutchison Whampoa Ltd.
(Warrants) (c). . . . . . .. 19,525 24,444 0.0
140,000 Wharf (Holdings) Limited
(Warrants) (c). . . . . . . 7,823 8,057 0.0
-- -------- -- -------- ---- ----
148,938 177,755 0.3
-----------------------------------------------------------------------------------------------------------------
MULTI--INDUSTRY 3,570,000 Sinocan Holdings Ltd.. . . . 726,557 1,269,723 2.3
-----------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 974,000 Zhenhai Refining & Chemical
Co., Ltd.. . . . . . . . . . 239,204 182,656 0.3
-----------------------------------------------------------------------------------------------------------------
PROPERTY 920,000 Cheung Kong (Holdings) Ltd.
(Warrants) (c). . . . . . . 217,729 255,820 0.5
794,000
Henderson Land Development
Co., Ltd. (Warrants) (c). . 164,149 166,358 0.3
-------- -------- ----
381,878 422,178 0.8
-----------------------------------------------------------------------------------------------------------------
REAL ESTATE 40,000 Sun Hung Kai Properties Ltd.
(Warrants) (c). . . . . . . . 8,599 9,312 0.0
-----------------------------------------------------------------------------------------------------------------
UTILITIES 367,000 China Light & Power
Company, Ltd. (Warrants)
(c).. . . . . . . . . . . . . 33,496 33,700 0.1
260,000 Hong Kong & China Gas Co.,
Ltd. (Warrants) (c). . . . . 9,897 9,247 0.0
150,000 Hong Kong Electric Holdings,
Ltd. (Warrants) (c). . . . . 8,530 7,760 0.0
-- -------- -- -------- ---- ----
51,923 50,707 0.1
-----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HONG KONG 2,437,690 2,837,422 5.2
- -----------------------------------------------------------------------------------------------------------------------------
INDIA AUTOMOTIVE 28,000 Ashok Leyland Ltd. (GDR) (b)
(d). . . . . . . . . . . . . 357,560 287,000 0.5
-----------------------------------------------------------------------------------------------------------------
BROADCASTING & 185,600 +Videocon International Ltd.
PUBLISHING (ADR) (a). . . . . . . . . . 839,737 501,120 0.9
-----------------------------------------------------------------------------------------------------------------
LEISURE 51,800 East India Hotels, Ltd. (ADR)
(a) (d). . . . . . . . . . . 820,294 919,450 1.7
-----------------------------------------------------------------------------------------------------------------
TEXTILES 22,000 +Reliance Industries (ADR)
(a)++. . . . . . . . . . . . 412,500 302,500 0.6
-----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 2,430,091 2,010,070 3.7
- -----------------------------------------------------------------------------------------------------------------------------
INDONESIA BANKING--INTERNATIONAL 222,000 P.T. Bank Bali. . . . . . . . 485,642 437,391 0.8
-----------------------------------------------------------------------------------------------------------------
BROADCASTING & US$765,000 P.T. Surya Citra Television
PUBLISHING (Convertible), 4% due
7/01/1997 (d). . . . . . . . 800,697 765,153 1.4
-----------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 170,000 P.T. Mulia Industrindo. . . . 505,363 480,079 0.9
-----------------------------------------------------------------------------------------------------------------
FOOD & TOBACCO 330,000 P.T. Wickaksana Overseas
International. . . . . . . . 938,974 881,349 1.6
-----------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA VALUE PERCENT OF
(CONCLUDED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDONESIA MINING 12,500 +P.T. Tambang Timah (GDR)
(CONCLUDED) (b) (d). . . . . . . . . . . $ 159,125 $ 145,375 0.3%
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & 544,000 P.T. Kabelmetal Indonesia. . 705,466 446,585 0.8
EQUIPMENT
236,500 P.T. Supreme Cable
Manufacturing Corp. (GDR)
(b). . . . . . . . . . . . . 647,658 352,058 0.6
--------- --------- ----
1,353,124 798,643 1.4
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
INDONESIA 4,242,925 3,507,990 6.4
- -------------------------------------------------------------------------------------------------------------------------------
MALAYSIA BANKING 65,000 Malayan Banking BHD. . . . . 538,715 547,961 1.0
270,000 Public Bank (Malaysia) BHD
'Foreign'. . . . . . . . . . 507,714 516,919 0.9
-- --------- -- --------- --- ----
1,046,429 1,064,880 1.9
---------------------------------------------------------------------
BROADCASTING 174,000 Sistem Televisyen Malaysia
BHD. . . . . . . . . . . . . 505,957 627,181 1.1
FINANCIAL SERVICES 121,000 Commerce Asset--Holdings
BHD. . . . . . . . . . . . . 458,885 610,124 1.1
-------------------------------------------------------------------------------------------------------------------
STEEL 46,000 Maruichi (Malaysia) Steel
Tube BHD. . . . . . . . . . . 179,313 171,243 0.3
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 69,000 Telekom Malaysia BHD. . . . . 503,276 538,192 1.0
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 2,693,860 3,011,620 5.4
- -------------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TRANSPORTATION 84,666 Ports of Auckland Ltd.. . . . 152,218 273,840 0.5
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NEW ZEALAND 152,218 273,840 0.5
- -------------------------------------------------------------------------------------------------------------------------------
PHILIPPINES BANKING 15,100 Metropolitan Bank and Trust
Company. . . . . . . . . . . 304,113 293,819 0.5
30,000 Philippine Commercial
International Bank, Inc.. . . 249,139 276,994 0.5
--------- --------- ----
553,252 570,813 1.0
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PHILIPPINES 553,252 570,813 1.0
- -------------------------------------------------------------------------------------------------------------------------------
SINGAPORE AUTOMOBILES 41,000 Cycle & Carriage Ltd.. . . . 401,358 408,840 0.7
-------------------------------------------------------------------------------------------------------------------
BANKING 76,000 Development Bank of
Singapore Ltd.. . . . . . . . 893,689 945,969 1.7
-------------------------------------------------------------------------------------------------------------------
REAL ESTATE 138,000 City Developments Ltd.. . . . 859,813 1,005,233 1.8
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SINGAPORE 2,154,860 2,360,042 4.2
- -------------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA TELECOMMUNICATIONS 61,400 Korea Mobile
Telecommunications
Corp. (GDR) (b). . . . . . . 2,128,475 2,624,850 4.7
-------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 45,000 Korea Electric Power Corp.
(ADR) (a). . . . . . . . . . 937,520 1,203,750 2.2
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH KOREA 3,065,995 3,828,600 6.9
- -------------------------------------------------------------------------------------------------------------------------------
TAIWAN ELECTRICAL & ELECTRONICS 17,000 Advanced Semiconductor
Engineering, Inc. (GDR) (b). 250,750 224,825 0.4
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TAIWAN 250,750 224,825 0.4
- -------------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 63,000 Thai Farmers Bank, Ltd.. . . 594,557 635,504 1.2
-------------------------------------------------------------------------------------------------------------------
FINANCE 80,500 Finance One Public Company
Limited, Foreign. . . . . . . 538,049 508,320 0.9
-------------------------------------------------------------------------------------------------------------------
UTILITIES 15,300 Sanyo Universal Electric Co.,
Ltd.. . . . . . . . . . . . . 9,344 61,978 0.1
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THAILAND 1,141,950 1,205,802 2.2
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN/ASIA 20,293,750 21,039,299 38.1
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
VALUE
- ------------------ FACE AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A)
<S> <C> <C> <C> <C>
COMMERCIAL PAPER* US$ 2,295,000 General Electric Capital Corp.,
5.90% due 1/02/1996. . . . . . $ 2,293,496 $ 2,293,496
2,500,000 Goldman Sachs Group L.P.,
5.75% due 1/03/1996. . . . . . 2,498,004 2,498,004
1,000,000 National Fleet Funding Corp.,
5.75% due 1/10/1996. . . . . . 998,083 998,083
2,000,000 Riverwoods Funding Corp.,
5.77% due 1/12/1996. . . . . . 1,995,512 1,995,512
-- --------- -- ---------
7,785,095 7,785,095
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 2,950,000 Federal Home Loan Bank, 5.60%
AGENCY OBLIGATIONS* due 1/19/1996. . . . . . . . . 2,940,363 2,940,363
1,000,000 Federal Home Loan Mortgage
Corp., 5.43% due
1/22/1996. . . . . . . . . . . 996,380 996,380
-- --------- -- ---------
3,936,743 3,936,743
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 11,721,838 11,721,838
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . $55,347,858 54,805,702
-------------
OTHER ASSETS LESS LIABILITIES. . . . . . . . . . . . . . . . . ------------- 402,928
-- ---------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $55,208,630
-------------
-------------
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERCENT OF
- ------------------ NET ASSETS
<S> <C>
COMMERCIAL PAPER*
4.2%
4.5
1.8
3.6
----- ------
14.1
- ----------------------------------
US GOVERNMENT &
AGENCY OBLIGATIONS* 5.3
1.8
----- ------
7.1
- ----------------------------------
21.2
- ----------------------------------
99.3
0.7
------------
100.0%
-------------
-------------
- ----------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) 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.
(d) Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $2,729,000, representing 4.9% of net
assets.
<TABLE>
<CAPTION>
ACQUISITION VALUE
ISSUE DATE(S) COST (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ashok Leyland Ltd. (GDR). . . . . . . . . . . . . . . . . . 7/07/1995 $ 357,560 $ 287,000
Companhia Energetica de Minas Gerais S.A. (CEMIG). . . . . 7/20/1995-8/01/1995 426,315 427,500
East India Hotels, Ltd. (ADR) 12/12/1994-7/10/1995 820,294 919,450
Fomento Economico Mexicano, S.A. de C.V. (Femsa) 'B' (ADR). 8/22/1995 67,488 51,000
La Cemento Nacional C.A.. . . . . . . . . . . . . . . . . . 1/05/1994 100,100 56,440
Pick Szeged Reszvenytarsasag (ADR) 6/01/1994 141,347 76,983
P.T. Surya Citra Television (Convertible), 4% due 7/01/1997 6/24/1994-3/31/1995 800,697 765,153
P.T. Tambang Timah (GDR). . . . . . . . . . . . . . . . . . 10/06/1995 159,125 145,375
- -------------------------------------------------------------------------------------------------------------
TOTAL $2,872,926 $ 2,728,901
------------ -------------
------------ -------------
- -------------------------------------------------------------------------------------------------------------
</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.
++ Investment in companies 5% or more of whose outstanding securities are held
by the Fund (such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) are as follows:
<TABLE>
<CAPTION>
NET SHARE NET DIVIDEND
INDUSTRY AFFILIATE ACTIVITY COST INCOME
- ---------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C>
Multi-Industry Pacific Dunlop Ltd.. . . . . . 82,000 $ 198,126 $ 3,167
Textiles Reliance Industries Ltd. (ADR) 22,000 412,500 ++ --
TOTAL $ 610,626
----------------
----------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
See Notes to Financial Statements
56
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
COMMERCIAL $ 3,500,000 Abbey National N.A. Corp.. . . . . . . . . . 5.44 % 5/30/96 $ 3,419,973
PAPER--37.6%
5,190,000 Allomon Funding Corp.. . . . . . . . . . . . 5.65 2/16/96 5,150,087
9,700,000 American Express Credit Corp.. . . . . . . . 5.62 4/11/96 9,546,438
5,229,000 Asset Securitization Cooperative Corp.. . . . 5.70 2/02/96 5,200,023
5,000,000 Beta Finance Inc.. . . . . . . . . . . . . . 5.50 3/29/96 4,930,486
1,596,000 CSW Credit, Inc.. . . . . . . . . . . . . . . 5.73 1/25/96 1,589,081
2,769,000 Ford Motor Credit, Co.. . . . . . . . . . . . 5.62 3/27/96 2,731,349
6,076,000 General Electric Capital Corp.. . . . . . . . 5.59 4/22/96 5,969,636
14,000,000 General Motors Acceptance Corp.. . . . . . . 5.80 2/01/96 13,923,311
1,836,000 Goldman Sachs Group L.P.. . . . . . . . . . . 5.60 4/04/96 1,808,890
3,625,000 Goldman Sachs Group L.P.. . . . . . . . . . . 5.60 4/12/96 3,567,060
5,191,000 Goldman Sachs Group L.P.. . . . . . . . . . . 5.60 4/18/96 5,103,289
5,000,000 Internationale Nederlanden (US) Funding Corp. 5.65 2/26/96 4,953,456
8,493,000 Internationale Nederlanden (US) Funding Corp. 5.60 2/28/96 8,412,411
6,358,000 McKenna Triangle National Corp.. . . . . . . 5.74 1/16/96 6,339,625
951,000 Premium Funding, Inc. (Series A). . . . . . . 5.78 1/18/96 947,946
8,349,000 Premium Funding, Inc. (Series A). . . . . . . 5.80 1/22/96 8,316,829
10,000,000 Santander Finance (Delaware), Inc.. . . . . . 5.62 3/05/96 9,897,639
1,866,000 Svenska Handelsbanken, Inc.. . . . . . . . . 5.71 1/17/96 1,860,308
7,540,000 Svenska Handelsbanken, Inc.. . . . . . . . . 5.75 2/01/96 7,499,410
3,141,000 Windmill Funding Corp.. . . . . . . . . . . . 5.75 1/16/96 3,131,923
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$114,284,201) 114,299,170
- ------------------------------------ --------------------------------------
CORPORATE NOTES--7.8% 8,000,000 Beta Finance Inc.+. . . . . . . . . . . . . . 5.88 9/16/96 8,000,000
2,000,000 Ford Motor Credit Co.. . . . . . . . . . . . 8.00 10/01/96 2,035,960
3,000,000 J.P. Morgan & Company+. . . . . . . . . . . . 5.90 7/17/96 2,998,880
1,600,000 SMM Trust 1995-K+. . . . . . . . . . . . . . 5.833 6/14/96 1,600,000
9,000,000 SMM Trust 1995-Q+. . . . . . . . . . . . . . 5.938 1/08/97 9,000,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$23,629,852) 23,634,840
- ------------------------------------------------------------------------------------------------------------------------
MASTER NOTES--1.0% 3,000,000 Goldman Sachs Group L.P.+. . . . . . . . . . 5.83 2/14/96 3,000,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$3,000,000) 3,000,000
- ------------------------------------------------------------------------------------------------------------------------
MEDIUM-TERM 8,000,000 CIT Group Holdings, Inc. (The). . . . . . . . 5.81 9/12/96 7,995,080
NOTES--6.8%
5,000,000 General Electric Capital Corp.. . . . . . . . 6.55 3/28/96 5,010,750
2,750,000 General Electric Capital Corp.. . . . . . . . 7.625 7/30/96 2,782,423
5,000,000 Society National Bank, Cleveland. . . . . . . 6.70 4/15/96 5,010,749
- ------------------------------------------------------------------------------------------------------------------------
TOTAL MEDIUM-TERM NOTES (COST--$20,780,586) 20,799,002
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY 160,000 Federal Home Loan Bank. . . . . . . . . . . . 6.10 2/26/96 158,542
& INSTRUMENTALITY
OBLIGATIONS-- 2,000,000 Federal Home Loan Bank. . . . . . . . . . . . 5.983 12/01/97 2,000,623
DISCOUNT--12.4%
5,000,000 Federal Home Loan Mortgage Corp.. . . . . . . 6.84 2/28/96 5,009,175
4,000,000 Federal National Mortgage Association. . . . 6.86 2/28/96 4,007,500
12,500,000 Federal National Mortgage Association. . . . 6.46 3/27/96 12,528,313
25,000 Federal National Mortgage Association. . . . 5.44 4/22/96 24,578
2,000,000 Federal National Mortgage Association. . . . 5.11 10/30/96 1,913,980
2,000,000 Federal National Mortgage Association. . . . 6.18 11/04/96 1,996,000
3,700,000 Student Loan Marketing Association. . . . . . 5.97 10/04/96 3,698,890
1,775,000 US Treasury Bills. . . . . . . . . . . . . . 6.59 2/08/96 1,764,215
4,500,000 US Treasury Bills. . . . . . . . . . . . . . 6.605 2/08/96 4,472,658
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY OBLIGATIONS--
DISCOUNT (COST--$37,528,159) 37,574,474
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
US GOVERNMENT, AGENCY $ 5,000,000 Federal Farm Credit Bank+. . . . . . . . . . . 5.88 % 11/25/97 $ 4,998,001
& INSTRUMENTALITY
OBLIGATIONS-- 1,500,000 Federal Home Loan Bank+. . . . . . . . . . . . 5.99 5/06/96 1,499,059
NON-DISCOUNT--35.5%
5,000,000 Federal Home Loan Bank+. . . . . . . . . . . . 5.05 9/12/96 4,998,136
1,040,000 Federal Home Loan Bank+. . . . . . . . . . . . 6.10 1/26/98 1,040,584
1,000,000 Federal Home Loan Mortgage Corp.+.. . . . . . . 5.75 6/03/96 999,142
10,000,000 Federal Home Loan Mortgage Corp.+. . . . . . . 6.20 6/07/96 9,998,647
10,000,000 Federal National Mortgage Association+. . . . . 5.05 5/10/96 9,998,246
2,000,000 Federal National Mortgage Association+. . . . . 6.08 5/13/96 2,000,000
2,000,000 Federal National Mortgage Association+. . . . . 6.08 8/13/96 2,000,000
15,000,000 Federal National Mortgage Association+. . . . . 5.781 10/11/96 15,000,000
5,000,000 Federal National Mortgage Association+. . . . . 6.35 2/14/97 5,023,755
12,000,000 Federal National Mortgage Association+. . . . . 5.05 2/21/97 12,000,000
2,000,000 Federal National Mortgage Association+. . . . . 6.20 5/19/97 2,000,000
2,000,000 Federal National Mortgage Association+. . . . . 6.25 5/14/98 2,000,000
3,960,000 Student Loan Marketing Association+. . . . . . 5.05 3/20/96 3,960,298
3,000,000 Student Loan Marketing Association+. . . . . . 5.05 5/14/96 3,000,861
4,000,000 Student Loan Marketing Association+. . . . . . 5.05 8/22/96 4,007,703
5,000,000 Student Loan Marketing Association+. . . . . . 5.05 1/23/97 5,004,629
2,000,000 Student Loan Marketing Association+. . . . . . 5.05 3/03/97 2,000,272
500,000 US Treasury Notes. . . . . . . . . . . . . . . 4.00 1/31/96 499,239
1,500,000 US Treasury Notes. . . . . . . . . . . . . . . 6.125 5/31/97 1,517,813
1,800,000 US Treasury Notes. . . . . . . . . . . . . . . 6.00 8/31/97 1,821,656
1,800,000 US Treasury Notes. . . . . . . . . . . . . . . 5.75 9/30/97 1,815,750
2,000,000 US Treasury Notes. . . . . . . . . . . . . . . 5.625 10/31/97 2,014,374
3,800,000 US Treasury Notes. . . . . . . . . . . . . . . 5.375 11/30/97 3,810,686
5,000,000 US Treasury Notes. . . . . . . . . . . . . . . 5.25 12/31/97 5,005,465
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY OBLIGATIONS--
NON-DISCOUNT (COST--$107,960,721) 108,014,316
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$307,183,519)--101.1%. 307,321,802
LIABILITIES IN EXCESS OF OTHER ASSETS--(1.1%). (3,409,973)
-----------------
NET ASSETS--100.0%. . . . . . . . . . . . . . . $ 303,911,829
-----------------
-----------------
- -----------------------------------------------------------------------------------------------------------------------------------
*Commercial Paper and certain US Government Obligations are traded on a discount basis; the interest rates shown are the discount
rates paid at the time of purchase by the Fund. Other securities bear interest at the rates shown, payable at fixed dates or upon
maturity. The interest rates on variable rate securities are adjusted periodically based upon appropriate indexes; the interest
rates shown are the rates in effect at December 31, 1995.
+Variable Rate Notes.
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) PERCENT OF
- ------------------------------------------------------------------------------------------------------- NET ASSETS
<S> <C> <C> <C> <C> <C>
BANKING 90,000 Collective Bancorp, Inc.. . . . . . . . $ 1,741,251 $ 2,283,750 0.7%
124,000 TCF Financial Corp.. . . . . . . . . . 2,485,152 4,107,500 1.2
------------- ------------- -----
4,226,403 6,391,250 1.9
- ---------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 300,000 COR Therapeutics, Inc.. . . . . . . . . 3,455,626 2,437,500 0.7
152,500 +Centocor, Inc.. . . . . . . . . . . . . 1,966,252 4,708,437 1.4
60,000 +Genzyme Corp.. . . . . . . . . . . . . 3,225,624 3,720,000 1.1
100,000 Ostex International, Inc.. . . . . . . 1,708,750 1,850,000 0.5
70,000 +Sano Corporation. . . . . . . . . . . . 805,000 770,000 0.2
------------- ------------- ----------
11,161,252 13,485,937 3.9
- ---------------------------------------------------------------------------------------------------------------------
BROADCAST, RADIO & TV 330,000 +Westcott Communications, Inc.. . . . . 4,996,253 4,537,500 1.3
- ---------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 165,000 Apogee Enterprises, Inc.. . . . . . . . 2,358,910 2,805,000 0.8
250,000 Ply-Gem Industries, Inc.. . . . . . . . 4,496,890 4,062,500 1.2
------------- ------------- -----
6,855,800 6,867,500 2.0
- ---------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 100,000 Reynolds & Reynolds Co. (The) (Class A) 2,392,876 3,887,500 1.1
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 210,000 BWIP Holdings, Inc.. . . . . . . . . . 3,594,688 3,360,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS 100,000 Arcadian Corp.. . . . . . . . . . . . . 1,680,075 1,937,500 0.6
280,000 Crompton & Knowles Corp.. . . . . . . . 4,569,537 3,710,000 1.1
------------- ------------- -----
6,249,612 5,647,500 1.7
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 155,000 Rollins Inc.. . . . . . . . . . . . . . 3,898,215 3,429,375 1.0
- ---------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE 77,000 +DataWorks Corp.. . . . . . . . . . . . 1,001,000 962,500 0.3
20,000 GT Interactive Software Corp.. . . . . 280,000 277,500 0.1
55,000 +Sterling Software, Inc.. . . . . . . . 1,711,139 3,430,625 1.0
------------- ------------- -----
2,992,139 4,670,625 1.4
- ---------------------------------------------------------------------------------------------------------------------
COMPUTERS 192,500 +3d Systems Corp.. . . . . . . . . . . . 3,328,750 4,571,875 1.3
100,000 Mylex Corp.. . . . . . . . . . . . . . 1,742,500 1,912,500 0.6
------------- ------------- -----
5,071,250 6,484,375 1.9
- ---------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 50,000 Harsco Corp.. . . . . . . . . . . . . . 2,075,492 2,906,250 0.9
100,000 Lancaster Colony Corporation. . . . . . 3,435,624 3,725,000 1.1
75,000 Martin Industries, Inc.. . . . . . . . 712,500 656,250 0.2
------------- ------------- -----
6,223,616 7,287,500 2.2
- ---------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 136,000 +Sheldahl, Inc.. . . . . . . . . . . . . 1,933,125 2,448,000 0.7
60,000 Silicon Storage Technology, Inc.. . . . 540,000 750,000 0.2
------------- ------------- -----
2,473,125 3,198,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONIC/INSTRUMENTS 220,000 BMC Industries, Inc.. . . . . . . . . . 1,333,308 5,115,000 1.5
70,000 +DOVatron International, Inc.. . . . . . 1,491,875 2,362,500 0.7
60,000 Electro Scientific Industries, Inc.. . 2,110,099 1,710,000 0.5
157,500 Methode Electronics Inc. (Class A). . . 1,463,857 2,205,000 0.7
------------- ------------- -----
6,399,139 11,392,500 3.4
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONIC/SEMI- 60,000 +Oak Technology Inc.. . . . . . . . . . 2,565,000 2,535,000 0.7
CONDUCTORS 140,000 +Orbit Semiconductor, Inc. 2,762,500 1,330,000 0.4
------------- ------------- ----------
5,327,500 3,865,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
ELECTRONICS 37,500 +Altron Inc.. . . . . . . . . . . . . . 658,125 1,106,250 0.3
1,372 Aura Systems Inc.. . . . . . . . . . . 6,346 7,718 0.0
100,000 Quality Semiconductor, Inc.. . . . . . 1,746,878 550,000 0.2
150,000 +Semitool Inc.. . . . . . . . . . . . . 2,496,875 1,931,250 0.6
------------- ------------- -----
4,908,224 3,595,218 1.1
- ---------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL 300,000 Calgon Carbon Corp.. . . . . . . . . . 3,679,060 3,600,000 1.1
150,400 IMCO Recycling, Inc.. . . . . . . . . . 2,149,984 3,684,800 1.1
109,375 +TETRA Technologies, Inc.. . . . . . . . 1,201,250 2,488,281 0.7
------------- ------------- -----
7,030,294 9,773,081 2.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) PERCENT OF
- ---------------------------------------------------------------------------------------------------- NET ASSETS
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES 100,000 FINOVA Group, Inc.. . . . . . . . . . $ 3,520,726 $ 4,825,000 1.4%
105,000 First USA, Inc.. . . . . . . . . . . 4,734,200 4,659,375 1.4
200,000 +National Auto Credit, Inc.. . . . . . 2,454,377 3,250,000 1.0
200,000 Transmedia Network, Inc.. . . . . . . 2,407,899 1,875,000 0.6
------------- ------------- -----
13,117,202 14,609,375 4.4
- ------------------------------------------------------------------------------------------------------------------
FOODS/FOOD PROCESSING 100,000 +Smithfield Foods, Inc.. . . . . . . . 2,671,870 3,175,000 0.9
- ------------------------------------------------------------------------------------------------------------------
GAMING 70,000 +Sodak Gaming, Inc.. . . . . . . . . . 1,633,874 1,417,500 0.4
- ------------------------------------------------------------------------------------------------------------------
1,535,333
HEALTHCARE-- 110,000 +Thermedics, Inc.. . . . . . . . . . . 3,052,500 0.9
PRODUCTS & SERVICES
- ------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 100,000 Community Care of America, Inc.. . . 950,000 1,037,500 0.3
110,000 Health Care & Retirement Corp.. . . . 3,219,599 3,850,000 1.1
150,000 +Health Management Associates, Inc.. . 3,119,314 3,918,750 1.2
150,000 +OrNda Health Corp.. . . . . . . . . . 2,331,250 3,487,500 1.0
150,000 Surgical Care Affiliates, Inc.. . . . 2,877,775 5,100,000 1.5
------------- ------------- -----
12,497,938 17,393,750 5.1
- ------------------------------------------------------------------------------------------------------------------
HOTEL(S) 150,000 Red Lion Hotels Inc.. . . . . . . . . 2,660,250 2,625,000 0.8
- ------------------------------------------------------------------------------------------------------------------
LEISURE 300,000 Callaway Golf Co.. . . . . . . . . . 4,470,495 6,787,500 2.0
130,000 Royal Caribbean Cruises Ltd. . . . . 3,032,800 2,860,000 0.8
------------- ------------- -----
7,503,295 9,647,500 2.8
- ------------------------------------------------------------------------------------------------------------------
MANUFACTURED HOUSING 156,250 Clayton Homes, Inc.. . . . . . . . . 1,920,136 3,339,844 1.0
75,000 +Redman Industries, Inc.. . . . . . . 1,380,374 2,512,500 0.7
------------- ------------- -----
3,300,510 5,852,344 1.7
- ------------------------------------------------------------------------------------------------------------------
MANUFACTURING 52,000 +Chicago Miniature Lamp, Inc.. . . . . 687,500 1,170,000 0.3
135,000 Fisher Scientific International, Inc. 3,813,699 4,505,625 1.3
111,200 +Lydall, Inc.. . . . . . . . . . . . . 1,777,124 2,529,800 0.7
------------- ------------- -----
6,278,323 8,205,425 2.3
- ------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 150,000 Curative Technologies, Inc.. . . . . 1,968,750 2,137,500 0.6
330,000 Mariner Health Group, Inc.. . . . . . 4,886,250 5,527,500 1.6
300,000 +North American Biologicals, Inc.. . . 2,381,250 3,225,000 1.0
------------- ------------- -----
9,236,250 10,890,000 3.2
- ------------------------------------------------------------------------------------------------------------------
MEDICAL SUPPLIES 225,000 +ATS Medical, Inc.. . . . . . . . . . 1,248,750 2,081,250 0.6
170,000 ATS Medical, Inc. (Warrants) (a). . . 0 148,750 0.0
340,000 +Angeion Corp.. . . . . . . . . . . . 1,434,070 2,847,500 0.8
170,000 Beckman Instruments, Inc.. . . . . . 4,789,806 6,013,750 1.8
105,000 Dentsply International, Inc.. . . . . 3,690,000 4,173,750 1.2
143,600 +Maxxim Medical, Inc.. . . . . . . . . 1,919,391 2,405,300 0.7
150,000 Quest Medical, Inc.. . . . . . . . . 1,562,500 1,537,500 0.5
160,000 +Sofamor Danek Group, Inc.. . . . . . 3,957,764 4,540,000 1.3
115,000 U.S. Surgical Corp.. . . . . . . . . 2,597,375 2,458,125 0.7
200,000 +Uromed Corp.. . . . . . . . . . . . . 1,929,250 2,475,000 0.7
------------- ------------- -----
23,128,906 28,680,925 8.3
- ------------------------------------------------------------------------------------------------------------------
METAL FABRICATING 112,500 Valmont Industries, Inc.. . . . . . . 2,398,749 2,728,125 0.8
- ------------------------------------------------------------------------------------------------------------------
METALS 120,000 Magma Copper Co.. . . . . . . . . . . 1,944,425 3,345,000 1.0
- ------------------------------------------------------------------------------------------------------------------
OIL & GAS 170,000 Parker & Parsley Development Partners 3,461,990 3,740,000 1.1
200,000 Snyder Oil Corp.. . . . . . . . . . . 2,755,632 2,425,000 0.7
------------- ------------- -----
6,217,622 6,165,000 1.8
- ------------------------------------------------------------------------------------------------------------------
OIL/GAS 150,000 Barrett Resources Corp.. . . . . . . 3,428,886 4,406,250 1.3
EQUIPMENT & SERVICES
300,000 +Pride Petroleum Services, Inc.. . . . 2,085,008 3,112,500 0.9
125,000 +Weatherford Enterra, Inc.. . . . . . 2,662,915 3,609,375 1.1
------------- ------------- -----
8,176,809 11,128,125 3.3
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) PERCENT OF
- ----------------------------------------------------------------------------------------------------- NET ASSETS
<S> <C> <C> <C> <C> <C>
OIL/GAS--EXPLORATION 270,000 +Belden & Blake Energy Co.. . . . . . $ 4,281,147 $ 4,725,000 1.4%
150,000 +Seagull Energy Corp.. . . . . . . . 2,956,364 3,337,500 1.0
-------------- -------------- -----
7,237,511 8,062,500 2.4
- -----------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 110,000 Banta Corp.. . . . . . . . . . . . . 3,611,250 4,840,000 1.4
- -----------------------------------------------------------------------------------------------------------------
REAL ESTATE 100,000 National Golf Properties Inc.. . . . 2,144,530 2,287,500 0.7
80,450 National Health Investors, Inc.. . . 2,201,700 2,664,906 0.8
-------------- -------------- -----
4,346,230 4,952,406 1.5
- -----------------------------------------------------------------------------------------------------------------
RESTAURANTS 200,000 Morrison Restaurants, Inc.. . . . . 4,505,648 2,800,000 0.8
100,000 +Outback Steakhouse, Inc.. . . . . . 2,617,815 3,587,500 1.1
-------------- -------------- -----
7,123,463 6,387,500 1.9
- -----------------------------------------------------------------------------------------------------------------
RETAIL--APPAREL 110,000 +Tommy Hilfiger Corp. 2,350,999 4,661,250 1.4
- -----------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 300,000 +MicroAge Inc.. . . . . . . . . . . . 3,448,132 2,362,500 0.7
60,000 Moovies, Inc.. . . . . . . . . . . . 870,000 780,000 0.2
-------------- -------------- -----
4,318,132 3,142,500 0.9
- -----------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 57,500 +ASM Lithography Holding N.V. (ADR)** 1,258,125 1,911,875 0.6
PRODUCTION EQUIPMENT
40,000 Ade Corporation. . . . . . . . . . . 560,000 555,000 0.2
60,000 +Asyst Technologies, Inc.. . . . . . 2,040,000 2,100,000 0.6
110,800 MEMC Electrical Materials, Inc.. . . 3,396,954 3,614,850 1.1
60,000 +Ultratech Stepper Inc.. . . . . . . 657,858 1,537,500 0.5
130,000 Veeco Instruments, Inc.. . . . . . . 2,706,249 1,787,500 0.5
-------------- -------------- -----
10,619,186 11,506,725 3.5
- -----------------------------------------------------------------------------------------------------------------
TECHNOLOGY 75,000 Smart Modular Technologies, Inc.. . 900,000 778,125 0.2
- -----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & 89,000 +Teltrend Inc.. . . . . . . . . . . . 1,424,000 4,160,750 1.2
EQUIPMENT
- -----------------------------------------------------------------------------------------------------------------
TEXTILES 188,800 +Galey & Lord, Inc.. . . . . . . . . 2,380,203 2,029,600 0.6
140,000 +Mohawk Industries, Inc.. . . . . . . 2,311,875 2,100,000 0.6
-------------- -------------- -----
4,692,078 4,129,600 1.2
- -----------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 100,000 MCN Corporation. . . . . . . . . . . 1,794,000 2,325,000 0.7
125,000 NICOR Inc.. . . . . . . . . . . . . 3,068,051 3,437,500 1.0
-------------- -------------- -----
4,862,051 5,762,500 1.7
- -----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 237,586,642 285,172,286 83.8
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $ 6,000,000 Daimler-Benz AG, 5.72% due
1/26/1996. . . . . . . . . . . . . . . $ 5,973,307 $ 5,973,307 1.8%
12,441,000 General Electric Capital Corp., 5.90%
due 1/02/1996. . . . . . . . . . . . 12,432,844 12,432,844 3.7
10,000,000 National Australia Funding (Delaware)
Inc., 5.69% due 1/12/1996. . . . . . 9,977,872 9,977,872 2.9
10,000,000 National Fleet Funding Corp., 5.77% due
1/10/1996. . . . . . . . . . . . . . 9,980,767 9,980,767 2.9
10,500,000 Preferred Receivable Funding Corp.,
5.78% due 1/02/1996. . . . . . . . . 10,493,257 10,493,257 3.1
---------------- ---------------- --------
48,858,047 48,858,047 14.4
- -----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 5,000,000 Federal National Mortgage Association,
AGENCY OBLIGATIONS* 5.47% due 1/17/1996
4,985,565 4,985,565 1.5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 53,843,612 53,843,612 15.9
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . $ 291,430,254 339,015,898 99.7
----------------
----------------
OTHER ASSETS LESS LIABILITIES. . . . . 905,256 0.3
---------------- --------
NET ASSETS. . . . . . . . . . . . . . $ 339,921,154 100.0%
---------------- --------
---------------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
* 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.
** American Depositary Receipts (ADR).
(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.
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 70,000 Boeing Co.. . . . . . . . . . . . . . . $ 4,507,170 $ 5,486,250 1.7%
60,000 United Technologies Corp.. . . . . . . . 4,788,081 5,692,500 1.8
------------- ---------- -----
9,295,251 11,178,750 3.5
- -----------------------------------------------------------------------------------------------------------------------
ALUMINUM 75,000 Aluminum Co. of America. . . . . . . . . 4,217,218 3,965,625 1.2
- -----------------------------------------------------------------------------------------------------------------------
APPLIANCES 30,000 Whirlpool Corporation. . . . . . . . . . 1,635,297 1,597,500 0.5
- -----------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 150,000 Ford Motor Co.. . . . . . . . . . . . . 4,450,543 4,350,000 1.3
- -----------------------------------------------------------------------------------------------------------------------
BANKING 120,000 Bank of New York, Inc.. . . . . . . . . 3,845,764 5,850,000 1.8
40,000 Bank of New York, Inc. (Warrants) (b). . 300,937 1,445,000 0.5
------------- ------------- -----
4,146,701 7,295,000 2.3
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS 35,000 Eastman Chemical Co.. . . . . . . . . . 2,119,343 2,191,875 0.7
- -----------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 20,000 +ADC Telecommunications Inc.. . . . . . . 599,662 725,000 0.2
- -----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 120,000 General Motors Corp. (Class E). . . . . 4,994,239 6,240,000 2.0
- -----------------------------------------------------------------------------------------------------------------------
ELECTRIC/INSTRUMENTS 89,100 Corning Inc.. . . . . . . . . . . . . . 2,459,964 2,851,200 0.9
45,000 Texas Instruments, Inc.. . . . . . . . . 3,214,156 2,328,750 0.7
------------- ------------- -----
5,674,120 5,179,950 1.6
- -----------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 350,000 Wheelabrator Technologies, Inc.. . . . . 5,888,869 5,862,500 1.8
- -----------------------------------------------------------------------------------------------------------------------
HARDWARE PRODUCTS 23,100 Stanley Works Co. (The). . . . . . . . . 1,147,302 1,189,650 0.4
- -----------------------------------------------------------------------------------------------------------------------
HEALTHCARE 150,000 +Humana, Inc.. . . . . . . . . . . . . . 3,124,478 4,106,250 1.3
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE 65,000 Aetna Life & Casualty Co.. . . . . . . . 3,829,284 4,501,250 1.4
85,000 Allstate Corp.. . . . . . . . . . . . . 2,798,812 3,495,625 1.1
38,000 National Re Corp.. . . . . . . . . . . . 1,085,853 1,444,000 0.5
------------- ------------- -----
7,713,949 9,440,875 3.0
- -----------------------------------------------------------------------------------------------------------------------
NATURAL GAS 33,800 Enron Corp.. . . . . . . . . . . . . . . 1,277,730 1,288,625 0.4
- -----------------------------------------------------------------------------------------------------------------------
OIL SERVICES 100,000 Dresser Industries, Inc.. . . . . . . . 2,343,697 2,437,500 0.8
- -----------------------------------------------------------------------------------------------------------------------
PETROLEUM 38,900 Pennzoil Co.. . . . . . . . . . . . . . 1,537,591 1,643,525 0.5
- -----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 78,000 Abbott Laboratories. . . . . . . . . . . 3,193,987 3,256,500 1.0
55,000 Merck & Co., Inc.. . . . . . . . . . . . 3,307,995 3,616,250 1.1
------------- ------------- -----
6,501,982 6,872,750 2.1
- -----------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 85,000 Eastman Kodak Co.. . . . . . . . . . . . 4,669,589 5,695,000 1.8
- -----------------------------------------------------------------------------------------------------------------------
RETAIL 80,000 Sears, Roebuck & Co.. . . . . . . . . . 2,791,819 3,120,000 1.0
- -----------------------------------------------------------------------------------------------------------------------
SCIENTIFIC EQUIPMENT 41,900 Fisher Scientific International Inc.. . 1,370,446 1,398,412 0.4
- -----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 50,000 AT&T Corp.. . . . . . . . . . . . . . . 3,289,943 3,237,500 1.0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS & WARRANTS 78,789,769 89,016,287 27.8
- -----------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS++++
- -----------------------------------------------------------------------------------------------------------------------
CANADA 35,000 Magna International Inc. (Class A) (6). 1,374,340 1,513,750 0.5
- -----------------------------------------------------------------------------------------------------------------------
CHILE 18,400 Cristalerias de Chile S.A. (ADR) (a) (7) 335,560 409,400 0.1
- -----------------------------------------------------------------------------------------------------------------------
HONG KONG 1,000,000 Hong Kong Telecommunications Ltd.
(ADR) (a) (5). . . . . . . . . . . . . . 1,768,771 1,784,790 0.5
- -----------------------------------------------------------------------------------------------------------------------
INDONESIA 1,200 P.T. Indonesia Satellite Corp. (ADR) 43,122 43,800 0.0
(a) (5). . . . . . . . . . . . . . . . .
- -----------------------------------------------------------------------------------------------------------------------
JAPAN 80,000 Canon, Inc. (9). . . . . . . . . . . . . 1,467,936 1,449,051 0.4
160,000 Nomura Securities Co., Ltd. (ADR)
(a) (8). . . . . . . . . . . . . . . . . 3,147,107 3,487,021 1.1
120,000 Tokio Marine & Fire Insurance Co.
(ADR) (a) (2). . . . . . . . . . . . . . 1,428,630 1,569,159 0.5
------------- ------------- -----
6,043,673 6,505,231 2.0
- -----------------------------------------------------------------------------------------------------------------------
MEXICO 146,400 +Grupo Carso, S.A. de C.V. (ADR)
(a) (3)++. . . . . . . . . . . . . . . . 1,702,240 1,482,300 0.5
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++++ COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
NETHERLANDS 20,000 Royal Dutch Petroleum Co. N.V. (ADR)
(a) (4). . . . . . . . . . . . . . $ 2,672,362 $ 2,822,500 0.9%
120,000 Singer Co. N.V. (d) (1). . . . . . . 4,025,070 3,345,000 1.0
-------------- -------------- ---------
6,697,432 6,167,500 1.9
- --------------------------------------------------------------------------------------------------------------------------
SPAIN 35,000 Repsol S.A. (ADR) (a) (4). . . . . . 1,151,615 1,150,625 0.4
- --------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 2,300 Sandoz A.G. (10). . . . . . . . . . 1,996,772 2,110,715 0.7
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 21,113,525 21,168,111 6.6
- --------------------------------------------------------------------------------------------------------------------------
FACE
INDUSTRY AMOUNT* CORPORATE & FOREIGN BONDS++++
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--CANADA US$ 5,000,000 Hydro-Electric Quebec, 6.35% due
1/15/2002 (12). . . . . . . . . . . 5,000,000 5,065,500 1.6
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN--ITALY 500,000 Republic of Italy, 8.75% due
2/08/2001 (1). . . . . . . . . . . . 537,305 558,282 0.2
- --------------------------------------------------------------------------------------------------------------------------
US--FINANCIAL SERVICES 1,000,000 Ford Motor Credit Co., 7.125%
due 12/01/1997. . . . . . . . . . . 995,000 1,025,420 0.3
- --------------------------------------------------------------------------------------------------------------------------
US--INDUSTRIAL 1,000,000 International Business Machines Corp.,
6.375% due 6/15/2000. . . . . . . . 1,000,000 1,024,700 0.3
- --------------------------------------------------------------------------------------------------------------------------
US--TELECOMMUNICATIONS 5,000,000 Chesapeake & Potomac Telecom Co.,
6.125% due 7/15/2005. . . . . . . . 4,503,300 5,032,350 1.6
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE & FOREIGN BONDS 12,035,605 12,706,252 4.0
- --------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------------
FEDERAL AGENCY Federal National Mortgage Association:
OBLIGATIONS
5,000,000 7.85% due 9/10/2004. . . . . . . . . 4,992,969 5,317,950 1.7
4,726,069 8.00% due 11/01/2024 (c). . . . . . 4,512,658 4,894,412 1.5
2,000,000 Series 93D, 5.85% due 2/25/2006 (c). 1,996,250 1,999,360 0.6
----------- ----------- -----
11,501,877 12,211,722 3.8
- --------------------------------------------------------------------------------------------------------------------------
GOVERNMENT US Treasury Notes:
OBLIGATIONS
1,000,000 8.625% due 8/15/1997. . . . . . . . 1,027,344 1,052,500 0.3
6,000,000 7.50% due 11/15/2001. . . . . . . . 6,143,336 6,608,460 2.1
5,000,000 6.25% due 2/15/2003. . . . . . . . . 4,990,469 5,216,400 1.6
3,000,000 US Treasury STRIPS++, 7.77% (e) due
5/15/2000. . . . . . . . . . . . . 2,283,715 2,382,120 0.8
----------- ----------- -----
14,444,864 15,259,480 4.8
- --------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED Government National Mortgage
SECURITIES Association (c):
982,310 9.00% due 11/15/2019. . . . . . . . 973,397 1,046,465 0.3
444,482 9.00% due 11/15/2019. . . . . . . . 441,427 473,512 0.2
----------- ----------- -----
1,414,824 1,519,977 0.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT &
AGENCY OBLIGATIONS 27,361,565 28,991,179 9.1
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** 10,000,000 ABN-AMRO North America Finance, Inc.,
5.54% due 1/26/1996. . . . . . . . 9,958,450 9,958,450 3.1
10,000,000 Ciesco L.P., 5.72% due 1/31/1996. . 9,949,156 9,949,156 3.1
10,000,000 Corporate Asset Funding Co. Inc., 5.67%
due 1/09/1996. . . . . . . . . . . 9,984,250 9,984,250 3.1
16,595,000 General Electric Capital Corp., 5.90%
due 1/02/1996. . . . . . . . . . . 16,586,841 16,586,841 5.2
12,000,000 Monsanto Company, 5.72% due
1/23/1996. . . . . . . . . . . . . . 11,954,240 11,954,240 3.7
12,000,000 Morgan Stanley Group, Inc., 5.65% due
1/17/1996. . . . . . . . . . . . . 11,966,100 11,966,100 3.8
15,000,000 National Australia Funding (Delaware)
Inc., 5.73% due 1/12/1996. . . . . 14,968,963 14,968,963 4.7
15,000,000 National Fleet Funding Corp., 5.75% due
1/12/1996. . . . . . . . . . . . . 14,968,854 14,968,854 4.7
10,000,000 Preferred Receivable Funding Corp.,
5.78% due 1/02/1996. . . . . . . . 9,995,183 9,995,183 3.1
10,000,000 USAA Capital Corp., 5.70% due
1/29/1996. . . . . . . . . . . . . . 9,952,500 9,952,500 3.1
12,000,000 Xerox Corp., 5.69% due 1/18/1996. . 11,963,963 11,963,963 3.7
-------------- -------------- -----
132,248,500 132,248,500 41.3
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT* SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GOVERNMENT & Federal National Mortgage Association:
AGENCY OBLIGATIONS**US$ 15,000,000 5.67% due 1/08/1996. . . . . . . . . $ 14,978,738 $ 14,978,738 4.7%
10,000,000 5.67% due 1/17/1996. . . . . . . . . 9,971,650 9,971,650 3.1
12,000,000 5.67% due 1/19/1996. . . . . . . . . 11,962,200 11,962,200 3.7
----------- ----------- ------
36,912,588 36,912,588 11.5
- ------------------------------------------------------------------------------------------------------------------------
169,161,088 169,161,088 52.8
TOTAL SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . $308,461,552 321,042,917 100.3
--------------
--------------
LIABILITIES IN EXCESS OF OTHER
ASSETS. . . . . . . . . . . . . . . . (809,254) (0.3)
----------- ------
NET ASSETS. . . . . . . . . . . . . . $320,233,663 100.0%
-------------- ------
-------------- ------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of
shares are subject to adjustment under certain conditions until the expiration
date.
(c) US Government Agency Mortgage-Backed Obligations are subject to principal
paydowns as a result of prepayments or
refinancings of the underlying mortgage investments. As a result, the average
life may be substantially less than the original
maturity.
(d) 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, investment made, or
services performed in the country, or in which at least
50% of the assets of the issuers are situated.
(e) Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
*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.
++ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $1,482,000,
representing 0.5% of net assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATES COST (NOTE 1A)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Grupo Carso, S.A. de C.V. (ADR). . . 1/24/1992-1/31/1995 $1,702,240 $ 1,482,300
- -------------------------------------------------------------------------------------
TOTAL $1,702,240 $ 1,482,300
------------ -------------
------------ -------------
- -------------------------------------------------------------------------------------
</TABLE>
++ Separate Trading of Registered Interest and Principal of Securities
(STRIPS).
++++ Corresponding industry groups for foreign securities:
<TABLE>
<CAPTION>
<S> <C> <C>
(1) Government Entities
(2) Insurance
(3) Multi-Industry
(4) Petroleum
(5) Telecommunications
(6) Auto Parts--Original
(7) Containers
(8) Financial
(9) Photography
(10) Pharmaceuticals
(11) Appliances
(12) Public Utilities
</TABLE>
65
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD US STOCKS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AEROSPACE 20,000 Boeing Co.. . . . . . . . . . . . . . $ 1,465,078 $ 1,567,500 0.3%
61,500 United Technologies Corp. . . . . . . 3,820,923 5,834,812 1.1
------------- ------------- -----
5,286,001 7,402,312 1.4
- ---------------------------------------------------------------------------------------------------------------------------
ALUMINUM 30,000 Aluminum Co. of America. . . . . . . . 1,726,248 1,586,250 0.3
- ---------------------------------------------------------------------------------------------------------------------------
APPLIANCES 90,000 Whirlpool Corporation. . . . . . . . . 5,124,101 4,792,500 0.9
- ---------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 120,000 Ford Motor Co.. . . . . . . . . . . . 3,221,336 3,480,000 0.6
- ---------------------------------------------------------------------------------------------------------------------------
BANKING 45,000 Bank of New York, Inc.. . . . . . . . 2,126,624 2,193,750 0.4
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS 72,050 Eastman Chemical Co.. . . . . . . . . 3,290,340 4,512,131 0.8
- ---------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 40,000 General Motors Corp. (Class E). . . . 2,058,814 2,080,000 0.4
- ---------------------------------------------------------------------------------------------------------------------------
ELECTRONICS/INSTRUMENTS 64,500 Corning Inc.. . . . . . . . . . . . . 1,780,749 2,064,000 0.4
30,000 Texas Instruments, Inc.. . . . . . . . 1,802,100 1,552,500 0.3
------------- ------------- -----
3,582,849 3,616,500 0.7
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 17,400 +California Energy Co., Inc.. . . . . . 279,096 339,300 0.1
- ---------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 261,800 Wheelabrator Technologies, Inc.. . . . 4,510,490 4,385,150 0.8
- ---------------------------------------------------------------------------------------------------------------------------
HARDWARE PRODUCTS 95,700 Stanley Works Co. (The). . . . . . . . 3,935,571 4,928,550 0.9
- ---------------------------------------------------------------------------------------------------------------------------
HEALTHCARE 160,000 +Humana Inc.. . . . . . . . . . . . . . 3,839,054 4,380,000 0.8
- ---------------------------------------------------------------------------------------------------------------------------
INSURANCE 30,000 Aetna Life & Casualty Co.. . . . . . . 2,232,630 2,077,500 0.4
50,000 Allstate Corp.. . . . . . . . . . . . 2,046,610 2,056,250 0.4
43,100 National Re Corp.. . . . . . . . . . . 1,397,635 1,637,800 0.3
------------- ------------- -----
5,676,875 5,771,550 1.1
- ---------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 28,200 Enron Corp.. . . . . . . . . . . . . . 1,066,036 1,075,125 0.2
- ---------------------------------------------------------------------------------------------------------------------------
PETROLEUM 29,900 Pennzoil Co.. . . . . . . . . . . . . 1,181,791 1,263,275 0.2
- ---------------------------------------------------------------------------------------------------------------------------
PETROLEUM & SERVICE EQUIPMENT 192,900 Dresser Industries, Inc.. . . . . . . 4,099,100 4,701,938 0.9
50,200 Schlumberger Ltd.. . . . . . . . . . . 2,972,633 3,476,350 0.6
------------- ------------- -----
7,071,733 8,178,288 1.5
- ---------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 112,000 Abbott Laboratories. . . . . . . . . . 3,152,867 4,676,000 0.8
105,000 Merck & Co., Inc.. . . . . . . . . . . 3,539,150 6,903,750 1.3
------------- ------------- -----
6,692,017 11,579,750 2.1
- ---------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 77,200 Eastman Kodak Co.. . . . . . . . . . . 3,487,735 5,172,400 1.0
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL 46,000 Sears, Roebuck & Co.. . . . . . . . . 1,833,758 1,794,000 0.3
- ---------------------------------------------------------------------------------------------------------------------------
SCIENTIFIC INSTRUMENTS 110,000 Fisher Scientific International, Inc.. 3,455,487 3,671,250 0.7
- ---------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 70,100 AT & T Corp.. . . . . . . . . . . . . 3,715,987 4,538,975 0.8
70,300 Bell Atlantic Corp.. . . . . . . . . . 3,816,168 4,701,312 0.9
------------- ------------- -----
7,532,155 9,240,287 1.7
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS 76,978,111 91,442,368 16.9
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY FOREIGN STOCKS++
- ---------------------------------------------------------------------------------------------------------------------------
ARGENTINA 150,473 Banco de Galicia S.A. (ADR)* (3). . . 2,868,834 3,084,696 0.6
134,550 Banco Frances del Rio de la Plata S.A.
(Class A) (ADR)* (3). . . . . . . . . 3,272,016 3,616,031 0.7
100,000 Yacimientos Petroliferos Fiscales S.A.
(Sponsored) (ADR)* (21). . . . . . . 2,345,882 2,162,500 0.4
------------- ------------- -----
8,486,732 8,863,227 1.7
- ---------------------------------------------------------------------------------------------------------------------------
CANADA 172,100 Canadian Pacific Ltd. (18). . . . . . 2,710,067 3,119,312 0.6
77,400 Northern Telecommunications,
Ltd. (27). . . . . . . . . . . . . . . 2,137,422 3,328,200 0.6
------------- ------------- -----
4,847,489 6,447,512 1.2
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SHARES VALUE PERCENT OF
COUNTRY HELD FOREIGN STOCKS++ COST (NOTE 1A) NET ASSETS
GERMANY 10,250 Mannesmann AG (17). . . . . . . . . . . . $ 2,195,390 $ 3,270,119 0.6%
9,750 Preussag AG (18). . . . . . . . . . . . . 2,569,641 2,731,226 0.5
6,150 Siemens AG (12). . . . . . . . . . . . . 2,507,770 3,372,511 0.6
-------------- -------------- -----
7,272,801 9,373,856 1.7
- ---------------------------------------------------------------------------------------------------------------------
HONG KONG 1,600,000 Hong Kong Telecommunications
Ltd. (27). . . . . . . . . . . . . . . . 2,845,505 2,855,665 0.5
- ---------------------------------------------------------------------------------------------------------------------
INDONESIA 65,180 P.T. Indonesian Satellite Corp.
(ADR)* (27). . . . . . . . . . . . . . . 2,516,111 2,379,070 0.4
- ---------------------------------------------------------------------------------------------------------------------
ITALY 680,000 Danieli & Co. (17). . . . . . . . . . . . 2,451,794 1,844,795 0.4
800,000 Societa Finanziara Telefonica S.p.A.
(STET) (27). . . . . . . . . . . . . . . 2,442,272 2,266,246 0.4
-------------- -------------- -----
4,894,066 4,111,041 0.8
- ---------------------------------------------------------------------------------------------------------------------
JAPAN 165,000 Canon, Inc. (12). . . . . . . . . . . . . 2,315,252 2,988,667 0.6
165,000 Dai Nippon Printing Co., Ltd. (23). . . . 2,681,206 2,796,881 0.5
455,000 Hitachi Cable, Ltd. (8). . . . . . . . . 3,313,228 3,221,668 0.6
57,000 Ito-Yokado Co., Ltd. (25). . . . . . . . 2,773,666 3,511,430 0.6
381,000 Kamigumi Co., Ltd (26). . . . . . . . . . 4,232,708 3,657,216 0.7
242,000 Maeda Corp. (4). . . . . . . . . . . . . 2,444,979 2,367,493 0.4
166,000 Matsushita Electric Industries, Ltd. (12) 2,324,955 2,701,279 0.5
430,000 Mitsubishi Electric Co. (11). . . . . . . 2,778,342 3,094,634 0.6
486,000 Mitsubishi Heavy Industry, Ltd. (8). . . 3,075,981 3,874,254 0.7
180,000 Mitsubishi Trust & Banking Corp. (3). . . 3,089,062 2,998,838 0.6
150,000 Nomura Securities Co., Ltd. (33). . . . . 3,097,803 3,269,082 0.6
310,000 Okumura Corp. (4). . . . . . . . . . . . 2,626,893 2,822,549 0.5
60,000 Rohm Company Ltd. (12). . . . . . . . . . 3,105,057 3,388,222 0.6
60,000 SMC Corp. (17). . . . . . . . . . . . . . 3,085,930 4,341,341 0.8
130,000 Sanwa Bank, Ltd. (3). . . . . . . . . . . 2,639,823 2,644,324 0.5
285,000 Sumitomo Corp. (30). . . . . . . . . . . 2,414,459 2,898,586 0.6
305,000 Tokio Marine and Fire Insurance Co.,
Ltd. (16). . . . . . . . . . . . . . . . 3,851,033 3,988,280 0.7
550,000 Toray Industries Ltd. (28). . . . . . . . 3,773,274 3,622,627 0.7
-------------- -------------- -----
53,623,651 58,187,371 10.8
NETHERLANDS 466 ABN-AMRO Holdings N.V. (Preferred)
(3). . . . . . . . . . . . . . . . . . . 15,383 20,019 0.0
29,000 Royal Dutch Petroleum Co., N.V.
(ADR)* (21). . . . . . . . . . . . . . .
3,006,732 4,092,625 0.8
110,000 Singer Co. N.V. (a) (34). . . . . . . . . 2,946,559 3,066,250 0.6
-------------- -------------- -----
5,968,674 7,178,894 1.4
PHILIPPINES 40,000 Philippine Long Distance Telephone Co.
(ADR)* (27). . . . . . . . . . . . . . . 2,829,796 2,165,000 0.4
SPAIN 102,400 Repsol S.A. (Sponsored) (ADR)* (21). . . 3,034,619 3,366,400 0.6
SWITZERLAND 3,300 BBC Brown Boveri & Cie AG (8). . . . . . 2,297,018 3,842,878 0.7
2,300 Sandoz AG (22). . . . . . . . . . . . . . 1,996,772 2,110,715 0.4
-------------- -------------- -----
4,293,790 5,953,593 1.1
UNITED KINGDOM 294,000 GKN PLC (6). . . . . . . . . . . . . . . 2,318,167 3,554,942 0.6
585,000 General Electric Co. PLC (11). . . . . . 2,809,289 3,223,531 0.6
207,000 Imperial Chemical Industries PLC (9). . . 2,402,001 2,449,954 0.5
-------------- -------------- -----
7,529,457 9,228,427 1.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 108,142,691 120,110,056 22.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FACE VALUE PERCENT OF
COUNTRY AMOUNT** FOREIGN BONDS++ COST (NOTE 1A) NET ASSETS
CANADA C$ 15,800,000 Government of Canada,
7.25% due 6/01/2003 (15). . . . . . . $11,839,689 $ 11,791,527 2.2%
- ------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM UK Treasury Gilt (15):
(pound sterling) 8,190,000 7.25% due 3/30/1998. . . . . . . . . 12,651,800 12,946,911 2.4
75,000 9.75% due 8/27/2002. . . . . . . . . 149,409 132,277 0.0
3,000,000 8.00% due 6/10/2003. . . . . . . . . 4,822,692 4,867,605 0.9
------------- -------------- -----
17,623,901 17,946,793 3.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS 29,463,590 29,738,320 5.5
- ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------
US Treasury Notes:
US$ 14,000,000 5.75% due 8/15/2003. . . . . . . . . 14,037,891 14,168,420 2.6
29,000,000 7.25% due 8/15/2004. . . . . . . . . 29,290,000 32,248,870 6.0
40,000,000 7.875% due 11/15/2004. . . . . . . . 39,980,781 46,300,000 8.5
10,000,000 6.50% due 8/15/2005. . . . . . . . . 9,966,406 10,653,100 2.0
- ------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS 93,275,078 103,370,390 19.1
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER***US$ 10,000,000 Ciesco L.P., 5.53% due 2/20/1996. . . 9,920,122 9,920,122 1.9
20,000,000 Corporate Asset Funding Co. Inc.,
5.72% due 1/04/1996. . . . . . . . . 19,984,111 19,984,111 3.7
21,211,000 General Electric Capital Corp., 5.90%
due 1/02/1996. . . . . . . . . . . . 21,200,571 21,200,571 3.9
12,000,000 Sandoz Corporation, 5.75% due
1/29/1996. . . . . . . . . . . . . . 11,942,500 11,942,500 2.2
------------- -------------- ----
63,047,304 63,047,304 11.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT** SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
US GOVERNMENT & US$43,495,000 Federal Home Loan Bank, 5.58% due
AGENCY OBLIGATIONS*** 1/19/1996. . . . . . . . . . . . . . $ 43,360,166 $ 43,360,166 8.0%
Federal National Mortgage Association:
20,000,000 5.65% due 1/12/1996. . . . . . . . . 19,959,195 19,959,195 3.7
20,000,000 5.59% due 1/18/1996. . . . . . . . . 19,940,994 19,940,994 3.7
30,000,000 5.67% due 1/18/1996. . . . . . . . . 29,910,225 29,910,225 5.5
7,000,000 5.50% due 1/19/1996. . . . . . . . . 6,978,611 6,978,611 1.3
----------- ----------- -------
120,149,191 120,149,191 22.2
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 183,196,495 183,196,495 33.9
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . $491,055,965 527,857,629 97.7
--------------
UNREALIZED APPRECIATION ON FORWARD FOREIGN -- ----------
EXCHANGE CONTRACTS++. . . . . . . . . . . . . . . . . . . . . 9,681,629 1.8
OTHER ASSETS LESS LIABILITIES. . . . . . . . . . . . . . . . . 2,702,355 0.5
-------------- -------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $540,241,613 100.0%
-------------- -------
-- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** 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.
(a) 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, investment made,
or services performed in the country, or in which at least 50% of the assets
of the issuers are situated.
+ Non-income producing securities.
++ Corresponding industry groups for foreign stocks and bonds:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) Automobiles (18) Multi-Industry
(2) Automotive Equipment (19) Natural Gas
(3) Banking (20) Packaging
(4) Building & Construction (21) Petroleum
(5) Building Materials (22) Pharmaceutical
(6) Business & Public Service (23) Printing & Publishing
(7) Business Publishing (24) Real Estate
(8) Capital Goods (25) Retail Stores
(9) Chemicals (26) Shipping
(10) Diversified (27) Telecommunications
(11) Electrical Equipment (28) Textiles
(12) Electronics (29) Toys
(13) Food (30) Trading
(14) Glass (31) Utilities
(15) Government (Bonds) (32) Utilities--Electric
(16) Insurance (33) Financial Services
(17) Machinery (34) Appliances
</TABLE>
++ Forward foreign exchange contracts as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
UNREALIZED
EXPIRATION APPRECIATION
FOREIGN CURRENCY SOLD DATE (NOTE 1B)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Y4,819,200,000. . . . . . . . . . . . . . . . . . . . . January 1996 $ 9,681,629
- --------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS (US$ COMMITMENT--$56,457,357) $ 9,681,629
---------------
---------------
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
69
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
(IN US DOLLARS)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARGENTINA TELECOMMUNICATIONS 7,900 Central Costanera S.A. (ADR)* (b) $ 261,847 $ 240,950 0.2%
25,600 Telecom Argentina Stet S.A.
(ADR)*. . . . . . . . . . . . . . 1,160,819 1,219,200 0.8
44,800 Telefonica de Argentina S.A.
(ADR)*. . . . . . . . . . . . . . 1,173,168 1,220,800 0.8
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
ARGENTINA 2,595,834 2,680,950 1.8
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA UTILITIES--GAS 434,496 Australian Gas & Light Co. Ltd.. 1,238,060 1,631,611 1.1
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRALIA 1,238,060 1,631,611 1.1
- ------------------------------------------------------------------------------------------------------------------------
AUSTRIA UTILITIES--GAS 11,300 Energie-Versorgung
Niederoesterreich AG (EVN). . . . 1,388,213 1,555,870 1.1
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
AUSTRIA 1,388,213 1,555,870 1.1
- ------------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 18,000 Telecomunicacoes Brasileiras
S.A.-Telebras (ADR)*. . . . . . . 870,759 852,750 0.6
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BRAZIL 870,759 852,750 0.6
- ------------------------------------------------------------------------------------------------------------------------
CANADA TELECOMMUNICATIONS 56,000 BC Telecom, Inc.. . . . . . . . . 1,052,989 1,026,167 0.7
--------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 70,100 Transcanada Pipeline Co., Ltd.
(ADR)*. . . . . . . . . . . . . . 1,045,275 963,875 0.7
93,000 Westcoast Energy, Inc.. . . . . . 1,594,099 1,360,125 0.9
------------ ------------ ----------
2,639,374 2,324,000 1.6
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
CANADA 3,692,363 3,350,167 2.3
- ------------------------------------------------------------------------------------------------------------------------
CHILE TELECOMMUNICATIONS 14,400 Compania de Telefonos de Chile
S.A. (ADR)*. . . . . . . . . . . 1,254,995 1,193,400 0.8
--------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 20,000 Chilgener S.A. (ADR)*. . . . . . 460,000 500,000 0.4
35,100 Distribuidora Chilectra
Metropolitan, S.A. (ADR)* (b). . 1,098,338 1,737,450 1.2
48,300 Enersis S.A. (ADR)*. . . . . . . 1,026,061 1,376,550 0.9
------------ ------------ ----------
2,584,399 3,614,000 2.5
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN CHILE 3,839,394 4,807,400 3.3
- ------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 77,000 Tele Danmark A/S (ADR)*. . . . . 1,826,433 2,127,125 1.4
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
DENMARK 1,826,433 2,127,125 1.4
- ------------------------------------------------------------------------------------------------------------------------
FRANCE UTILITIES--WATER 16,409 Generale des Eaux. . . . . . . . 1,872,761 1,639,961 1.1
7,111 Lyonnaise des Eaux-Dumez. . . . . 722,326 685,399 0.5
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
FRANCE 2,595,087 2,325,360 1.6
- ------------------------------------------------------------------------------------------------------------------------
GERMANY UTILITIES--ELECTRIC 40,000 Veba AG. . . . . . . . . . . . . 1,305,397 1,701,711 1.1
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
GERMANY 1,305,397 1,701,711 1.1
- ------------------------------------------------------------------------------------------------------------------------
HONG KONG UTILITIES--ELECTRIC 57,500 Hong Kong Electric Holdings, Ltd. 180,587 188,518 0.1
--------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 473,760 The Hong Kong & China Gas Co.,
Ltd.. . . . . . . . . . . . . . . 755,615 762,844 0.5
32,900 The Hong Kong & China Gas Co.,
Ltd. (Warrants) (a). . . . . . . -- 43 0.0
------------ ------------ ----------
755,615 762,887 0.5
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
IN HONG KONG 936,202 951,405 0.6
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDIA UTILITIES--ELECTRIC 4,500 CESC Ltd. (GDR)** (b). . . . . . $ 40,950 $ 12,375 0.0%
7,500 CESC Ltd. (Units) (c). . . . . . 400,050 90,000 0.1
1,000 Tata Electric Companies
(GDR)** (b). . . . . . . . . . . 710,000 320,000 0.2
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN INDIA 1,151,000 422,375 0.3
- ------------------------------------------------------------------------------------------------------------------------
INDONESIA TELECOMMUNICATIONS 1,110 P.T. Indonesian Satellite
Corp. (ADR)*. . . . . . . . . . 35,576 40,515 0.0
8,000 P.T. Telekomunikasi Indonesia
(ADR)*. . . . . . . . . . . . . 144,000 202,000 0.1
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
INDONESIA 179,576 242,515 0.1
- ------------------------------------------------------------------------------------------------------------------------
ITALY TELECOMMUNICATIONS 761,900 Societa Finanziara Telefonica
S.p.A. (STET). . . . . . . . . . 1,629,934 1,557,449 1.0
729,600 Telecom Italia S.p.A.. . . . . . 950,865 1,136,979 0.8
729,600 Telecom Italia Mobile S.p.A.. . 684,328 1,286,582 0.9
------------ ------------ ----------
3,265,127 3,981,010 2.7
------------------------------------------------------------------------------------------------------------
UTILITIES--GAS 513,400 Italgas Torino. . . . . . . . . 1,581,576 1,564,493 1.0
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN ITALY 4,846,703 5,545,503 3.7
- ------------------------------------------------------------------------------------------------------------------------
KOREA UTILITIES--ELECTRIC 40,800 Korea Electric Power Corp.
(ADR)*. . . . . . . . . . . . . 821,100 1,091,400 0.8
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
KOREA 821,100 1,091,400 0.8
- ------------------------------------------------------------------------------------------------------------------------
MALAYSIA TELECOMMUNICATIONS 139,000 Telekom Malaysia BHD. . . . . . 962,438 1,084,184 0.8
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
MALAYSIA 962,438 1,084,184 0.8
- ------------------------------------------------------------------------------------------------------------------------
MEXICO TELECOMMUNICATIONS 29,000 Telefonos de Mexico, S.A. de C.V.
(Telemex) (ADR)*. . . . . . . . 1,706,306 924,375 0.6
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
MEXICO 1,706,306 924,375 0.6
- ------------------------------------------------------------------------------------------------------------------------
NEW TELECOMMUNICATIONS 36,800 Telecom Corporation of New
ZEALAND Zealand Ltd. (ADR)*. . . . . . . 1,680,030 2,553,000 1.7
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
NEW ZEALAND 1,680,030 2,553,000 1.7
- ------------------------------------------------------------------------------------------------------------------------
PHILIPPINES TELECOMMUNICATIONS 21,800 Philippine Long Distance
Telephone Co. (ADR)* 1,270,791 1,179,925 0.8
------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 57,000 Manila Electric Co. (MERALCO)
'B'. . . . . . . . . . . . . . . 518,117 465,395 0.3
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
PHILIPPINES 1,788,908 1,645,320 1.1
- ------------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 20,600 +Portugal Telecom S.A. (ADR)*. . 385,735 391,400 0.3
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
PORTUGAL 385,735 391,400 0.3
- ------------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 50,700 Telefonica de Espana S.A. (ADR)* 1,942,165 2,123,062 1.4
------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 36,400 Empresa Nacional de Electricidad,
S.A. (Endesa) (ADR)*. . . . . . 1,634,684 2,083,900 1.4
15,000 HidroElectrica Del Cantabrico,
S.A.. . . . . . . . . . . . . . 503,484 519,588 0.4
131,000 Iberdrola I S.A.. . . . . . . . 879,896 1,199,258 0.8
------------ ------------ ----------
3,018,064 3,802,746 2.6
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN SPAIN 4,960,229 5,925,808 4.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THAILAND TELECOMMUNICATIONS 2,000 +TelecomAsia Corp. Public
Co., Ltd. (ADR)*. . . . . . . . $ 43,740 $ 56,000 0.0%
------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 68,000 +Electricity Generating Company
Ltd. (EGCOMP). . . . . . . . . . 60,715 232,248 0.2
------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN
THAILAND 104,455 288,248 0.2
- ---------------------------------------------------------------------------------------------------------------------
UNITED TELECOMMUNICATIONS 57,000 British Telecommunications PLC. 406,712 313,203 0.2
KINGDOM
10,000 British Telecommunications PLC
(ADR)*. . . . . . . . . . . . . 741,450 565,000 0.4
87,000 Vodafone Group PLC (ADR)*. . . . 2,549,289 3,066,750 2.0
------------- ------------- ---------
3,697,451 3,944,953 2.6
------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 86,000 London Electricity PLC. . . . . 860,944 765,561 0.5
60,000 Midlands Electricity PLC. . . . 684,138 707,803 0.5
174,822 National Grid Holding Co. PLC. . 561,038 541,361 0.4
140,000 National Power PLC. . . . . . . 1,010,949 976,799 0.7
90,000 Powergen PLC. . . . . . . . . . 658,010 743,892 0.5
58,000 South Wales Electricity PLC. . . 691,336 839,958 0.5
------------- ------------- ---------
4,466,415 4,575,374 3.1
TOTAL COMMON STOCKS IN THE
UNITED KINGDOM 8,163,866 8,520,327 5.7
- ---------------------------------------------------------------------------------------------------------------------
UNITED TELECOMMUNICATIONS 36,400 +AirTouch Communications, Inc.. . 879,157 1,028,300 0.7
STATES
10,000 AT&T Corp.. . . . . . . . . . . 564,350 647,500 0.4
45,800 Ameritech Corp.. . . . . . . . . 1,864,458 2,702,200 1.8
31,800 Bell Atlantic Corp.. . . . . . . 1,872,160 2,126,625 1.4
67,400 BellSouth Corp.. . . . . . . . . 2,020,584 2,931,900 2.0
32,000 Frontier Corporation.. . . . . . 653,920 960,000 0.6
53,500 GTE Corp.. . . . . . . . . . . . 1,866,628 2,354,000 1.6
150,000 NYNEX Corp.. . . . . . . . . . . 5,893,598 8,100,000 5.5
45,300 SBC Communications. . . . . . . 1,921,580 2,604,750 1.8
60,000 Sprint Corporation. . . . . . . 2,135,074 2,392,500 1.6
66,900 U S West, Inc.. . . . . . . . . 1,765,286 2,391,675 1.6
------------- ------------- ---------
21,436,795 28,239,450 19.0
------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 65,600 Allegheny Power System, Inc.. . 1,689,846 1,877,800 1.3
47,500 Boston Edison Co.. . . . . . . . 1,386,299 1,401,250 0.9
84,192 CINergy Corp.. . . . . . . . . . 2,052,668 2,578,380 1.7
49,300 Consolidated Edison Co. of New
York. . . . . . . . . . . . . . 1,597,050 1,577,600 1.1
31,500 DTE Energy. . . . . . . . . . . 989,953 1,086,750 0.7
26,400 Dominion Resources, Inc.. . . . 1,242,516 1,089,000 0.7
61,000 Duke Power Co.. . . . . . . . . 2,452,906 2,889,875 1.9
54,300 Entergy Corp.. . . . . . . . . . 1,905,240 1,588,275 1.1
85,200 General Public Utilities Corp.. 2,559,840 2,896,800 2.0
146,200 Houston Industries, Inc.. . . . 3,215,466 3,545,350 2.4
56,000 NIPSCO Industries, Inc.. . . . . 1,787,890 2,142,000 1.4
50,700 New York State Electric & Gas
Corp.. . . . . . . . . . . . . . 1,537,761 1,311,862 0.9
42,300 Northeast Utilities Co.. . . . . 1,096,216 1,031,062 0.7
93,800 PECO Energy Co.. . . . . . . . . 2,719,313 2,825,725 1.9
50,000 Pacific Gas and Electric Company 1,378,500 1,418,750 1.0
72,800 PacifiCorp.. . . . . . . . . . . 1,401,416 1,547,000 1.0
44,000 Public Service Co. of Colorado. 1,312,146 1,556,500 1.1
64,000 SCEcorp.. . . . . . . . . . . . 1,220,732 1,136,000 0.8
86,200 Southern Co.. . . . . . . . . . 1,846,654 2,122,675 1.4
40,600 Western Resources Co.. . . . . . 1,393,851 1,355,025 0.9
------------- ------------- ---------
34,786,263 36,977,679 24.9
------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED UTILITIES--GAS 33,000 The Brooklyn Union Gas Co.. . $ 855,855 $ 965,250 0.7%
STATES
(CONCLUDED) 52,000 The Coastal Corp.. . . . . . . 1,509,758 1,937,000 1.3
24,800 El Paso Natural Gas Co.. . . . 895,148 703,700 0.5
40,000 Enron Global Power & Pipelines
L.L.C., Com. . . . . . . . . . 930,101 995,000 0.7
26,100 National Fuel Gas Company. . . 788,314 877,612 0.6
25,000 New Jersey Resources Corp.. . 656,623 753,125 0.5
53,500 Questar Corp.. . . . . . . . . 1,908,628 1,792,250 1.2
72,200 Sonat, Inc.. . . . . . . . . . 2,342,585 2,572,125 1.7
49,800 Washington Gas Light Co.. . . 1,046,197 1,020,900 0.7
78,600 Williams Co., Inc.. . . . . . 2,298,643 3,448,575 2.3
-------------- -------------- -------------
13,231,852 15,065,537 10.2
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE
UNITED STATES 69,454,910 80,282,666 54.1
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON
STOCKS 116,492,998 130,901,470 88.3
- ---------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT FIXED-INCOME SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------------
AUSTRALIA TELECOMMUNICATIONS US$ 1,040,000 Telstra Corp. Ltd., 6.50% due
7/31/2003 (b). . . . . . . . . 1,084,062 1,062,100 0.7
---------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES
IN AUSTRALIA 1,084,062 1,062,100 0.7
- ---------------------------------------------------------------------------------------------------------------------------------
KOREA UTILITIES--ELECTRIC 1,000,000 Korea Electric Power Corp.,
6.375% due 12/01/2003. . . . . 985,510 996,160 0.7
---------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES
IN KOREA 985,510 996,160 0.7
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FIXED-
INCOME SECURITIES 2,069,572 2,058,260 1.4
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER*** 7,457,000 General Electric Capital Corp.,
5.90% due 1/02/1996. . . . . . 7,452,112 7,452,112 5.0
- ---------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & 6,000,000 Federal Home Loan Bank,
AGENCY OBLIGATIONS*** Discount Note, 5.67%
due 1/16/1996. . . . . . . . . 5,982,990 5,982,990 4.0
400,000 Federal Home Loan Mortgage
Corp., 5.47% due 2/12/1996. . 397,265 397,265 0.3
-------------- -------------- -------------
6,380,255 6,380,255 4.3
------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 13,832,367 13,832,367 9.3
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . $132,394,937 146,792,097 99.0
--------------
--------------
OTHER ASSETS LESS LIABILITIES. 1,433,180 1.0
-------------- -------------
NET ASSETS. . . . . . . . . . $148,225,277 100.0%
-------------- -------------
-------------- ------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** 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) 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 security as to resale. The value of the Fund's investment in
restricted securities was approximately $3,373,000, representing 2.2% of net
assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
VALUE
ISSUE ACQUISITION DATE(S) COST (NOTE 1A)
- -- --
- ---------------------------------------------------- -------------------- ------------ -------------
CESC Ltd. (GDR). . . . . . . . . . . . . . . . . 5/17/1994 $ 40,950 $ 12,375
Central Costanera S.A. (ADR). . . . . . . . . . 12/17/1993 261,847 240,950
Distribuidora Chilectra Metropolitana S.A. (ADR) 8/06/1993-12/21/1993 1,098,338 1,737,450
Tata Electric Companies (GDR). . . . . . . . . . 2/22/1994 710,000 320,000
Telstra Corp. Ltd., 6.50% due 7/31/2003. . . . . 7/26/1993-9/29/1993 1,084,062 1,062,100
TOTAL $3,195,197 $ 3,372,875
------------ -------------
-- -------- -- ---------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(c) Each unit consists of five GDR's and two warrants of CESC Ltd.
+ Non-income producing security.
See Notes to Financial Statements.
73
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
AEROSPACE--1.2% B B3 $4,000,000++ Howmet Corp., 10.00% due
12/01/2003. . . . . . . . . . . . . . $ 4,000,000 $ 4,200,000
- ------------------------------------------------------------------------------------------------------------------------
AIRLINES--1.7% BB+ Baa2 500,000 Delta Air Lines Inc., 10.50% due
4/30/2016. . . . . . . . . . . . . . 506,875 630,325
United Air Lines, Inc.:
BB+ Baa1 500,000 10.02% due 3/22/2014. . . . . . . . . 506,250 598,175
BB+ Baa1 1,000,000 9.35% due 4/07/2016. . . . . . . . . . 1,016,260 1,102,500
BB- B1 4,000,000 USAir, Inc., 10.375% due
3/01/2013. . . . . . . . . . . . . . . 3,935,000 3,720,000
------------- --------------
5,964,385 6,051,000
- ------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE--1.2% NR* B1 1,000,000 Exide Corp., 10.00% due 4/15/2005. . . 1,000,000 1,085,000
B B3 2,000,000 SPX Corp., 11.75% due 6/01/2002. . . . 2,043,750 2,120,000
B+ Ba3 1,000,000 Walbro Corp., 9.875% due 7/15/2005. . 980,000 997,500
------------- --------------
4,023,750 4,202,500
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING & B- B3 3,000,000 ACT III Broadcasting Inc., 10.25% due
PUBLISHING--5.6% 12/15/2005. . . . . . . . . . . . . . 3,000,000 3,063,750
B B1 4,000,000 American Media, Inc., 11.625% due
11/15/2004. . . . . . . . . . . . . . 4,015,000 4,040,000
BB- Ba3 750,000 Heritage Media Services Corporation,
11.00% due 6/15/2002. . . . . . . . . 789,063 796,875
BB- Ba3 1,000,000 K-III Communications Corp., 10.25% due
6/01/2004. . . . . . . . . . . . . . 995,000 1,070,000
B Caa 4,300,000 NWCG Holding Corp., 13.50% due
6/15/1999 (d). . . . . . . . . . . . 2,737,640 2,967,000
BB- B3 2,500,000 SCI Television Inc., 11.00% due
6/30/2005. . . . . . . . . . . . . . 2,560,000 2,643,750
Sinclair Broadcasting Group Inc.:
B+ B3 2,500,000 10.00% due 12/15/2003. . . . . . . . . 2,436,250 2,550,000
B+ B1 1,250,000 10.00% due 9/30/2005. . . . . . . . . 1,250,000 1,278,125
B* B2 1,500,000 Young Broadcasting Corp., 10.125% due
2/15/2005. . . . . . . . . . . . . . 1,500,000 1,582,500
------------- --------------
19,282,953 19,992,000
- ------------------------------------------------------------------------------------------------------------------------
BROADCASTING/ CCC+ Caa 5,023,939 American Telecasting, Inc., 14.38% due
CABLE--6.1% 6/15/2004 (d). . . . . . . . . . . . 3,103,217 3,453,958
CCC B3 5,000,000 Australis Media Ltd., 14.07% due
5/15/2003 (d). . . . . . . . . . . . 2,756,486 3,612,500
BB- B2 9,000,000++ Bell Cablemedia PLC., 11.74% due
9/15/2005 (d). . . . . . . . . . . . 5,282,944 5,647,500
BB- B3 2,500,000 Cai Wireless Systems Inc., 12.25% due
9/15/2002. . . . . . . . . . . . . . 2,500,000 2,668,750
Videotron Holdings PLC.:
B+ B3 5,500,000 11.77% due 7/01/2004 (d). . . . . . . 3,597,244 3,836,250
BB+ Baa3 2,500,000 10.625% due 2/15/2005. . . . . . . . . 2,559,375 2,681,250
------------- --------------
19,799,266 21,900,208
- ------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS-- B+ B3 3,340,000 Pacific Lumber Co., 10.50% due
0.9% 3/01/2003. . . . . . . . . . . . . . 3,252,088 3,164,650
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--1.7% B+ B1 1,660,000 Essex Group, Inc., 10.00% due
5/01/2003. . . . . . . . . . . . . . . 1,668,925 1,626,800
B- B3 4,500,000 International Wire Group Inc., 11.75%
due 6/01/2005. . . . . . . . . . . . 4,490,625 4,275,000
------------- --------------
6,159,550 5,901,800
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS--3.8% B B2 4,100,000 Agricultural Minerals & Chemicals Co.,
L.P., 10.75% due 9/30/2003. . . . . . 4,123,188 4,530,500
B+ Ba3 7,495,000 G-I Holdings Inc., 12.77% due
10/01/1998 (d). . . . . . . . . . . . 5,421,149 5,808,625
B B3 3,000,000 Laroche Industries Inc., 13.00% due
8/15/2004. . . . . . . . . . . . . . 2,991,250 3,187,500
------------- --------------
12,535,587 13,526,625
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS--5.3% CCC+ B3 $6,000,000 NEXTEL Communications, Inc., 14.11%
due 8/15/2004 (d). . . . . . . . . . $ 3,275,312 $ 3,255,000
B- B3 3,000,000 Panamsat L.P., 12.16% due
8/01/2003 (d). . . . . . . . . . . . 2,148,774 2,460,000
BB- B2 3,000,000 Rogers Communications, Inc., 10.875%
due 4/15/2004. . . . . . . . . . . . 3,042,500 3,135,000
BB- B1 3,000,000 Telecom Argentina S.A., 8.375% due
10/18/2000. . . . . . . . . . . . . 2,357,500 2,842,500
BB- B1 4,000,000 Telefonica de Argentina S.A., 11.875%
due 11/01/2004. . . . . . . . . . . 3,917,780 4,140,000
CCC+ B3 3,000,000 USA Mobile Communications Holdings,
Inc., 9.50% due 2/01/2004. . . . . . 2,710,000 2,970,000
------------- --------------
17,451,866 18,802,500
- ----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--6.2% BB+ Ba3 4,000,000 ADT Operations, Inc., 9.25% due
8/01/2003. . . . . . . . . . . . . . 4,010,000 4,290,000
BB- B3 3,890,000 Coltec Industries, Inc., 10.25% due
4/01/2002. . . . . . . . . . . . . . 4,070,450 3,996,975
CCC+ B3 2,500,000 Interlake Corp., 12.125% due
3/01/2002. . . . . . . . . . . . . . 2,354,188 2,375,000
B+ B2 2,000,000 JB Poindexter & Co., 12.50% due
5/15/2004. . . . . . . . . . . . . . 2,000,000 1,605,000
B+ B3 3,000,000 Jordan Industries Inc., 10.375% due
8/01/2003. . . . . . . . . . . . . . 2,993,000 2,670,000
NR* NR* 890,000 MacAndrews & Forbes Group, Inc.,
13.00% due 3/01/1999. . . . . . . . 868,373 898,900
Sequa Corp.:
BB B2 750,000 9.625% due 10/15/1999. . . . . . . . 740,625 742,500
B+ B3 2,500,000 9.375% due 12/15/2003. . . . . . . . 2,512,813 2,325,000
BB- B1 3,000,000 Sherritt Gordon, Ltd., 9.75% due
4/01/2003. . . . . . . . . . . . . . 2,985,938 3,195,000
------------- --------------
22,535,387 22,098,375
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER-- B NR* 4,950,000 Coleman Holdings, Inc., 11.41% due
PRODUCTS--6.8% 5/27/1998 (d). . . . . . . . . . . . 3,779,986 4,009,500
B+ Ba3 1,250,000 Coty Inc., 10.25% due 5/01/2005. . . 1,250,000 1,325,000
NR* B2 4,000,000 Herff Jones Inc., 11.00% due
8/15/2005. . . . . . . . . . . . . . 4,000,000 4,250,000
B+ Ba2 7,000,000 International Semi-Tech
Microelectronics, Inc., 13.13% due
8/15/2003 (d). . . . . . . . . . . . 3,734,702 3,675,000
B- Caa 4,000,000 Polymer Group Inc., 12.25% due
7/15/2002. . . . . . . . . . . . . . 3,967,500 4,120,000
B B2 3,000,000 Revlon Consumer Products Corp., 9.375%
due 4/01/2001. . . . . . . . . . . . 2,678,438 3,037,500
B- B3 4,000,000 Samsonite Corp., 11.125% due
7/15/2005. . . . . . . . . . . . . . 3,851,875 3,840,000
------------- --------------
23,262,501 24,257,000
- ----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE B B2 200,000 OHM Corp., 8.00% due
BONDS+--0.1% 10/01/2006 (1). . . . . . . . . . . . 186,500 173,000
- ----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED--0.7% Foamex L.P. :
B+ B1 530,000 9.50% due 6/01/2000. . . . . . . . . 517,413 523,375
B B1 1,950,000 11.25% due 10/01/2002. . . . . . . . 1,936,375 1,950,000
------------- --------------
2,453,788 2,473,375
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (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--6.2% BB- Ba3 $2,500,000 California Energy Company, Inc., 9.875%
due 6/30/2003. . . . . . . . . . . . . $ 2,518,750 $ 2,625,000
B+ B1 6,000,000 Clark R & M Holdings, Inc., 11.00% due
2/15/2000 (d). . . . . . . . . . . . . 3,867,581 3,990,000
NR* NR* 1,500,000 Consolidated Hydro, Inc., 11.80% due
7/15/2003 (d). . . . . . . . . . . . . 1,120,411 875,625
BB- B1 2,925,000 Energy Ventures, Inc., 10.25% due
3/15/2004. . . . . . . . . . . . . . . 2,901,875 3,085,875
BB B1 1,580,000 Gulf Canada Resources, Ltd., 9.00% due
8/15/1999. . . . . . . . . . . . . . . 1,517,450 1,666,900
BB+ B2 3,500,000 TransTexas Gas Corp., 11.50% due
6/15/2002. . . . . . . . . . . . . . . 3,500,000 3,613,750
B- Caa 3,400,000 Transamerican Refining Corp., 19.11% due
2/15/2002 (d). . . . . . . . . . . . . 2,253,092 2,057,000
BB- B1 4,500,000 Yacimientos Petroliferos Fiscales S.A.,
8.00% due 2/15/2004. . . . . . . . . . 3,694,375 4,230,000
------------- --------------
21,373,534 22,144,150
- -------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--2.5% BB- B1 4,500,000 Marvel Holdings, Inc., 9.125% due
2/15/1998. . . . . . . . . . . . . . . 3,999,375 4,140,000
B B2 5,000,000 Six Flags Theme Parks, 12.25% due
6/15/2005 (d). . . . . . . . . . . . . 3,782,056 3,900,000
D Caa 3,415,000 SpectraVision Inc., 16.80% due
10/01/2001 (d). . . . . . . . . . . . 2,983,294 683,000
------------- --------------
10,764,725 8,723,000
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- D Ca 1,500,000 Lomas Mortgage USA, Inc., 10.25% due
1.3% 10/01/2002. . . . . . . . . . . . . . 1,561,250 720,000
BB- B1 4,000,000 Reliance Group Holdings Inc., 9.75% due
11/15/2003. . . . . . . . . . . . . . 3,898,750 4,120,000
------------- --------------
5,460,000 4,840,000
- -------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--3.3% B+ B1 3,000,000 Chiquita Brands International Inc.,
9.125% due 3/01/2004. . . . . . . . . . 2,950,625 2,970,000
B B3 2,500,000 Del Monte Corp., 10.00% due
5/01/2003. . . . . . . . . . . . . . . 2,310,000 2,262,500
B- B2 3,000,000 Envirodyne Industries, Inc., 10.25%
due 12/01/2001. . . . . . . . . . . . . 3,056,250 2,205,000
B B3 4,500,000 Specialty Foods Corp., 11.125%
due 10/01/2002. . . . . . . . . . . . . 4,444,375 4,365,000
------------- --------------
12,761,250 11,802,500
- --------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BB- B1 3,000,000 Republic of Argentina, 8.375% due
OBLIGATIONS--0.7% 12/20/2003. . . . . . . . . . . . . . 2,257,500 2,527,500
- -------------------------------------------------------------------------------------------------------------------------
GAMING--4.1% BB B1 3,000,000 Bally's Park Place Funding Corp., 9.25%
due 3/15/2004. . . . . . . . . . . . . 2,850,000 3,052,500
158,000 Goldriver Hotel & Casino Corp., 13.375%
D NR* due 8/31/1999. . . . . . . . . . . . . 222,801 74,260
4,000,000 Greate Bay Properties, Inc., 10.875% due
B+ B2 1/15/2004. . . . . . . . . . . . . . . 3,590,000 3,510,000
4,500,000 Harrah's Jazz Company, 14.25% due
D Caa 11/15/2001. . . . . . . . . . . . . . 4,468,750 1,237,500
250,000 Pioneer Finance Corp., 13.50% due
B- B3 12/01/1998. . . . . . . . . . . . . . 264,062 195,000
2,500,000 Showboat Inc., 13.00% due
B B2 8/01/2009. . . . . . . . . . . . . . . 2,500,000 2,812,500
3,000,000 Trump Plaza Funding, Inc., 10.875% due
B+ B3 6/15/2001. . . . . . . . . . . . . . . 2,963,277 3,105,000
552,658 Trump Taj Mahal Funding, Inc., 11.35%
NR* Caa due 11/15/1999 (a). . . . . . . . . . 446,353 518,893
------------- --------------
17,305,243 14,505,653
- -------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES--0.9% B+ Ba3 2,900,000 Tenet Healthcare Corp., 10.125% due
3/01/2005. . . . . . . . . . . . . . . 2,900,000 3,226,250
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
HOME BUILDERS--0.8% B- B2 $2,500,000 Del Webb Corporation, 9.00% due
2/15/2006. . . . . . . . . . . . . . . . $ 2,497,500 $ 2,375,000
B B1 250,000 K. Hovnanian Enterprise Inc., 11.25% due
4/15/2002. . . . . . . . . . . . . . . . 247,812 227,500
------------- --------------
2,745,312 2,602,500
- -----------------------------------------------------------------------------------------------------------------------------
HOTEL(S)--2.2% BB- Ba3 500,000++ HMC Acquisition Properties, 9.00% due
12/15/2007. . . . . . . . . . . . . . . 500,000 505,000
BB- B1 4,000,000 Host Marriott Hospitality Inc., 9.50% due
5/15/2005. . . . . . . . . . . . . . . . 3,873,216 4,085,000
BB- B1 3,500,000 John Q. Hammons Hotel, Inc., 8.875% due
2/15/2004. . . . . . . . . . . . . . . . 3,092,500 3,465,000
------------- --------------
7,465,716 8,055,000
- -----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL- B- B3 3,500,000 Day International Corp., 11.125% due
SERVICES--1.0% 6/01/2005. . . . . . . . . . . . . . . . 3,525,000 3,517,500
- -----------------------------------------------------------------------------------------------------------------------------
METALS & MINING--0.9% B- B2 1,000,000 Kaiser Aluminum and Chemical Corp., 12.75%
due 2/01/2003. . . . . . . . . . . . . . 1,003,750 1,095,000
B- B3 3,000,000 Maxxam Group, Inc., 12.25% due 8/01/2003
(d). . . . . . . . . . . . . . . . . . . 2,204,282 2,055,000
------------- --------------
3,208,032 3,150,000
- -----------------------------------------------------------------------------------------------------------------------------
PACKAGING--4.0% CCC+ Ca 4,000,000 Anchor Glass Container Co., 9.875% due
12/15/2008. . . . . . . . . . . . . . . 3,782,500 2,360,000
Owens-Illinois, Inc.:
B+ B2 2,000,000 10.00% due 8/01/2002. . . . . . . . . . . 2,000,000 2,100,000
BB Ba3 2,000,000 11.00% due 12/01/2003. . . . . . . . . . 2,145,312 2,260,000
B B2 4,000,000 Portola Packaging Inc., 10.75% due
10/01/2005. . . . . . . . . . . . . . . 4,000,000 4,140,000
B- B3 3,660,000 Siligan Holdings, Inc., 12.53% due
12/15/2002 (d). . . . . . . . . . . . . 3,478,600 3,458,700
------------- --------------
15,406,412 14,318,700
- -----------------------------------------------------------------------------------------------------------------------------
PAPER--4.0% B B3 3,000,000 Crown Paper Co., 11.00% due
9/01/2005. . . . . . . . . . . . . . . . 2,740,000 2,625,000
BB Ba2 2,000,000 P.T. Indah Kiat International Finance,
11.875% due 6/15/2002. . . . . . . . . . 1,957,500 2,020,000
BB- B1 3,000,000 Repap Wisconsin Finance, Inc., 9.25% due
2/01/2002. . . . . . . . . . . . . . . . 2,760,000 2,850,000
B B1 1,250,000 Riverwood International Corp., 11.25% due
6/15/2002. . . . . . . . . . . . . . . . 1,340,312 1,356,250
B+ B1 2,000,000 S.D. Warren Co., 12.00% due
12/15/2004. . . . . . . . . . . . . . . . 2,000,000 2,205,000
Stone Container Corp.:
B B1 1,950,000 9.875% due 2/01/2001. . . . . . . . . . . 1,869,375 1,896,375
B+ B1 1,300,000 10.75% due 10/01/2002. . . . . . . . . . 1,287,000 1,342,250
------------- --------------
13,954,187 14,294,875
- -----------------------------------------------------------------------------------------------------------------------------
RESTAURANTS--1.2% CCC+ Caa 3,890,000 Flagstar Corp., 11.375% due
9/15/2003. . . . . . . . . . . . . . . . 3,701,100 2,761,900
B+ Ba3 1,750,000 Foodmaker, Inc., 9.75% due
11/01/2003. . . . . . . . . . . . . . . . 1,722,700 1,610,000
------------- --------------
5,423,800 4,371,900
- -----------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.8% D Caa 4,500,000 Bradlees, Inc., 11.00% due
8/01/2002. . . . . . . . . . . . . . . . 4,466,562 1,125,000
B- Caa 2,500,000 Pamida Holdings, Inc., 11.75% due
3/15/2003. . . . . . . . . . . . . . . . 2,457,187 1,925,000
------------- --------------
6,923,749 3,050,000
- -----------------------------------------------------------------------------------------------------------------------------
SPECIALTY NR* NR* 1,957,000++ Cumberland Farms, 10.50% due
RETAILING--0.5% 10/01/2003. . . . . . . . . . . . . . . . 1,915,414 1,800,440
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
STEEL--2.7% B B1 $4,000,000 Gulf States Steel Acquisition Corp.,
13.50% due 4/15/2003. . . . . . . . . $ 3,975,780 $ 3,530,000
B+ B1 3,000,000 WCI Steel Inc., 10.50% due
3/01/2002. . . . . . . . . . . . . . . 2,990,000 2,917,500
B B2 3,500,000 Weirton Steel Corp., 10.75% due
6/01/2005. . . . . . . . . . . . . . 3,346,250 3,298,750
-------------- ---------------
10,312,030 9,746,250
- ---------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.6% B- B3 2,274,000 Grand Union Co., 12.00% due
9/01/2004. . . . . . . . . . . . . . . 2,187,686 1,967,010
- ---------------------------------------------------------------------------------------------------------------------------
TEXTILES--2.8% B+ B2 3,000,000 Decorative Home Accents, Inc., 13.00%
due 6/30/2002. . . . . . . . . . . . 2,977,008 2,970,000
BB- Ba3 3,500,000 Tultex Corp., 10.625% due 3/15/2005. . 3,500,000 3,561,250
B+ B3 3,500,000 Westpoint Stevens Industries, Inc.,
9.375% due 12/15/2005. . . . . . . . 3,291,250 3,456,250
-------------- ---------------
9,768,258 9,987,500
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.6% B- B3 3,700,000 Transtar Holdings Inc., 11.02% due
12/15/2003 (d). . . . . . . . . . . . 2,464,067 2,442,000
B+ Ba3 3,000,000 Viking Star Shipping Co., 9.625% due
7/15/2003. . . . . . . . . . . . . . 2,905,937 3,075,000
-------------- ---------------
5,370,004 5,517,000
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES--6.5% B+ B1 3,453,000 Beaver Valley Funding Corp., 9.00% due
6/01/2017. . . . . . . . . . . . . . 3,252,225 2,912,536
BB Ba2 2,000,000 Cleveland Electric Illuminating, 9.50%
due 5/15/2005. . . . . . . . . . . . 1,996,160 2,070,000
CTC Mansfield Funding Corp.:
B+ Ba3 1,000,000 10.25% due 3/30/2003. . . . . . . . . 983,750 1,013,750
B+ Ba3 2,300,000 11.125% due 9/30/2016. . . . . . . . 2,402,500 2,448,580
NR* NR* 4,000,000 Gas Argentino S.A., 7.25% due
12/07/1998. . . . . . . . . . . . . . 3,521,372 3,620,000
BB- B1 4,000,000 Metrogas S.A., 12.00% due
8/15/2000. . . . . . . . . . . . . . . 3,935,000 4,050,000
Midland Cogeneration Venture L.P.:
BB Ba3 2,597,494 10.33% due 7/23/2002. . . . . . . . . 2,641,869 2,739,289
B- B2 250,000 11.75% due 7/23/2005 250,000 261,923
BBB- NR* 3,000,000++ Trans Gas de Occidente, 9.79% due
11/01/2010. . . . . . . . . . . . . . 3,000,000 2,970,000
++
Tucson Electric & Power Co.:
NR* NR* 570,387 10.21% due 1/01/2009. . . . . . . . . 529,034 579,393
NR* NR* 500,000 10.732% due 1/01/2013. . . . . . . . 461,050 503,175
-------------- ---------------
22,972,960 23,168,646
- ---------------------------------------------------------------------------------------------------------------------------
WASTE B B3 3,500,000 Mid-American Waste Systems, Inc.,
MANAGEMENT--0.9% 12.25% due 2/15/2003. . . . . . . . . 3,555,000 3,325,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CORPORATE BONDS--90.8% 328,463,433 323,384,407
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE
INDUSTRY HELD PREFERRED STOCKS COST (NOTE 1A)
<S> <C> <C> <C> <C>
BROADCASTING & 13,607 K-III Communications Corp. (a) (c) $1,348,536 $ 1,347,180
PUBLISHING--0.4%
- -------------------------------------------------------------------------------------------------------
STEEL--0.8% 120,000 USX Capital Corp (c).. . . . . . . 3,000,000 3,045,000
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 4,348,536 4,392,180
PREFERRED STOCKS--1.2%
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS
- -------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--0.0% 4,211 Foodbrands America, Inc (c).. . . 239,652 48,427
- -------------------------------------------------------------------------------------------------------
GAMING--0.0% 2,500 Goldriver Hotel & Casino Finance
Corp. (c). . . . . . . . . . . . . 18,603 2,500
500 Trump Taj Mahal Holding Corp.
(Class A) (c). . . . . . . . . . . 250 9,000
------------ -------------
18,853 11,500
- -------------------------------------------------------------------------------------------------------
HOTEL(S)--0.0% 107 Buckhead America Corp. (c). . . . 575 642
- -------------------------------------------------------------------------------------------------------
INDUSTRIAL- 311 Thermadyne Industries, Inc. (c). . 4,495 5,637
SERVICES--0.0%
- -------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.4% 53,022 Grand Union Co. (c). . . . . . . . 3,090,000 391,037
37,642 Kash-N-Karry Food Stores, Inc. (c) 1,123,412 950,461
------------ -------------
4,213,412 1,341,498
- -------------------------------------------------------------------------------------------------------
TEXTILES--0.0% 3,000++ Decorative Home Accents, Inc.
(Class F) (c). . . . . . . . . . . 22,992 30,000
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
COMMON STOCKS--0.4% 4,499,979 1,437,704
- -------------------------------------------------------------------------------------------------------
TRUSTS AND WARRANTS
- -------------------------------------------------------------------------------------------------------
BROADCASTING/ 23,350 American Telecasting, Inc.
CABLE--0.1% (Warrants) (b). . . . . . . . . . 4,776 145,938
- -------------------------------------------------------------------------------------------------------
COMPUTER 7,587 Anacomp, Inc. (Warrants) (b). . . 10,000 237
SERVICES--0.0%
- -------------------------------------------------------------------------------------------------------
ENERGY--0.0% 42,733 Transamerica Refining Corp.
(Warrants) (b). . . . . . . . . . 99,622 106,832
833 UGI Corp. (Warrants) (b). . . . . 3,644 125
------------ -------------
103,266 106,957
- -------------------------------------------------------------------------------------------------------
GAMING--0.0% 250++ Goldriver Hotel & Casino Finance
Corp. (Liquidating Trust). . . . . 6,000 2,141
- -------------------------------------------------------------------------------------------------------
STEEL--0.0% 4,000 Gulf States Steel Acquisition
Corp. (Warrants) (b). . . . . . . 44,220 1,000
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TRUSTS AND WARRANTS--0.1% 168,262 256,273
- -------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL $15,714,000 General Electric Capital Corp., 5.90%
PAPER**--5.8% due 1/02/1996. . . . . . . . . . . . . $ 15,703,699 $ 15,703,699
5,000,000 National Fleet Funding Corp., 5.77% due
1/10/1996. . . . . . . . . . . . . . . 4,990,383 4,990,383
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 20,694,082 20,694,082
SHORT-TERM SECURITIES--5.8%
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.3%. . . . . . . . $358,174,292 350,164,646
--------------
OTHER ASSETS LESS LIABILITIES--1.7%. . -------------- 6,187,294
---------------
NET ASSETS--100.0%. . . . . . . . . . .
$ 356,351,940
---------------
---------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Not Rated.
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay interest/dividend in
additional face/shares.
(b) Warrants entitle the Fund 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 by the Fund.
+ Corresponding industry group for convertible bonds:
(1) Waste Management
++ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $16,238,000, representing 4.6% of net
assets.
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE(S) COST (NOTE 1A)
<S> <C> <C> <C>
Bell Cablemedia PLC, 11.74% due 9/15/2005. . . . . . . . . 9/13/1995 $ 5,282,944 $ 5,647,500
Cumberland Farms, 10.50% due 10/01/2003. . . . . . . . . . 2/18/1994 1,915,414 1,800,440
Decorative Home Accents, Inc. (Class F). . . . . . . . . . 6/30/1995-9/21/1995 22,992 30,000
Goldriver Hotel & Casino Finance Corp. (Liquidating Trust) 8/31/1992 6,000 2,141
HMC Acquisition Properties, 9.00% due 12/15/2007. . . . . 12/18/1995 500,000 505,000
Howmet Corp., 10.00% due 12/01/2003. . . . . . . . . . . . 11/22/1995 4,000,000 4,200,000
Trans Gas de Occidente, 9.79% due 11/01/2010. . . . . . . 11/02/1995 3,000,000 2,970,000
Tucson Electric & Power Co., 10.21% due 1/01/2009. . . . . 6/16/1993 529,034 579,393
Tucson Electric & Power Co., 10.732% due 1/01/2013. . . . 3/01/1993 461,050 503,175
- -------------------------------------------------------------------------------------------------------------
TOTAL $15,717,434 $ 16,237,649
------------- --------------
------------- --------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
80
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERMEDIATE GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ISSUE COST (NOTE 1A)
US GOVERNMENT & AGENCY OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE $ 500,000 Federal National Mortgage Association, 7.85% due
ASSOCIATION--1.3% 9/10/2004. . . . . . . . . . . . . . . . . . . $ 499,297 $ 531,795
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 499,297 531,795
- -------------------------------------------------------------------------------------------------------------------------
US TREASURY NOTES--81.7% US Treasury Notes:
1,000,000 5.75% due 9/30/1997. . . . . . . . . . . . . . 999,140 1,009,060
1,000,000 8.875% due 2/15/1999. . . . . . . . . . . . . . 1,086,250 1,102,500
2,000,000 6.875% due 8/31/1999. . . . . . . . . . . . . . 2,056,875 2,101,880
1,000,000 7.50% due 10/31/1999. . . . . . . . . . . . . . 1,062,780 1,073,590
2,000,000 7.125% due 2/29/2000. . . . . . . . . . . . . . 2,004,375 2,129,060
2,000,000 6.875% due 3/31/2000. . . . . . . . . . . . . . 2,038,750 2,112,820
2,000,000 7.50% due 11/15/2001. . . . . . . . . . . . . . 2,021,875 2,202,820
5,000,000 6.375% due 8/15/2002. . . . . . . . . . . . . . 4,978,034 5,242,950
2,000,000 7.25% due 5/15/2004. . . . . . . . . . . . . . 2,010,625 2,220,000
4,000,000 7.875% due 11/15/2004. . . . . . . . . . . . . 4,440,000 4,630,000
1,000,000 7.50% due 2/15/2005. . . . . . . . . . . . . . 1,106,875 1,133,440
8,000,000 6.50% due 5/15/2005. . . . . . . . . . . . . . 7,732,480 8,511,280
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY NOTES 31,538,059 33,469,400
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--83.0% 32,037,356 34,001,195
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT*--4.6% 1,873,000 Morgan Stanley Group, Inc., purchased on
12/29/1995 to yield 5.87% to 1/02/1996. . . . . 1,873,000 1,873,000
- -------------------------------------------------------------------------------------------------------------------------
US TREASURY BILLS**--10.9% US Treasury Bills:
500,000 4.30% due 1/11/1996. . . . . . . . . . . . . . 499,224 499,224
4,000,000 4.83% due 1/11/1996. . . . . . . . . . . . . . 3,993,023 3,993,023
------------- --------------
4,492,247 4,492,247
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--15.5% 6,365,247 6,365,247
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%. . . . . . . . . . . . $38,402,603 40,366,442
-------------
OTHER ASSETS LESS LIABILITIES--1.5%. . . . . . -- --------- 629,985
--------------
NET ASSETS--100.0%. . . . . . . . . . . . . . . $ 40,996,427
--------------
-- ----------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Repurchase Agreements are fully collateralized by US Government Obligations.
** 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
81
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
(IN US DOLLARS)
<TABLE>
<CAPTION>
NORTH FACE VALUE PERCENT OF
AMERICA AMOUNT INVESTMENTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CANADA FOREIGN GOVERNMENT Canadian Government Bonds:
OBLIGATIONS C$ 600,000 6.50% due 6/01/2004. . . . $ 413,533 $ 425,053 2.4%
600,000 8.75% due 12/01/2005. . . 478,644 491,461 2.7
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CANADA 892,177 916,514 5.1
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA 892,177 916,514 5.1
- ------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
- ------------------------------------------------------------------------------------------------------------------
AUSTRALIA FOREIGN GOVERNMENT A$ 350,000 Australian Government Bond,
OBLIGATIONS 9.00% due 9/15/2004. . . . 261,381 274,124 1.5
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 261,381 274,124 1.5
- ------------------------------------------------------------------------------------------------------------------
JAPAN FOREIGN GOVERNMENT Y 65,000,000 Asian Development Bank,
OBLIGATIONS 5.625% due 2/18/2002. . . 750,697 737,578 4.1
50,000,000 European Investment Bank,
4.625% due 2/26/2003. . . 545,588 539,762 3.0
40,000,000 Japanese Government Bond-
182, 3.00% due 9/20/2005. 395,762 385,420 2.1
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 1,692,047 1,662,760 9.2
- ------------------------------------------------------------------------------------------------------------------
NEW FOREIGN GOVERNMENT NZ$ 800,000 New Zealand Government
ZEALAND OBLIGATIONS Bond, 8.00% due
7/15/1998. . . . . . . . . 515,668 525,292 2.9
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NEW
ZEALAND 515,668 525,292 2.9
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE 2,469,096 2,462,176 13.6
PACIFIC BASIN
- ------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- ------------------------------------------------------------------------------------------------------------------
AUSTRIA FOREIGN GOVERNMENT Ats 4,000,000 Republic of Austria, 7.625%
OBLIGATIONS due 10/18/2004. . . . . . 419,440 429,864 2.4
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRIA 419,440 429,864 2.4
- ------------------------------------------------------------------------------------------------------------------
DENMARK FOREIGN GOVERNMENT Dkr 3,300,000 Denmark Government Bonds,
OBLIGATIONS 7.00% due 11/10/2024. . . 530,814 530,334 2.9
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
DENMARK 530,814 530,334 2.9
- ------------------------------------------------------------------------------------------------------------------
FRANCE FOREIGN GOVERNMENT Frf French Government 'B-Tan':
OBLIGATIONS 2,500,000 4.75% due 4/12/1999. . . . 423,692 499,509 2.8
2,000,000 7.00% due 10/12/2000. . . 420,453 427,462 2.4
4,500,000 French Oat STRIPS,**
6.33757%++ due10/25/2001.
600,123 647,668 3.6
2,000,000 Government of France,
7.75% due 10/25/2005. . .
423,657 440,165 2.4
--------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FRANCE 1,867,925 2,014,804 11.2
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
WESTERN
EUROPE FACE VALUE
(CONCLUDED) AMOUNT INVESTMENTS COST (NOTE 1A)
<S> <C> <C> <C> <C> <C>
GERMANY FOREIGN GOVERNMENT DM 890,000 Bundes Obligations, 6.25%
OBLIGATIONS due 1/04/2024.. . . . . . . $ 569,521 $ 579,137
1,000,000 Bundesrepublic
Deutscheland, 6.875% due
5/12/2005.. . . . . . . . 733,343 739,225
1,000,000 Export Import Bank, 7.75%
due 2/21/2005.. . . . . . . 729,491 761,439
800,000 Kingdom of Belgium, 6.25%
due 10/06/2003.. . . . . . 472,882 568,914
500,000 Landes Banken Badenwurtt,
6.75% due 6/22/2005. . . . 344,882 360,112
800,000 World Bank, 6.125%
due 9/27/2002. . . . . . . 541,224 572,546
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GERMANY 3,391,343 3,581,373
- -------------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN GOVERNMENT Buoni Poliennali Del Tesoro
OBLIGATIONS (Italian Goverment Bonds):
Lit 600,000,000 10.50% due 4/01/2005. . . . 356,303 376,088
760,000,000 10.50% due 9/01/2005. . . . 455,552 475,324
Y 80,000,000 Government of Italy, 3.75%
due 6/08/2005. . . . . . . 800,625 787,679
Lit 600,000,000 Nordic Investment Bank,
10.80% due 5/24/2003. . . . 368,311 382,107
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ITALY 1,980,791 2,021,198
- -------------------------------------------------------------------------------------------------------------------------
NETHERLANDS FOREIGN GOVERNMENT Nlg 1,000,000 Netherlands Government
OBLIGATIONS Bond, 6.75% due
11/15/2005. . . . . . . . . 647,163 656,634
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 647,163 656,634
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT
SPAIN OBLIGATIONS Government of Spain:
Pta 50,000,000 7.40% due 7/30/1999. . . . 333,061 390,062
50,000,000 10.15% due 1/31/2006. . . . 386,365 420,247
Y 65,000,000 Kingdom of Spain,
5.75% due 3/23/2002. . . . 753,715 742,300
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SPAIN 1,473,141 1,552,609
- -------------------------------------------------------------------------------------------------------------------------
SWEDEN FOREIGN GOVERNMENT Skr 2,000,000 Government of Sweden,
OBLIGATIONS 11.00% due 1/21/1999 283,043 324,335
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWEDEN 283,043 324,335
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT
UNITED OBLIGATIONS United Kingdom Gilt,
KINGDOM (pound sterling) 630,000 8.50% due 12/07/2005. . . . 1,023,238 1,051,834
320,000 9.00% due 8/06/2012. . . . 548,620 556,507
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THE UNITED KINGDOM 1,571,858 1,608,341
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 12,165,518 12,719,492
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WESTERN
EUROPE PERCENT OF
(CONCLUDED) NET ASSETS
<S> <C>
GERMANY
3.2%
4.1
4.2
3.1
2.0
3.2
------------
19.8
- ------------------------
ITALY
2.1
2.6
4.3
2.1
------------
11.1
- ------------------------
NETHERLANDS
3.6
------------
3.6
- ------------------------
SPAIN
2.1
2.3
4.1
------------
8.5
- ------------------------
SWEDEN
1.8
------------
1.8
- ------------------------
UNITED
KINGDOM 5.8
3.1
------------
8.9
- ------------------------
70.2
- ------------------------
</TABLE>
83
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $ 962,000 General Electric Capital
Corp., 5.90% due
1/02/1996. . . . . . . . . . $ 961,527 $ 961,527 5.3%
- -----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY 400,000 Federal Home Loan Mortgage
OBLIGATIONS* Corp., 5.65% due
1/04/1996. . . . . . . . . . 399,686 399,686 2.2
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 1,361,213 1,361,213 7.5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . $ 16,888,004 17,459,395 96.4
-----------------
OTHER ASSETS LESS LIABILITIES. . . . . ---- ----------- 661,149 3.6
----------------- --------------
NET ASSETS. . . . . . . . . . . . . .
$ 18,120,544 100.0%
----------------- --------------
---- ----------- ----- -------
- -----------------------------------------------------------------------------------------------------------------------------------
*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.
** Separate Trading of Registered Interest and Principal of Securities (STRIPS).
++ Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Fund.
</TABLE>
See Notes to Financial Statements.
84
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
(IN US DOLLARS)
<TABLE>
<CAPTION>
VALUE PERCENT OF
AFRICA INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH BANKING 102,120 Nedcor Ltd. (GDR) (b) (f). . . . . $1,087,409 $1,698,256 0.6%
AFRICA
25,530 Nedcor Ltd. (Warrants) (d) (f). . . 61,441 140,415 0.1
--------- --------- -----
1,148,850 1,838,671 0.7
- ------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 152,698 Malbak Ltd.. . . . . . . . . . . . 894,767 992,537 0.4
--------------------------------------------------------------------------------------------------------------------
MINING 54,545 Beatrix Mines Ltd.. . . . . . . . . 486,726 490,149 0.2
13,000 Driefontein Consolidated
Ltd.. . . . . . . . . . . . . . . . 191,888 164,975 0.1
36,000 Driefontein Consolidated Ltd.
(ADR) (a). . . . . . . . . . . . . 541,728 445,500 0.2
47,300 Kinross Mines Ltd.. . . . . . . . . 511,564 444,512 0.2
44,000 Vaal Reefs Exploration & Mining Ltd
(ADR) (a). . . . . . . . . . . . . 328,154 280,500 0.1
11,300 Western Areas Gold Mining
Company, Ltd.. . . . . . . . . . . 175,713 190,685 0.1
32,680 Western Areas Gold Mining
Company, Ltd. (ADR) (a). . . . . . 534,291 543,305 0.2
------------ ------------ ----------
2,770,064 2,559,626 1.1
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH AFRICA 4,813,681 5,390,834 2.2
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AFRICA 4,813,681 5,390,834 2.2
--------------------------------------------------------------------------------------------------------------------
LATIN
AMERICA
- ------------------------------------------------------------------------------------------------------------------------------
ARGENTINA BANKING 17,250 Banco Frances del Rio de la Plata
(ADR) (a). . . . . . . . . . . . . 386,412 463,594 0.2
--------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 6,600 Telecom Argentina Stet-France
Telecom S.A. (GDR) (b). . . . . . . 275,474 314,325 0.1
11,700 Telefonica de Argentina S.A.
(Class B) (ADR) (a). . . . . . . . 284,969 318,825 0.1
------------ ------------ ----------
560,443 633,150 0.2
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ARGENTINA 946,855 1,096,744 0.4
- ------------------------------------------------------------------------------------------------------------------------------
BRAZIL OIL--RELATED 5,750,000 Petroleo Brasileiro S.A.
(Preferred). . . . . . . . . . . . 504,797 491,090 0.2
--------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 44,540 Telecommunicacoes Brasileiras
S.A.--Telebras (ADR) (a). . . . . . 1,917,250 2,110,083 0.8
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
BRAZIL 2,422,047 2,601,173 1.0
--------------------------------------------------------------------------------------------------------------------
CHILE TELECOMMUNICATIONS 13,500 Compania de Telefonos de Chile
S.A. (ADR) (a). . . . . . . . . . . 963,907 1,118,813 0.4
--------------------------------------------------------------------------------------------------------------------
UTILITIES 16,000 Enersis S.A. (ADR) (a). . . . . . . 400,482 456,000 0.2
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
CHILE 1,364,389 1,574,813 0.6
--------------------------------------------------------------------------------------------------------------------
MEXICO MULTI-INDUSTRY 216,000 Grupo Carso, S.A. de C.V.
(Series A1) (e). . . . . . . . . . 1,901,439 1,168,249 0.4
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MEXICO 1,901,439 1,168,249 0.4
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICA 6,634,730 6,440,979 2.4
- ------------------------------------------------------------------------------------------------------------------------------
MIDDLE
EAST
- ------------------------------------------------------------------------------------------------------------------------------
ISRAEL COMPUTER SOFTWARE 29,200 Scitex Corporation Ltd. . . . . . . 638,646 394,200 0.2
--------------------------------------------------------------------------------------------------------------------
HOLDING COMPANIES 34,460 PEC Israel Economic Corp. (e). . . 897,278 831,348 0.3
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ISRAEL 1,535,924 1,225,548 0.5
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
THE MIDDLE EAST 1,535,924 1,225,548 0.5
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
PACIFIC VALUE PERCENT OF
BASIN INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA FOOD & BEVERAGE 563,598 Coca-Cola Amatil, Ltd. (Ordinary) $ 3,228,491 $ 4,496,852 1.7%
----------------------------------------------------------------------------------------------------------------------
MEDIA 89,939 The News Corp., Ltd. (ADR) (a). . 431,743 480,189 0.2
52,364 The News Corp., Ltd. (Preferred). 222,611 244,919 0.1
------------- ---------- ----------
654,354 725,108 0.3
----------------------------------------------------------------------------------------------------------------------
MERCHANDISING 30,300 Amway Asia Pacific Ltd.. . . . . . 1,176,105 1,079,437 0.4
----------------------------------------------------------------------------------------------------------------------
NATURAL GAS PIPELINES 37,943 Broken Hill Proprietary Co.. . . . 452,087 536,074 0.2
----------------------------------------------------------------------------------------------------------------------
PROPERTY 276,131 Lend Lease Corp.. . . . . . . . . 3,552,157 4,003,955 1.5
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRALIA 9,063,194 10,841,426 4.1
- --------------------------------------------------------------------------------------------------------------------------------
HONG KONG BANKING 297,870 HSBC Holdings PLC. . . . . . . . . 3,584,349 4,507,345 1.7
----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 717,140 Hutchison Whampoa Ltd.. . . . . . 3,770,398 4,368,507 1.6
----------------------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 399,000 Swire Pacific Ltd. (Class A). . . 2,742,209 3,096,223 1.2
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HONG KONG 10,096,956 11,972,075 4.5
- --------------------------------------------------------------------------------------------------------------------------------
JAPAN AUTOMOBILES 340,000 3,740,006 3,787,292 1.4
Suzuki Motor Corp. (Ordinary). . .
----------------------------------------------------------------------------------------------------------------------
BEVERAGES
23,000 Chukyo Coca-Cola Bottling Co.,
Ltd. (Ordinary). . . . . . . . . . 303,183 225,010 0.1
31,000 Hokkaido Coca-Cola Bottling Co.,
Ltd. (Ordinary). . . . . . . . . . 473,832 375,339 0.1
27,000 Kinki Coca-Cola Bottling Co., Ltd.
(Ordinary). . . . . . . . . . . . 429,219 366,137 0.1
35,000 Mikuni Coca-Cola Bottling Co.,
Ltd.. . . . . . . . . . . . . . . 539,515 478,012 0.2
29,000 Sanyo Coca-Cola Bottling Co., Ltd.
434,480 421,348 0.2
------------- ------------- ----------
2,180,229 1,865,846 0.7
----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS 669,000 Mitsubishi Heavy Industries, Ltd.. 4,613,257 5,333,078 2.0
----------------------------------------------------------------------------------------------------------------------
CHEMICALS 119,000 Shin-Etsu Chemical Co., Ltd.
(Ordinary). . . . . . . . . . . . 2,474,232 2,466,680 0.9
----------------------------------------------------------------------------------------------------------------------
ELECTRICAL
CONSTRUCTION 72,000 Chudenko Corp. (Ordinary). . . . . 2,550,265 2,468,811 0.9
63,000 Sanki Engineering Co., Ltd.. . . . 888,004 738,377 0.3
74,000 Taihei Dengyo Kaisha, Ltd.. . . . 1,583,696 1,168,346 0.4
------------- ------------- ----------
5,021,965 4,375,534 1.6
----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT
172,000 Murata Manufacturing Co., Ltd.. . 6,479,053 6,330,880 2.4
215,000 NEC Corporation. . . . . . . . . . 3,017,807 2,623,983 1.0
74,000 The Nippon Signal Co., Ltd.. . . . 1,013,087 605,676 0.2
95,000 Rohm Co., Ltd.. . . . . . . . . . 3,630,393 5,364,684 2.0
------------- ------------- ----------
14,140,340 14,925,223 5.6
----------------------------------------------------------------------------------------------------------------------
ENGINEERING & 123,000 Kinden Corp.. . . . . . . . . . . 2,323,181 2,132,604 0.8
CONSTRUCTION
----------------------------------------------------------------------------------------------------------------------
INSURANCE 383,000 Dai-Tokyo Fire & Marine
Insurance Co., Ltd.. . . . . . . . 2,735,642 2,923,324 1.1
70,000 Fuji Fire & Marine Insurance Co.,
Ltd.. . . . . . . . . . . . . . . 477,842 368,849 0.1
292,000 Koa Fire & Marine Insurance Co.,
Ltd.. . . . . . . . . . . . . . . 2,008,042 1,787,524 0.7
149,000 Mitsui Marine & Fire Insurance Co.,
Ltd.. . . . . . . . . . . . . . . 1,217,441 1,062,224 0.4
318,000 Nichido Fire & Marine Insurance
Co., Ltd.. . . . . . . . . . . . . 2,497,420 2,556,567 1.0
117,000 Nippon Fire & Marine Insurance
Co., Ltd.. . . . . . . . . . . . . 858,344 793,297 0.3
342,000 Sumitomo Marine & Fire
Insurance Co., Ltd.. . . . . . . . 2,851,410 2,809,144 1.1
</TABLE>
86
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
PACIFIC
BASIN SHARES HELD/ VALUE PERCENT OF
(CONTINUED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
JAPAN INSURANCE 321,000 Tokio Marine & Fire Insurance Co.,
(CONTINUED) (CONTINUED) Ltd. (Ordinary). . . . . . . . . . . $ 3,745,007 $ 4,197,501 1.6%
201,000 Yasuda Fire & Marine Insurance
Co., Ltd.. . . . . . . . . . . . . . 1,505,908 1,421,251 0.5
------------- ------------- ---------
17,897,056 17,919,681 6.8
--------------------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 299,000 Canon, Inc. (Ordinary). . . . . . . 5,269,209 5,415,827 2.0
--------------------------------------------------------------------------------------------------------------------
PACKAGING 169,000 Toyo Seikan Kaisha, Ltd.
(Ordinary). . . . . . . . . . . . . 5,221,253 5,058,214 1.9
--------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS
141,000 Sankyo Co., Ltd. (Ordinary). . . . . 3,106,650 3,168,539 1.2
67,000 Taisho Pharmaceutical Co., Ltd.
(Ordinary). . . . . . . . . . . . . 1,345,910 1,323,905 0.5
------------- ------------- ---------
4,452,560 4,492,444 1.7
--------------------------------------------------------------------------------------------------------------------
RETAILING
90,000 Ito-Yokado Co., Ltd. (Ordinary). . . 4,668,048 5,544,363 2.1
30,000 Sangetsu Co., Ltd.. . . . . . . . . 1,120,547 755,521 0.3
------------- ------------- ---------
5,788,595 6,299,884 2.4
--------------------------------------------------------------------------------------------------------------------
STEEL 48,000 Maruichi Steel Tube, Ltd. (Ordinary) 840,875 878,729 0.3
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
JAPAN 73,962,758 74,951,036 28.1
- --------------------------------------------------------------------------------------------------------------------------------
MALAYSIA BANKING
127,000 Malayan Banking BHD. . . . . . . . . 1,045,198 1,070,632 0.4
251,000 Public Bank (Malaysia) BHD
'Foreign'. . . . . . . . . . . . . . 507,895 480,544 0.2
------------- ------------- ---------
1,553,093 1,551,176 0.6
--------------------------------------------------------------------------------------------------------------------
LEISURE 40,000 Resorts World BHD. . . . . . . . . . 200,377 214,300 0.1
--------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 110,000 Telekom Malaysia BHD. . . . . . . . 825,241 857,987 0.3
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
MALAYSIA 2,578,711 2,623,463 1.0
- --------------------------------------------------------------------------------------------------------------------------------
NEW FOODS 221,600 Wrightson Ltd.. . . . . . . . . . . 173,395 167,960 0.1
ZEALAND
--------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT NZ$ 2,600,000 New Zealand Government Bonds,
OBLIGATIONS 9.00% due 11/15/1996 (c). . . . . . 1,626,140 1,707,640 0.6
--------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY 1,759,000 Brierley Investments Ltd.. . . . . . 1,360,501 1,390,690 0.5
--------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 60,000 Telecom Corporation of New
Zealand. . . . . . . . . . . . . . . 250,249 258,746 0.1
--------------------------------------------------------------------------------------------------------------------
TEXTILES 52,000 Lane Walker Rudkin Industries,
Ltd.. . . . . . . . . . . . . . . . 62,863 57,761 0.0
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NEW ZEALAND
3,473,148 3,582,797 1.3
- --------------------------------------------------------------------------------------------------------------------------------
PHILIPPINES BANKING 58,150 Metropolitan Bank and Trust
Company. . . . . . . . . . . . . . . 1,143,382 1,131,496 0.4
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PHILIPPINES 1,143,382 1,131,496 0.4
- --------------------------------------------------------------------------------------------------------------------------------
SINGAPORE BANKING 98,000 Development Bank of Singapore
Ltd.. . . . . . . . . . . . . . . . 1,199,385 1,219,802 0.5
--------------------------------------------------------------------------------------------------------------------
MACHINERY 80,000 Jurong Shipyard Ltd.. . . . . . . . 619,257 616,690 0.2
--------------------------------------------------------------------------------------------------------------------
NEWSPAPER/ 61,000 Singapore Press Holdings Ltd.. . . . 881,155 1,078,501 0.4
PUBLISHING
--------------------------------------------------------------------------------------------------------------------
REAL ESTATE 160,000 City Developments Ltd., 'Local'. . . 1,067,498 1,165,488 0.4
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SINGAPORE 3,767,295 4,080,481 1.5
- --------------------------------------------------------------------------------------------------------------------------------
SOUTH TELECOMMUNICATIONS 39,400 Korea Mobile Telecommunications
KOREA Corp. (GDR) (b). . . . . . . . . . . 1,367,350 1,684,350 0.6
--------------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PACIFIC
BASIN VALUE PERCENT OF
(CONCLUDED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
SOUTH UTILITIES %
KOREA 19,000 Korea Electric Power Corp.. . . . . $ 753,726 $ 822,313 0.3
(CONCLUDED)
52,000 Korea Electric Power Corp.
(ADR) (a). . . . . . . . . . . . . 1,011,333 1,391,000 0.5
-------------- -------------- ---------
1,765,059 2,213,313 0.8
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTH KOREA 3,132,409 3,897,663 1.4
- ---------------------------------------------------------------------------------------------------------------------------------
TAIWAN ELECTRONICS 63,700 Advanced Semiconductor
Engineering, Inc. (GDR) (b). . . . 986,796 842,432 0.3
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TAIWAN 986,796 842,432 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 190,500 Krung Thai Bank Public Company Ltd.
800,696 786,815 0.3
98,700 Phatra Thanakit Public Co. Ltd.,
'Foreign'. . . . . . . . . . . . .
853,230 846,672 0.3
23,000 Thai Farmers Bank Public Co., Ltd..
217,409 232,010 0.1
-------------- -------------- ---------
1,871,335 1,865,497 0.7
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND 1,871,335 1,865,497 0.7
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
PACIFIC BASIN 110,075,984 115,788,366 43.3
- ---------------------------------------------------------------------------------------------------------------------------------
SOUTHEAST
ASIA
- ---------------------------------------------------------------------------------------------------------------------------------
INDIA AUTOMOBILES 46,300 Ashok Leyland Ltd. (GDR) (b) (f). . 558,306 474,575 0.2
---------------------------------------------------------------------------------------------------------------------
CHEMICALS 23,100 Reliance Industries Ltd. (GDR)
(b) (e). . . . . . . . . . . . . . 428,575 317,625 0.1
---------------------------------------------------------------------------------------------------------------------
MEDIA 113,500 Videocon International Ltd. (GDR)
(b) (e). . . . . . . . . . . . . . 662,808 306,450 0.1
---------------------------------------------------------------------------------------------------------------------
TEXTILES
20,800 JCT Ltd. (GDR) (b) (e). . . . . . . 358,965 114,400 0.0
8,000 Raymond Woolen Mills Ltd. (GDR)
(b). . . . . . . . . . . . . . . . 123,750 132,000 0.1
-------------- -------------- ---------
482,715 246,400 0.1
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 2,132,404 1,345,050 0.5
---------------------------------------------------------------------------------------------------------------------
INDONESIA BANKING 68,000 P.T. Bank Bali. . . . . . . . . . . 149,525 133,975 0.1
---------------------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 290,000 P.T. Wicaksana Overseas
PRODUCTS International. . . . . . . . . . . 504,511 774,518 0.3
---------------------------------------------------------------------------------------------------------------------
METALS & MINING 51,900 P.T. Tambag Timah (GDR) (b) (e) (f) 660,687 603,597 0.2
---------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS
18,960 P.T. Indonesian Satellite (ADR) (a) 664,105 692,040 0.3
599,500 P.T. Kabelmetal Indonesia (e). . . 757,512 492,146 0.2
14,300 P.T. Telekomunikasi Indonesia
(ADR) (a) (e). . . . . . . . . . . 301,145 361,075 0.1
-------------- -------------- ---------
1,722,762 1,545,261 0.6
---------------------------------------------------------------------------------------------------------------------
TOBACCO 17,000 P.T. Hanjaya Mandala Sampoerna. . . 167,001 177,145 0.1
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDONESIA 3,204,486 3,234,496 1.3
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SOUTHEAST ASIA 5,336,890 4,579,546 1.8
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
88
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
WESTERN VALUE PERCENT OF
EUROPE INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
AUSTRIA ENGINEERING & 1,500 V.A. Technologie AG. . . . . . $ 163,987 $ 190,874 0.1%
CONSTRUCTION
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
AUSTRIA 163,987 190,874 0.1
--------------------------------------------------------------------------------------------------------------
FINLAND BANKING 273,566 Unitas Bank Ltd., (Class A)
(Ordinary) (e). . . . . . . . . 1,047,133 693,322 0.3
--------------------------------------------------------------------------------------------------------------
DIVERSIFIED 41,500 Outokumpu OY. . . . . . . . . . 653,106 659,747 0.3
--------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 24,850 Kymmene OY(Ordinary). . . . . . 746,318 658,422 0.2
--------------------------------------------------------------------------------------------------------------
MACHINE-- 12,400 Rauma OY (e). . . . . . . . . . 223,784 244,269 0.1
DIVERSIFIED
--------------------------------------------------------------------------------------------------------------
PAPER & FOREST 132,100 Enso-Gutzeit OY (Registered). . 1,005,099 882,635 0.3
PRODUCTS
22,100 Metsa Serla OY. . . . . . . . . 873,739 682,303 0.3
55,575 Repola OY. . . . . . . . . . . 919,279 1,049,962 0.4
------------ ------------ ----------
2,798,117 2,614,900 1.0
--------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 13,470 Nokia AB. . . . . . . . . . . . 650,389 530,694 0.2
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FINLAND 6,118,847 5,401,354 2.1
--------------------------------------------------------------------------------------------------------------
FRANCE AUTOMOBILES 8,680 Peugeot S.A.. . . . . . . . . . 1,298,715 1,146,261 0.4
--------------------------------------------------------------------------------------------------------------
BANKING 17,800 Compagnie Financiere de Paribas
(Ordinary). . . . . . . . . . . 902,586 977,002 0.4
18,900 Compangie Financiere de Suez
(Ordinary). . . . . . . . . . . 743,625 780,449 0.3
6,050 Societe Generale de Surveillance
S.A. (Class A) (Ordinary). . . 634,340 748,242 0.3
------------ ------------ ----------
2,280,551 2,505,693 1.0
--------------------------------------------------------------------------------------------------------------
BUILDING & 6,000 Compagnie de Saint-Gobain S.A. 717,949 654,974 0.2
CONSTRUCTION
--------------------------------------------------------------------------------------------------------------
COMMUNICATION 7,400 Alcatel Alsthom Cie Generale
EQUIPMENT d'Electricite S.A.. . . . . . . 712,930 638,677 0.2
--------------------------------------------------------------------------------------------------------------
INSURANCE 30,120 Assurances Generales de France
S.A. (AGF). . . . . . . . . . . 768,212 1,009,788 0.4
--------------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 2,828 EuraFrance S.A.. . . . . . . . 918,349 950,991 0.4
--------------------------------------------------------------------------------------------------------------
OIL & RELATED 9,475 Societe Nationale Elf Aquitaine 657,126 698,839 0.3
--------------------------------------------------------------------------------------------------------------
STEEL 62,980 Usinor Sacilor S.A. (e). . . . 1,028,190 833,631 0.3
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
FRANCE 8,382,022 8,438,854 3.2
--------------------------------------------------------------------------------------------------------------
GERMANY BANKING 2,693 Deutsche Bank AG (Warrants) (d) 41,046 41,670 0.0
2,800 Hoechst AG. . . . . . . . . . . 733,417 760,880 0.3
------------ ------------ ----------
774,463 802,550 0.3
--------------------------------------------------------------------------------------------------------------
CHEMICALS 2,900 Bayer AG (Ordinary) (e). . . . 663,276 766,783 0.3
--------------------------------------------------------------------------------------------------------------
MACHINERY 17,250 Kloeckner Werke AG (e). . . . . 1,232,262 651,921 0.2
3,300 Mannesmann AG. . . . . . . . . 819,475 1,052,819 0.4
------------ ------------ ----------
2,051,737 1,704,740 0.6
--------------------------------------------------------------------------------------------------------------
UTILITIES 2,600 Vereinigte Elektrizitaets &
Bergwerks AG (Veba)
(Warrants) (d). . . . . . . . . 111,934 179,811 0.1
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 3,601,410 3,453,884 1.3
--------------------------------------------------------------------------------------------------------------
GREECE BANKING 12,900 Ergo Bank S.A. (Registered). . 510,673 514,899 0.2
--------------------------------------------------------------------------------------------------------------
BEVERAGES 25,225 Hellenic Bottling Co. S.A.. . . 576,119 826,158 0.3
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
GREECE 1,086,792 1,341,057 0.5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
WESTERN
EUROPE VALUE PERCENT OF
(CONTINUED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
HUNGARY FOODS 3,400 Pick Szeged Reszvenytarsasag
(GDR) (b) (f). . . . . . . . . . $ 167,513 $ 126,752 0.0%
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 5,500 Magyar TarKozlesi
Reszvenytarsasag (Ordinary) (e). 910,789 841,631 0.3
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
HUNGARY 1,078,302 968,383 0.3
-------------------------------------------------------------------------------------------------------------------
IRELAND BUILDING MATERIALS 53,650 CRH PLC. . . . . . . . . . . . . 327,852 406,385 0.2
-------------------------------------------------------------------------------------------------------------------
CLOSED-END FUNDS 445,000 First Ireland Investment Co.. . 658,002 842,689 0.3
-------------------------------------------------------------------------------------------------------------------
INSURANCE 157,000 Irish Life PLC. . . . . . . . . 526,948 604,365 0.2
-------------------------------------------------------------------------------------------------------------------
PACKAGING & 297,800 Jefferson Smurfit Group PLC
CONTAINERS (Ordinary). . . . . . . . . . . 888,436 716,480 0.3
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
IRELAND 2,401,238 2,569,919 1.0
-------------------------------------------------------------------------------------------------------------------
ITALY AUTOMOBILES 250,000 Fiat S.p.A. (Ordinary). . . . . 750,125 812,303 0.3
1,750,000 Montedison S.p.A. (e). . . . . . 1,364,663 1,174,763 0.4
------------ ------------ ----------
2,114,788 1,987,066 0.7
-------------------------------------------------------------------------------------------------------------------
BUILDING & CONTAINERS 96,100 Fochi Filippo S.p.A. (e). . . . 304,917 18,189 0.0
-------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 335,500 CIR NC Savings (e). . . . . . . 157,313 119,383 0.0
1,411,500 Compagnie Industrial Riunite
S.p.A. (CIR) (e). . . . . . . . 1,306,203 943,968 0.4
------------ ------------ ----------
1,463,516 1,063,351 0.4
-------------------------------------------------------------------------------------------------------------------
INSURANCE 55,000 Assicurazioni Generali S.p.A.. . 1,392,767 1,334,227 0.5
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 543,216 Stet Savings Telecom. . . . . . 1,356,502 1,110,423 0.4
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ITALY 6,632,490 5,513,256 2.0
- -------------------------------------------------------------------------------------------------------------------------------
NETHERLANDS BANKING 20,350 ABN-AMRO Bank (Ordinary). . . . 711,620 928,870 0.4
20,000 Amev N.V. (Ordinary). . . . . . 825,683 1,342,491 0.5
------------ ------------ ----------
1,537,303 2,271,361 0.9
-------------------------------------------------------------------------------------------------------------------
CHEMICALS 3,200 Akzo N.V. (Ordinary). . . . . . 379,245 370,852 0.1
26,570 European Vinyls Corporation
International N.V.. . . . . . . 1,144,357 691,832 0.3
------------ ------------ ----------
1,523,602 1,062,684 0.4
-------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 49,465 Philips Electronics N.V.. . . . 1,534,025 1,791,427 0.7
-------------------------------------------------------------------------------------------------------------------
FINANCE 39,000 AEGON N.V. (Ordinary). . . . . . 813,328 1,729,004 0.7
-------------------------------------------------------------------------------------------------------------------
INSURANCE 21,900 Internationale Nederlanden
Groep N.V.. . . . . . . . . . . 1,030,181 1,465,926 0.6
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 19,425 Koninklijke PTT Nederland N.V.. 712,827 707,135 0.3
-------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 12,550 KLM Royal Dutch Airlines. . . . 352,565 441,973 0.2
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
NETHERLANDS 7,503,831 9,469,510 3.8
- -------------------------------------------------------------------------------------------------------------------------------
NORWAY OIL & GAS PRODUCERS 84,000 Saga Petroleum A.S. (Class B). . 951,425 1,050,449 0.4
-------------------------------------------------------------------------------------------------------------------
OIL & RELATED 16,900 Norsk Hydro A.S.. . . . . . . . 707,860 711,601 0.3
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORWAY 1,659,285 1,762,050 0.7
- -------------------------------------------------------------------------------------------------------------------------------
POLAND AUTOMOTIVE & 12,900 T.C. Debica S.A.. . . . . . . . 199,796 194,756 0.1
EQUIPMENT
-------------------------------------------------------------------------------------------------------------------
ENGINEERING & 138,000 Mostostal-Export S.A.. . . . . . 393,039 271,631 0.1
CONSTRUCTION
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
POLAND 592,835 466,387 0.2
-------------------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
WESTERN
EUROPE VALUE PERCENT OF
(CONTINUED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
PORTUGAL BANKING 106,600 Banco Commercial Portugues S.A.
(ADR) (a). . . . . . . . . . . . $1,616,748 $1,399,125 0.5%
------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 46,780 Sonae Investimentos-SGPS S.A.. . 1,028,891 1,002,071 0.4
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
PORTUGAL 2,645,639 2,401,196 0.9
- ------------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING 4,800 Banco Popular Espanol (Ordinary). 545,778 885,575 0.3
------------------------------------------------------------------------------------------------------------------
GLASS 11,400 Cristaleria Espanola S.A. (e). . 502,213 639,340 0.2
------------------------------------------------------------------------------------------------------------------
OIL & RELATED 51,000 Repsol S.A.. . . . . . . . . . . 1,551,028 1,671,959 0.6
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SPAIN 2,599,019 3,196,874 1.1
- ------------------------------------------------------------------------------------------------------------------------------
SWEDEN APPLIANCES 18,481 Electrolux AB. . . . . . . . . . 898,932 759,921 0.3
------------------------------------------------------------------------------------------------------------------
AUTOMOBILES & 80,000 Volvo AB 'B'. . . . . . . . . . . 1,466,079 1,641,744 0.6
EQUIPMENT
------------------------------------------------------------------------------------------------------------------
BUILDING RELATED 24,750 Svedala Industry. . . . . . . . . 601,966 638,628 0.2
------------------------------------------------------------------------------------------------------------------
ENGINEERING 36,350 SKF AB 'A'. . . . . . . . . . . . 668,183 688,374 0.3
15,300 SKF AB 'B' Free. . . . . . . . . 297,054 293,205 0.1
------------ ------------ -----
965,237 981,579 0.4
------------------------------------------------------------------------------------------------------------------
FINANCE 23,875 Stadshypotek AB. . . . . . . . . 352,150 479,150 0.2
------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 18,900 Mo Och Domsjo AB-'B' Free. . . . 962,403 807,095 0.3
432,300 Rottneros Bruks AB. . . . . . . . 666,730 456,625 0.2
91,500 Stora Kopparbergs Bergslags AB. . 1,152,700 1,076,942 0.4
------------ ------------ ----------
2,781,833 2,340,662 0.9
------------------------------------------------------------------------------------------------------------------
METALS & MINING 51,800 Avesta Sheffield AB. . . . . . . 463,023 457,259 0.2
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWEDEN 7,529,220 7,298,943 2.8
- ------------------------------------------------------------------------------------------------------------------------------
SWITZERLAND CHEMICALS 895 Ciba-Geigy AG (Registered). . . . 621,919 789,454 0.3
------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 790 BBC Brown Boveri AG. . . . . . . 668,242 919,962 0.3
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SWITZERLAND 1,290,161 1,709,416 0.6
- ------------------------------------------------------------------------------------------------------------------------------
TURKEY BEVERAGES 439,392 Erciyas Biracilik Ve Malt Sanayii
A.S.. . . . . . . . . . . . . . . 251,703 206,986 0.1
------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 568,330 Alarko Holdings A.S.. . . . . . . 281,111 230,150 0.1
97,073 Cimentas Izmir Cimento Fabrikasi
T.A.S.. . . . . . . . . . . . . . 65,259 57,762 0.0
------------ ------------ ----------
346,370 287,912 0.1
------------------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD 774,008 Dardanel Onentas Gida A.S.. . . . 49,722 33,903 0.0
PRODUCTS
------------------------------------------------------------------------------------------------------------------
INSURANCE 863,750 Akisgorta A.S.. . . . . . . . . . 168,498 67,815 0.0
------------------------------------------------------------------------------------------------------------------
RETAIL STORES 472,075 Migros Turk A.S.. . . . . . . . . 378,827 362,834 0.1
------------------------------------------------------------------------------------------------------------------
STEEL 10,103,279 Izmir Demir Celik Sanayii A.S.. . 356,666 192,046 0.1
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
TURKEY 1,551,786 1,151,496 0.4
- ------------------------------------------------------------------------------------------------------------------------------
UNITED AUTOMOBILE PARTS 274,900 T & N PLC. . . . . . . . . . . . 704,904 691,254 0.3
KINGDOM
------------------------------------------------------------------------------------------------------------------
BANKING 121,355 TSB Group PLC (Ordinary). . . . . 568,019 623,496 0.2
------------------------------------------------------------------------------------------------------------------
BEVERAGE 94,900 Grand Metropolitan PLC (Ordinary) 581,693 682,753 0.3
------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 133,500 General Electric Co., Ltd. PLC
(Ordinary). . . . . . . . . . . . 668,517 735,626 0.3
------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 43,100 Tate & Lyle PLC (Ordinary). . . . 286,107 315,767 0.1
------------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
WESTERN
EUROPE VALUE PERCENT OF
(CONCLUDED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
UNITED INDUSTRIAL--OTHER 286,000 Tomkins PLC. . . . . . . . . . . $ 995,138 $ 1,249,661 0.5%
KINGDOM
(CONCLUDED)
--------------------------------------------------------------------------------------------------------------------
INSURANCE 78,500 Prudential Corp. PLC. . . . . . 386,922 505,059 0.2
--------------------------------------------------------------------------------------------------------------------
OIL--RELATED 142,400 British Petroleum Co., Ltd.. . . 1,039,907 1,190,264 0.4
--------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 62,750 Glaxo Holdings PLC. . . . . . . 750,029 891,215 0.3
--------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 204,300 Racal Electronics PLC. . . . . . 712,277 902,191 0.3
229,300 Vodafone Group PLC (Ordinary). . 843,348 822,174 0.3
------------- ------------- ---------
1,555,625 1,724,365 0.6
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED KINGDOM 7,536,861 8,609,460 3.2
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
WESTERN EUROPE 62,373,725 63,942,913 24.2
--------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
--------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* US$ 5,000,000 Corporate Asset Funding Co. Inc.,
5.75% due 1/05/1996. . . . . . . 4,994,410 4,994,410 1.9
8,762,000
General Electric Capital Corp.,
5.90% due 1/02/1996. . . . . . . 8,756,256 8,756,256 3.3
------------- ------------- ---------
13,750,666 13,750,666 5.2
FOREIGN GOVERNMENT MXP 3,438,050 Mexican Cetes, 52.375%,
OBLIGATIONS* due 2/08/1996. . . . . . . . . . 428,837 423,608 0.2
--------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY US$12,000,000 Federal National Mortgage
OBLIGATIONS* Association, 5.40%
due 2/01/1996. . . . . . . . . . 11,938,800 11,938,800 4.5
United States Treasury Bills (c):
600,000 5.10% due 1/25/1996. . . . . . . 597,705 597,686 0.2
4,900,000 5.21% due 1/25/1996. . . . . . . 4,880,853 4,881,102 1.8
100,000 5.21% due 1/25/1996. . . . . . . 99,609 99,614 0.0
20,000,000 5.225% due 1/25/1996. . . . . . 19,921,625 19,922,867 7.5
1,200,000 5.33% due 1/25/1996. . . . . . . 1,195,203 1,195,372 0.5
130,000 5.33% due 1/25/1996. . . . . . . 129,481 129,499 0.0
500,000 5.34% due 1/25/1996. . . . . . . 497,998 498,072 0.2
400,000 5.35% due 1/25/1996. . . . . . . 398,395 398,457 0.2
1,800,000 5.40% due 1/25/1996. . . . . . . 1,792,710 1,793,058 0.7
1,740,000 5.88% due 3/07/1996. . . . . . . 1,720,390 1,723,322 0.6
------------- ------------- ---------
43,172,769 43,177,849 16.2
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 57,352,272 57,352,123 21.6
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
(IN US DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NUMBER OF
OPTIONS CONTRACTS/ PREMIUMS VALUE PERCENT OF
PURCHASED FACE AMOUNT ISSUE PAID (NOTE 1A) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
CALL OPTIONS
PURCHASED 6,800 OMX, expiring April 1996 at $ $
Skr 1,491. . . . . . . . . . . . 34,918 17,140 0.0%
914 NZ Top Ten Index, expiring August
1996 at NZ$1,094. . . . . . . . 45,173 45,264 0.0
24,496 Nikkei, expiring March 1996 at
Y21,091.5. . . . . . . . . . . . 45,800 65,250 0.0
14,600 Nikkei, expiring May 1996 at
Y18,388. . . . . . . . . . . . . 148,569 253,845 0.1
14,600 Nikkei, expiring May 1996 at --- ---
Y19,000. . . . . . . . . . . . . 117,700 194,591 ---- 0.1
17,289 Nikkei, expiring June 1996 at
Y20,500. . . . . . . . . . . . . 111,943 119,418 0.0
----------- ----------- -----
504,103 695,508 0.2
- --------------------------------------------------------------------------------------------------------------------------------
CURRENCY PUT
OPTIONS PURCHASED Y 1,500,000 Japanese Yen, expiring January
1996 at Y 86.15. . . . . . . . . 49,842 240,272 0.1
7,000,000 Japanese Yen, expiring January
1996 at Y 86.15. . . . . . . . . 145,600 1,121,267 0.4
3,500,000 Japanese Yen, expiring June
1996 at Y 108. . . . . . . . . . 29,750 44,800 0.0
3,500,000 Japanese Yen, expiring June
1996 at Y 108. . . . . . . . . . 32,200 44,800 0.0
--- --- ----
10,000,000 Japanese Yen, expiring
September 1996 at Y 105. . . . . 235,000 254,000 0.1
----------- ----------- -----
492,392 1,705,139 0.6
-------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED 996,495 2,400,647 0.8
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 249,119,701 257,120,956 96.8
- --------------------------------------------------------------------------------------------------------------------------------
PREMIUMS
RECEIVED
- --------------------------------------------------------------------------------------------------------------------------------
OPTIONS CALL OPTIONS WRITTEN 6,800 OMX, expiring April 1996 at
WRITTEN Skr 1,491. . . . . . . . . . . . (54,253) (17,140) 0.0
------------------------------------------------------------------------------------------------------------------------
PUT OPTIONS WRITTEN 914 NZ Top Ten Index, expiring August
1996 at NZ$1,094. . . . . . . . (21,437) (22,880) 0.0
------------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (75,690) (40,020) 0.0
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN. . . . . . . . . . . . . . . . . $249,044,011 257,080,936 96.8
--------------
-- ----------
VARIATION MARGIN ON STOCK INDEX FUTURES CONTRACTS**. . . . . . . . . . . . (49,882) 0.0
UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS***. . . . . (267,385) (0.1)
OTHER ASSETS LESS LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . 8,838,572 3.3
-------------- ---------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265,602,241 1 00.0%
-------------- ---------
-- ---------- --- ----
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Securities held as collateral in connection with open stock index futures contracts.
(d) 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.
(e) Non-income producing securities.
(f) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $3,044,000,
representing 1.1% of net assets.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ISSUE ACQUISITION COST VALUE
- --------------------------------------- DATE(S) -----------------(NOTE 1A)
-------------------- ----------
Ashok Leyland Ltd. (GDR). . . . . . . 3/09/1995-10/23/1995 $ 558,306 $ 474,575
Nedcor Ltd. (GDR). . . . . . . . . . 5/23/1995 1,087,409 1,698,256
Nedcor Ltd. (Warrants). . . . . . . . 5/23/1995 61,441 140,415
Pick Szeged Reszvenytarsasag (GDR). . 2/14/1995-9/07/1995 167,513 126,752
P.T. Tambag Timah (GDR). . . . . . . 10/06/1995 660,687 603,597
- --------------------------------------------------------------------------------------
TOTAL $ 2,535,356 $ 3,043,595
------------ -------------
-- -------- -- ---------
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Commercial Paper and certain Foreign and 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.
</TABLE>
93
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
(IN US DOLLARS)
** Stock Index futures contracts purchased as of December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE EXCHANGE DATE (NOTE 1A & 1B)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
161 Tokyo. . . . . . . . . . . . . . . . . . . . TOPIX March 1996 $ 24,546,106
13 CAC 40 Index. . . . . . . . . . . . . . . . CAC 40 January 1996 996,566
30 Hang Seng. . . . . . . . . . . . . . . . . . Hang Seng January 1996 1,967,149
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT PRICE--$26,021,702) $ 27,509,821
----------------
--- -----------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
***Forward foreign exchange contracts as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
EXPIRATION (DEPRECIATION)
FOREIGN CURRENCY PURCHASED DATE (NOTE 1B)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Y732,275,000 . . . . . . . . . . . . . . . . . . . . . . . . January 1996 $ (123,968)
Y999,425,000 . . . . . . . . . . . . . . . . . . . . . . . . April 1996 (195,110)
TOTAL (US$ COMMITMENT--$17,245,976) $ (319,078)
-------------
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- -----------------------------------------------------------------------------------------------------------------------
DM7,170,500 . . . . . . . . . . . . . . . . . . . . . . . . January 1996 $ (9,319)
Frf25,100,000 . . . . . . . . . . . . . . . . . . . . . . . . February 1996 (134,492)
Frf9,913,020 . . . . . . . . . . . . . . . . . . . . . . . . April 1996 (26,986)
Y1,199,435,000 . . . . . . . . . . . . . . . . . . . . . . . . April 1996 198,018
Nlg1,733,340 . . . . . . . . . . . . . . . . . . . . . . . . April 1996 24,472
- -----------------------------------------------------------------------------------------------------------------------
TOTAL (US$ COMMITMENT--$25,116,244) $ 51,693
-------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION--NET ON FORWARD FOREIGN EXCHANGE CONTRACTS $ (267,385)
-------------
-- ---------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
94
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALUMINUM 15,000 Alcan Aluminium, Ltd.. . . . . . . . . $ 314,175 $ 466,875 1.1%
4,300 Aluminum Co. of America. . . . . . . . 224,399 227,363 0.5
18,100 Comalco Ltd.. . . . . . . . . . . . . 65,166 97,041 0.2
7,700 Reynolds Metals Co.. . . . . . . . . . 349,628 436,013 1.0
------------ ------------ ---------
953,368 1,227,292 2.8
- ---------------------------------------------------------------------------------------------------------------
CHEMICALS 100,000 Asahi Chemical Industry Co., Ltd.. . . 735,324 765,207 1.8
10,400 Dow Chemical Co.. . . . . . . . . . . 646,664 731,900 1.7
10,700 du Pont (E.I.) de Nemours & Co.. . . . 534,988 747,663 1.7
------------ ------------ ---------
1,916,976 2,244,770 5.2
- ---------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 26,500 Canadian Pacific, Ltd.. . . . . . . . 415,534 480,312 1.1
COMPANIES
14,000 Coastal Corp.. . . . . . . . . . . . . 376,945 521,500 1.2
33,000 Cyprus Amax Minerals Co.. . . . . . . 921,470 862,125 2.0
3,999 Freeport-McMoran Inc.. . . . . . . . . 98,200 147,963 0.3
38,500 Norcen Energy Resources Ltd.. . . . . 600,603 578,502 1.4
20,000 Occidental Petroleum Corp.. . . . . . 391,200 427,500 1.0
44,600 RGC Ltd.. . . . . . . . . . . . . . . 170,568 222,203 0.5
------------ ------------ ---------
2,974,520 3,240,105 7.5
- ---------------------------------------------------------------------------------------------------------------
GAS DISTRIBUTION/ 12,100 Consolidated Natural Gas Co.. . . . . 586,109 549,037 1.3
TRANSMISSION
- ---------------------------------------------------------------------------------------------------------------
GOLD 95,220 +Acacia Resources Ltd.. . . . . . . . . 163,669 171,350 0.4
17,000 +Amax Gold, Inc.. . . . . . . . . . . . 107,020 123,250 0.3
167,100 +Delta Gold N.L.. . . . . . . . . . . . 315,856 405,073 0.9
15,000 Driefontein Consolidated Ltd.. . . . . 229,000 190,355 0.5
52,000 Newcrest Mining Ltd.. . . . . . . . . 221,509 218,856 0.5
22,864 Newmont Mining Corp.. . . . . . . . . 914,907 1,034,596 2.4
45,000 Placer Dome Inc. (ADR)*. . . . . . . . 1,018,177 1,085,625 2.5
75,900 Sante Fe Pacific Gold Corp.. . . . . . 1,018,143 920,287 2.1
------------ ------------ ---------
3,988,281 4,149,392 9.6
- ---------------------------------------------------------------------------------------------------------------
INTEGRATED OIL 10,500 Amoco Corp.. . . . . . . . . . . . . . 554,378 754,687 1.8
COMPANIES
10,600 British Petroleum Co. PLC (ADR)*. . . 808,886 1,082,525 2.5
2,200 Mobil Corp.. . . . . . . . . . . . . . 214,196 246,400 0.6
2,000 OMV AG. . . . . . . . . . . . . . . . 214,068 173,974 0.4
25,000 Petro-Canada (Installment Receipts). . 117,895 143,750 0.3
17,700 Phillips Petroleum Co.. . . . . . . . 517,938 604,012 1.4
3,000 Repsol S.A. (ADR)*. . . . . . . . . . 86,490 98,625 0.2
7,300 Repsol S.A. (Foreign). . . . . . . . . 210,174 239,320 0.5
11,000 Societe Nationale Elf Aquitaine (ADR)* 391,885 404,250 0.9
14,000 Total S.A. (Class B). . . . . . . . . 841,537 945,869 2.2
29,000 Unocal Corp. . . . . . . . . . . . . . 819,256 844,625 2.0
23,000 Yacimientos Petroliferos Fiscales S.A.
(ADR)*. . . . . . . . . . . . . . . . 508,759 497,375 1.2
------------ ------------ ---------
5,285,462 6,035,412 14.0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
METALS & MINING 12,100 ASARCO Inc.. . . . . . . . . . . . . . . . . $ 341,486 $ 387,200 0.9%
14,942 CRA Ltd.. . . . . . . . . . . . . . . . . . 179,473 219,329 0.5
26,900 Falconbridge Ltd. (Installment Receipts) (a) 217,391 234,140 0.5
16,841 Freeport-McMoran Copper & Gold Inc.. . . . . 366,388 473,653 1.1
1,200 Freeport-McMoran Copper & Gold Inc.
(Class A). . . . . . . . . . . . . . . . . . 27,601 33,600 0.1
283,000 M.I.M. Holdings Ltd.. . . . . . . . . . . . 618,436 391,416 0.9
4,700 Magma Copper Co.. . . . . . . . . . . . . . 77,543 131,012 0.3
91,000 Mitsubishi Materials Corp.. . . . . . . . . 461,572 471,571 1.1
38,000 Nippon Light Metal Co. Ltd.. . . . . . . . . 225,758 217,900 0.5
32,400 Noranda Inc.. . . . . . . . . . . . . . . . 600,505 667,925 1.5
25,500 Outokumpu OY. . . . . . . . . . . . . . . . 455,626 405,387 0.9
9,400 +P.T. Tambang Timah (GDR)***++. . . . . . . . 115,742 109,322 0.3
10,000 Phelps Dodge Corp.. . . . . . . . . . . . . 556,143 622,500 1.5
108,000 QNI Ltd.. . . . . . . . . . . . . . . . . . 216,381 228,077 0.5
64,600 RTZ Corp. PLC (The). . . . . . . . . . . . . 837,147 938,547 2.2
300,000 +Savage Resources Ltd.. . . . . . . . . . . . 228,385 207,464 0.5
56,000 Sumitomo Metal Mining Co. Ltd.. . . . . . . 467,299 503,371 1.2
34,000 Trelleborg 'B' Fria. . . . . . . . . . . . . 454,495 366,827 0.9
156,600 WMC Ltd.. . . . . . . . . . . . . . . . . . 914,727 1,006,109 2.3
------------ ------------ ---------
7,362,098 7,615,350 17.7
- -------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 151,300 +Ampolex Ltd.. . . . . . . . . . . . . . . . 461,392 330,770 0.8
10,500 Anadarko Petroleum Corp.. . . . . . . . . . 513,411 568,312 1.3
18,000 Apache Corp.. . . . . . . . . . . . . . . . 482,356 531,000 1.2
37,000 +Chauvco Resources Ltd.. . . . . . . . . . . 437,096 332,222 0.8
17,300 Enron Oil & Gas Co.. . . . . . . . . . . . . 370,478 415,200 1.0
78,100 Enterprise Oil PLC. . . . . . . . . . . . . 510,617 480,058 1.1
8,900 Louisiana Land and Exploration Co. (The). . 342,742 381,587 0.9
25,000 Mitchell Energy & Development Corp.
(Class B). . . . . . . . . . . . . . . . . . 437,442 468,750 1.1
13,000 +Oryx Energy Co.. . . . . . . . . . . . . . . 216,739 173,875 0.4
93,000 Ranger Oil Ltd.. . . . . . . . . . . . . . . 625,617 581,250 1.4
19,000 Sonat, Inc.. . . . . . . . . . . . . . . . . 614,630 676,875 1.6
3,300 Triton Energy Corp.. . . . . . . . . . . . . 109,905 189,337 0.4
9,800 Vastar Resources, Inc.. . . . . . . . . . . 268,604 311,150 0.7
------------ ------------ ---------
5,391,029 5,440,386 12.7
- -------------------------------------------------------------------------------------------------------------------
OIL SERVICE 8,000 Coflexip Stena Offshore, Inc. (ADR)*. . . . 172,000 150,000 0.4
15,600 IHC Caland N.V.. . . . . . . . . . . . . . . 345,620 526,007 1.2
11,400 Schlumberger Ltd.. . . . . . . . . . . . . . 693,409 789,450 1.8
------------ ------------ ---------
1,211,029 1,465,457 3.4
- -------------------------------------------------------------------------------------------------------------------
PAPER & FOREST 24,533 Aracruz Celulose S.A. (ADR)*. . . . . . . . 196,788 190,131 0.4
PRODUCTS
28,800 Avenor Inc.. . . . . . . . . . . . . . . . . 573,943 493,440 1.2
10,000 Georgia-Pacific Corp.. . . . . . . . . . . . 710,723 686,250 1.6
14,800 International Paper Co.. . . . . . . . . . . 497,368 560,550 1.3
11,700 Kimberly-Clark Corp.. . . . . . . . . . . . 299,588 968,175 2.3
11,500 Metsa-Serla OY 'B'. . . . . . . . . . . . . 499,397 355,045 0.8
11,300 Mo Och Domsjo AB Co.. . . . . . . . . . . . 492,512 482,549 1.1
20,000 Weyerhaeuser Co.. . . . . . . . . . . . . . 796,864 865,000 2.0
9,000 Willamette Industries, Inc.. . . . . . . . . 376,875 504,000 1.2
------------ ------------ ---------
4,444,058 5,105,140 11.9
- -------------------------------------------------------------------------------------------------------------------
PLANTATIONS 86,000 Golden Hope Plantations BHD. . . . . . . . . 158,974 143,644 0.3
60,000 Kuala Lumpur Kepong BHD. . . . . . . . . . . 120,553 190,270 0.5
------------ ------------ ---------
279,527 333,914 0.8
- -------------------------------------------------------------------------------------------------------------------
REFINING 22,300 Total Petroleum (North America), Ltd. (ADR)*
328,442 217,425 0.5
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
96
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STEEL 21,000 Allegheny Ludlum Corp.. . . . . . . . . . $ 493,494 $ 388,500 0.9%
10,800 Koninklijke Nederlandsche Hoogovens en
Staalfabrienken N.V.. . . . . . . . . . 460,210 362,135 0.8
213,000 +Nippon Steel Corp.. . . . . . . . . . . . 728,282 730,356 1.7
255,000 +Sumitomo Metal Industries, Ltd.. . . . . 820,271 773,102 1.8
------------- -------------- ---------------
2,502,257 2,254,093 5.2
- -----------------------------------------------------------------------------------------------------------------------------------
WOOD PRODUCTS 18,400 Louisiana-Pacific Corp.. . . . . . . . . 467,929 446,200 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 37,691,085 40,323,973 93.6
- -----------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $ 1,818,000 General Electric Capital Corp., 5.90% due
1/02/1996. . . . . . . . . . . . . . . . 1,816,808 1,816,808 4.2
- -----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & Federal National Mortgage Association,
AGENCY OBLIGATIONS** 1,000,000 5.44% due 1/23/1996. . . . . . . . . . . 996,222 996,222 2.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 2,813,030 2,813,030 6.5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . . $40,504,115 43,137,003 100.1
-------------
-------------
LIABILITIES IN EXCESS OF OTHER ASSETS. . (34,652) (0.1)
-------------- ---------------
NET ASSETS. . . . . . . . . . . . . . . . $ 43,102,351 100.0%
-------------- ---------------
-------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
* American Depositary Receipts (ADR).
**
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.
*** Global Depositary Receipts (GDR).
+ Non-income producing security.
++Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $109,000,
representing 0.3% of net assets.
</TABLE>
<TABLE>
<CAPTION>
VALUE
ISSUE ACQUISITION DATE COST (NOTE 1A)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
P.T. Tambang Timah (GDR). . . . . . . . . . 10/06/1995 $115,742 $ 109,322
- ---------------------------------------------------------------------------------------
TOTAL $115,742 $ 109,322
---------- -----------
---------- -----------
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Receipts evidence payment by the Fund of 34% of the purchase price of common
stock of Falconbridge Ltd. The Fund is obligated to pay the remaining 66%,
approximately $375,000, over the next two years.
See Notes to Financial Statements.
97
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BANKS & THRIFTS--4.3% A A $ 1,000,000 BankAmerica Corp., 7.125% due
5/12/2005. . . . . . . . . . . . . $ 985,500 $ 1,058,670
A- A3 2,000,000 Golden West Financial Corp.,
9.15% due 5/23/1998. . . . . . . . . 2,271,480 2,152,800
NationsBank Corp.:
A A2 2,000,000 7.50% due 2/15/1997. . . . . . . . . 1,998,280 2,041,240
A- A3 6,500,000 10.50% due 3/15/1999. . . . . . . . 6,808,555 6,559,540
A- A3 2,000,000 7.75% due 8/15/2015. . . . . . . . . 2,000,000 2,190,700
Wachovia Corp.:
AA+ Aa2 3,000,000 6.55% due 6/09/1997. . . . . . . . . 2,997,810 3,048,870
AA- A1 4,000,000 6.80% due 6/01/2005. . . . . . . . . 3,936,200 4,176,240
----------- -----------
20,997,825 21,228,060
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- Chrysler Finance Corp.:
CAPTIVE--3.9%
A- A3 1,000,000 7.13% due 9/30/1996. . . . . . . . 985,130 1,010,680
A- A3 6,500,000 10.95% due 8/01/2017. . . . . . . . 7,380,520 7,293,520
General Motors Acceptance Corp.:
BBB+ A3 3,000,000 7.125% due 5/11/1998. . . . . . . . 3,033,840 3,097,590
BBB+ A3 7,500,000 7.40% due 9/01/2025. . . . . . . . . 7,439,550 8,001,900
---------- -----------
18,839,040 19,403,690
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- A+ A1 2,000,000 American General Finance Corp.,
CONSUMER--6.2% 8.50% due 8/15/1998. . . . . . . . . 2,278,920 2,138,040
Associates Corp. of North America:
AA- Aa3 5,000,000 8.375% due 1/15/1998. . . . . . . . 5,016,100 5,269,050
AA- Aa3 1,500,000 5.25% due 9/01/1998. . . . . . . . 1,454,385 1,486,800
AA- Aa3 1,000,000 7.25% due 9/01/1999. . . . . . . . 987,620 1,047,740
A A2 10,000,000 Beneficial Corp., 5.41% due
10/14/1997. . . . . . . . . . . . . 10,000,000 9,954,590
A+ Aa3 3,000,000 CIT Group Holdings, Inc., 7.625% due
12/05/1996. . . . . . . . . . . . . 2,990,340 3,056,508
Commercial Credit Co.:
A+ A1 3,250,000 10.00% due 5/01/1999. . . . . . . . 3,626,350 3,660,962
A+ A1 3,000,000 6.70% due 8/01/1999. . . . . . . . 3,022,580 3,087,720
A+ A2 1,000,000 Transamerica Financial Corp., 6.80%
due 3/15/1999. . . . . . . . . . . 999,730 1,030,810
----------- --------------
30,376,025 30,732,220
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES-- A A2 10,000,000 Bear Stearns Companies Inc. (The),
OTHER--11.7% 6.75% due 8/15/2000. . . . . . . . 9,936,500 10,283,900
Dean Witter, Discover & Co.:
A A2 3,500,000 6.75% due 8/15/2000. . . . . . . . 3,486,805 3,623,550
A A2 4,000,000 6.50% due 11/01/2005. . . . . . . . 3,953,800 4,041,600
A A2 2,250,000 6.75% due 10/15/2013. . . . . . . . 2,207,925 2,236,387
A+ A2 2,000,000 Dillard Investment Co., 9.25% due
2/01/2001. . . . . . . . . . . . . 2,354,230 2,272,400
General Electric Capital Corp.:
AAA Aaa 3,000,000 14.00% due 7/01/1996. . . . . . . . 3,405,570 3,121,710
AAA Aaa 3,500,000 8.125% due 5/15/2012. . . . . . . . 3,553,725 4,087,685
A A3 10,000,000 Lehman Brothers Holdings, Inc.,
7.375% due 8/15/1997. . . . . . . . 9,987,000 10,216,600
PaineWebber Group, Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001. . . . . . . . 3,501,570 3,394,080
BBB+ Baa1 2,000,000 8.875% due 3/15/2005. . . . . . . . 2,012,540 2,276,400
A- A3 6,000,000 Smith Barney Holdings, Inc., 6.50%
due 10/15/2002. . . . . . . . . . . 5,972,240 6,104,340
Travelers Corp. (The):
A+ A2 1,000,000 9.50% due 3/01/2002. . . . . . . . 1,084,200 1,172,490
A+ A2 4,000,000 7.875% due 5/15/2025. . . . . . . . 3,997,680 4,477,800
----------- --------------
55,453,785 57,308,942
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
98
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOREIGN*--11.5% A+ Aa2 $6,500,000 ABN AMRO Bank, 7.25% due
5/31/2005 (1). . . . . . . . . . . . $ 6,651,015 $ 6,978,270
AA- A1 4,000,000 Aegon N.V., 8.00% due 8/15/2006 (1). 3,963,480 4,528,640
CRA Finance Ltd. (3):
A+ A2 6,500,000 6.50% due 12/01/2003. . . . . . . . 6,509,920 6,589,830
A+ A2 3,000,000 7.125% due 12/01/2013. . . . . . . . 2,982,600 3,087,240
AAA Aaa 2,000,000 Export-Import Bank of Japan, 8.35% due
12/01/1999 (1). . . . . . . . . . . 2,113,320 2,189,940
Metropolis of Tokyo (Japan) (2):
AAA Aaa 3,000,000 8.70% due 10/05/1999. . . . . . . . 3,469,410 3,305,670
AAA Aaa 250,000 9.25% due 11/08/2000. . . . . . . . 268,428 287,090
A+ A1 1,000,000+ Petronas Corp., 6.875% due 7/01/2003
(4). . . . . . . . . . . . . . . . . 986,480 1,037,270
A+ A2 4,500,000 Pohang Iron & Steel Co., Ltd., 7.375%
due 5/15/2005 (3). . . . . . . . . . 4,581,720 4,780,755
AA- Aa3 6,000,000 Province of Ontario (Canada), 7.75%
due 6/04/2002 (2). . . . . . . . . . 5,854,440 6,532,020
Province of Quebec (Canada) (2):
A+ A2 3,500,000 8.80% due 4/15/2003. . . . . . . . . 3,944,780 4,007,535
A+ A2 6,500,000 7.125% due 2/09/2024. . . . . . . . 5,283,240 6,536,595
AA A1 7,000,000 Republic of Italy, 6.875% due
9/27/2023 (2). . . . . . . . . . . . 6,487,690 6,835,850
----------- --------------
53,096,523 56,696,705
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--CONSUMER A- A2 2,000,000 American Home Products Corp., 7.90%
GOODS--12.3% due 2/15/2005. . . . . . . . . . . . 1,996,100 2,249,480
Anheuser-Busch Cos., Inc.:
AA- A1 2,500,000 8.75% due 12/01/1999. . . . . . . . 2,839,090 2,765,700
AA- A1 5,000,000 7.375% due 7/01/2023. . . . . . . . 5,127,300 5,292,250
A+ A1 2,500,000 Bass America, Inc., 8.125% due
3/31/2002. . . . . . . . . . . . . . 2,668,930 2,784,350
Dillard Department Stores, Inc.:
A+ A2 5,000,000 7.375% due 6/15/1999. . . . . . . . 5,305,840 5,224,500
A+ A2 3,000,000 9.125% due 8/01/2011. . . . . . . . 3,240,150 3,740,850
Grand Metropolitan Investment Corp.:
A+ A2 5,500,000 6.50% due 9/15/1999. . . . . . . . . 5,615,810 5,624,905
A+ A2 1,000,000 8.625% due 8/15/2001. . . . . . . . 1,049,910 1,127,530
AAA Aaa 3,000,000 Johnson & Johnson Co., 8.72% due
11/01/2024. . . . . . . . . . . . . 3,000,000 3,488,190
A+ A1 2,000,000 Kimberly-Clark Corporation, 7.875% due
2/01/2023. . . . . . . . . . . . . . 2,033,960 2,185,680
A A2 2,000,000 May Department Stores Company (The),
10.625% due 11/01/2010. . . . . . . 2,419,800 2,771,340
A A1 1,000,000 PepsiCo., Inc., 6.125% due 1/15/1998. 993,060 1,010,210
Philip Morris Companies, Inc.:
A A2 4,000,000 9.00% due 1/01/2001. . . . . . . . . 4,071,540 4,503,920
A A2 5,500,000 7.25% due 1/15/2003. . . . . . . . . 5,537,840 5,811,300
AA Aa1 4,000,000 Wal-Mart Stores, Inc., 8.50% due
9/15/2024. . . . . . . . . . . . . . 3,926,560 4,616,960
A A2 5,000,000 Weyerhaeuser Co., 7.95% due
3/15/2025. . . . . . . . . . . . . . 4,945,200 5,811,800
----------- --------------
54,771,090 59,008,965
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--ENERGY-- BP America Inc.:
2.3%
AA- A1 2,000,000 9.375% due 11/01/2000. . . . . . . . 2,204,960 2,299,720
AA- A1 4,000,000 8.50% due 4/15/2001. . . . . . . . . 4,176,000 4,480,440
Texaco Capital Inc.:
A+ A1 1,500,000 9.00% due 12/15/1999. . . . . . . . 1,731,670 1,667,265
A+ A1 1,000,000 8.875% due 2/15/2021. . . . . . . . 999,860 1,291,940
A+ A1 1,000,000 8.625% due 11/15/2031. . . . . . . . 1,045,390 1,258,850
----------- --------------
10,157,880 10,998,215
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
99
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES COST (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL--OTHER--9.5% A A3 $4,000,000 Alco Standard Corporation, 6.75% due
12/01/2025. . . . . . . . . . . . . . $ 3,939,200 $ 3,961,008
AA- Aa2 2,000,000 Archer-Daniels-Midland Co., 8.125% due
6/01/2012. . . . . . . . . . . . . . 2,125,020 2,298,800
AA- Aa3 2,500,000 Capital Cities/ABC, Inc., 8.75% due
8/15/2021. . . . . . . . . . . . . . 2,711,750 3,123,975
A- A3 4,000,000 Carnival Cruise Lines, Inc., 7.70% due
7/15/2004. . . . . . . . . . . . . . 4,208,480 4,317,360
AA- Aa3 5,950,000 du Pont (E.I.) de Nemours & Co., 8.25%
due 1/15/2022. . . . . . . . . . . . 6,188,164 6,558,923
A A1 7,000,000+ Electronic Data Systems Corp., 6.85%
due 5/15/2000. . . . . . . . . . . . 6,994,470 7,271,250
Ford Motor Credit Co.:
A+ A1 3,000,000 6.25% due 11/08/2000. . . . . . . . . 2,990,100 3,040,770
A+ A1 2,500,000 7.75% due 3/15/2005. . . . . . . . . 2,497,725 2,754,475
A+ A1 2,000,000 9.50% due 6/01/2010. . . . . . . . . 2,217,880 2,490,000
AA Aa2 5,890,000 Kaiser Foundation Hospital, 9.55% due
7/15/2005. . . . . . . . . . . . . . 6,625,366 7,282,043
BBB+ Aa3 3,000,000 Philips Electronics N.V., 7.75% due
5/15/2025. . . . . . . . . . . . . . 2,989,830 3,332,970
------------ ---------------
43,487,985 46,431,574
- -----------------------------------------------------------------------------------------------------------------------------------
SUPRANATIONAL--2.5% Asian Development Bank:
AAA Aaa 1,000,000 10.75% due 6/01/1997. . . . . . . . . 1,084,890 1,069,290
AAA Aaa 4,000,000 6.125% due 3/09/2004. . . . . . . . . 3,962,320 4,017,600
Inter-American Development Bank Co.:
AAA Aaa 2,000,000 8.875% due 6/01/2009. . . . . . . . . 2,481,700 2,551,360
AAA Aaa 4,000,000 8.50% due 3/15/2011. . . . . . . . . 4,910,200 4,861,840
------------ ---------------
12,439,110 12,500,090
- -----------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION AA A1 9,500,000 Boeing Co., 6.35% due
SERVICES--3.9% 6/15/2003. . . . . . . . . . . . . . . 8,549,905 9,673,850
Southwest Airlines, Inc.:
A- Baa1 3,500,000 9.40% due 7/01/2001. . . . . . . . . 4,021,990 4,025,175
A- Baa1 4,000,000 8.00% due 3/01/2005. . . . . . . . . 3,980,450 4,451,200
A- Baa1 1,000,000 7.875% due 9/01/2007. . . . . . . . . 992,600 1,089,000
------------ ---------------
17,544,945 19,239,225
- -----------------------------------------------------------------------------------------------------------------------------------
UTILITIES-- AA Aa3 4,000,000 AT&T Corp., 8.35% due 1/15/2025. . . . 3,929,080 4,575,800
COMMUNICATIONS--3.2%
AAA Aaa 3,500,000 BellSouth Corp., 7.00% due 10/01/2025.
3,467,380 3,720,010
GTE Corp.:
8.85% due 3/01/1998. . . . . . . . .
BBB+ Baa1 1,000,000 1,143,360 1,066,150
9.10% due 6/01/2003. . . . . . . . .
BBB+ Baa1 1,000,000 1,221,680 1,162,710
Southwestern Bell Telecommunications
A+ A1 1,000,000 Corp., 6.125% due 3/01/2000. . . . .
1,005,000 1,015,590
US West Communications, 7.25% due
AA- Aa3 4,000,000 9/15/2025. . . . . . . . . . . . . .
3,993,200 4,304,360
------------ ---------------
14,759,700 15,844,620
- -----------------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC--3.9% AA- Aa2 7,000,000 Duke Power Co., 8.00% due
11/01/1999. . . . . . . . . . . . . . 6,966,520 7,546,770
A A2 3,000,000 Georgia Power Co., 6.125% due
9/01/1999. . . . . . . . . . . . . . . 2,892,720 3,032,670
A A2 7,500,000 Virginia Electric & Power Co., 8.625%
due 10/01/2024. . . . . . . . . . . . 7,416,540 8,746,215
------------ ---------------
17,275,780 19,325,655
- -----------------------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS--1.6% AA- A1 7,000,000 Consolidated Natural Gas Co., 8.75% due
6/01/1999. . . . . . . . . . . . . . 7,448,861 7,634,060
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES-- 76.8%
356,648,549 376,352,021
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
100
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT US GOVERNMENT & AGENCY OBLIGATIONS COST (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C>
US GOVERNMENT AGENCY AAA Aaa $ 5,000,000 Federal Home Loan Bank, 5.96% due
OBLIGATIONS--2.5% 5/06/1996. . . . . . . . . . . . . . . $ 4,980,500 $ 5,003,495
AAA Aaa 7,000,000 Federal National Mortgage Association,
7.85% due 9/10/2004. . . . . . . . . . 6,925,569 7,445,130
-------------- -----------------
11,906,069 12,448,625
- -----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Notes & Bonds:
OBLIGATIONS--13.3%
AAA Aaa 2,500,000 7.75% due 12/31/1999. . . . . . . . . 2,669,922 2,712,900
AAA Aaa 10,000,000 5.875% due 6/30/2000. . . . . . . . . 10,008,100 10,203,100
AAA Aaa 2,500,000 8.75% due 8/15/2000. . . . . . . . . . 2,976,172 2,839,450
AAA Aaa 7,000,000 6.375% due 8/15/2002. . . . . . . . . 6,734,033 7,340,130
AAA Aaa 11,000,000 6.50% due 5/15/2005. . . . . . . . . . 10,668,276 11,703,010
AAA Aaa 1,000,000 5.875% due 11/15/2005. . . . . . . . . 1,015,156 1,022,500
AAA Aaa 10,500,000 8.875% due 8/15/2017. . . . . . . . . 11,899,219 14,063,385
AAA Aaa 12,000,000 7.625% due 2/15/2025. . . . . . . . . 14,101,562 14,673,720
-------------- -----------------
60,072,440 64,558,195
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS--15.8% 71,978,509 77,006,820
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER**-- 5,000,000 General Electric Capital Corp., 5.90%
1.0% due 1/03/1996. . . . . . . . . . . . . 4,995,903 4,995,903
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE 22,531,000 Morgan Stanley Group, Inc., purchased on
AGREEMENT***--4.6% 12/29/1995 to yield 5.87% to 1/02/1996
22,531,000 22,531,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES--5.6% 27,526,903 27,526,903
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.2%. . . . . . . . $ 456,153,961 480,885,744
--------------
OTHER ASSETS LESS LIABILITIES-- --------------
1.8%. . . . . . . . . . . . . . . . . . 8,952,224
-----------------
NET ASSETS--100.0%. . . . . . . . . . .
$ 489,837,968
-----------------
-----------------
- -----------------------------------------------------------------------------------------------------------------------------------
*Corresponding industry groups for foreign securities, which are denominated in US dollars.
(1) Financial Institution
(2) Government Entity
(3) Industrial Mining and Metals
(4) Industrial Energy
**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.
***Repurchase Agreements are fully collateralized by US Government and Agency Obligations.
+Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $8,309,000,
representing 1.7% of net assets.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ISSUE ACQUISITION VALUE
- ------------------------------------------------------- DATE ---- COST ---- (NOTE 1A)
----------- --------- ----------
Petronas Corp., 6.875% due 7/01/2003. . . . . . . 8/10/1995 $ 986,480 $ 1,037,270
Electronic Data Systems Corp., 6.85% due 5/15/2000 5/26/1995 6,994,470 7,271,250
- ---------------------------------------------------------------------------------------------
$ 7,980,950 $ 8,308,520
------------ -------------
TOTAL ------------ -------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
101
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
HELD (NOTE 1A) NET ASSETS
INDUSTRY STOCKS & WARRANTS COST
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 215,000 Boeing Co.. . . . . . . . . . . . . . $ 13,710,875 $ 16,850,625 2.6%
220,000 United Technologies Corp.. . . . . . 17,602,167 20,872,500 3.2
-------------- -------------- -----
31,313,042 37,723,125 5.8
- --------------------------------------------------------------------------------------------------------------------
ALUMINUM 215,000 Aluminum Co. of America. . . . . . . 11,993,522 11,368,125 1.8
- --------------------------------------------------------------------------------------------------------------------
APPLIANCES 120,000 Whirlpool Corporation.. . . . . . . . 6,541,272 6,390,000 1.0
- --------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 520,000 Ford Motor Co.. . . . . . . . . . . . 15,558,788 15,080,000 2.3
- --------------------------------------------------------------------------------------------------------------------
AUTOMOBILE PARTS-- 85,000 Magna International, Inc. (Class A). 3,105,362 3,676,250 0.6
ORIGINAL EQUIPMENT
- --------------------------------------------------------------------------------------------------------------------
BANKING 425,000 Bank of New York, Inc.. . . . . . . . 14,242,811 20,718,750 3.2
60,000 Bank of New York, Inc. (Warrants) (b) 433,750 2,167,500 0.3
-------------- -------------- -----
14,676,561 22,886,250 3.5
- --------------------------------------------------------------------------------------------------------------------
CHEMICALS 120,000 Eastman Chemical Co.. . . . . . . . . 7,251,299 7,515,000 1.2
- --------------------------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT 75,000 +ADC Telecommunications, Inc.. . . . . 3,014,376 2,718,750 0.4
- --------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 425,000 General Motors Corp. (Class E). . . . 17,936,810 22,100,000 3.4
- --------------------------------------------------------------------------------------------------------------------
ELECTRONICS/INSTRUMENTS 255,800 Corning Inc.. . . . . . . . . . . . . 7,062,592 8,185,600 1.3
130,000 Texas Instruments, Inc.. . . . . . . 9,342,810 6,727,500 1.0
-------------- -------------- -----
16,405,402 14,913,100 2.3
- --------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 800,000 Wheelabrator Technologies, Inc.. . . 13,684,829 13,400,000 2.1
- --------------------------------------------------------------------------------------------------------------------
FOREIGN--HONG KONG 300,000 Hong Kong Telecommunications
Limited (ADR) (a) (3). . . . . . . . 5,342,920 5,325,000 0.8
- --------------------------------------------------------------------------------------------------------------------
FOREIGN--NETHERLANDS 80,000 Royal Dutch Petroleum Co., N.V.
(ADR) (a) (1). . . . . . . . . . . . 10,690,414 11,290,000 1.8
400,000
Singer Co., N.V. (c) (4). . . . . . . 13,220,178 11,150,000 1.7
-------------- -------------- -----
23,910,592 22,440,000 3.5
- --------------------------------------------------------------------------------------------------------------------
FOREIGN--SWITZERLAND 160,000 Sandoz AG (ADR) (a) (2). . . . . . . 6,973,917 7,300,000 1.1
- --------------------------------------------------------------------------------------------------------------------
HARDWARE PRODUCTS 120,100 Stanley Works Co. (The). . . . . . . 5,965,108 6,185,150 1.0
- --------------------------------------------------------------------------------------------------------------------
13,687,500 2.1
HEALTHCARE 500,000 +Humana Inc.. . . . . . . . . . . . . 10,288,989
- --------------------------------------------------------------------------------------------------------------------
INSURANCE 240,000 Aetna Life & Casualty Co.. . . . . . 14,392,691 16,620,000 2.6
290,000 Allstate Corp.. . . . . . . . . . . . 9,515,583 11,926,250 1.9
100,000 National Re Corp.. . . . . . . . . . 2,890,779 3,800,000 0.6
-------------- -------------- -----
26,799,053 32,346,250 5.1
- --------------------------------------------------------------------------------------------------------------------
NATURAL GAS 93,000 Enron Corp.. . . . . . . . . . . . . 3,515,656 3,545,625 0.6
- --------------------------------------------------------------------------------------------------------------------
OIL SERVICE 350,000 Dresser Industries, Inc.. . . . . . . 8,202,968 8,531,250 1.3
- --------------------------------------------------------------------------------------------------------------------
PETROLEUM 124,000 Pennzoil Co.. . . . . . . . . . . . . 4,904,735 5,239,000 0.8
- --------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 300,000 Abbott Laboratories. . . . . . . . . 12,284,595 12,525,000 1.9
255,000 Merck & Co., Inc.. . . . . . . . . . 15,352,870 16,766,250 2.6
-------------- -------------- -----
27,637,465 29,291,250 4.5
- --------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 275,000 Eastman Kodak Co.. . . . . . . . . . 15,238,527 18,425,000 2.9
- --------------------------------------------------------------------------------------------------------------------
RETAIL 385,000 Sears, Roebuck & Co.. . . . . . . . . 13,882,526 15,015,000 2.3
- --------------------------------------------------------------------------------------------------------------------
SCIENTIFIC INSTRUMENTS 167,700 Fisher Scientific Intl Inc... . . . . 5,485,059 5,596,987 0.9
- --------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 230,000 AT&T Corp. . . . . . . . . . . . . . 15,125,009 14,892,500 2.3
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS & WARRANTS 314,753,787 345,591,112 53.6
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
102
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $28,000,000 Corporate Asset Funding Co. Inc., 5.67%
due 1/09/1996. . . . . . . . . . . . $ 27,951,490 $ 27,951,490 4.3%
15,000,000 Ford Motor Credit Co., 5.76% due
1/04/1996. . . . . . . . . . . . . . 14,985,600 14,985,600 2.3
30,387,000 General Electric Capital Corp., 5.90%
due 1/02/1996. . . . . . . . . . . . 30,367,080 30,367,080 4.7
10,000,000 Matterhorn Capital Corp., 5.75% due
1/03/1996. . . . . . . . . . . . . . 9,992,014 9,992,014 1.6
----------- ----------- ------
83,296,184 83,296,184 12.9
- -------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT &
AGENCY OBLIGATIONS*
Federal Home Loan Mortgage Corporation:
40,000,000 5.62% due 1/16/1996. . . . . . . . . . 39,887,600 39,887,600 6.2
70,000,000 5.43% due 1/22/1996. . . . . . . . . . 69,746,600 69,746,600 10.8
Federal National Mortgage Association:
49,000,000 5.65% due 1/19/1996. . . . . . . . . . 48,838,504 48,838,504 7.6
20,000,000 5.67% due 1/19/1996. . . . . . . . . . 19,933,850 19,933,850 3.1
40,000,000 5.45% due 2/02/1996. . . . . . . . . . 39,788,056 39,788,056 6.2
----------- ----------- ------
218,194,610 218,194,610 33.9
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 301,490,794 301,490,794 46.8
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . $616,244,581 647,081,906 100.4
--------------
--------------
LIABILITIES IN EXCESS OF OTHER ASSETS. (2,531,305) (0.4)
----------- ------
NET ASSETS. . . . . . . . . . . . . . $644,550,601 100.0%
-------------- ------
-------------- ------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to adjustment
under certain conditions until the expiration date.
(c) 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, investment made, or
services performed in the country, or in which at least 50% of the assets of
the issuers are situated.
* Commercial Paper and certain US Government & Agency Obligations trade 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.
Corresponding industry groups for foreign securities:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) Petroleum
(2) Pharmaceuticals
(3) Telecommunications
(4) Appliances
</TABLE>
See Notes to Financial Statements.
103
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
CERTIFICATE OF DEPOSIT-- $ 500,000 Abbey National PLC. . . . . . . . . . . 6.54 % 4/09/96 $ 501,056
EUROPEAN--2.0%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATE OF DEPOSIT/EUROPEAN (COST--$500,013) 501,056
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL 500,000 Abbey National PLC. . . . . . . . . . . 5.44 5/30/96 488,567
PAPER--26.8%
300,000 American Express Credit Corp.. . . . . . 5.62 4/11/96 295,251
500,000 CXC Inc.. . . . . . . . . . . . . . . . 5.75 1/19/96 498,314
748,000 Ford Motor Credit Co.. . . . . . . . . . 5.62 3/27/96 737,829
1,200,000 General Motors Acceptance Corp.. . . . . 5.80 2/01/96 1,193,427
1,000,000 Kingdom of Sweden. . . . . . . . . . . . 5.60 3/11/96 988,847
698,000 Korea Development Bank. . . . . . . . . 5.68 2/20/96 692,163
887,000 McKenna Triangle National Corp.. . . . . 5.74 1/16/96 884,437
500,000 National Australia Funding (Delaware). . 5.44 5/29/96 488,642
285,000 Premium Funding, Inc.. . . . . . . . . . 5.78 1/16/96 284,176
300,000 Svenska Handelsbanken, Inc.. . . . . . . 5.71 1/31/96 298,405
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$6,849,309) 6,850,058
- -----------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--7.1% 1,000,000 Beta Finance Inc.+. . . . . . . . . . . 5.88 9/16/96 1,000,000
500,000 Morgan (J.P.) & Company, Inc.+. . . . . 5.92 7/17/96 499,813
325,000 SMM Trust+. . . . . . . . . . . . . . . 5.8325 6/14/96 325,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES--INT BEARING
(COST--$1,824,813) 1,824,813
- -----------------------------------------------------------------------------------------------------------------------
MASTER NOTES--3.9% 1,000,000 Goldman Sachs Group L.P.+. . . . . . . . 5.85 2/14/96 1,000,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (COST--$1,000,000) 1,000,000
- -----------------------------------------------------------------------------------------------------------------------
MEDIUM-TERM 500,000 Federal National Mortgage Association+.. 6.46 3/27/96 501,133
NOTES--2.9%
250,000 General Electric Capital Corp.. . . . . 7.625 7/30/96 252,948
- -----------------------------------------------------------------------------------------------------------------------
TOTAL MEDIUM-TERM NOTES (COST--$752,560) 754,081
- -----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT, AGENCY 190,000 Federal Farm Credit Bank. . . . . . . . 5.56 3/20/96 187,685
& INSTRUMENTALITY
OBLIGATIONS-- 130,000 Federal Home Loan Bank.. . . . . . . . . 6.18 3/07/96 128,667
DISCOUNT--26.0%
270,000 Federal Home Loan Bank.. . . . . . . . . 5.48 4/09/96 265,961
170,000 Federal Home Loan Bank.. . . . . . . . . 5.58 4/10/96 167,432
270,000 Federal Home Loan Bank.. . . . . . . . . 5.58 4/11/96 265,882
165,000 Federal Home Loan Bank.. . . . . . . . . 5.43 7/12/96 160,418
312,000 Federal Home Loan Mortgage Corporation. 6.44 2/09/96 309,976
170,000 Federal National Mortgage Association. . 5.60 3/06/96 168,282
390,000 Federal National Mortgage Association. . 5.41 3/28/96 384,784
450,000 Federal National Mortgage Association. . 5.38 4/02/96 443,730
70,000 Federal National Mortgage Association. . 5.47 4/02/96 69,024
450,000 Federal National Mortgage Association. . 5.44 4/05/96 443,532
300,000 Federal National Mortgage Association. . 5.59 4/05/96 295,688
220,000 Federal National Mortgage Association. . 5.57 4/12/96 216,612
475,000 Federal National Mortgage Association. . 5.44 4/16/96 467,406
120,000 Federal National Mortgage Association. . 5.44 4/22/96 117,976
155,000 Federal National Mortgage Association. . 5.47 5/03/96 152,179
350,000 Federal National Mortgage Association. . 5.45 5/09/96 343,327
450,000 Federal National Mortgage Association. . 5.21 9/05/96 434,062
315,000 US Treasury Bills. . . . . . . . . . . . 5.30 1/11/96 314,396
300,000 US Treasury Bills. . . . . . . . . . . . 6.815 1/11/96 299,425
500,000 US Treasury Bills. . . . . . . . . . . . 6.59 2/08/96 496,962
500,000 US Treasury Bills. . . . . . . . . . . . 6.605 2/08/96 496,962
- -----------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
6,630,368
OBLIGATIONS--DISCOUNT (COST--$6,625,227)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
104
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
FACE INTEREST MATURITY VALUE
AMOUNT ISSUE RATE* DATE (NOTE 1A)
<S> <C> <C> <C> <C> <C>
US GOVERNMENT, AGENCY $ 150,000 Federal Farm Credit Bank+. . . . . . . 6.11 % 8/19/96 $ 149,941
& INSTRUMENTALITY
OBLIGATIONS-- 500,000 Federal Home Loan Mortgage Corporation+ 6.84 2/28/96 500,918
NON-DISCOUNT--32.6%
1,000,000 Federal National Mortgage Association+. 6.35 2/14/97 1,004,751
1,000,000 Federal National Mortgage Association+. 6.08 5/13/96 1,000,000
1,000,000 Federal National Mortgage Association+. 5.4596 10/11/96 1,000,000
1,000,000 Federal National Mortgage Association+. 6.20 5/19/97 1,000,000
1,000,000 Federal National Mortgage Association+. 6.25 5/14/98 1,000,000
450,000 Student Loan Marketing Association+. . 5.40 3/20/96 450,000
100,000 Student Loan Marketing Association+. . 5.27 4/16/96 100,019
300,000 Student Loan Marketing Association+. . 5.97 10/04/96 299,910
365,000 Student Loan Marketing Association+. . 5.45 1/23/97 365,338
200,000 US Treasury Notes. . . . . . . . . . . 6.125 5/31/97 202,375
200,000 US Treasury Notes. . . . . . . . . . . 6.00 8/31/97 202,406
400,000 US Treasury Notes. . . . . . . . . . . 5.625 10/31/97 402,875
200,000 US Treasury Notes. . . . . . . . . . . 5.375 11/30/97 200,562
450,000 US Treasury Notes. . . . . . . . . . . 5.25 12/31/97 450,492
- ------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$8,324,092) 8,329,587
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TOTAL INVESTMENTS (COST--$25,876,014)--101.3%. 25,889,963
LIABILITIES IN EXCESS OF OTHER ASSETS--1.3%. . (340,094)
------------------------------------------
NET ASSETS--100.0%. . . . . . . . . . . . . .
$ 25,549,869
------------------------------------------
------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
*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, 1995.
+Variable Rate Notes.
</TABLE>
See Notes to Financial Statements.
105
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (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>
SOUTH AFRICA FOREIGN GOVERNMENT US$ 500,000 Republic of South Africa,
OBLIGATIONS 9.625% due 12/15/1999. . . $ 498,425 $ 540,000 0.7%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN SOUTH AFRICA 498,425 540,000 0.7
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN AFRICA 498,425 540,000 0.7
- ----------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
AND THE CARIBBEAN
- ----------------------------------------------------------------------------------------------------------------------------
ARGENTINA TELECOMMUNICATIONS 500,000 Telefonica de Argentina, S.A.,
11.875% due 11/01/2004. . . 490,040 517,500 0.6
--------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN ARGENTINA 490,040 517,500 0.6
- ----------------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 500,000+ UNIBANCO--Uniao de Bancos
Brasilerios S.A., 10.25% due
6/12/1997. . . . . . . . . 498,750 502,500 0.6
--------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN BRAZIL 498,750 502,500 0.6
- ----------------------------------------------------------------------------------------------------------------------------
MEXICO ENERGY 500,000 Petroleos Mexicanos, 8.25% due
2/04/1998. . . . . . . . . 521,875 488,750 0.6
--------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN MEXICO 521,875 488,750 0.6
- ----------------------------------------------------------------------------------------------------------------------------
TRINIDAD & FOREIGN GOVERNMENT 350,000 Republic of Trinidad &
TOBAGO OBLIGATIONS Tobago, 11.50% due 11/20/1997. 368,500 369,250 0.5
--------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN TRINIDAD & TOBAGO 368,500 369,250 0.5
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
LATIN AMERICAN AND
CARIBBEAN SECURITIES 1,879,165 1,878,000 2.3
- ----------------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
- ----------------------------------------------------------------------------------------------------------------------------
UNITED STATES AIRLINES 500,000 USAir Inc., 10.375% due
3/01/2013. . . . . . . . . 504,688 465,000 0.6
United Air Lines, Inc.:
500,000 10.02% due 3/22/2014. . . . 506,250 598,175 0.7
100,000 United Air Pass Through 10.125%
due 3/22/2015. . . . . . . 109,036 120,015 0.1
-- -------- -- -------- ---- ----
1,119,974 1,183,190 1.4
--------------------------------------------------------------------------------------------------------------
AUTOMOTIVE 500,000 Walbro Corp., 9.875% due
7/15/2005. . . . . . . . . 490,000 498,750 0.6
--------------------------------------------------------------------------------------------------------------
BROADCASTING & 500,000 SCI Television Inc., 11.00% due
PUBLISHING 6/30/2005. . . . . . . . . 520,625 528,750 0.6
250,000 Sinclair Broadcast Group Inc.,
10.00% due 9/30/2005. . . . 250,000 255,625 0.3
-- -------- -- -------- ---- ----
770,625 784,375 0.9
--------------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 1,011,242 American Telecasting Inc.,
12.59%* due 6/15/2004. . . 642,918 695,229 0.8
1,000,000 Videotron Holdings PLC, 11.05%*
7/01/2004. . . . . . . . . 652,360 697,500 0.9
-- -------- -- -------- ---- ----
1,295,278 1,392,729 1.7
--------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 500,000 Pacific Lumber Co., 10.50% due
3/01/2003. . . . . . . . . 492,000 473,750 0.6
--------------------------------------------------------------------------------------------------------------
</TABLE>
106
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (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>
UNITED STATES CHEMICALS US$ 1,225,000 G-I Holdings, Inc., 12.86%*
(CONTINUED) due 10/01/1998. . . . . . . $ 886,971 $ 946,313 1.2%
----------------------------------------------------------------------------------------------------------
COMMUNICATIONS 1,375,000 Panamsat L.P., 11.35%*
due 8/01/2003. . . . . . . . . 987,186 1,127,500 1.4
1,000,000 Rogers Communications, Inc.,
10.875% due 4/15/2004. . . . 1,007,500 1,045,000 1.3
500,000 USA Mobile Communications
Holdings, Inc., 9.50% due
2/01/2004. . . . . . . . . . 454,375 495,000 0.6
-- -------- -- -------- ---- ----
2,449,061 2,667,500 3.3
----------------------------------------------------------------------------------------------------------
CONGLOMERATES Coltec Industries Inc.:
150,000 9.75% due 11/01/1999. . . . . 159,000 154,500 0.2
600,000 10.25% due 4/01/2002. . . . . 622,000 616,500 0.8
J.B. Poindexter Co., Inc.,
500,000 12.50% due 5/15/2004. . . . . 500,000 401,250 0.5
Jordan Industries, Inc.,
500,000 10.375% due 8/01/2003. . . . 495,688 445,000 0.5
Sequa Corp., 9.375% due
500,000 12/15/2003. . . . . . . . . . 508,750 465,000 0.6
Sherritt Gordon, Ltd., 9.75%
500,000 due 4/01/2003. . . . . . . . 503,625 532,500 0.7
-- -------- -- -------- ---- ----
2,789,063 2,614,750 3.3
----------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS 1,000,000 Polymer Group Inc., 12.25% due
7/15/2002. . . . . . . . . . 1,001,250 1,030,000 1.3
1,000,000 Revlon Consumer Products Corp.,
9.375% due
4/01/2001. . . . . . . . . . 872,167 1,012,500 1.2
1,000,000 Samsonite Corp., 11.125% due
7/15/2005. . . . . . . . . . 963,125 960,000 1.2
-- -------- -- -------- ---- ----
2,836,542 3,002,500 3.7
----------------------------------------------------------------------------------------------------------
DIVERSIFIED Foamex L.P.:
191,000 9.50% due 6/01/2000. . . . . . 186,464 188,613 0.2
500,000 11.25% due 10/01/2002. . . . . 498,125 500,000 0.6
-- -------- -- -------- ---- ----
684,589 688,613 0.8
----------------------------------------------------------------------------------------------------------
ENERGY 2,000,000 Clark R & M Holdings, Inc.,
10.52%* due 12/15/2000. . . 1,268,150 1,330,000 1.6
250,000 Consolidated-Hydro Inc.,
16.05%* due 7/15/2003. . . 186,735 145,937 0.2
500,000 TransTexas Gas Corp., 12.55%
due 6/15/2002. . . . . . . 500,000 516,250 0.6
-- -------- -- -------- ---- ----
1,954,885 1,992,187 2.4
----------------------------------------------------------------------------------------------------------
ENTERTAINMENT 500,000 Marvel Holdings, Inc., 9.125%
due 2/15/1998. . . . . . . 448,000 460,000 0.6
350,000 SpectraVision Inc., 11.50%* due
10/01/2001. . . . . . . . . 303,557 70,000 0.1
-- -------- -- -------- ---- ----
751,557 530,000 0.7
----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 500,000 Penn Financial Corp., 9.25% due
12/15/2003. . . . . . . . . 498,750 507,500 0.6
500,000 Reliance Group Holdings, Inc.,
9.00% due 11/15/2000. . . . 460,000 514,375 0.6
-- -------- -- -------- ---- ----
958,750 1,021,875 1.2
----------------------------------------------------------------------------------------------------------
</TABLE>
107
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (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>
UNITED STATES FOOD & BEVERAGE US$ 500,000 Chiquita Brands International
(CONTINUED) Corp., 9.125% due
3/01/2004. . . . . . . . . $ 497,500 $ 495,000 0.6%
750,000 Del Monte Corp., 10.00% due
5/01/2003. . . . . . . . . 740,000 665,625 0.8
500,000 Envirodyne Industries, Inc.,
10.25% due 12/01/2001. . . 509,375 367,500 0.4
250,000 Specialty Foods Corp., 10.25%
due 8/15/2001. . . . . . . 250,000 235,000 0.3
-- -------- -- -------- ---- ----
1,996,875 1,763,125 2.1
------------------------------------------------------------------------------------------------------------
GAMING 1,000,000 Bally's Park Place Funding,
Inc., 9.25% due 3/15/2004. 920,000 1,017,500 1.2
1,100,000 Greate Bay Properties, Inc.,
10.875% due 1/15/2004. . . 990,750 965,250 1.2
500,000 Harrah's Jazz Company, 14.25%
due 11/15/2001. . . . . . . 482,500 137,500 0.2
500,000 Showboat, Inc., 13.00% due
8/01/2009. . . . . . . . . 500,000 562,500 0.7
750,000 Trump Plaza Funding, Inc.,
10.875% due 6/15/2001. . . 741,250 776,250 0.9
103,633 Trump Taj Mahal Funding, Inc.,
11.35% due
11/15/1999 (a) (c). . . . . 98,002 92,411 0.1
-- -------- -- -------- ---- ----
3,732,502 3,551,411 4.3
------------------------------------------------------------------------------------------------------------
HOME BUILDING 500,000 Del E. Webb Corp., 9.00% due
2/15/2006. . . . . . . . . 500,000 475,000 0.6
------------------------------------------------------------------------------------------------------------
HOTEL(S) 500,000+ HMC Acquisition Properties,
9.00% due 12/15/2007. . . . 500,000 505,000 0.6
1,000,000 John Q. Hammons Hotel, Inc. ,
8.875% due 2/15/2004. . . . 887,500 990,000 1.2
-- -------- -- -------- ---- ----
1,387,500 1,495,000 1.8
------------------------------------------------------------------------------------------------------------
METALS & MINING 250,000 Maxxam Group, Inc., 14.04%* due
8/01/2003. . . . . . . . . 183,690 171,250 0.2
------------------------------------------------------------------------------------------------------------
PACKAGING 500,000 Anchor Glass Container Co.,
9.875% due 12/15/2008. . . 493,125 295,000 0.4
500,000 Owens-Illinois, Inc., 11.00%
due 12/01/2003. . . . . . . 512,500 565,000 0.7
500,000 Portola Packaging Inc., 10.75%
due 10/01/2005. . . . . . . 500,000 515,000 0.6
-- -------- -- -------- ---- ----
1,505,625 1,375,000 1.7
------------------------------------------------------------------------------------------------------------
PAPER 250,000 Riverwood International Corp.,
11.25% due 6/15/2002. . . . 274,813 271,250 0.3
500,000 S.D. Warren Co., 12.00% due
12/15/2004. . . . . . . . . 500,000 551,250 0.7
100,000 Stone Container Group, 10.75%
due 10/01/2002. . . . . . . 99,000 103,250 0.1
-- -------- -- -------- ---- ----
873,813 925,750 1.1
------------------------------------------------------------------------------------------------------------
RESTAURANTS 750,000 Flagstar Corp., 11.375% due
9/15/2003. . . . . . . . . 762,500 532,500 0.7
250,000 Foodmaker, Inc., 9.75% due
11/01/2003. . . . . . . . . 246,563 230,000 0.3
-- -------- -- -------- ---- ----
1,009,063 762,500 1.0
------------------------------------------------------------------------------------------------------------
SPECIALTY RETAILING 500,000 Bradlees Inc., 11.00% due
8/01/2002. . . . . . . . . 489,375 125,000 0.2
487,000+ Cumberland Farms, 10.50% due
10/01/2003. . . . . . . . . 476,651 448,040 0.5
-- -------- -- -------- ---- ----
966,026 573,040 0.7
------------------------------------------------------------------------------------------------------------
STEEL 500,000 WCI Steel, Inc., 10.50% due
3/01/2002. . . . . . . . . 500,000 486,250 0.6
------------------------------------------------------------------------------------------------------------
</TABLE>
108
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED) (IN US DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICA VALUE PERCENT OF
(CONCLUDED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES TEXTILES US$ 500,000 Tultex Corp., 10.625% due
(CONCLUDED) 3/15/2005. . . . . . . . . $ 500,000 $ 512,500 0.6%
1,500,000
WestPoint Stevens Inc.,
9.375% due 12/15/2005. . . 1,451,875 1,481,250 1.8
-- --------- -- --------- --- ----
1,951,875 1,993,750 2.4
----------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 250,000 Eletson Holdings Inc., 9.25%
due 11/15/2003. . . . . . 250,000 245,937 0.3
1,050,000 Transtar Holdings L.P.,
12.52%* due 12/15/1999. . 699,453 693,000 0.8
250,000 Viking Star Shipping Co.,
9.625% due 7/15/2003. . . 250,937 256,250 0.3
-- --------- -- --------- --- ----
1,200,390 1,195,187 1.4
----------------------------------------------------------------------------------------------------------
UTILITIES 494,000 Beaver Valley Funding Corp.,
9.00% due 6/01/2017. . . . 466,212 416,679 0.5
86,583 Midland Congeneration Venture
L.P., 10.33% due
7/23/2002. . . . . . . . . 84,851 91,310 0.1
233,383+ Tucson Electric Power Co.,
10.732% due 1/01/2013. . . 223,464 234,865 0.3
-- --------- -- --------- --- ----
774,527 742,854 0.9
----------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT 500,000 Mid-American Waste System,
Inc., 12.25% due 2/15/2003 511,250 470,000 0.6
----------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN THE 34,572,431 33,776,649 41.2
UNITED STATES
- ------------------------------------------------------------------------------------------------------------------------
SHARES HELD STOCKS & WARRANTS
- ------------------------------------------------------------------------------------------------------------------------
UNITED STATES BROADCASTING/CABLE 4,700 American Telecasting Inc.
(Warrants) (b). . . . . . 11,222 29,375 0.0
----------------------------------------------------------------------------------------------------------
BROADCASTING & 2,572 K-III Communications Corp.
PUBLISHING (Non-Convertible Preferred) 253,090 254,628 0.3
----------------------------------------------------------------------------------------------------------
SUPERMARKETS 17,674 Grand Union Co.. . . . . . 917,437 130,346 0.2
----------------------------------------------------------------------------------------------------------
TOTAL STOCKS & WARRANTS IN
THE UNITED STATES 1,181,749 414,349 0.5
----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 35,754,180 34,190,998 41.7
NORTH AMERICAN SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN FACE AMOUNT FIXED-INCOME INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
AUSTRALIA FOREIGN GOVERNMENT Australian Government
OBLIGATIONS-- Bonds:
REGIONAL & AGENCY
A$ 7,000,000 10.00% due 10/15/2002. . . . 5,743,662 5,744,771 7.0
1,200,000 9.50% due 8/15/2003. . . . 962,680 963,982 1.2
----------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN AUSTRALIA 6,706,342 6,708,753 8.2
- ------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND FOREIGN GOVERNMENT NZ$ 4,100,000 New Zealand Government Bond,
OBLIGATIONS 10.00% due
7/15/1997. . . . . . . . . 2,780,898 2,752,102 3.4
----------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME
INVESTMENTS IN
NEW ZEALAND 2,780,898 2,752,102 3.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
109
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONTINUED) (IN US DOLLARS)
<TABLE>
<CAPTION>
PACIFIC
BASIN VALUE PERCENT OF
(CONCLUDED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
PHILIPPINES TELECOMMUNICATIONS US$ 1,000,000 Philippine Long Distance
Telephone Co., 9.125%
due 8/01/2002. . . . . . . $ 1,000,000 $ 1,051,250 1.3%
-----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN THE
PHILIPPINES 1,000,000 1,051,250 1.3
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PACIFIC
BASIN SECURITIES 10,487,240 10,512,105 12.9
- -----------------------------------------------------------------------------------------------------------------------------------
WESTERN
EUROPE
- -----------------------------------------------------------------------------------------------------------------------------------
DENMARK FOREIGN GOVERNMENT Denmark Government Bonds:
OBLIGATIONS
Dkr 13,250,000 9.00% due 11/15/2000. . . . 2,569,181 2,655,020 3.2
2,500,000 8.00% due 5/15/2003. . . . . 468,522 480,471 0.6
4,730,000 8.00% due 3/15/2006. . . . . 854,226 897,616 1.1
-----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN DENMARK 3,891,929 4,033,107 4.9
- -----------------------------------------------------------------------------------------------------------------------------------
GERMANY FOREIGN GOVERNMENT DM 5,000,000 German Unity, 8.00% due
OBLIGATIONS 1/21/2002. . . . . . . . . 3,938,016 3,936,430 4.8
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN GERMANY 3,938,016 3,936,430 4.8
- -----------------------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN GOVERNMENT Buoni Poliennali del Tesoro
OBLIGATIONS (Italian Government Bonds):
Lit 6,750,000,000 10.50% due 4/01/2000. . . . 4,129,686 4,291,041 5.2
1,000,000,000 10.50% due 9/01/2005. . . . 583,280 625,426 0.8
2,600,000,000 Credit Local de France S.A.,
12.20% due 6/12/1996. . . . 1,627,204 1,646,120 2.0
-----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN ITALY 6,340,170 6,562,587 8.0
- -----------------------------------------------------------------------------------------------------------------------------------
SPAIN FOREIGN GOVERNMENT Government of Spain:
OBLIGATIONS
Pta 775,000,000 12.25% due 3/25/2000. . . . 6,468,254 7,018,144 8.6
190,000,000 10.50% due 10/30/2003. . . 1,505,519 1,640,503 2.0
-----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN SPAIN 7,973,773 8,658,647 10.6
- -----------------------------------------------------------------------------------------------------------------------------------
SWEDEN FOREIGN GOVERNMENT Skr 8,500,000 Government of Sweden, 11.00%
OBLIGATIONS-- due 1/21/1999. . . . . . . 1,344,113 1,378,423 1.7
REGIONAL & AGENCY
-----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN SWEDEN 1,344,113 1,378,423 1.7
- -----------------------------------------------------------------------------------------------------------------------------------
UNITED FOREIGN GOVERNMENT (pound 1,250,000 United Kingdom Treasury Gilt,
KINGDOM OBLIGATIONS sterling) 8.50% due 12/07/2005. . . . 2,014,816 2,086,972 2.6
-----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
IN
UNITED KINGDOM 2,014,816 2,086,972 2.6
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN
EUROPEAN
SECURITIES 25,502,817 26,656,166 32.6
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
110
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1995 (CONCLUDED) (IN US DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
VALUE PERCENT OF
FACE AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL US $ 3,127,000 General Electric Capital Corp.,
PAPER** 5.90% due 1/02/1996. . . . $3,125,463 $ 3,125,463 3.8%
2,000,000 Preferred Receivables Funding
Corp., 5.70% due
1/25/1996. . . . . . . . . 1,991,767 1,991,767 2.4
-- -------- -- --------- --- -----
5,117,230 5,117,230 6.2
- -----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT 555,000 Federal Home Loan Bank, 5.65%
& AGENCY due 1/16/1996. . . . . . . 553,519 553,519
OBLIGATIONS** 0.7
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 5,670,749 5,670,749 6.9
SHORT-TERM SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,792,576 79,448,018 97.1
------------
UNREALIZED DEPRECIATION ON FORWARD FOREIGN ------------
EXCHANGE CONTRACTS***. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,151) 0.0
OTHER ASSETS LESS LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . 2,401,765 2.9
-- --------- --- -----
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,844,632 100.0%
------------- ----------
------------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
(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.
* Represents a zero coupon or step bond; the interest rate shown is the effective yield at the time of purchase by the Fund.
**
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.
*** Forward foreign exchange contracts as of December 31, 1995 were as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
FOREIGN CURRENCY PURCHASED EXPIRATION UNREALIZED APPRECIATION
DATE (DEPRECIATION) (NOTE 1B)
DM2,000,000. . . . . . . . . . . . . . . January 1996 $ 9,657
- ----------------------------------------------------------------------- ------
TOTAL US$ COMMITMENT--$1,388,600 $ 9,657
--- ---------
- ---------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD
- ---
------------------------------------------------------------------------------------
Lit2,229,100,000. . . . . . . . . . . . January 1996 $ (14,808)
- ---
------------------------------------------------------------------------------------
TOTAL US$ COMMITMENT--$1,388,600 $ (14,808)
--- ---------
- ---------------------------------------------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON
FORWARD FOREIGN EXCHANGE CONTRACTS--NET $ (5,151)
--------------
--------------
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
+Restricted security as to resale. The value of the Fund's investment in restricted scurities was approximately $1,690,000,
representing 2.1% of net assets.
<S> <C> <C> <C>
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------------------------------
Cumberland Farms, 10.50% due 10/01/2003. . 3/10/1994 $ 476,651 $ 448,040
HMC Acquisition Properties, 9.00% due
12/15/2007. . . . . . . . . . . . . . . . . 12/21/1995 500,000 505,000
Tucson Electric Power Co., 10.732% due
1/01/2013. . . . . . . . . . . . . . . . . 8/19/1993 223,464 234,865
UNIBANCO--Uniao de Bancos Brasilerios S.A.,
10.25% due 6/12/1997. . . . . . . . . . . . 6/12/1995 498,750 502,500
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,698,865 $ 1,690,405
------------------------------ -------------------------------
------------------------------ -------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
111
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
BASIC DEVELOPING DOMESTIC
AMERICAN VALUE CAPITAL MONEY
BALANCED FOCUS MARKETS MARKET
FUND FUND FOCUS FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . $ 207,165,951 $ 308,711,181 $ 54,805,702 $ 307,321,802
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,538 -- 12,285 13,894
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . . -- -- 19 --
Receivable for securities sold. . . . . . . . . . . . . . . . . 3,768,310 -- 371,831 --
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . 1,955,663 -- 15,133 1,723,932
Receivable for capital shares sold. . . . . . . . . . . . . . . 200,059 912,338 270,955 --
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . 142,836 568,240 146,937 --
Receivable from investment adviser (Note 2). . . . . . . . . . . -- -- 7,129 --
Deferred organization expenses (Note 1f). . . . . . . . . . . . -- 2,160 2,667 1,340
Prepaid registration fees and other assets (Note 1f). . . . . .
18,329 21,000 5,980 28,178
-------------- -------------- ------------- ----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . 213,731,686 310,214,919 55,638,638 309,089,146
-------------- -------------- ------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for custodian bank (Note 1h). . . . . . . . . . . . . . -- 2,550,277 -- --
Payable for securities purchased. . . . . . . . . . . . . . . . 684,228 977,032 391,924 5,003,947
Payable to investment adviser (Note 2). . . . . . . . . . . . . 91,752 142,121 -- 121,062
Payable for capital shares redeemed. . . . . . . . . . . . . . . 8,060 16,967 188 --
Accrued expenses and other liabilities. . . . . . . . . . . . . 35,432 65,629 37,896 52,308
-------------- -------------- ------------- -----------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 819,472 3,752,026 430,008 5,177,317
- --------------------------------------------------------------------------------------------------------------------------------
-------------- -------------- ------------- ----------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212,912,214 $ 306,462,893 $ 55,208,630 $ 303,911,829
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . $ 1,403,143 $ 2,339,143 $ 592,201 $ 30,377,355
Paid-in capital in excess of par. . . . . . . . . . . . . . . . 186,902,200 259,065,629 57,775,197 273,396,191
Undistributed investment income--net. . . . . . . . . . . . . . 4,146,614 2,262,426 1,184,973 --
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . (945,759) 13,442,164 (3,801,898) --
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . 21,406,016 29,353,531 (541,843) 138,283
-------------- -------------- ------------- ----------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212,912,214 $ 306,462,893 $ 55,208,630 $ 303,911,829
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . 14,031,432 23,391,429 5,922,009 303,773,546
-------------- -------------- ------------- ----------------
-------------- -------------- ------------- ----------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . $ 15.17 $ 13.10 $ 9.32 $ 1.00
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . $ 185,759,935 $ 279,357,650 $ 55,347,858 $ 307,183,519
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000 1,300,000,000
-------------- -------------- ------------- ----------------
-------------- -------------- ------------- ----------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
112
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . . $ 339,015,898 $ 321,042,917 $ 527,857,629 $ 146,792,097
Unrealized appreciation on forward foreign exchange
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . . -- -- 9,681,629 --
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,050 24,217 576,498 46,328
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . . . -- -- -- 311
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . -- 603,012 2,034,611 32,615
Receivable for securities sold. . . . . . . . . . . . . . . . . . -- 119,466 645,794 1,155,189
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . . 201,590 169,134 584,726 541,544
Receivable for capital shares sold. . . . . . . . . . . . . . . . 935,425 13,787 426,771 49,593
Deferred organization expenses (Note 1f). . . . . . . . . . . . . -- -- -- 3,277
Prepaid registration fees and other assets (Note 1f). . . . . . . 23,118 26,761 41,934 11,488
-------------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 340,204,081 321,999,294 541,849,592 148,632,442
---------------------------------------------------------------
- ------------------------------------------------------------------- -------------- -------------- -------------- ----------------
LIABILITIES:
Payable for securities purchased. . . . . . . . . . . . . . . . . -- 1,277,730 1,066,036 --
Payable to investment adviser (Note 2). . . . . . . . . . . . . . 195,114 164,372 275,588 68,668
Payable for capital shares redeemed. . . . . . . . . . . . . . . . 24,213 269,553 98,531 299,897
Accrued expenses and other liabilities. . . . . . . . . . . . . . 63,600 53,976 167,824 38,600
-------------- -------------- -------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 282,927 1,765,631 1,607,979 407,165
-------------------------------------------------------------
- ------------------------------------------------------------------- -------------- -------------- -------------- --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,921,154 $ 320,233,663 $ 540,241,613 $ 148,225,277
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . . $ 1,214,674 $ 1,944,346 $ 4,306,428 $ 1,311,353
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . 246,436,854 274,133,560 505,710,448 134,208,350
Undistributed investment income--net. . . . . . . . . . . . . . . 1,279,867 4,603,408 7,489,615 2,159,534
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . . 43,404,115 26,971,363 (23,380,052) (3,861,578)
Accumulated distributions in excess of realized capital gains--net -- -- (369,180) --
Unrealized appreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 47,585,644 12,580,986 46,484,354 14,407,618
-------------- -------------- -------------- --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,921,154 $ 320,233,663 $ 540,241,613 $ 148,225,277
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . . 12,146,738 19,443,457 43,064,280 13,113,525
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . . $ 27.98 $ 16.47 $ 12.55 $ 11.30
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . . $ 291,430,254 $ 308,461,552 $ 491,055,965 $ 132,394,937
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000 100,000,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
113
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
HIGH INTERMEDIATE
CURRENT GOVERNMENT INTERNATIONAL
INCOME BOND BOND
FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . . $ 350,164,646 $ 40,366,442 $ 17,459,395
Options purchased, at value (premiums paid-$996,495)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,784 1,028 812
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . . . -- -- 2,251
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . 6,855,429 478,550 475,274
Receivable for capital shares sold. . . . . . . . . . . . . . . . 458,735 147,197 183,421
Receivable for securities sold. . . . . . . . . . . . . . . . . . -- -- 537,598
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . . -- -- --
Receivable from investment adviser (Note 2). . . . . . . . . . . . -- 18,524 9,242
Receivable for forward foreign exchange contracts (Note 1b). . . . -- -- --
Deferred organization expenses (Note 1f). . . . . . . . . . . . . -- -- 2,667
Prepaid registration fees and other assets (Note 1f). . . . . . . 30,383 3,078 3,008
-------------- --------------- ---------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 357,574,977 41,014,819 18,673,668
-------------------------------------------------
- ------------------------------------------------------------------- -------------- --------------- ---------------
LIABILITIES:
Options written, at value (premiums received-$75,690)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Unrealized depreciation on forward foreign exchange
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Payable for securities purchased. . . . . . . . . . . . . . . . . 907,222 -- 536,115
Payable to investment adviser (Note 2). . . . . . . . . . . . . . 136,548 -- --
Payable for capital shares redeemed. . . . . . . . . . . . . . . . 109,895 5,523 384
Payable for variation margin on stock index futures
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Accrued expenses and other liabilities. . . . . . . . . . . . . . 69,372 12,869 16,625
-------------- --------------- ---------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 1,223,037 18,392 553,124
-------------------------------------------------
- ------------------------------------------------------------------- -------------- --------------- ---------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 356,351,940 $ 40,996,427 $ 18,120,544
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . . $ 3,168,717 $ 380,014 $ 172,214
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . 359,886,019 38,315,855 17,186,094
Undistributed investment income--net. . . . . . . . . . . . . . . 2,822,298 199,053 88,192
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . . (1,515,448) 137,666 102,508
Accumulated distributions in excess of realized capital gains--net -- -- --
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . (8,009,646) 1,963,839 571,536
-------------- --------------- ---------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 356,351,940 $ 40,996,427 $ 18,120,544
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . . 31,687,165 3,800,136 1,722,139
-------------- --------------- ---------------
-------------- --------------- ---------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . . $ 11.25 $ 10.79 $ 10.52
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . . $ 358,174,292 $ 38,402,603 $ 16,888,004
-------------- --------------- ---------------
-------------- --------------- ---------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000
-------------- --------------- ---------------
-------------- --------------- ---------------
- -------------------------------------------------------------------
-------------------------------------------------
<CAPTION>
<S> <C>
INTERNATIONAL
EQUITY FOCUS
FUND
- --------------------------------------------------------------------------------------
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . . $ 254,720,309
Options purchased, at value (premiums paid-$996,495)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . . 2,400,647
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,029,991
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . . . 9,364,676
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . 18,902
Receivable for capital shares sold. . . . . . . . . . . . . . . . 179,722
Receivable for securities sold. . . . . . . . . . . . . . . . . . 141,791
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . . 221,152
Receivable from investment adviser (Note 2). . . . . . . . . . . . --
Receivable for forward foreign exchange contracts (Note 1b). . . . 4,386
Deferred organization expenses (Note 1f). . . . . . . . . . . . . --
Prepaid registration fees and other assets (Note 1f). . . . . . .
22,919
----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . .
268,104,495
------------------
-
- ------------------------------------------------------------------- ------------------
LIABILITIES:
Options written, at value (premiums received-$75,690)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . . 40,020
Unrealized depreciation on forward foreign exchange
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . . 267,385
Payable for securities purchased. . . . . . . . . . . . . . . . . 853,100
Payable to investment adviser (Note 2). . . . . . . . . . . . . . 155,439
Payable for capital shares redeemed. . . . . . . . . . . . . . . . 44,985
Payable for variation margin on stock index futures
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . .
49,882
Accrued expenses and other liabilities. . . . . . . . . . . . . .
1,091,443
----------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . .
2,502,254
----------------
-
- ------------------------------------------------------------------- ----------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 265,602,241
------------------
------------------
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . . $ 2,401,786
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . 261,644,387
Undistributed investment income--net. . . . . . . . . . . . . . . 4,974,839
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . . (7,433,489)
Accumulated distributions in excess of realized capital gains--net (5,275,618)
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . .
9,290,336
----------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 265,602,241
------------------
------------------
- --------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . . 24,017,864
----------------
----------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . . $ 11.06
------------------
------------------
- --------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . . $ 248,123,206
------------------
------------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . . 100,000,000
----------------
----------------
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
114
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NATURAL
RESOURCES PRIME QUALITY
FOCUS BOND EQUITY
- -------------------------------------------------------------- FUND FUND FUND
----------------------------------------------
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . $ 43,137,003 $ 480,885,744 $ 647,081,906
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,054 7,136 495,853
Interest receivable. . . . . . . . . . . . . . . . . . . . . -- 8,564,673 --
Receivable for capital shares sold. . . . . . . . . . . . . . 20,061 599,533 469,435
Dividends receivable. . . . . . . . . . . . . . . . . . . . . 53,178 -- 459,458
Receivable for securities sold. . . . . . . . . . . . . . . . 200,782 -- --
Receivable for loaned securities (Note 6). . . . . . . . . . -- 1,716 --
Prepaid registration fees and other assets (Note 1f). . . . . 3,285 41,602 47,820
------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 43,419,363 490,100,404 648,554,472
----------------------------------------------
- -------------------------------------------------------------- ------------- -------------- --------------
LIABILITIES:
Payable for securities purchased. . . . . . . . . . . . . . . 268,643 -- 3,515,656
Payable to investment adviser (Note 2). . . . . . . . . . . . 22,050 169,087 226,353
Payable for capital shares redeemed. . . . . . .. . . . . . . 12,852 19,959 152,688
Accrued expenses and other liabilities. . . . . . . . . . . . 13,467 73,390 109,174
------------- -------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 317,012 262,436 4,003,871
----------------------------------------------
- -------------------------------------------------------------- ------------- -------------- --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,102,351 $ 489,837,968 $ 644,550,601
------------- -------------- --------------
------------- -------------- --------------
- ------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . $ 360,832 $ 3,935,106 $ 1,967,624
Paid-in capital in excess of par. . . . . . . . . . . . . . . 39,066,877 474,621,652 521,412,111
Undistributed investment income--net. . . . . . . . . . . . . 315,714 2,495,885 6,008,129
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). 726,008 (15,946,458) 84,325,412
Unrealized appreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . 2,632,920 24,731,783 30,837,325
------------- -------------- --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,102,351 $ 489,837,968 $ 644,550,601
------------- -------------- --------------
------------- -------------- --------------
- ------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . 3,608,317 39,351,063 19,676,238
------------- -------------- --------------
------------- -------------- --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . $ 11.95 $ 12.45 $ 32.76
------------- -------------- --------------
------------- -------------- --------------
- ------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . $ 40,504,115 $ 456,153,961 $ 616,244,581
------------- -------------- --------------
------------- -------------- --------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000
------------- -------------- --------------
------------- -------------- --------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
115
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,889,963 $ 79,448,018
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,463 13,497
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,827 2,445,075
Receivable for capital shares sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 17,699
Deferred organization expenses (Note 1f). . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,944
Prepaid registration fees and other assets (Note 1f). . . . . . . . . . . . . . . . . . . . 6,647 6,032
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,026,900 81,934,265
------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange contracts (Note 1b). . . . . . . . . . . -- 5,151
Payable for securities purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,402 --
Payable to investment adviser (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . 10,326 38,386
Payable for capital shares redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 28,906
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,303 17,190
------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477,031 89,633
------------- -------------
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,549,869 $ 81,844,632
------------- ---------------
------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,553,592 $ 836,037
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,982,328 83,350,355
Undistributed investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 765,308
Accumulated realized capital losses on investments and foreign currency
transactions--net (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (2,777,024)
Unrealized appreciation (depreciation) on investments and foreign currency transactions--net 13,949 (330,044)
------------- -------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,549,869 $ 81,844,632
------------- ---------------
------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,535,919 8,360,366
------------- -------------
------------- -------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . . . . . . . . . . . . . . . $ 1.00 $ 9.79
------------- ---------------
------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,876,014 $ 79,792,576
------------- ---------------
------------- ---------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000,000 100,000,000
------------- -------------
------------- -------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
116
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEVELOPING
BASIC CAPITAL DOMESTIC
AMERICAN VALUE MARKETS MONEY
BALANCED FOCUS FOCUS MARKET
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $ 7,031,460 $ 1,154,160 $ 1,080,022 $19,295,095
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,141,936 4,379,125 649,244 --
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- 102
----------- ------------- ------------- -------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,173,396 5,533,285 1,729,266 19,295,197
----------- ------------- ------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 1,045,146 1,414,380 434,062 1,598,551
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . . 41,190 57,905 13,359 86,535
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 21,196 29,519 108,500 21,423
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 19,957 17,625 7,788 37,201
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 5,318 29,048 5,957 5,090
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . . 5,006 5,031 5,006 5,005
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . . 4,229 4,108 -- 8,337
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . . 642 229 5,393 --
Amortization of organization expenses (Note 1f). . . . . . . . . . -- 720 -- 1,340
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,204 7,084 12,264 5,292
----------- ------------- ------------- -------------
Total expenses before reimbursement. . . . . . . . . . . . . . . . 1,150,888 1,565,649 592,329 1,768,774
Reimbursement of expenses (Note 2). . . . . . . . . . . . . . . . . -- -- (49,477) --
----------- ------------- ------------- -------------
Expenses after reimbursement. . . . . . . . . . . . . . . . . . . . 1,150,888 1,565,649 542,852 1,768,774
----------- ------------- ------------- -------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . 8,022,508 3,967,636 1,186,414 17,526,423
----------- ------------- ------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . . (311,392) 13,595,994 (3,328,623) 44,778
Realized gain on foreign currency transactions--net. . . . . . . . -- -- 198,982 --
Change in unrealized appreciation/depreciation on investments--net. 27,587,655 34,077,480 1,803,393 334,598
Change in unrealized appreciation/depreciation on foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (60) --
----------- ------------- ------------- -------------
Total realized and unrealized gain (loss) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . 27,276,263 47,673,474 (1,326,308) 379,376
----------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,298,771 51,641,110 (139,894) 17,905,799
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
*Net of withholding tax on interest. . . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
**Net of withholding tax on dividends. . . . . . . . . . . . . . .
$ -- $ 14,182 $ 59,140 $ --
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
117
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $ 1,754,524 $ 8,453,860 $ 14,006,863 $ 612,220
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,038,745 2,824,136 6,858,616 6,220,288
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 17,632 -- --
----------- ------------- -------------- -------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,793,269 11,295,628 20,865,479 6,832,508
----------- ------------- -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 1,852,641 1,941,598 3,348,535 803,260
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 34,750 62,945 161,121 44,871
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 61,209 68,096 121,656 20,432
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 20,382 30,654 51,124 9,425
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 4,303 6,749 12,679 3,086
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 20,246 -- -- --
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 5,008 4,952 4,956 4,709
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . -- 5,283 7,426 3,454
Amortization of organization expenses (Note 1f). . . . . . . . . . -- -- 2,680 863
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,128 8,648 9,248 --
----------- ------------- -------------- -------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,007,667 2,128,925 3,719,425 890,100
----------- ------------- -------------- -------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . 1,785,602 9,166,703 17,146,054 5,942,408
----------- ------------- -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . 45,385,878 25,472,110 (19,049,909) (2,381,425)
Realized gain (loss) on foreign currency transactions--net. . . . -- 1,579,908 (4,330,143) 1,247
Change in unrealized appreciation/depreciation on investments--net 44,941,516 11,829,508 49,029,900 26,080,420
Change in unrealized appreciation/depreciation on foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (6,929) 9,132,728 10,320
----------- ------------- -------------- -------------
Total realized and unrealized gain on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 90,327,394 38,874,597 34,782,576 23,710,562
----------- ------------- -------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,112,996 $48,041,300 $ 51,928,630 $29,652,970
----------- ------------- -------------- -------------
----------- ------------- -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------------------
*Net of withholding tax on interest. . . . . . . . . . . . . . . . $ -- $ -- $ 50,929 $ --
----------- ------------- -------------- -------------
----------- ------------- -------------- -------------
**Net of withholding tax on dividends. . . . . . . . . . . . . . .
$ -- $ 84,307 $ 535,933 $ 293,663
----------- ------------- -------------- -------------
----------- ------------- -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
118
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
HIGH INTERMEDIATE
CURRENT GOVERNMENT INTERNATIONAL
INCOME BOND BOND
FUND FUND FUND
<S> <C> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $31,843,555 $ 1,796,464 $ 829,012
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,769 -- --
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . 370,896 -- --
----------- -------------- ----------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 32,617,220 1,796,464 829,012
----------- -------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 1,551,098 143,117 70,573
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 31,881 12,551 15,491
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 71,607 8,115 5,246
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 28,860 5,368 7,829
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 15,984 8,606 1,233
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 5,052 5,022 5,006
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . 8,781 454 --
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 6,296 -- --
Amortization of organization expenses (Note 1f). . . . . . . . . . -- -- 800
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300 6,772 6,083
----------- -------------- ----------------
Total expenses before reimbursement. . . . . . . . . . . . . . . . 1,727,859 190,005 112,261
Reimbursement of expenses (Note 2). . . . . . . . . . . . . . . . -- (190,005) (112,261)
----------- -------------- ----------------
Expenses after reimbursement. . . . . . . . . . . . . . . . . . . 1,727,859 -- --
----------- -------------- ----------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . 30,889,361 1,796,464 829,012
----------- -------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . 589,358 192,982 333,867
Realized loss on foreign currency transactions--net. . . . . . . . -- -- (132,668)
Change in unrealized appreciation/depreciation on investments--net 16,336,511 2,024,581 667,859
Change in unrealized appreciation/depreciation on foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 67,361
----------- ---------- -----------
Total realized and unrealized gain on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 16,925,869 2,217,563 936,419
----------- -------------- ----------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,815,230 $ 4,014,027 $ 1,765,431
----------- -------------- ----------------
----------- -------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------
*Net of withholding tax on interest. . . . . . . . . . . . . . . . $ -- $ -- $ 3,338
----------- -------------- ----------------
----------- -------------- ----------------
**Net of withholding tax on dividends. . . . . . . . . . . . . . .
$ -- $ -- $ --
----------- -------------- ----------------
----------- -------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL
EQUITY
FOCUS
FUND
<S> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $ 3,641,750
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,247,788
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,110
---------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,891,648
---------------
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 1,817,721
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 240,690
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 54,687
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 22,282
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . --
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 4,987
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . 9,410
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 5,734
Amortization of organization expenses (Note 1f). . . . . . . . . . 1,383
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,142
---------------
Total expenses before reimbursement. . . . . . . . . . . . . . . . 2,163,036
Reimbursement of expenses (Note 2). . . . . . . . . . . . . . . . --
---------------
Expenses after reimbursement. . . . . . . . . . . . . . . . . . . 2,163,036
---------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . 4,728,612
---------------
- -------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . (7,381,797)
Realized loss on foreign currency transactions--net. . . . . . . . (35,666)
Change in unrealized appreciation/depreciation on investments--net 15,123,591
Change in unrealized appreciation/depreciation on foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . 461,950
-----------
Total realized and unrealized gain on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 8,168,078
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,896,690
---------------
---------------
- -------------------------------------------------------------------------------------
*Net of withholding tax on interest. . . . . . . . . . . . . . . . $ --
---------------
---------------
**Net of withholding tax on dividends. . . . . . . . . . . . . . .
$ 412,462
---------------
---------------
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
119
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (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. . . . . . . . . . . . . . . . . . . $ 242,595 $32,558,262 $ 5,420,683
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 838,050 -- 8,088,307
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 311,307 --
------------ ------------- --------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,645 32,869,569 13,508,990
------------ ------------- --------------
- ------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 277,494 1,964,869 2,505,030
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 6,986 97,176 126,438
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 23,939 45,235 54,907
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 7,496 43,392 47,862
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 586 6,275 27,220
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 563 9,670 11,597
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 5,004 5,005 4,931
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . 5,422 6,805 225
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,583 9,562 9,674
------------ ------------- --------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 335,073 2,187,989 2,787,884
------------ ------------- --------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . 745,572 30,681,580 10,721,106
------------ ------------- --------------
- ------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain on investments--net. . . . . . . . . . . . . . . . . 797,739 2,850,926 84,589,225
Realized loss on foreign currency transactions--net. . . . . . . . (8,179) -- --
Change in unrealized appreciation/depreciation on investments--net 3,506,869 46,631,310 17,627,851
Change in unrealized appreciation/depreciation on foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . 82 -- --
------------ ------------- --------------
Total realized and unrealized gain on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 4,296,511 49,482,236 102,217,076
------------ ------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . $ 5,042,083 $80,163,816 112,938,182
------------ ------------- --------------
------------ ------------- --------------
- ------------------------------------------------------------------------------------------------------------------
**Net of withholding tax on dividends. . . . . . . . . . . . . . . $ 58,820 $ -- $ 111,328
------------ ------------- --------------
------------ ------------- --------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
120
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND
<S> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $1,748,915 $ 7,350,623
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 26,246
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 103,874
---------- -------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,748,915 7,480,743
---------- -------------
- ------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 144,618 464,049
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 12,967 23,244
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 738 11,786
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 5,439 6,781
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 4,848 4,911
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . -- 7,712
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 613 1,494
Amortization of organization expenses (Note 1f). . . . . . . . . . -- 1,578
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,198 6,197
---------- -------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 176,421 527,752
---------- -------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . 1,572,494 6,952,991
---------- -------------
- ------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain on investments--net. . . . . . . . . . . . . . . . . 10,309 846,540
Realized loss on foreign currency transactions--net. . . . . . . . -- (336,253
Change in unrealized appreciation/depreciation on investments--net 41,873 4,273,121
Change in unrealized appreciation/depreciation on foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 229,617
---------- -------------
Total realized and unrealized gain on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 52,182 5,013,025
---------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,624,676 $11,966,016
---------- -------------
---------- -------------
- ------------------------------------------------------------------------------------------------
*Net of withholding tax on interest. . . . . . . . . . . . . . . . $ -- $ 60,326
---------- -------------
---------- -------------
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
121
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
AMERICAN BALANCED FUND
-------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . $ 8,022,508 $ 5,743,492
Realized gain (loss) on investments and foreign currency (311,392) (634,222)
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . 27,587,655 (11,011,500)
------- --------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . 35,298,771 (5,902,230)
------- --------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . (7,173,644) (3,724,806)
Realized gain on investments--net. . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . -- (382,403)
------- --------------- -- ----------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . . (7,173,644) (4,107,209)
------- --------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions 25,836,347 53,540,259
----------------------- -------------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . 53,961,474 43,530,820
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . 158,950,740 115,419,920
----------------------- -------------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212,912,214 $ 158,950,740
------------------------ --------------
------------------------ --------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . $ 4,146,614 $ 3,297,750
------------------------ --------------
------------------------ --------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
122
<PAGE>
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
-------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . $ 3,967,636 $ 2,366,053
Realized gain (loss) on investments and foreign currency 13,595,994 7,037,711
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . 34,077,480 (6,328,115)
----------------------- -------------
Net increase (decrease) in net assets resulting from operations. . 51,641,110 3,075,649
----------------------- -------------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . (3,296,595) (928,253)
Realized gain on investments--net. . . . . . . . . . . . . . . . . (7,106,929) --
In excess of realized gain on investments--net. . . . . . . . . . -- --
----------------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . . (10,403,524) (928,253)
----------------------- -------------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions 100,918,588 114,952,060
----------------------- -------------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . 142,156,174 117,099,456
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . 164,306,719 47,207,263
----------------------- -------------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 306,462,893 $ 164,306,719
------------------------ --------------
------------------------ --------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . $ 2,262,426 $ 1,591,385
------------------------ --------------
------------------------ --------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
123
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DEVELOPING CAPITAL
MARKETS FOCUS FUND
---------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED MAY 2, 1994+
DEC. 31, 1995 TO DEC. 31, 1994
-----
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . $ 1,186,414 $ 330,561
Realized gain (loss) on investments and foreign currency (3,129,641) (672,256)
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . 1,803,333 (2,345,177)
------ ------------- ---- -----------
Net increase (decrease) in net assets resulting from operations. . . (139,894) (2,686,872)
------ ------------- ---- -----------
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (332,002) --
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- --
------ ------------- ---- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (332,002) --
------ ------------- ---- -----------
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 19,004,774 31,362,624
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 18,532,878 28,675,752
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 36,675,752 8,000,000
-------------------- ----------------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,208,630 $ 36,675,752
--------------------- -----------------
--------------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ 1,184,973 $ 330,561
--------------------- -----------------
--------------------- -----------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
124
<PAGE>
<TABLE>
<CAPTION>
DOMESTIC MONEY
MARKET FUND
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . $ 17,526,423 $ 11,419,926
Realized gain (loss) on investments and foreign currency 44,778 5,347
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . 334,598 (199,049)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . 17,905,799 11,226,224
------------ -------------------- -- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (17,526,423) (11,419,926)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (44,778) (5,347)
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (17,571,201) (11,425,273)
------------ -------------------- -- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (59,621,869) 192,866,796
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . (59,287,271) 192,667,747
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 363,199,100 170,531,353
------------ -------------------- -- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,911,829 $ 363,199,100
---------------------------------- --------------
---------------------------------- --------------
- ------------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ -- $ --
---------------------------------- --------------
---------------------------------- --------------
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
<CAPTION>
EQUITY GROWTH FUND
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . $ 1,785,602 $ 383,328
Realized gain (loss) on investments and foreign currency 45,385,878 (1,981,763)
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . 44,941,516 (8,755,921)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . 92,112,996 (10,354,356)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (889,063) --
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- (895,916)
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (889,063) (895,916)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 78,653,598 82,317,471
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 169,877,531 71,067,199
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 170,043,623 98,976,424
------------ -------------------- -- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,921,154 $ 170,043,623
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ 1,279,867 $ 383,328
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
125
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,166,703 $ 6,185,965
Realized gain (loss) on investments and foreign currency transactions--net 27,052,018 4,744,740
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 11,822,579 (21,104,289)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . . . . 48,041,300 (10,173,584)
------------ -------------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (8,045,358) (4,296,790)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . . (5,055,924) (6,450,353)
In excess of realized gain on investments--net. . . . . . . . . . . . . . -- --
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,101,282) (10,747,143)
------------ -------------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 10,795,379 100,642,477
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 45,735,397 79,721,750
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,498,266 194,776,516
--------------------------------- --------------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 320,233,663 $ 274,498,266
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . . . . $ 4,603,408 $ 3,474,388
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
126
<PAGE>
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,146,054 $ 12,299,420
Realized gain (loss) on investments and foreign currency transactions--net (23,380,052) (202,960)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 58,162,628 (23,383,348)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . . . . 51,928,630 (11,286,888)
------------ -------------------- -- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (16,913,134) (6,805,684)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . . -- (1,046,779)
In excess of realized gain on investments--net. . . . . . . . . . . . . . (199,509) (169,671)
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,112,643) (8,022,134)
------------ -------------------- -- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (9,981,690) 265,089,157
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 24,834,297 245,780,135
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515,407,316 269,627,181
------------ -------------------- -- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 540,241,613 $ 515,407,316
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . . . . $ 7,489,615 $ 7,256,695
---------------------------------- --------------
---------------------------------- --------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL UTILITY FOCUS FUND
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,942,408 $ 4,762,634
Realized gain (loss) on investments and foreign currency transactions--net (2,380,178) (1,481,987)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 26,090,740 (14,255,796)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . . . . 29,652,970 (10,975,149)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (5,144,108) (3,959,983)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . . . . . -- (33,522)
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,144,108) (3,993,505)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (2,526,392) 36,694,148
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 21,982,470 21,725,494
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,242,807 104,517,313
------------ -------------------- -- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,225,277 $ 126,242,807
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . . . . $ 2,159,534 $ 1,361,234
---------------------------------- --------------
---------------------------------- --------------
</TABLE>
See Notes to Financial Statements.
127
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------
HIGH CURRENT INCOME FUND
-----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,889,361 $ 21,977,178
Realized gain (loss) on investments and foreign currency transactions--net 589,358 (1,918,504)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 16,336,511 (28,517,478)
----- ------------- ----- -------------
Net increase (decrease) in net assets resulting from operations. . . . . 47,815,230 (8,458,804)
----- ------------- ----- -------------
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (30,645,264) (20,563,966)
------------------- -------------------
Net decrease in net assets resulting from dividends to shareholders. . . (30,645,264) (20,563,966)
------------------- -------------------
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions. . . . 83,463,234 121,313,338
------------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 100,633,200 92,290,568
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 255,718,740 163,428,172
------------------- -------------------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 356,351,940 $ 255,718,740
-------------------- --------------------
-------------------- --------------------
- ----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . . . $ 2,822,298 $ 2,509,684
-------------------- --------------------
-------------------- --------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
128
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
INTERMEDIATE
GOVERNMENT BOND FUND
--------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSETS: DEC. 31, 1995 ----- DEC. 31, 1994 -----------
- -------------------------------------------------------------------------------------------------- -----------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,796,464 $ 295,427
Realized gain (loss) on investments and foreign currency transactions--net 192,982 (55,316)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 2,024,581 (60,742)
------- -------------- ---- -----------
Net increase (decrease) in net assets resulting from operations. . . . . 4,014,027 179,369
------- -------------- ---- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (1,670,786) (222,052)
------- -------------- ---- -----------
Net decrease in net assets resulting from dividends to shareholders. . . (1,670,786) (222,052)
------- -------------- ---- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions. . . . 20,842,535 15,853,334
------- -------------- ---- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 23,185,776 15,810,651
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,810,651 2,000,000
------- -------------- ---- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,996,427 $ 17,810,651
----------------------- -----------------
----------------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . . . $ 199,053 $ 73,375
----------------------- -----------------
----------------------- -----------------
- -----------------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
<CAPTION>
<S> <C> <C>
INTERNATIONAL BOND FUND
-----------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSETS: DEC. 31, 1995 ----- DEC. 31, 1994
- ---------------------------------------------------------------------------------------------------- ------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 829,012 $ 325,753
Realized gain (loss) on investments and foreign currency transactions--net 201,199 (98,691)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 735,220 (163,684)
-------- --------------- ----- -----------
Net increase (decrease) in net assets resulting from operations. . . . . 1,765,431 63,378
-------- --------------- ----- -----------
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (795,220) (271,353)
-------- --------------- ----- -----------
Net decrease in net assets resulting from dividends to shareholders. . . (795,220) (271,353)
-------- --------------- ----- -----------
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions. . . . 7,217,039 5,141,269
-------- --------------- ----- -----------
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 8,187,250 4,933,294
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,933,294 5,000,000
-------- --------------- ----- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,120,544 $ 9,933,294
------------------------- ------------------
------------------------- ------------------
- ---------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . . . $ 88,192 $ 54,400
------------------------- ------------------
------------------------- ------------------
- ----------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
</TABLE>
129
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
INTERNATIONAL EQUITY
FOCUS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . $ 4,728,612 $ 1,973,400
Realized gain (loss) on investments and foreign currency (7,417,463) 3,850,217
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . 15,585,541 (10,680,341)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . 12,896,690 (4,856,724)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (151,930) (1,644,756)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (3,904,078) (61,190)
In excess of realized gain on investments--net. . . . . . . . . . . . (5,275,618) --
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (9,331,626) (1,705,946)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 14,153,402 177,540,023
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . 17,718,466 170,977,353
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 247,883,775 76,906,422
------------ -------------------- -- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 265,602,241 $ 247,883,775
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . $ 4,974,839 $ 382,131
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
130
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NATURAL RESOURCES
FOCUS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . $ 745,572 $ 526,129
Realized gain (loss) on investments and foreign currency 789,560 102,053
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . 3,506,951 (810,365)
------------ ------------------- --- ----------
Net increase (decrease) in net assets resulting from operations. . . 5,042,083 (182,183)
------------ ------------------- --- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (719,125) (319,496)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (116,046) --
In excess of realized gain on investments--net. . . . . . . . . . . . -- --
------------ ------------------- --- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (835,171) (319,496)
------------ ------------------- --- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (819,422) 25,438,978
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ ------------------- --- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . 3,387,490 24,937,299
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 39,714,861 14,777,562
------------ ------------------- --- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,102,351 $ 39,714,861
--------------------------------- ---------------
--------------------------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . $ 315,714 $ 289,267
--------------------------------- ---------------
--------------------------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
PRIME BOND FUND
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . $ 30,681,580 $ 24,851,838
Realized gain (loss) on investments and foreign currency 2,850,926 (18,783,776)
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . 46,631,310 (23,383,983)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . 80,163,816 (17,315,921)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (30,585,478) (23,986,615)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . . . -- (4,204,953)
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (30,585,478) (28,191,568)
------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 49,025,455 122,650,200
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . 98,603,793 77,142,711
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 391,234,175 314,091,464
------------ -------------------- -- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 489,837,968 $ 391,234,175
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . $ 2,495,885 $ 2,399,783
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
131
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
<S> <C> <C>
QUALITY EQUITY FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 10,721,106 $ 5,564,058
Realized gain (loss) on investments and foreign currency 84,589,225 10,329,187
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 17,627,851 (20,646,284)
------------ -------------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . 112,938,182 (4,753,039)
------------ -------------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (8,042,730) (3,345,688)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (9,959,874) (7,187,525)
In excess of realized gain on investments--net. . . . . . . . . . . -- --
------------ -------------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (18,002,604) (10,533,213)
------------ -------------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 85,255,141 170,226,497
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ -------------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 180,190,719 154,940,245
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 464,359,882 309,419,637
------------ -------------------- -- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 644,550,601 $ 464,359,882
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ 6,008,129 $ 3,329,753
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
132
<PAGE>
<TABLE>
<S> <C> <C>
RESERVE ASSETS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
--------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 1,572,494 $ 1,248,878
Realized gain (loss) on investments and foreign currency 10,309 1,901
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 41,873 (35,001)
------------ ------------------- --- ----------
Net increase (decrease) in net assets resulting from operations. . . 1,624,676 1,215,778
------------ ------------------- --- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (1,572,494) (1,248,878)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (10,309) (1,901)
In excess of realized gain on investments--net. . . . . . . . . . . -- --
------------ ------------------- --- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,582,803) (1,250,779)
------------ ------------------- --- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (6,688,035) 2,063,127
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ ------------------- --- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . (6,646,162) 2,028,126
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 32,196,031 30,167,905
------------ ------------------- --- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,549,869 $ 32,196,031
--------------------------------- ---------------
--------------------------------- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ -- $ --
--------------------------------- ---------------
--------------------------------- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
WORLD INCOME FOCUS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 6,952,991 $ 5,733,672
Realized gain (loss) on investments and foreign currency 510,287 (3,236,703)
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 4,502,738 (5,553,092)
------------ ------------------- --- ----------
Net increase (decrease) in net assets resulting from operations. . . 11,966,016 (3,056,123)
------------ ------------------- --- ----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (6,851,555) (5,598,199)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . . -- (101,589)
------------ ------------------- --- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (6,851,555) (5,699,788)
------------ ------------------- --- ----------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 1,580,255 33,168,379
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ ------------------- --- ----------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 6,694,716 24,412,468
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 75,149,916 50,737,448
------------ ------------------- --- ----------
End of year*. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,844,632 $ 75,149,916
--------------------------------- ---------------
--------------------------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ 619,777 $ 409,286
--------------------------------- ---------------
--------------------------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
133
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. AMERICAN BALANCED FUND
-----------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 13.08 $ 14.08 $ 12.85 $ 12.82 $ 11.26
-------- ---------- ---------- --------- ---------
Investment income--net .59 .48 .32 .31 .47
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net 2.06 (1.06) 1.37 .37 1.76
-------- ---------- ---------- --------- ---------
Total from investment operations 2.65 (.58) 1.69 .68 2.23
-------- ---------- ---------- --------- ---------
Less dividends and distributions:
Investment income--net (.56) (.37) (.34) (.37) (.49)
Realized gain on investments--net -- --) (.12) (.28) (.18)
In excess of realized gain on investments--net -- (.05 -- -- --
-------- ---------- ---------- --------- ---------
Total dividends and distributions (.56) (.42) (.46) (.65) (.67)
-------- ---------- ---------- --------- ---------
Net asset value, end of year $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 20.81% (4.19%) 13.49% 5.72% 20.65%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .61% .63% .70% .97% 1.20%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
Investment income--net 4.22% 3.95% 3.20% 3.71% 4.16%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $212,912 $158,951 $115,420 $24,918 $ 7,937
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
Portfolio turnover 38.40% 35.36% 12.55% 36.34% 50.82%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
*Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
134
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BASIC VALUE FOCUS FUND
------------------------------------------------
--------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOR THE YEAR ENDED
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL DECEMBER 31,
STATEMENTS. ---------------------------- FOR THE PERIOD
JULY 1, 1993+ TO
DECEMBER 31,
1993
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.10 $ 10.95 $ 10.00
-------- ---------- ---------
--------------------------------------------------
Investment income--net .18 .17 .04
Realized and unrealized gain on investments and foreign
currency transactions--net 2.49 .08 .91
-------- ---------- ---------
--------------------------------------------------
Total from investment operations 2.67 .25 .95
-------- ---------- ---------
Less dividends and distributions:
Investment income--net (.19) (.10) --
Realized gain on investments--net (.48) -- --
-------- ---------- ---------
--------------------------------------------------
Total dividends and distributions (.67) (.10) --
-------- ---------- ---------
Net asset value, end of period $ 13.10 $ 11.10 $ 10.95
- ------ -- ------ - ------
-------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 25.49% 2.36% 9.50%++
- ------ -- ------ - ------
-------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .66% .72% .86%*
- ------ -- ------ - ------
-------- ---------- ---------
Investment income--net 1.68% 2.08% 1.69%*
- ------ -- ------ - ------
-------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $306,463 $164,307 $ 47,207
- ------ -- ------ - ------
-------- ---------- ---------
------------------ --
Portfolio turnover 74.10% 60.55% 30.86%
- ------ -- ------ - ------
-------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
135
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C>
DEVELOPING CAPITAL
MARKETS 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 MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DEC. 31, 1995 DEC. 31, 1994
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . . . . . . . . . . . . . . $ 9.51 $ 10.00
------------ ---------
-------------------------------------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . .20 .09
Realized and unrealized loss on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . . . (.30) (.58)
------------ ---------
-------------------------------------------
Total from investment operations. . . . . . . . . . . . . . . . . . . . (.10) (.49)
------------ ---------
Less dividends and distributions:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . (.09) --
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . --
-- ---------
------------
-------------------------------------------
Total dividends and distributions. . . . . . . . . . . . . . . . . . . (.09) --
------------ ---------
Net asset value, end of period. . . . . . . . . . . . . . . . . . . . . $ 9.32 $ 9.51
-- -------- - ------
------------ ---------
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . . . . . . . . . . . . . . . . . (1.08%) (4.90%)++
-- -------- - ------
------------ ---------
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement. . . . . . . . . . . . . . . . . . . . . 1.25% 1.29%*
-- -------- - ------
------------ ---------
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.36% 1.35%*
-- -------- - ------
------------ ---------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . 2.73% 2.18%*
-- -------- - ------
------------ ---------
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands). . . . . . . . . . . . . . . . . $ 55,209 $ 36,676
-- -------- - ------
------------ ---------
------------------------ --
Portfolio turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . 62.53% 29.79%
-- -------- - ------
------------ ---------
- --------------------------------------------------------------------------------------------------------------------
*Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
136
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN FOR THE YEAR ENDED
DERIVED DECEMBER 31,
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ---------------------------------------------------------
FOR THE PERIOD
INCREASE (DECREASE) IN NET ASSET VALUE: FEB. 20, 1992+
TO DEC. 31,
1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------- ---------- ---------- ---------
Investment income--net .0547 .0386 .0302 .0302
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net .0012 (.0007) .0005 .0013
---------------------- ---------- ---------- ---------
Total from investment operations .0559 .0379 .0307 .0315
---------------------- ---------- ---------- ---------
Less dividends and distributions:
Investment income--net (.0547) (.0386) (.0302) (.0302)
Realized gain on investments--net (.0002) -- (.0005) (.0010)
---------------------- ---------- ---------- ---------
Total dividends and distributions (.0549) (.0386) (.0307) (.0312)
---------------------- ---------- ---------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------------ -- ------ -- ------ - ------
---------------------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 5.64% 3.94% 3.10% 3.65%*
-------- ------------ -- ------ -- ------ - ------
---------------------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .55% .50% .36% .32%*
-------- ------------ -- ------ -- ------ - ------
---------------------- ---------- ---------- ---------
Expenses .55% .57% .63% .88%*
-------- ------------ -- ------ -- ------ - ------
---------------------- ---------- ---------- ---------
Investment income--net, and realized gain on 5.50% 4.02% 3.03% 3.48%*
investments--net -------- ------------ -- ------ -- ------ - ------
---------------------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 303,912 $363,199 $170,531 $ 41,128
-------- ------------ -- ------ -- ------ - ------
---------------------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
137
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. EQUITY GROWTH FUND
-----------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995+ 1994+ 1993+ 1992+ 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98
-------- ---------- --------- --------- ---------
Investment income (loss)--net .17 .05 (.01) .01 .09
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net 8.64 (1.56) 3.17 (.10) 5.91
-------- ---------- --------- --------- ---------
Total from investment operations 8.81 (1.51) 3.16 (.09) 6.00
-------- ---------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.09) -- --++ (.07) (.02)
Realized gain on investments--net -- (.19) -- -- --
-------- ---------- --------- --------- ---------
Total dividends and distributions (.09) (.19) -- (.07) (.02)
-------- ---------- --------- --------- ---------
Net asset value, end of year $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96
- ------ -- ------ -- ----- -- ----- -- -----
-------- ---------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 45.90% (7.27%) 17.78% (.53%) 50.10%
- ------ -- ------ -- ----- -- ----- -- -----
-------- ---------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .81% .83% .96% 1.18% 1.25%
- ------ -- ------ -- ----- -- ----- -- -----
-------- ---------- --------- --------- ---------
Expenses .81% .83% .96% 1.18% 1.28%
- ------ -- ------ -- ----- -- ----- -- -----
-------- ---------- --------- --------- ---------
Investment income (loss)--net .72% .27% (.05%) .04% .51%
- ------ -- ------ -- ----- -- ----- -- -----
-------- ---------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $339,921 $170,044 $98,976 $23,167 $11,318
- ------ -- ------ -- ----- -- ----- -- -----
-------- ---------- --------- --------- ---------
Portfolio turnover 96.79% 88.48% 131.75% 98.64% 79.10%
- ------ --------- -------- -- ----- --------
-------- ---------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
++ Amount is less than $.01 per share.
</TABLE>
See Notes to Financial Statements.
138
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FLEXIBLE STRATEGY FUND
-------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995+ 1994+ 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55
---------- ---------- ---------- --------- ---------
Investment income--net .47 .37 .28 .33 .47
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net 1.99 (1.02) 1.94 .25 2.52
---------- ---------- ---------- --------- ---------
Total from investment operations 2.46 (.65) 2.22 .58 2.99
---------- ---------- ---------- --------- ---------
Less dividends and distributions:
Investment income--net (.42) (.30) (.15) (.54) (.66)
Realized gain on investments--net (.27) (.54) (.03) (.68) (.09)
---------- ---------- ---------- --------- ---------
Total dividends and distributions (.69) (.84) (.18) (1.22) (.75)
---------- ---------- ---------- --------- ---------
Net asset value, end of year $ 16.47 $ 14.70 $ 16.19 $ 14.15 $ 14.79
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 17.40% (4.20%) 15.80% 4.25% 24.98%
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .71% .73% .80% .90% .96%
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
Investment income--net 3.07% 2.52% 2.26% 2.62% 3.51%
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 320,234 $274,498 $194,777 $82,549 $55,221
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
Portfolio turnover 135.83% 65.54% 56.42% 55.25% 67.13%
--------- --------- -- ------ -- ----- --------
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
</TABLE>
See Notes to Financial Statements.
139
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GLOBAL STRATEGY 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,
---------------------------------------
FOR THE PERIOD
INCREASE (DECREASE) IN NET ASSET VALUE: FEB. 28, 1992+ TO
1995 1994 1993 DECEMBER 31,1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.73 $ 12.17 $ 10.22 $ 10.00
-------- ---------- ---------- -----------
Investment income--net .39 .30 .16 .13
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net .82 (.48) 1.96 .13
-------- ---------- ---------- -----------
Total from investment operations 1.21 (.18) 2.12 .26
-------- ---------- ---------- -----------
Less dividends and distributions:
Investment income--net (.39) (.21) (.17) (.04)
Realized gain on investments--net -- (.04) -- --
In excess of realized gain on investments--net --++ (.01) -- --
-------- ---------- ---------- -----------
Total dividends and distributions (.39) (.26) (.17) (.04)
-------- ---------- ---------- -----------
Net asset value, end of period $ 12.55 $ 11.73 $ 12.17 $ 10.22
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 10.60% (1.46%) 21.03% 2.62%#
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .72% .77% .88% 1.25%*
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
Expenses .72% .77% .88% 1.35%*
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
Investment income--net 3.33% 2.85% 2.41% 2.66%*
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $540,242 $515,407 $269,627 $ 15,527
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
Portfolio turnover 27.23% 21.03% 17.07% 14.47%
- ------ -- ------ -- ------ -- -------
-------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
140
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GLOBAL UTILITY 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,
------------------------------ ----------------
FOR THE PERIOD
1994 JULY 1, 1993+ TO
1995 DECEMBER 31,1993
INCREASE (DECREASE) IN NET ASSET VALUE: --------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.45 $ 10.66 $ 10.00
-------- ---------- ----------
--------------------------------------------------
Investment income--net .45 .35 .04
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net 1.79 (1.25) .64
-------- ---------- ----------
--------------------------------------------------
Total from investment operations 2.24 (.90) .68
-------- ---------- ----------
Less dividends and distributions:
Investment income--net (.39) (.29) (.02)
In excess of realized gain on investments--net -- (.02) --
-------- ---------- ----------
--------------------------------------------------
Total dividends and distributions (.39) (.31) (.02)
-------- ---------- ----------
Net asset value, end of period $ 11.30 $ 9.45 $ 10.66
- ------ -- ------ - -------
-------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 24.33% (8.51%) 6.85%++
- ------ -- ------ - -------
-------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .66% .73% .89%*
- ------ -- ------ - -------
-------- ---------- ----------
Investment income--net 4.44% 3.68% 2.84%*
- ------ -- ------ - -------
-------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $148,225 $126,243 $ 104,517
- ------ -- ------ - -------
-------- ---------- ----------
----------------- --
Portfolio turnover 11.05% 9.52% 1.72%
- ------ -- ------ - -------
-------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
* 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
<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: 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14
-------- ---------- ---------- --------- ---------
Investment income--net 1.09 1.05 .95 1.07 1.19
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net .65 (1.47) .95 .90 2.10
-------- ---------- ---------- --------- ---------
Total from investment operations 1.74 (.42) 1.90 1.97 3.29
-------- ---------- ---------- --------- ---------
Less dividends and distributions:
Investment income--net (1.10) (1.03) (.97) (1.07) (1.20)
Realized gain on investments--net -- -- -- -- --
-------- ---------- ---------- --------- ---------
Total dividends and distributions (1.10) (1.03) (.97) (1.07) (1.20)
-------- ---------- ---------- --------- ---------
Net asset value, end of year $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 17.21% (3.59%) 17.84% 20.05% 43.00%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .55% .61% .72% .89% 1.10%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
Investment income--net 9.92% 9.73% 8.62% 10.06% 12.49%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $356,352 $255,719 $163,428 $26,343 $ 9,649
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
Portfolio turnover 41.60% 51.88% 35.67% 28.21% 51.54%
- ------ --------- -- ------ -- ----- --------
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
142
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C>
INTERMEDIATE GOVERNMENT
BOND 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 MAY 2, 1994+
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1995 TO DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . . . . . . . . . . . . . $ 9.97 $ 10.00
------------- ------------
---------------------------------------------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . .62 .25
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . . . .81 (.07)
------------- ------------
---------------------------------------------------
Total from investment operations. . . . . . . . . . . . . . . . . . . 1.43 .18
------------- ------------
Less dividends and distributions:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (.61) (.21)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . .
-- --
------------- ------------
---------------------------------------------------
Total dividends and distributions. . . . . . . . . . . . . . . . . . . (.61) (.21)
------------- ------------
Net asset value, end of period. . . . . . . . . . . . . . . . . . . . $ 10.79 $ 9.97
--- -------- -- --------
------------- ------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . . . . . . . . . . . . . . . . 14.83% 1.79%++
--- -------- -- --------
------------- ------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement. . . . . . . . . . . . . . . . . . . . .00% .00%*
--- -------- -- --------
------------- ------------
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66% .80%*
--- -------- -- --------
------------- ------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . 6.28% 4.66%*
--- -------- -- --------
------------- ------------
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands). . . . . . . . . . . . . . . $ 40,996 $ 17,811
--- -------- -- --------
------------- ------------
---------------------------- --
Portfolio turnover. . . . . . . . . . . . . . . . . . . . . . . . . . 45.39% 103.03%
--- -------- -- --------
------------- ------------
- ----------------------------------------------------------------------------------------------------------------------------
*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
<TABLE>
<CAPTION>
<S> <C> <C>
INTERNATIONAL BOND 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 MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1995 DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . . . . . . . . . . . . . $ 9.70 $ 10.00
------------- ----------
----------------------------------------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . .72 .38
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . . . .82 (.35)
------------- ----------
----------------------------------------------
Total from investment operations. . . . . . . . . . . . . . . . . . . 1.54 .03
------------- ----------
Less dividends:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . (.72) (.33)
------------- ----------
----------------------------------------------
Total dividends and distributions. . . . . . . . . . . . . . . . . . . (.72) (.33)
------------- ----------
Net asset value, end of period. . . . . . . . . . . . . . . . . . . . $ 10.52 $ 9.70
--- -------- - -------
------------- ----------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . . . . . . . . . . . . . . . . 16.35% 0.37%++
--- -------- - -------
------------- ----------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement. . . . . . . . . . . . . . . . . . . . .00% .00%*
--- -------- - -------
------------- ----------
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95% 1.08%*
--- -------- - -------
------------- ----------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . 7.05% 6.34%*
--- -------- - -------
------------- ----------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands). . . . . . . . . . . . . . . $ 18,121 $ 9,933
--- -------- - -------
------------- ----------
--------------------------- --
Portfolio turnover. . . . . . . . . . . . . . . . . . . . . . . . . . 2.23% 152.20%
--- -------- - -------
------------- ----------
- -----------------------------------------------------------------------------------------------------------------------
*Annualized.
**Total investment returns exclude insurance-related fees and expenses.
+Commencement of Operations.
++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
144
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INTERNATIONAL EQUITY 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,
---------------------------------------
FOR THE PERIOD
JULY 1, 1993+ TO
1995 1994 DECEMBER 31, 1993
INCREASE (DECREASE) IN NET ASSET VALUE: ---------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.90 $ 11.03 $ 10.00
---------- ------------ ---------
---------------------------------------------------------
Investment income--net .20 .19 .01
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net .37 (.13) 1.02
---------- ------------ ---------
---------------------------------------------------------
Total from investment operations .57 .06 1.03
---------- ------------ ---------
Less dividends and distributions:
Investment income--net (.01) (.18) --
Realized gain on investments--net (.17) (.01) --
In excess of realized gain on investments--net (.23) -- --
---------- ------------ ---------
---------------------------------------------------------
Total dividends and distributions (.41) (.19) --
---------- ------------ ---------
Net asset value, end of period $ 11.06 $ 10.90 $ 11.03
- ------- --- ------- - ------
---------- ------------ ---------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 5.48% .55% 10.30%++
- ------- --- ------- - ------
---------- ------------ ---------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .89% .97% 1.14%*
- ------- --- ------- - ------
---------- ------------ ---------
Investment income--net 1.95% 1.09% .30%*
- ------- --- ------- - ------
---------- ------------ ---------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 265,602 $ 247,884 $ 76,906
- ------- --- ------- - ------
---------- ------------ ---------
----------------------- --
Portfolio turnover 100.02% 58.84% 17.39%
--------- --- ------- - ------
---------- ------------ ---------
- -----------------------------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
145
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. NATURAL RESOURCES FOCUS FUND
-------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.82 $ 10.82 $ 9.84 $ 10.06 $ 10.17
------- --------- --------- --------- --------
Investment income--net .20 .17 .11 .18 .25
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net 1.15 (.02) .92 (.05) (.11)
------- --------- --------- --------- --------
Total from investment operations 1.35 .15 1.03 .13 .14
------- --------- --------- --------- --------
Less dividends and distributions:
Investment income--net (.19) (.15) (.05) (.29) (.25)
Realized gain on investments--net (.03) -- -- (.06) --
------- --------- --------- --------- --------
Total dividends and distributions (.22) (.15) (.05) (.35) (.25)
------- --------- --------- --------- --------
Net asset value, end of year $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06
- ----- -- ----- -- ----- -- ----- -- ----
------- --------- --------- --------- --------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 12.65% 1.44% 10.47% 1.36% 1.36%
- ----- -- ----- -- ----- -- ----- -- ----
------- --------- --------- --------- --------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .78% .87% 1.13% 1.25% 1.25%
------ -- ----- -- ----- -- ----- -- ----
------- --------- --------- --------- --------
Expenses .78% .87% 1.13% 1.27% 1.30%
------ -- ----- -- ----- -- ----- -- ----
------- --------- --------- --------- --------
Investment income--net 1.75% 1.91% 1.34% 2.00% 2.31%
------ -- ----- -- ----- -- ----- -- ----
------- --------- --------- --------- --------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $43,102 $39,715 $14,778 $ 4,144 $3,084
- ----- -- ----- -- ----- -- ----- -- ----
------- --------- --------- --------- --------
Portfolio turnover 30.15% 10.94% 58.44% 22.88% 31.38%
- ----- -------- -- ----- -- ----- -------
------- --------- --------- --------- --------
- -----------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
146
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. PRIME BOND FUND
-----------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18
-------- ---------- ---------- --------- ---------
Investment income--net .82 .77 .70 .79 .90
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net 1.34 (1.36) .71 .04 .84
-------- ---------- ---------- --------- ---------
Total from investment operations 2.16 (.59) 1.41 .83 1.74
-------- ---------- ---------- --------- ---------
Less dividends and distributions:
Investment income--net (.83) (.76) (.70) (.81) (.90)
Realized gain on investments--net -- -- (.11) -- --
In excess of realized gain on investments--net -- (.17) -- -- --
-------- ---------- ---------- --------- ---------
Total dividends and distributions (.83) (.93) (.81) (.81) (.90)
-------- ---------- ---------- --------- ---------
Net asset value, end of year $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 20.14% (4.80%) 12.02% 7.27% 16.41%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .50% .54% .63% .78% .78%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
Investment income--net 7.00% 6.74% 5.86% 6.76% 7.94%
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $489,838 $391,234 $314,091 $84,810 $39,743
- ------ -- ------ -- ------ -- ----- -- -----
-------- ---------- ---------- --------- ---------
Portfolio turnover 90.12% 139.89% 115.26% 82.74% 152.18%
------- --------- --------- -------- --------
-------- ---------- ---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
See Notes to Financial Statements.
147
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. QUALITY EQUITY FUND
-------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995+ 1994+ 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72
---------- ---------- ---------- --------- ---------
Investment income--net .58 .38 .24 .34 .43
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net 5.48 (.74) 3.46 .32 5.75
---------- ---------- ---------- --------- ---------
Total from investment operations 6.06 (.36) 3.70 .66 6.18
---------- ---------- ---------- --------- ---------
Less dividends and distributions:
Investment income--net (.45) (.25) (.12) (.58) (.50)
Realized gain on investments--net (.59) (.67) (.04) (.95) (1.05)
---------- ---------- ---------- --------- ---------
Total dividends and distributions (1.04) (.92) (.16) (1.53) (1.55)
---------- ---------- ---------- --------- ---------
Net asset value, end of year $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 22.61% (1.20%) 14.57% 2.69% 30.18%
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .51% .54% .62% .74% .79%
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
Investment income--net 1.94% 1.39% 1.07% 1.54% 1.87%
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 644,551 $464,360 $309,420 $87,977 $55,005
- ------- -- ------ -- ------ -- ----- -- -----
---------- ---------- ---------- --------- ---------
Portfolio turnover 140.32% 60.57% 88.25% 62.54% 55.83%
--------- --------- --------- -------- --------
---------- ---------- ---------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
</TABLE>
See Notes to Financial Statements.
148
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. RESERVE ASSETS FUND
---------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <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--net .0543 .0371 .0268 .0320 .0546
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net .0018 (.0009) .0005 .0007 .0014
------- --------- --------- --------- ---------
Total from investment operations .0561 .0362 .0273 .0327 .0560
------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.0543) (.0362) (.0268) (.0320) (.0546)
Realized gain on investments--net (.0004) -- (.0005) (.0005) (.0014)+
------- --------- --------- --------- ---------
Total dividends and distributions (.0547) (.0362) (.0273) (.0325) (.0560)
------- --------- --------- --------- ---------
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 5.63% 3.80% 2.77% 3.29% 5.68%
- ----- -- ----- -- ----- -- ----- -- -----
------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .61% .65% .70% .79% .79%
- ----- -- ----- -- ----- -- ----- -- -----
------- --------- --------- --------- ---------
Investment income--net, and realized gain (loss)
on investments--net 5.47% 3.75% 2.73% 3.36% 5.64%
- ----- -- ----- -- ----- -- ----- -- -----
------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $25,550 $32,196 $30,168 $26,767 $34,362
- ----- -- ----- -- ----- -- ----- -- -----
------- --------- --------- --------- ---------
* Total investment returns exclude insurance-related fees and expenses.
+ Includes unrealized gain (loss).
</TABLE>
See Notes to Financial Statements.
149
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WORLD INCOME 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,
---------------------------- FOR THE PERIOD
JULY 1, 1993+ TO
DECEMBER 31,
1993
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994
--------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.17 $ 10.38 $ 10.00
--------- --------- ---------
--------------------------------------------------
Investment income--net .85 .76 .25
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net .61 (1.19) .33
--------- --------- ---------
Total from investment operations 1.46 (0.43) .58
--------- --------- ---------
Less dividends and distributions:
Investment income--net (.84) (.76) (.20)
Realized gain on investments--net -- --) --
In excess of realized gain on investments--net -- (.02 --
--------- --------- ---------
Total dividends and distributions (.84) (.78) (.20)
--------- --------- ---------
Net asset value, end of period $ 9.79 $ 9.17 $ 10.38
- ------ -- ----- - ------
--------- --------- ---------
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 16.69% (4.21%) 5.90%#
- ------ -- ----- - ------
--------- --------- ---------
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .68% .75% .94%*
- ------ -- ----- - ------
--------- --------- ---------
Investment income--net 8.99% 8.01% 6.20%*
- ------ -- ----- - ------
--------- --------- ---------
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 81,845 $75,150 $ 50,737
- ------ -- ----- - ------
--------- --------- ---------
------------------- --
Portfolio turnover 132.57% 117.58% 54.80%
-------- -------- - ------
--------- --------- ---------
- ---------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
150
<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 Focus Fund, International Bond 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. Options written are valued at the 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 asked price. Options purchased are valued at
the 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 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.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract.
- - 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
Funds' records. However, the effect on operations is recorded from the date the
Funds enter into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Options--Certain Funds may write and purchase call 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 market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid or received is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the proceeds of
the security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
- - Financial futures contracts--Certain Funds may purchase or sell futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Funds deposit and maintain as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Funds agree 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 Funds as unrealized gains or losses.
When the contract is closed, the Funds record 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.
- - Foreign currency options and futures--Certain Funds may also purchase or sell
listed or over-the-
151
<PAGE>
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 Funds, sold by the
Funds but not yet delivered, or committed or anticipated to be purchased by the
Funds.
(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) or valuing (unrealized) assets and 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.
(h) Custodian Bank--The Fund recorded an amount payable to the Custodian Bank
reflecting an overnight overdraft which resulted from a failed trade which
settled the next day.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial reporting and tax purposes. These
reclassifications have no effect on net assets or net asset values per share.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial reporting and tax purposes. These
reclassifications have no effect on net assets or net asset values per share.
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 and International Equity
Focus 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 each of the Domestic Money Market Fund and
Intermediate Government Bond Fund, 0.60% of the average daily net assets of each
of the Basic Value Focus Fund, International Bond Fund, World Income Focus Fund,
Global Utility Focus Fund, 1.00% of the average daily net assets of the
Developing Capital Markets Focus Fund, and at the following annual rates with
respect to the other Funds:
<TABLE>
<CAPTION>
<S> <C> <C>
RESERVE ASSETS FUND
--------------------------
Portion of average daily value of net assets of the Fund:
- ---------------------------------------------------------------------
ADVISORY
FEE
- ---------------------------------------------------------------------
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%
- ---------------------------------------------------------------------
QUALITY EQUITY FUND
- ---------------------------------------------------------------------
Portion of average daily value of net assets of the Fund:
- ---------------------------------------------------------------------
ADVISORY
FEE
- ---------------------------------------------------------------------
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>
152
<PAGE>
<TABLE>
<CAPTION>
PRIME BOND FUND AND HIGH CURRENT INCOME FUND
- ---------------------------------------------------------------------
Portion of aggregate average daily value of net assets
of both Funds:
- ---------------------------------------------------------------------
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%
- -------------------------------------------
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>
The Investment Advisory Agreement obligates MLAM to reimburse the Company, if
in any year the aggregate ordinary operating expenses of any Fund exceed the
most restrictive expense limitations then in effect under any state securities
law or the regulations thereunder. Under the most restrictive state regulations
presently in effect, MLAM 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, 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 each Fund by
MLAM which, in turn, will be reimbursed by MLLA.
For the Developing Capital Markets Focus Fund for the year ended December 31,
1995, MLAM earned fees of $434,062, of which $49,477 was voluntarily waived.
For the Intermediate Government Bond Fund for the year ended December 31, 1995,
MLAM earned fees of $143,117, all of which was voluntarily waived. MLAM has also
reimbursed the Fund $46,888 in additional expenses.
For the International Bond Fund for the year ended December 31, 1995, MLAM
earned fees of $70,573, all of which was voluntarily waived. MLAM has also
reimbursed the Fund for $41,688 in additional expenses.
For the year ended December 31, 1995, Merrill Lynch, Pierce, Fenner & Smith,
Inc. ("MLPF&S"), an affiliate of MLAM, earned commissions on the execution of
portfolio security transactions aggregating $8,555 in the American Balanced
Fund, $19,224 in the Basic Value Focus Fund, $15,316 in the Developing Capital
Markets Focus Fund, $25,801 in the Flexible Strategy Fund, $98,716 in the Global
Strategy Focus Fund, $2,568 in the Global Utility Focus Fund, $2,500 in the High
Current Income Fund, $30,505 in the International Equity Focus Fund, $1,182 in
the Natural Resources Focus Fund, and $60,632 in the Quality Equity Fund.
Accounting services are provided to the Company by MLAM at cost.
For the year ended December 31, 1995, American Balanced Fund, Flexible Strategy
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, $473, $368, $38,
$10,932, $439, $7,041 and $4,613, respectively, for security price quotations to
compute the net asset value of the Funds.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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, MLFDS, 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, 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
PURCHASES SALES
- ---------------------------------------------------------------------
American Balanced Fund. . . . . . . . $ 65,295,830 $ 65,975,700
- --------------------------------------- ------------ ------------
Basic Value Focus Fund. . . . . . . . 245,165,235 160,870,634
Developing Capital Markets Focus Fund 36,531,034 20,370,629
- --------------------------------------- ---------------
Domestic Money Market Fund. . . . . . -- --
Equity Growth Fund. . . . . . . . . . 257,504,664 214,370,372
- --------------------------------------- ---------------
Flexible Strategy Fund. . . . . . . . 312,054,813 423,274,421
Global Strategy Focus Fund. . . . . . 132,976,697 312,046,775
- --------------------------------------- ---------------
Global Utility Focus Fund. . . . . . 13,896,690 22,670,209
High Current Income Fund. . . . . . . 189,555,307 118,831,902
- --------------------------------------- ---------------
Intermediate Government Bond Fund. . 38,570,516 9,311,094
International Bond Focus Fund. . . . 30,310,797 23,635,078
- --------------------------------------- ---------------
International Equity Focus Fund. . . 199,921,987 224,352,372
Natural Resources Focus Fund. . . . . 14,806,417 11,543,043
- --------------------------------------- ---------------
Prime Bond Fund. . . . . . . . . . . 421,783,779 369,712,587
Quality Equity Fund. . . . . . . . . 628,072,841 759,764,651
- --------------------------------------- ---------------
Reserve Assets Fund. . . . . . . . . -- --
World Income Focus Fund. . . . . . . 94,569,249 88,910,273
- ---------------------------------------------------------------------
</TABLE>
153
<PAGE>
Transactions in options written for the year ended December 31, 1995, were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
FLEXIBLE STRATEGY FUND
- ----------------------------------------------------------------------------------
SHARES
COVERED BY
WRITTEN PREMIUMS
CALL OPTIONS WRITTEN OPTIONS RECEIVED
- ----------------------------------------------------------------------------------
Outstanding call options written, beginning of year 16,000 $ 20,528
Options written. . . . . . . . . . . . . . . . . . 73,000 94,386
Options closed. . . . . . . . . . . . . . . . . . . (56,000) (62,093)
Options exercised. . . . . . . . . . . . . . . . . (33,000) (52,821)
---------- ------------
Outstanding call options written, end of year. . . -- $ --
---------- ------------
--------- -- --------
- ----------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND
- ----------------------------------------------------------------------------------
NUMBER
OF PREMIUMS
CALL OPTIONS WRITTEN CONTRACTS RECEIVED
- ----------------------------------------------------------------------------------
Outstanding call options written, beginning of year 3 $ 357,100
Options written. . . . . . . . . . . . . . . . . . 13 1,140,031
Options expired. . . . . . . . . . . . . . . . . . (10) (974,231)
(5) (468,647)
Options closed. . . . . . . . . . . . . . . . . . . ---------- ---------
Outstanding call options written, end of year. . . 1 $ 54,253
---------- ------------
--------- -- --------
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
INTERNATIONAL EQUITY FOCUS FUND
- -------------------------------------------------------------------------------
NUMBER OF PREMIUMS
PUT OPTIONS WRITTEN CONTRACTS RECEIVED
- -------------------------------------------------------------------------------
Outstanding put options written, beginning of year. . 3 $ 215,822
Options written. . . . . . . . . . . . . . . . . . . 2 55,738
Options expired. . . . . . . . . . . . . . . . . . . (3) (114,012)
Options exercised. . . . . . . . . . . . . . . . . . (1) (136,111)
--------- -----------
Outstanding put options written, end of year. . . . . 1 $ 21,437
--------- -----------
-------- -- -------
- -------------------------------------------------------------------------------
QUALITY EQUITY FUND
- -------------------------------------------------------------------------------
NUMBER OF
SHARES PREMIUMS
CALL OPTIONS WRITTEN COVERED RECEIVED
- -------------------------------------------------------------------------------
Outstanding call options written, beginning of period 28,700 $ 35,167
Options written. . . . . . . . . . . . . . . . . . . 256,500 461,990
Options expired. . . . . . . . . . . . . . . . . . . (4,400) (5,551)
Options closed. . . . . . . . . . . . . . . . . . . . (106,000) (110,673)
Options exercised. . . . . . . . . . . . . . . . . . (174,800) (380,933)
--------- -----------
Outstanding call options written, end of period. . . -- $ --
--------- -----------
-------- -- -------
- -------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND
- -------------------------------------------------------------------------------
NUMBER OF PREMIUMS
CALL OPTIONS WRITTEN CONTRACTS RECEIVED
- -------------------------------------------------------------------------------
Outstanding call options written, beginning of year. 2 $ 10,100
Options written. . . . . . . . . . . . . . . . . . . 8 63,379
Options expired. . . . . . . . . . . . . . . . . . . (8) (63,834)
(2) (9,645)
Options closed. . . . . . . . . . . . . . . . . . . . --------- -----------
Outstanding call options written, end of year. . . . -- $ --
--------- -----------
-------- -- -------
- -------------------------------------------------------------------------------
NUMBER OF PREMIUMS
PUT OPTIONS WRITTEN CONTRACTS RECEIVED
- -------------------------------------------------------------------------------
Outstanding put options written, beginning of year. . -- $ --
Options written. . . . . . . . . . . . . . . . . . . 6 104,585
Options expired. . . . . . . . . . . . . . . . . . . (1) (43,651)
(5) (60,934)
Options closed. . . . . . . . . . . . . . . . . . . . --------- --------
Outstanding put options written, end of year. . . . . -- $ --
--------- -----------
-------- -- -------
- -------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, net unrealized appreciation/
depreciation and aggregate cost for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
DEVELOPING
BASIC CAPITAL DOMESTIC
AMERICAN VALUE MARKETS MONEY
BALANCED FOCUS FOCUS MARKET
FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------
Appreciated securities $ 22,263,476 $ 39,327,571 $ 4,311,192 $ 147,439
Depreciated securities (857,460) (10,416,762) (4,933,203) (9,156)
-------------- -------------- ------------- --------------
Net unrealized
appreciation
(depreciation). . . $ 21,406,016 $ 28,910,809 $ (622,011) $ 138,283
-------------- -------------- ------------- --------------
-- ---------- -- ---------- -- --------- -- ----------
Cost for Federal income
tax purposes*. . . . $185,759,935 $279,800,372 $55,427,713 $307,183,519
-------------- -------------- ------------- --------------
-- ---------- -- ---------- -- --------- -- ----------
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . $ 60,814,076 $ 14,855,401 $ 40,662,038 $ 18,532,091
Depreciated securities. . . (13,386,221) (2,274,036) (3,860,374) (4,134,931)
-------------- -------------- -------------- ----------------
Net unrealized appreciation $ 47,427,855 $ 12,581,365 $ 36,801,664 $ 14,397,160
-------------- -------------- -------------- ----------------
-- ---------- -- ---------- -- ---------- --- -----------
Cost for Federal income
tax purposes*. . . . . . . $291,588,043 $308,461,552 $491,055,965 $ 132,394,937
-------------- -------------- -------------- ----------------
-- ---------- -- ---------- -- ---------- --- -----------
- -----------------------------------------------------------------------------------------------
HIGH INTERMEDIATE INTERNATIONAL
CURRENT GOVERNMENT INTERNATIONAL EQUITY
INCOME BOND BOND FOCUS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . $ 13,031,721 $ 1,963,839 $ 625,527 $ 17,847,559
Depreciated securities. . . (21,359,277) -- (54,136) (11,513,815)
-------------- -------------- -------------- ----------------
Net unrealized appreciation
(depreciation). . . . . . . $ (8,327,556) $ 1,963,839 $ 571,391 $ 6,333,744
-------------- -------------- -------------- ----------------
-- ---------- -- ---------- -- ---------- --- -----------
Cost for Federal income
tax purposes*. . . . . . . $358,492,202 $ 38,402,603 $ 16,888,004 $ 249,042,053
-------------- -------------- -------------- ----------------
-- ---------- -- ---------- -- ---------- --- -----------
- -----------------------------------------------------------------------------------------------
NATURAL
RESOURCES PRIME QUALITY RESERVE
FOCUS BOND EQUITY ASSETS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . $ 4,381,714 $ 26,498,632 $ 37,609,153 $ 14,248
Depreciated securities. . . (1,748,826) (1,833,902) (6,771,828) (299)
-------------- -------------- -------------- ----------------
Net unrealized appreciation $ 2,632,888 $ 24,664,730 $ 30,837,325 $ 13,949
-------------- -------------- -------------- ----------------
-- ---------- -- ---------- -- ---------- --- -----------
Cost for Federal income
tax purposes*. . . . . . . $ 40,504,115 $456,221,014 $616,244,581 $ 25,876,014
-------------- -------------- -------------- ----------------
-- ---------- -- ---------- -- ---------- --- -----------
- -----------------------------------------------------------------------------------------------
WORLD
INCOME
FOCUS
FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,648,210
Depreciated securities. . . . . . . . . . . . . . . . . . . . . . . . . . (2,992,768)
----------------
Net unrealized depreciation. . . . . . . . . . . . . . . . . . . . . . . . $ (344,558)
----------------
--- -----------
Cost for Federal income tax purposes*. . . . . . . . . . . . . . . . . . . $ 79,792,576
----------------
--- -----------
- -----------------------------------------------------------------------------------------------
</TABLE>
* Net of premiums received on options written.
154
<PAGE>
At December 31, 1995, net realized and unrealized gains (losses) were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AMERICAN BASIC VALUE
BALANCED FUND FOCUS FUND
------------------------------------ -------------------------------
Realized Unrealized Realized Unrealized
Losses Gains Gains Gains
- ----------------------------------------------------------------------------------------------
Long-term investments. $ (311,135) $21,406,016 $ 13,595,994 $ 29,353,531
Short-term investments (257) -- -- --
--------------------- ------------- ----------------- -------------
$ (311,392) $21,406,016 $ 13,595,994 $ 29,353,531
--------------------- ------------- ----------------- -------------
------ ------------- -- --------- ---- ----------- - ----------
DEVELOPING CAPITAL DOMESTIC MONEY
MARKETS FOCUS FUND MARKET FUND
------------------------------------ -------------------------------
Realized Unrealized
Gains Gains Realized Unrealized
(Losses) (Losses) Gains Gains
- ----------------------------------------------------------------------------------------------
Long-term investments. $ (3,328,515) $ (542,156) -- --
Short-term investments (108) -- $ 44,778 $ 138,283
Foreign currency
transactions. . . . . 198,982 313 -- --
--------------------- ------------- ----------------- -------------
$ (3,129,641) $ (541,843) $ 44,778 $ 138,283
--------------------- ------------- ----------------- -------------
--------------------- ------------- ----------------- -------------
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EQUITY GROWTH FLEXIBLE STRATEGY
FUND FUND
----------------------------------- ---------------------------------------
Realized Realized Unrealized
Gains Unrealized Gains Gains
(Losses) Gains (Losses) (Losses)
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ 45,386,271 $47,585,644 $ 25,424,239 $ 12,581,365
Short-term investments. . (393) -- (349) --
Options written. . . . . -- -- 48,220 --
Foreign currency
transactions. . . . . . . -- -- 1,579,908 (379)
-------------------- ------------- ------------------------- -------------
$ 45,385,878 $47,585,644 $ 27,052,018 $ 12,580,986
-------------------- ------------- ------------------------- -------------
----- ------------- -- --------- -------- --------------- - ----------
- -----------------------------------------------------------------------------------------------------------
GLOBAL STRATEGY GLOBAL UTILITY
FOCUS FUND FOCUS FUND
----------------------------------- ---------------------------------------
Realized Realized
Gains Unrealized Gains Unrealized
(Losses) Gains (Losses) Gains
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ (19,050,016) $36,801,664 $ (2,381,425) $ 14,397,160
Short-term investments. . 107 -- -- --
Forward foreign exchange
contracts. . . . . . . . (6,045,348) 9,681,629 -- --
Foreign currency
transactions. . . . . . . 1,715,205 1,061 1,247 10,458
-------------------- ------------- ------------------------- -------------
$ (23,380,052) $46,484,354 $ (2,380,178) $ 14,407,618
-------------------- ------------- ------------------------- -------------
----- ------------- -- --------- -------- --------------- - ----------
- -----------------------------------------------------------------------------------------------------------
HIGH CURRENT INTERMEDIATE GOVERNMENT
INCOME FUND BOND FUND
----------------------------------- ---------------------------------------
Realized
Realized Unrealized Gains Unrealized
Gains Losses (Losses) Gains
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ 589,358 $(8,009,646) $ 194,164 $ 1,963,839
Short-term investments. . -- -- (1,182) --
-------------- ---------- ---------------- -----------
$ 589,358 $(8,009,646) $ 192,982 $ 1,963,839
-------------------- ------------- ------------------------- -------------
----- ------------- -- --------- -------- --------------- - ----------
- -----------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND INTERNATIONAL EQUITY
FUND FOCUS FUND
----------------------------------- ---------------------------------------
Realized Realized Unrealized
Gains Unrealized Gains Gains
(Losses) Gains (Losses) (Losses)
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ 333,743 $ 571,391 $ (6,622,084) $ 6,597,252
Short-term investments. . 124 -- 3,728 (149)
Stock Index futures
contracts. . . . . . . . -- -- (347,201) 1,488,119
Options purchased. . . . -- -- (195,887) 191,405
Options written. . . . . -- -- (220,353) 35,670
Foreign currency
transactions. . . . . . . 134,942 145 79,053 32,677
Forward foreign exchange
contracts. . . . . . . . (267,610) -- (1,444,242) (267,385)
Currency options written. -- -- 1,217,268 --
Currency options
purchased. . . . . . . . -- -- 112,255 1,212,747
-------------------- ------------- ------------------------- -------------
$ 201,199 $ 571,536 $ (7,417,463) $ 9,290,336
-------------------- ------------- ------------------------- -------------
----- ------------- -- --------- -------- --------------- - ----------
- -----------------------------------------------------------------------------------------------------------
NATURAL RESOURCES PRIME BOND
FOCUS FUND FUND
----------------------------------- ---------------------------------------
Realized Realized
Gains Unrealized Gains Unrealized
(Losses) Gains (Losses) Gains
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ 797,755 $ 2,632,888 $ 2,851,304 $ 24,731,783
Short-term investments. . (16) -- (378) --
Foreign currency
transactions. . . . . . . (8,179) 32 -- --
-------------------- ------------- ------------------------- -------------
$ 789,560 $ 2,632,920 $ 2,850,926 $ 24,731,783
-------------------- ------------- ------------------------- -------------
----- ------------- -- --------- -------- --------------- - ----------
- -----------------------------------------------------------------------------------------------------------
QUALITY EQUITY RESERVE ASSETS
FUND FUND
----------------------------------- ---------------------------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Gains Gains
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ 84,499,995 $30,837,325 -- --
Short-term investments. . (1,446) -- $ 10,309 $ 13,949
Options written. . . . . 90,676 -- -- --
-------------- ---------- ---------------- -----------
$ 84,589,225 $30,837,325 $ 10,309 $ 13,949
-------------------- ------------- ------------------------- -------------
----- ------------- -- --------- -------- --------------- - ----------
- -----------------------------------------------------------------------------------------------------------
WORLD INCOME
FOCUS FUND
-----------------------------------
Realized Unrealized
Gains Gains
(Losses) (Losses)
- -----------------------------------------------------------------------------------------------------------
Long-term investments. . $ 1,101,384 $ (344,558)
Short-term investments. . 207 --
Financial futures contracts (255,051) --
Currency options written. (5,716) --
Currency options
purchased. . . . . . . . (104,248) --
Foreign currency
transactions. . . . . . . 806,962 19,665
Forward foreign exchange
contracts. . . . . . . . (1,033,251) (5,151)
-------------------- -------------
$ 510,287 $ (330,044)
-------------------- -------------
----- ------------- -- ---------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
155
<PAGE>
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
AMERICAN BALANCED FUND
- ----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . 2,201,026 $ 30,814,364
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . 529,259 7,173,644
--------- --------------
Total issued. . . . . . . . . . . . . . . . . . 2,730,285 37,988,008
Shares redeemed. . . . . . . . . . . . . . . . (850,020) (12,151,661)
--------- --------------
Net increase. . . . . . . . . . . . . . . . . . 1,880,265 $ 25,836,347
--------- --------------
-------- -- ----------
- ----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------
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>
<S> <C> <C>
BASIC VALUE FOCUS FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . . 7,762,209 $ 98,591,635
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . . . . . . 1,538,264 10,403,524
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 9,300,473 108,995,159
Shares redeemed. . . . . . . . . . . . . . . . . . . . . . (711,444) (8,076,571)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 8,589,029 $ 100,918,588
---------- --------------
--------- -- ----------
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
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
---------- --------------
--------- -- ----------
- ----------------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . . 2,555,725 $ 23,265,598
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . . 36,009 332,002
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 2,591,734 23,597,600
Shares redeemed. . . . . . . . . . . . . . . . . . . . . . (525,636) (4,592,826)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 2,066,098 $ 19,004,774
---------- --------------
--------- -- ----------
- ----------------------------------------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . . 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>
<S> <C> <C>
DOMESTIC MONEY MARKET FUND
- ------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 111,267,159 $ 111,267,159
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . . . . . 17,571,280 17,571,280
------------ ---------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 128,838,439 128,838,439
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (188,460,308) (188,460,308)
------------ ---------------
Net decrease. . . . . . . . . . . . . . . . . . . . . . . (59,621,869) $ (59,621,869)
------------ ---------------
----------- -- -----------
- ------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ------------------------------------------------------------------------------------------
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
------------ ---------------
----------- -- -----------
- ------------------------------------------------------------------------------------------
EQUITY GROWTH FUND
- ------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 3,628,361 $ 86,301,010
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 41,296 889,063
------------ ---------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 3,669,657 87,190,073
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (353,757) (8,536,475)
------------ ---------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 3,315,900 $ 78,653,598
------------ ---------------
----------- -- -----------
- ------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ------------------------------------------------------------------------------------------
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>
<S> <C> <C> <C> <C> <C> <C>
FLEXIBLE STRATEGY FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 1,290,613 $ 19,615,145
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . . . . . 896,275 13,101,282
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 2,186,888 32,716,427
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (1,417,547 ) (21,921,048 )
----------- ----------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 769,341 $ 10,795,379
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
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>
156
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
GLOBAL STRATEGY FOCUS FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 2,383,467 $ 28,913,701
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . . . . . 1,452,481 17,112,643
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 3,835,948 46,026,344
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (4,725,965 ) (56,008,034 )
----------- ----------------
Net decrease. . . . . . . . . . . . . . . . . . . . . . . (890,017 ) $ (9,981,690 )
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
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
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 782,432 $ 7,896,815
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 517,492 5,144,108
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 1,299,924 13,040,923
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (1,545,955 ) (15,567,315 )
----------- ----------------
Net decrease. . . . . . . . . . . . . . . . . . . . . . . (246,031 ) $ (2,526,392 )
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
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
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
HIGH CURRENT INCOME FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 5,980,682 $ 65,910,048
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 2,792,967 30,645,264
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 8,773,649 96,555,312
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (1,184,474 ) (13,092,078 )
----------- ----------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 7,589,175 $ 83,463,234
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 10,081,695 $ 116,511,262
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 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
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 2,173,331 $ 22,410,622
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 161,544 1,670,786
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 2,334,875 24,081,408
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (321,060 ) (3,238,873 )
----------- ----------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 2,013,815 $ 20,842,535
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
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>
<S> <C> <C>
INTERNATIONAL BOND FUND
- -------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- -------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 937,367 $ 9,691,745
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 77,732 795,218
--------- -------------
Total issued. . . . . . . . . . . . . . . . . . 1,015,099 10,486,963
Shares redeemed. . . . . . . . . . . . . . . . . (317,282) (3,269,924)
--------- -------------
Net increase. . . . . . . . . . . . . . . . . . 697,817 $ 7,217,039
--------- -------------
-------- -- ---------
- -------------------------------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
- -------------------------------------------------------------------------------
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>
<S> <C> <C>
INTERNATIONAL EQUITY FOCUS FUND
- ---------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ---------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 2,540,187 $ 26,767,717
Shares issued to shareholders in reinvestment of dividends
and distributions. . . . . . . . . . . . . . . . . . . . 898,135 9,331,626
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 3,438,322 36,099,343
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (2,161,108) (21,945,941)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 1,277,214 $ 14,153,402
---------- --------------
--------- -- ----------
- ---------------------------------------------------------------------------------------
</TABLE>
157
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY FOCUS FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
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
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 474,971 $ 5,198,076
Shares issued to shareholders in reinvestment of dividends
and distributions. . . . . . . . . . . . . . . . . . . . 63,806 835,171
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 538,777 6,033,247
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (601,388 ) (6,852,669 )
----------- ----------------
Net decrease. . . . . . . . . . . . . . . . . . . . . . . (62,611 ) $ (819,422 )
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
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
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
PRIME BOND FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 3,880,829 $ 45,621,465
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 2,612,921 30,585,478
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 6,493,750 76,206,943
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (2,316,349) (27,181,488)
----------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 4,177,401 $ 49,025,455
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
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
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
QUALITY EQUITY FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 2,793,165 $ 82,433,320
Shares issued to shareholders in reinvestment of dividends
and distributions. . . . . . . . . . . . . . . . . . . . 651,881 18,002,604
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 3,445,046 100,435,924
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (509,752) (15,180,783)
----------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 2,935,294 $ 85,255,141
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
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
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
RESERVE ASSETS FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 6,811,139 $ 6,811,139
Shares issued to shareholders in reinvestment of dividends
and distributions. . . . . . . . . . . . . . . . . . . . 1,582,801 1,582,801
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 8,393,940 8,393,940
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (15,081,975) (15,081,975)
----------- --------------
Net decrease. . . . . . . . . . . . . . . . . . . . . . . (6,688,035) $ (6,688,035)
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
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
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 481,318 $ 4,592,255
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 727,949 6,851,555
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 1,209,267 11,443,810
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (1,045,651) (9,863,555)
----------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 163,616 $ 1,580,255
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
</TABLE>
158
<PAGE>
<TABLE>
<CAPTION>
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>
5. CAPITAL LOSS CARRYFORWARD:
At December 31, 1995, the Company had net capital loss carryforwards of
approximately $3,818,000 in the Developing Capital Markets Focus Fund, of which
$91,000 expires in 2002 and $3,727,000 expires in 2003; $3,364,000 in the Global
Strategy Focus Fund, all of which expires in 2003; $3,673,000 in the Global
Utility Focus Fund, of which $1,463,000 expires in 2002 and $2,210,000 expires
in 2003; $1,391,000 in the High Current Income Fund, of which $119,000 expires
in 1999 and $301,000 expires in 2002 and $971,000 expires in 2003; $6,977,000 in
the International Equity Focus Fund, all of which expires in 2003; $15,879,000
in the Prime Bond Fund, of which $15,024,000 expires in 2002 and $855,000
expires in 2003; and $1,881,000 in the World Income Focus Fund, all of which
expires in 2002. These amounts will be available to offset like amounts of any
future taxable gains.
6. LOANED SECURITIES:
At December 31, 1995, the Prime Bond Fund held US
Treasury bonds having an aggregate value of
approximately $4,904,000 as collateral for portfolio securities loaned having a
market value of
approximately $4,692,000.
At December 31, 1995, the Prime Bond Fund held US
Treasury bonds having an aggregate value of
approximately $4,904,000 as collateral for portfolio securities loaned having a
market value of
approximately $4,692,000.
7. COMMITMENTS:
At December 31, 1995, the following Portfolios had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedules of Investments,
under which they agreed to purchase and sell various foreign currencies with
values of approximately:
<TABLE>
<CAPTION>
<S> <C> <C>
FUND PURCHASE SELL
- ------------------------------------------------------
Flexible Strategy Fund $ -- $ 119,000
Global Strategy Focus Fund -- 151,000
Global Utility Focus Fund -- 224,000
International Bond Fund -- 1,500
International Equity Focus Fund 796,000 142,000
Natural Resources Focus Fund 267,000 --
- ------------------------------------------------------
</TABLE>
8. SUBSEQUENT EVENT:
On January 2, 1996, the Board of Directors declared net investment income
dividends and a capital gains distributions per share payable on January 2 and
January 9, 1996 to shareholders of record as of December 29, 1995 as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM
ORDINARY CAPITAL
FUND INCOME-NET GAINS
- -----------------------------------------------------------------
American Balanced Fund. . . . . . . . $ 0.295524 $ 0.023427
Basic Value Focus Fund. . . . . . . . 0.556549 0.264736
Developing Capital Markets Focus Fund 0.233987 --
Domestic Money Market Fund. . . . . . -- --
Equity Growth Fund. . . . . . . . . . 2.871396 0.820277
Flexible Strategy Fund. . . . . . . . 0.727180 0.896948
Global Strategy Focus Fund. . . . . . 0.294897 --
Global Utility Focus Fund. . . . . . 0.165645 --
High Current Income Fund. . . . . . . 0.101166 --
Intermediate Government Bond Fund. . 0.052380 --
International Bond Fund. . . . . . . 0.185368 --
International Equity Focus Fund. . . 0.152775 --
Natural Resources Focus Fund. . . . . 0.118310 0.170782
Prime Bond Fund. . . . . . . . . . . 0.063426 --
Quality Equity Fund. . . . . . . . . 1.573476 3.019036
Reserve Assets Fund. . . . . . . . . -- --
World Income Focus Fund. . . . . . . -- --
- -----------------------------------------------------------------
</TABLE>
159
