<PAGE>
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996
REGISTRATION NO. 333-7919
811-3290
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
IRA P. SHAPIRO, ESQ.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
LEONARD B. MACKEY, JR., ESQ.
ROGERS & WELLS
200 PARK AVENUE
NEW YORK, NEW YORK 10166
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
------------------------
NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER OF SHARES HAVE
PREVIOUSLY BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY
ACT OF 1940. REGISTRANT IS FILING AS AN EXHIBIT TO THIS REGISTRATION STATEMENT A
COPY OF ITS EARLIER DECLARATION UNDER RULE 24F-2. REGISTRANT FILED ITS RULE
24F-2 NOTICE ON FEBRUARY 29, 1996 FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION PROXY STATEMENT--PROSPECTUS CAPTION
- --------- ------------------------------------------ ----------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Facing page of Registration Statement; Cover page of Proxy
Statement--Prospectus
Item 2. Beginning and Outside Back Cover Page of
Prospectus.............................. Table of Contents
Item 3. Synopsis and Risk Factors................. Summary; Special Considerations Regarding the
Reorganizations
Item 4. Information about the Transaction......... Summary; Proposal No. 6 and Proposal No. 7--The
Reorganizations
Item 5. Information about the Registrant.......... Available Information; Summary; The Company; Appendix C;
Appendix D
Item 6. Information about the Company Being
Acquired................................ Available Information; Summary; The Company; Appendix C;
Appendix D
Item 7. Voting Information........................ The Meeting; Proposal No. 1--Election of Directors;
Proposal No. 6 and Proposal No. 7--The Reorganizations;
Appendix A
Item 8. Interest of Certain Persons and
Experts................................. Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
PART B STATEMENT OF ADDITIONAL INFORMATION CAPTION
--------------------------------------------
Item 10. Cover Page................................ Cover page of Statement of Additional Information
Item 11. Table of Contents......................... Table of Contents
Item 12. Additional Information about the
Registrant.............................. Incorporation by Reference
Item 13. Additional Information about the Company
Being Acquired.......................... Incorporation by Reference
Item 14. Financial Statements...................... Pro Forma Financial Information
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 11, 1996
TO THE STOCKHOLDERS OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
Notice is hereby given that an Annual Meeting of Stockholders (the
'Meeting') of Merrill Lynch Variable Series Funds, Inc. (the 'Company') will be
held at the offices of Merrill Lynch Asset Management, 800 Scudders Mill Road,
Plainsboro, New Jersey, on Monday, October 11, 1996 at 9:00 a.m. for the
following purposes:
(1) To elect a Board of Directors to serve until their successors are duly
elected and qualified.
(2) To consider and act upon a proposal to ratify the selection of Deloitte
& Touche LLP to serve as independent auditors of the Company for its
current fiscal year.
(3) To consider and act upon a proposal to amend the investment
restrictions applicable to all of the Company's Funds other than the
Merrill Lynch Domestic Money Market Fund and Merrill Lynch Reserve
Assets Fund. (ONLY HOLDERS OF SHARES OF THE COMPANY'S FUNDS, OTHER THAN
THE MERRILL LYNCH DOMESTIC MONEY MARKET FUND AND THE MERRILL LYNCH
RESERVE ASSETS FUND, WILL BE PERMITTED TO VOTE ON THIS MATTER.)
(4) To consider and act upon a proposal to approve a change in the
investment objective of the Company's Merrill Lynch Intermediate
Government Bond Fund and to rename that Fund as the 'Merrill Lynch
Government Bond Fund.' (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL
LYNCH INTERMEDIATE GOVERNMENT BOND FUND WILL BE PERMITTED TO VOTE ON
THIS MATTER.)
(5) To consider and act upon a proposal to approve a change in the
investment objective of the Company's Merrill Lynch World Income Focus
Fund and to change the name of that Fund to the 'Merrill Lynch Global
Bond Focus Fund.' (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL
LYNCH WORLD INCOME FOCUS FUND WILL BE PERMITTED TO VOTE ON THIS
MATTER.)
(6) To consider and act upon a proposal to approve the Agreement and the
Plan of Reorganization between the Company's Merrill Lynch
International Bond Fund and Merrill Lynch World Income Focus Fund and
Articles of Amendment to the Company's Articles of Incorporation in
connection therewith. (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL
LYNCH INTERNATIONAL BOND FUND WILL BE PERMITTED TO VOTE ON THIS
MATTER.)
(7) To consider and act upon a proposal to approve the Agreement and Plan
of Reorganization between the Company's Merrill Lynch Flexible Strategy
Fund and Merrill Lynch Global Strategy Focus Fund and Articles of
Amendment to the Company's Articles of Incorporation in connection
therewith. (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH
FLEXIBLE STRATEGY FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
(8) To transact such other business as may properly come before the Meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on August 12, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at the Meeting or any adjournment thereof.
<PAGE>
A complete list of the stockholders of the Company entitled to vote at the
Meeting will be available and open to the examination of any stockholder of the
Fund for any purpose germane to the Meeting during ordinary business hours from
and after September 23, 1996, at the office of the Company, 800 Scudders Mill
Road, Plainsboro, New Jersey. Stockholders are cordially invited to attend the
Meeting. Stockholders who do not expect to attend the Meeting in person are
requested to complete, date and sign the enclosed form of proxy and return it
promptly in the envelope provided for this purpose. The enclosed proxy is being
solicited on behalf of the Board of Directors of the Fund.
By Order of the Board of Directors
Ira P. Shapiro
Secretary
Plainsboro, New Jersey
Dated: August 30, 1996
<PAGE>
PROXY STATEMENT AND PROSPECTUS
Annual Meeting of Stockholders To Be Held October 11, 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.
This Proxy Statement--Prospectus is being furnished to the stockholders of
the Company in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the Company's outstanding shares of
common stock for use at an Annual Meeting of Stockholders of the Company (the
'Meeting') to be held at the offices of Merrill Lynch Asset Management, L.P.
('MLAM' or the 'Investment Adviser'), 800 Scudders Mill Road, Plainsboro, New
Jersey, on Monday, October 11, 1996, at 9:00 a.m., and at any and all
adjournments thereof. The approximate mailing date of this Proxy
Statement--Prospectus is September 9, 1996. The Board of Directors of the
Company has fixed the close of business on August 12, 1996 as the record date
(the 'Record Date') for the determination of stockholders entitled to notice of
and to vote at the Meeting and at any adjournment thereof. Stockholders on the
Record Date will be entitled to one vote for each share held and a fractional
vote for each fractional share held, with no shares having cumulative voting
rights. As of the Record Date, the Company had outstanding the number of shares
of each of its Funds indicated in Appendix A. Appendix A also indicates the
number of shares owned by each person who owned 5% or more of the outstanding
shares of a Fund on such date.
At the Meeting, stockholders will be asked to vote on (i) the election of
the Board of Directors, (ii) the ratification of the selection of Deloitte &
Touche LLP to serve as independent auditors for the Company's current fiscal
year, (iii) a proposal to amend the fundamental investment restrictions of each
of the Company's Funds other than the Merrill Lynch Domestic Money Market Fund
and Merrill Lynch Reserve Assets Fund, (iv) a proposal to amend the investment
objective of the Merrill Lynch Intermediate Government Bond Fund and to change
the name of that Fund, (v) a proposal to amend the investment objective of the
Merrill Lynch World Income Focus Fund and to change the name of that Fund, (vi)
a proposal to approve the Agreement and Plan of Reorganization between the
Company's Merrill Lynch International Bond Fund and its Merrill Lynch World
Income Focus Fund and Articles of Amendment to the Company's Articles of
Incorporation in connection therewith, and (vii) a proposal to approve the
Agreement and Plan of Reorganization between the Company's Merrill Lynch
Flexible Strategy Fund and its Merrill Lynch Global Strategy Focus Fund and
Articles of Amendment to the Company's Articles of Incorporation in connection
therewith. The International Bond Fund and the Flexible Strategy Fund are
sometimes referred to herein as the 'Transferor Funds' or the 'Corresponding
Transferor Funds,' and the World Income Focus Fund and the Global Strategy Focus
Fund are sometimes referred to herein as the 'Acquiring Funds' or the
'Corresponding Acquiring Funds.' ALL STOCKHOLDERS WILL BE PERMITTED TO VOTE ON
PROPOSALS 1 AND 2. WITH RESPECT TO EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY
HOLDERS OF SHARES OF THE FUNDS AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO
VOTE ON SUCH PROPOSALS.
At the Meeting, the stockholders of each Transferor Fund will be asked to
approve an Agreement and Plan of Reorganization whereby the Acquiring Fund will
acquire substantially all the assets of the Corresponding Transferor Fund by
means of a tax-free acquisition in exchange for shares of the Acquiring Fund and
the assumption by the Acquiring Fund of substantially all the liabilities of the
Corresponding Transferor Fund, which shares would then be distributed to the
stockholders of each Transferor Fund in liquidation of each Transferor Fund. The
number of shares of the Acquiring Fund to be issued to the Corresponding
Transferor Fund would be that number having an aggregate net asset value equal
to the aggregate value of the net assets of the Corresponding Transferor Fund
transferred to the Acquiring Fund. Each of these transactions, consisting of the
transfer to the (continued on next page)
------------------------
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 ON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT--PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Proxy Statement--Prospectus sets forth concisely the information that
stockholders of the Company should know before voting on the proposals described
above and should be retained for future reference. A description of the Company,
in general, and each Acquiring Fund and each Transferor Fund, including each
such Fund's investment objective and policies is contained herein at Appendix C.
A statement containing additional information about the Company has been filed
with the Securities and Exchange Commission (the 'Commission') by the Company in
a Statement of Additional Information dated August 30, 1996 (the 'SAI'). A copy
of the SAI and the Company's annual report for its fiscal year ended December
31, 1995 may be obtained without charge by writing to the Company at the address
above or by calling (800) 456-4587, ext. 123. The Statement of Additional
Information is hereby incorporated by reference into this Proxy
Statement--Prospectus.
THE DATE OF THIS PROXY STATEMENT--PROSPECTUS IS AUGUST 30, 1996.
<PAGE>
(continued from cover page)
Acquiring Fund of all the assets of the Corresponding Transferor Fund in
exchange for the Acquiring Fund shares and the Acquiring Fund's assumption of
all the liabilities of the Corresponding Transferor Fund, and the subsequent
distribution of the Acquiring Fund shares in liquidation of the Corresponding
Transferor Fund, is referred to herein as a 'Reorganization.' As a result of the
Reorganization, each stockholder of a Transferor Fund will receive that number
of full and fractional shares of the Corresponding Acquiring Fund equal in value
at the close of business on the business day preceding the effective date of the
Reorganization to the value of that stockholder's shares of the Transferor Fund.
The terms and conditions of each Reorganization and related transactions
are more fully described in this Proxy Statement--Prospectus and in the
Agreement and Plan of Reorganization, the form of which is attached hereto as
Appendix B.
The World Income Focus, the International Bond and the Global Strategy
Focus Funds are non-diversified, open-end management investment companies. The
Flexible Strategy Fund is a diversified, open-end management investment company.
The investment objective of the World Income Focus Fund is to seek to provide
stockholders with high current income. The investment objective of the
International Bond Fund is to seek a high total investment return. However, the
investment objective of the World Income Focus Fund will be the same as the
investment objective of the International Bond Fund if stockholders of the World
Income Focus Fund approve a change in the World Income Focus Fund's investment
objective as discussed in Proposal No. 5 (which is a precondition to
consummation of the Reorganization contemplated in Proposal No. 6).
Additionally, the implementation of Proposal No. 5 is subject to the approval of
Proposal No. 6. The investment objective of each of the Flexible Strategy Fund
and the Global Strategy Focus Fund is to seek high total investment return.
The Board of Directors of the Company knows of no business other than that
mentioned in Proposals 1 through 7 of the Notice of Meeting which will be
presented for consideration at the Meeting. If any matter is properly presented,
it is the intention of the persons named in the enclosed Proxy, as well as any
other Proxy sent by the Company in connection with the Meeting, to vote in
accordance with their best judgment.
The chart below summarizes which stockholders of the Company on the Record
Date will be entitled to vote on the proposals set forth herein.
<TABLE>
<CAPTION>
PROPOSALS ON WHICH STOCKHOLDERS
OF A FUND ARE ELIGIBLE TO VOTE
-----------------------------------------------------------------------
NAME OF FUND 1* 2* 3# 4 5 6 7
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
American Balanced Fund.................... X X X
Basic Value Focus Fund.................... X X X
Developing Capital Markets Focus Fund..... X X X
Domestic Money Market Fund................ X X
Equity Growth Fund........................ X X X
Flexible Strategy Fund.................... X X X X
Global Strategy Focus Fund................ X X X
Global Utility Focus Fund................. X X X
High Current Income Fund.................. X X X
Intermediate Government Bond Fund......... X X X X
International Bond Fund................... X X X X
International Equity Focus Fund........... X X X
Natural Resources Focus Fund.............. X X X
Prime Bond Fund........................... X X X
Quality Equity Fund....................... X X X
Reserve Assets Fund....................... X X
World Income Focus Fund................... X X X X
(Footnotes on next page)
2
<PAGE>
(Footnotes from previous page)
- ------------------
* Vote tabulated on an aggregate basis.
# All stockholders of indicated Funds may vote, but votes will be tabulated on a
Fund by Fund basis. In general, the proposed fundamental investment
restrictions are different in varying degrees from the current fundamental
investment restrictions for each of the Funds, except that proposed
fundamental investment restrictions 2, 3, 4, and 8, if adopted by the
stockholders of the Funds as proposed herein, will not result in a material
change from existing fundamental investment restrictions for the Funds. In
addition, proposed fundamental investment restriction 5 is substantively
similar to the existing fundamental investment restrictions of the Developing
Capital Markets Fund, the International Bond Fund and the Intermediate
Government Bond Fund. Further, it is not proposed herein that stockholders of
the Natural Resource Focus, Global Strategy Focus, World Income Focus,
Developing Capital Markets Focus and International Bond Funds adopt proposed
fundamental investment restriction 1. See 'Proposal No. 3--Amendment to the
Fundamental Investment Restrictions of each of the Funds' herein.
3
<PAGE>
TABLE OF CONTENTS
</TABLE>
<TABLE>
<S> <C>
Available Information....................................... 7
Summary..................................................... 8
Special Considerations Regarding the Reorganizations........ 12
The Company................................................. 14
The Meeting................................................. 15
Proposal No. 1-- Election of Directors...................... 16
Proposal No. 2-- Selection of Independent Auditors.......... 20
Proposal No. 3-- Amendment to the Fundamental Investment
Restrictions of each of the Funds........... 20
General................................................... 20
Proposed Fundamental Investment Restrictions.............. 21
1. A Fund may not make any investment inconsistent with
the Fund's(1) classification as a diversified company
under the Investment Company Act.................... 22
2. A Fund may not invest more than 25% of its assets,
taken at market value, in the securities of issuers
in any particular industry (excluding the U.S.
Government and its agencies and
instrumentalities)(2)............................... 22
3. A Fund may not make investments for the purpose of
exercising control or management.................... 23
4. A Fund may not purchase or sell real estate, except
that a Fund may invest in securities directly or
indirectly secured by real estate or interests
therein or issued by companies which invest in real
estate or interests therein......................... 23
5. A Fund may not make loans to other persons, except
that the acquisition of bonds, debentures or other
corporate debt securities and investment in
government obligations, commercial paper,
pass-through instruments, certificates of deposit,
bankers acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the
making of a loan, and except further that the Fund
may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in
accordance with applicable law and the guidelines
set forth in the Prospectus and Statement of
Additional Information, as they may be amended from
time to time........................................ 23
</TABLE>
- --------------
1 The Natural Resource 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, and
therefore this restriction is not proposed to be adopted by such Funds.
2 None of the Funds concentrate in a particular industry (i.e., more than
25%). However, the Global Utility Focus Fund invests, under normal
circumstances, 65% or more of its total assets in equity and debt securities
issued by domestic and foreign companies in the utilities industries (i.e.,
electricity, telecommunications, gas or water), and the Natural Resources
Focus Fund may invest greater than 25% of its assets in gold-related
companies. The adoption of this restriction will be subject to the foregoing.
4
<PAGE>
<TABLE>
<S> <C>
6. A Fund may not issue senior securities to the extent
such issuance would violate applicable law.......... 23
7. A Fund may not borrow money, except that (i) the
Fund may borrow from banks (as defined in the
Investment Company Act) in amounts up to 33 1/3% of
its total assets (including the amount borrowed),
(ii) the Fund may borrow up to an additional 5% of
its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales
of portfolio securities and (iv) the Fund may
purchase securities on margin to the extent
permitted by applicable law. The Fund may not pledge
its assets other than to secure such borrowings or,
to the extent permitted by the Fund's investment
policies as set forth in the Prospectus and
Statement of Additional Information, as they may be
amended from time to time, in connection with
hedging transactions, short sales, when-issued and
forward commitment transactions and similar
investment strategies............................... 24
8. A Fund may not underwrite securities of other
issuers except insofar as the Fund technically may
be deemed an underwriter under the Securities Act of
1933 in selling portfolio
securities.......................................... 24
9. A Fund may not purchase or sell commodities or
contracts on commodities, except to the extent the
Fund may do so in accordance with applicable law and
the Prospectus and Statement of Additional
Information, as they may be amended from time to
time, and without registering as a commodity pool
operator under the Commodity Exchange Act........... 25
Proposed Non-Fundamental Investment Restrictions.......... 25
A. A Fund may not purchase securities of other
investment companies, except to the extent such
purchases are permitted by applicable law........... 26
B. A Fund may not make short sales of securities or
maintain a short position except to the extent
permitted by applicable law......................... 26
C. A Fund may not invest in securities which cannot be
readily resold because of legal or contractual
restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if
at the time of acquisition more than 15% of its
total assets would be invested in such securities.
This restriction shall not apply to securities which
mature within seven days or securities which the
Board of Directors has otherwise determined to be
liquid pursuant to applicable law................... 26
D. A Fund may not 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 total assets; included within such
limitation, but not to exceed 2% of the Fund's total
assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a
major foreign exchange. For purposes of this
restriction, warrants acquired by the Fund in units
or attached to securities may be deemed to be
without value....................................... 27
E. A Fund may not invest in securities of companies
having a record, together with predecessors, of less
than three years of continuous operation, except to
the extent permitted under applicable law. This
restriction shall not apply to mortgage-backed
securities, asset-backed securities or obligations
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities....................... 27
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
F. A Fund may not purchase or retain the securities of
any issuer, if those individual officers and
directors of the Company, the officers and general
partner of the Investment Adviser, the directors of
such general partner or the officers and directors
of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities
of such issuer own in the aggregate more than 5% of
the securities of such issuer....................... 27
G. A Fund may not invest in real estate limited
partnership interests or interests in oil, gas or
other mineral leases, or 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.......................................... 28
H. A Fund may not write, purchase or sell puts, calls,
straddles, spreads or combinations thereof, except
to the extent permitted in the Prospectus and
Statement of Additional Information, as they may be
amended from time to time........................... 28
Elimination of Restrictions Applicable to Foreign
Securities............................................. 28
Proposal No. 4--To Change the Investment Objective of the
Company's Merrill Lynch Intermediate
Government Bond Fund and Rename that Fund as
the 'Merrill Lynch Government Bond Fund'.... 28
Proposal No. 5--To Change the Investment Objective of the
Company's Merrill Lynch World Income Focus
Fund and Rename That Fund as the 'Merrill
Lynch Global Bond Focus Fund'............... 29
Proposal No. 6 and Proposal No. 7-- The Reorganizations..... 30
Legal Proceedings........................................... 39
Legal Opinions.............................................. 39
Experts..................................................... 39
Meetings of Shareholders.................................... 40
Appendix A--Outstanding Ownership of each Fund and Security
Ownership of Certain Owners..................... A-1
Appendix B--Form of Agreement and Plan of Reorganization.... B-1
Appendix C--Information Regarding the Acquiring Funds and
Transferor Funds................................ C-1
Appendix D--Existing Investment Restrictions of the Funds... D-1
</TABLE>
6
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Investment
Company Act of 1940, as amended (the 'Investment Company Act'), and in
accordance therewith is required to file reports, proxy statements and other
information with the Securities and Exchange Commission (the 'Commission'). Any
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
New York Regional Office, Seven World Trade Center, New York, New York 10048 and
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Company has filed with the Commission a registration statement on Form
N-14 (herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act of 1933, as amended (the
'Securities Act'). This Proxy Statement--Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the shares of the Merrill Lynch
International Bond Fund and the Merrill Lynch Flexible Strategy Fund issuable
pursuant to the reorganization, reference is hereby made to the Registration
Statement. This Proxy Statement--Prospectus constitutes a prospectus of the
Company with respect to the shares of the Company to be issued in connection
with the reorganization discussed herein.
A statement containing additional information about the Company, including
pro forma financial information with respect to the Reorganizations, has been
filed with the Securities and Exchange Commission (the 'Commission') by the
Company in a Statement of Additional Information, dated August 30, 1996 the
('SAI'), and may be obtained without charge by writing to the Company at P.O.
Box 9011, Princeton, New Jersey 08543-9011, Attention: Ira P. Shapiro, or
calling (800) 456-4587, ext. 123. The SAI is incorporated by reference into this
Proxy Statement--Prospectus.
7
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement-- Prospectus. This summary is qualified in its entirety by
the more detailed information contained herein. Stockholders should read the
entire Proxy Statement--Prospectus. Certain capitalized terms in this summary
are defined elsewhere in this Proxy Statement--Prospectus.
THE COMPANY
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. Appendix A contains a list of each Fund of the Company as
well as the number of shares outstanding of each of its Funds on the Record
Date. Appendix A also indicates the number of shares owned by each person who
owned 5% or more of the outstanding shares of a Fund on such date.
The shares of the Company are sold only to separate accounts of certain
insurance companies (the 'Insurance Companies'), including Merrill Lynch Life
Insurance Company and ML Life Insurance Company of New York, or to Insurance
Companies directly, in connection with variable annuity contracts and/or
variable life insurance contracts (the 'Contracts') issued by such companies. In
accordance with their view of, and to the extent required by present applicable
law and interpretations thereof, the Insurance Companies generally will vote the
shares of the Funds held in such separate accounts based on the instructions
timely received from owners of the Contracts (the 'Contract Owners') having a
voting interest in the shares to be voted. Each Insurance Company generally will
also vote shares of a Fund held in such separate accounts for which no voting
instructions from Contract Owners are timely received, as well as shares of the
Funds which such Insurance Company owns directly, in the same proportion as
those shares of a Fund for which voting instructions from Contract Owners are
timely received. In connection with the solicitation of such instructions from
Contract Owners, it is expected that the Insurance Companies will furnish a copy
of this Proxy Statement--Prospectus to Contract Owners. Contract Owners
providing voting instructions should consult carefully the detailed information
regarding each proposal to be voted on by stockholders of the Company, and the
recommendations of the Company's Board of Directors, set forth in this Proxy
Statement--Prospectus.
The rights of the Insurance Companies as stockholders 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, the
terms 'stockholder' and 'stockholders' in this Proxy Statement--Prospectus refer
to the Insurance Companies.
THE MEETING
This Proxy Statement--Prospectus is being furnished to the stockholders of
the Company in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the Company's outstanding shares of
common stock for use at an Annual Meeting of Stockholders of the Company (the
'Meeting') to be held at the offices of Merrill Lynch Asset Management, L.P.
('MLAM' or the 'Investment Adviser'), 800 Scudders Mill Road, Plainsboro, New
Jersey, on Monday, October 11, 1996, at 9:00 a.m., and at any and all
adjournments thereof.
The Board of Directors of the Company has fixed the close of business on
August 12, 1996 as the Record Date for the determination of stockholders
entitled to notice of and to vote at the Meeting and at any adjournment thereof.
Stockholders on the Record Date will be entitled to one vote for each share held
and a fractional vote for each fractional share held, with no shares having
cumulative voting rights. This Proxy Statement--Prospectus is first being mailed
to stockholders of the Funds on or about September 9, 1996.
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All properly marked proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted 'FOR' election of the Board of Directors, 'FOR' the ratification of the
selection of Deloitte & Touche LLP to serve as independent auditors for the
Company's current fiscal year, 'FOR' the proposal to amend the fundamental
investment restrictions of each of the Company's Funds other than the Merrill
Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets Fund, 'FOR'
the proposal to amend the investment objective of the Merrill Lynch Intermediate
Government Bond Fund and to change the name of that Fund, 'FOR' the proposal to
amend the investment objective of the Merrill Lynch World Income Focus Fund and
to change the name of that Fund, 'FOR' the proposal to approve the Agreement and
Plan of Reorganization between the Company's Merrill Lynch International Bond
Fund and its Merrill Lynch World Income Focus Fund and Articles of Amendment to
the Company's Articles of Incorporation (the 'Charter') in connection therewith,
and 'FOR' the proposal to approve the Agreement and Plan of Reorganization
between the Company's Merrill Lynch Flexible Strategy Fund and its Merrill Lynch
Global Strategy Focus Fund and Articles of Amendment to the Charter in
connection therewith.
ALL STOCKHOLDERS WILL BE PERMITTED TO VOTE ON PROPOSALS 1 AND 2. WITH
RESPECT TO EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY HOLDERS OF SHARES OF THE
FUNDS AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO VOTE ON SUCH PROPOSALS.
The details of each proposal to be voted on by the stockholders of each
Fund and the vote required for approval of each proposal are set forth under the
description of each proposal in this Proxy Statement-- Prospectus. Unless the
Board of Directors determines otherwise, it is anticipated that Proposals 3, 4,
and 5, if approved by the stockholders of the relevant Funds, will be
implemented on the Effective Date (as defined below) of the Reorganizations.
THE REORGANIZATIONS
Based on the recommendation of MLAM, at a meeting of the Board of Directors
held on July 10, 1996, the Board approved the combination of the Merrill Lynch
International Bond Fund and the Merrill Lynch World Income Focus Fund and the
combination of the Merrill Lynch Flexible Strategy Fund and the Merrill Lynch
Global Strategy Focus Fund. The International Bond Fund and the Flexible
Strategy Fund are sometimes referred to herein as the 'Transferor Funds' or the
'Corresponding Transferor Funds,' and the World Income Focus Fund and the Global
Strategy Focus Fund are sometimes referred to herein as the 'Acquiring Funds' or
the 'Corresponding Acquiring Funds.'
The Agreement and Plan of Reorganization (the 'Plan') provides that upon
the closing of the transaction, each Acquiring Fund will acquire substantially
all the assets of its Corresponding Transferor Fund and assume substantially all
the liabilities of the Corresponding Transferor Fund in exchange for the shares
of such Acquiring Fund on the effective date of the Reorganization (the
'Effective Date'), which is expected to be on or about Friday, December 13, 1996
or such earlier or later date as the Company's Board of Directors determines.
The number of full and fractional shares of any Acquiring Fund to be issued to
the holders of shares of the Corresponding Transferor Fund is to be determined
on the basis of the net asset value per share of such Acquiring Fund.
On the Effective Date, each Transferor Fund will liquidate and will
distribute pro rata to its holders of record the shares of the Corresponding
Acquiring Fund received by the Transferor Fund. The liquidation and distribution
will be accomplished by the establishment of an account on the share records of
the Company with respect to each Acquiring Fund in the name of each stockholder
of the Corresponding Transferor Fund representing the number of full and
fractional shares of the Acquiring Fund due such stockholder. Fractional shares
of the Acquiring Funds will be carried to the fourth decimal place.
Simultaneously with the establishment of accounts on the share records of the
Company with respect to the shares of an Acquiring Fund due to the Transferor
Fund stockholders, Transferor Fund shares held by those stockholders will be
cancelled. New certificates for shares will be issued only upon written
stockholder request, and any certificate representing shares of an Acquiring
Fund to be issued in replacement of a certificate representing shares of a
Transferor Fund will be issued only upon the surrender of the certificate
representing the Transferor Fund shares.
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Stockholders of each Transferor Fund will also be asked to approve Articles
of Amendment to the Company's Charter, which must be filed under Maryland law in
order to implement each Reorganization. A copy of the proposed Articles of
Amendment to the Charter is attached as an exhibit to the Plan, the form of
which is attached hereto as Appendix B.
Consummation of the Plan is subject to the conditions set forth therein,
including the condition that all necessary orders or exemptions under the
Investment Company Act with respect to the Reorganization shall have been
granted by the Commission. The Plan may be terminated, in its entirety or with
respect to any Transferor Fund and its Corresponding Acquiring Fund, by the
Board and the Reorganization abandoned at any time prior to the closing of the
Reorganization on the Effective Date.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS
On the Effective Date, the Company will receive an opinion from Rogers &
Wells, counsel to the Company, with respect to the U.S. federal income tax
consequences of the Reorganization. The tax opinion will be substantively to the
effect that, with respect to each Transferor Fund and its Corresponding
Acquiring Fund, on the basis of then current law and certain representations and
assumptions, and subject to certain limitations: (i) the Reorganization will
constitute a reorganization within the meaning of Section 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended (the 'Code'); (ii) the stockholders of
the Transferor Fund who receive shares of the Acquiring Fund pursuant to the
Reorganization will not recognize any gain or loss upon the exchange of their
shares of the Transferor Fund for shares of the Acquiring Fund; (iii) the
aggregate tax basis of the shares of the Acquiring Fund received by each
stockholder of the Transferor Fund will be the same as the aggregate tax basis
of the shares of the Transferor Fund surrendered in the exchange; and (iv) the
holding period of shares of the Acquiring Fund received by each stockholder of
the Transferor Fund will include the holding period of the shares of the
Transferor Fund which are surrendered in exchange thereof, provided that the
shares of the Transferor Fund constitute capital assets of such stockholder on
the Effective Date.
COMPARISON OF THE FUNDS IN THE REORGANIZATIONS
GENERAL
The World Income Focus, the International Bond and the Global Strategy
Focus Funds are non-diversified, open-end management investment companies. The
Flexible Strategy Fund is a diversified, open-end management investment company.
The investment objective of the World Income Focus Fund is to seek to provide
stockholders with high current income. The investment objective of the
International Bond Fund is to seek a high total investment return. However, the
investment objective of the World Income Focus Fund will be the same as the
investment objective of the International Bond Fund if stockholders of the World
Income Focus Fund approve a change in the World Income Focus Fund's investment
objective as discussed in Proposal No. 5 (which is a precondition to
consummation of the Reorganization contemplated in Proposal No. 6).
Additionally, the implementation of Proposal No. 5 is subject to the approval of
Proposal No. 6. See Appendix C to this Proxy Statement--Prospectus for a
description of the investment objective and policies of the World Income Focus
Fund as such investment objective and policies of the Fund will read if Proposal
No. 5 is approved. The investment objective of each of the Flexible Strategy
Fund and the Global Strategy Focus Fund is to seek high total investment return.
INVESTMENT OBJECTIVE AND POLICIES
International Bond Fund and World Income Focus Fund. The investment
objective of the World Income Focus Fund is to seek to provide stockholders with
high current income. The investment objective of the International Bond Fund is
to seek a high total investment return. However, the investment objective of the
World Income Focus Fund will be the same as the investment objective of the
International Bond Fund if stockholders of the World Income Focus Fund approve a
change in the World Income Focus Fund's investment objective as discussed above
in Proposal No. 5. If Proposal No. 5 is not approved, the Reorganization
contemplated by Proposal No. 6 will not be consummated. The investment
objectives and policies of each of the Funds are described more fully in
Appendix C to this Proxy Statement--Prospectus. Assuming Proposal No. 5 is
approved by the stockholders of the World Income Focus Fund, the investment
objectives and policies of the World Income Focus Fund and the International
Bond Fund will be substantially similar with one noteworthy
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exception. The focus of the World Income Focus Fund is on both U.S and non-U.S.
debt instruments, including government and corporate fixed income securities,
whereas the focus of the International Bond Fund is primarily non-U.S. debt
instruments. Therefore, investors in the World Income Focus Fund are likely to
have a greater exposure to debt securities in the U.S. market, although there is
no requirement that the World Income Focus Fund have any fixed percentage of its
assets in U.S. government or corporate fixed income securities.
Flexible Strategy Fund and Global Strategy Focus Fund. The investment
objectives, policies and styles of the Funds are substantially similar. The
investment objective of each of the Flexible Strategy Fund and the Global
Strategy Focus Fund is to seek high total investment return. However, the Global
Strategy Focus Fund is a non-diversified investment company, and the Flexible
Strategy Fund is a diversified investment company. The investment objectives of
each of the Funds is stated more fully in Appendix C to this Proxy Statement--
Prospectus. The main difference between these Funds is that the Flexible
Strategy Fund seeks to meet its investment objective by investing primarily in
the securities of U.S. issuers whereas the Global Strategy Focus Fund seeks to
achieve its investment objective by investing primarily in the securities of
issuers located in the United States, Canada, Western Europe and the Far East.
The Flexible Strategy Fund has, as a matter of operating policy, limited its
investment in foreign issuers to no more than 25% of its total assets. The
Global Strategy Focus Fund has no similar limitation. Additionally, the Flexible
Strategy Fund emphasizes investment in common stocks of larger-capitalization
issuers. The Global Strategy Focus Fund invests in issuers that MLAM believes to
be quality companies, which includes such companies that have a strong balance
sheet, good financial resources, a satisfactory rate of return on capital, a
good industry position and superior management. The capitalization of such
quality companies may be considered by MLAM but is not a controlling factor.
Both Funds limit investment in corporate debt securities to those securities
rated investment grade by Standard & Poor's Ratings Group ('S&P') or Moody's
Investors Services, Inc. ('Moody's') or of comparable quality. The Global
Strategy Focus Fund may invest a greater percentage of its assets in non-U.S.
securities than the Flexible Strategy Fund, and investing on an international
basis involves special considerations. See 'Special Considerations Regarding the
Reorganization.'
Unlike the Flexible Strategy Fund, the Global Strategy Focus Fund may
engage in certain of the options, futures and currency transactions discussed in
Annex A to Appendix C of this Proxy Statement--Prospectus. See 'Proposal No. 6
and Proposal No. 7--The Reorganization--Comparison of Investment Objectives and
Policies--Flexible Strategy Fund and Global Strategy Focus Fund.'
------------------------
A more detailed description of the types of securities in which each of the
Acquiring Funds invests, its fundamental and non-fundamental investment policies
and the risks associated with an investment in the Fund is contained in more
detail in Appendix C of this Proxy Statement--Prospectus and in the SAI, which
is available upon request.
MANAGEMENT OF THE TRANSFEROR FUNDS AND ACQUIRING FUNDS
MLAM acts as the investment adviser for, and manages the investment and
reinvestment of the assets of, each Transferor Fund and its Corresponding
Acquiring Fund. The terms of the investment management agreement for each
Transferor Fund and Corresponding Acquiring Fund are substantively identical,
including the fees payable by each Transferor Fund and its Corresponding
Acquiring Fund to MLAM. Such fees will remain the same after the Reorganization.
Each of the World Income Focus Fund and the International Bond Fund has agreed
to pay MLAM a monthly fee at an annual rate of 0.60% of such Fund's average
daily net assets for the services and facilities furnished by MLAM. Each of the
Global Strategy Focus Fund and the Flexible Strategy Fund has agreed to pay MLAM
a monthly fee at an annual rate of 0.65% of such Fund's average daily net assets
for the services and facilities furnished by MLAM.
DESCRIPTION OF SHARES OF THE ACQUIRING FUND
Full and fractional shares of the Acquiring Funds will be issued without
the imposition of a sales load or other fee to the stockholders of the
Corresponding Transferor Funds in accordance with the procedures described
above. The shares of each Acquiring Fund to be issued in the Reorganization will
be fully paid and nonassessable when issued and will have no preemptive or
conversion rights. In addition, the voting procedures of the Transferor Funds
and the Acquiring Funds are identical.
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SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATIONS
The Flexible Strategy Fund and the Global Strategy Focus Fund have similar
investment objectives and portfolio composition, which in the opinion of
management should minimize any risks that might otherwise be associated with the
Reorganization. The World Income Focus Fund and International Bond Fund
currently have different investment objectives and portfolio compositions.
However, if Proposal No. 5 relating to a change in the investment objective of
the World Income Focus Fund is approved by the stockholders of such Fund, the
World Income Focus Fund and the International Bond Fund would have similar
investment objectives and management believes such Funds would have upon the
implementation of Proposal No. 5 a similar portfolio composition.
Each Acquiring Fund, in general, may invest in a broader range of
securities or other assets than the Corresponding Transferor Fund, and
stockholders of the Transferor Funds should consider the special considerations
and risks discussed below with respect to the Corresponding Acquiring Fund, as
well as the discussion of risks with respect to the Corresponding Acquiring Fund
contained in Appendix C of this Proxy Statement--Prospectus.
ADDITIONAL RISKS ASSOCIATED WITH THE GLOBAL STRATEGY FOCUS FUND
Unlike the Flexible Strategy Fund, the Global Strategy Focus 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. Additionally, the Global Strategy Focus Fund may write call options
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 objective
sought to be realized through the use of the foregoing instruments will be
achieved. The Global Strategy Focus Fund's use of such instruments may be
limited by certain Code requirements for qualification of such Fund for the
favorable tax treatment afforded investment companies. There can be no assurance
that the Global Strategy Focus Fund's hedging transactions will be effective.
Furthermore, the Global Strategy Focus Fund will only engage in hedging
activities from time to time and will not necessarily engage in hedging
transactions in all the markets in which it may be invested in any given time.
The foregoing investment strategies and their use by the Global Strategy Focus
Fund are subject to special risks which are discussed under the heading
'Transactions in Options, Futures and Currency-Restrictions on Use of Futures
Transactions' in Annex A to Appendix C of this Proxy Statement--Prospectus.
ADDITIONAL RISKS ASSOCIATED WITH THE WORLD INCOME FOCUS FUND
AND THE GLOBAL STRATEGY FOCUS FUND
The Flexible Strategy Fund has, as a matter of operating policy, limited
its investment in foreign issuers to no more than 25% of its total assets. The
Global Strategy Focus Fund has no similar limitation. As a result, the Global
Strategy Focus Fund may invest a greater percentage of its assets in non-U.S.
securities than the Flexible Strategy Fund, and investing on an international
basis involves special considerations. Each of the International Bond Fund and
the World Income Focus Fund is not limited in the amount of assets that it may
invest in foreign securities, and the risks associated with an investment in
each Fund (as discussed below) are similar with respect to each such Fund's
investment in foreign securities and sovereign debt.
Foreign Securities. Each of the Global Strategy Focus and World Income
Focus 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
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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 the particular Fund. The Global Strategy Focus Fund
may concentrate its investments in any particular country. The Global Strategy
Focus and World Income Focus 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. 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 Untied 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 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 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 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.
Sovereign Debt. The Global Strategy Focus and World Income Focus Funds may
invest in debt securities issued by foreign governments. Investments in foreign
government debt securities involve special risks. 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
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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.
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.
Holders of sovereign debt, including the Global Strategy Focus Fund and the
World Income 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.
Other Risks. 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.
THE COMPANY
Merrill Lynch Variable Series Funds, Inc. is an open-end management
investment company which has a wide range of investment objectives among its
seventeen separate Funds. A separate class of common stock is issued for each
Fund. Appendix A contains a list of each Fund of the Company as well as the
number of shares outstanding of each of its Funds on the Record Date. Appendix A
also indicates the number of shares owned by each person who owned 5% or more of
the outstanding shares of a Fund on such date.
The shares of the Company are sold only to separate accounts of certain
insurance companies (the 'Insurance Companies'), including Merrill Lynch Life
Insurance Company and ML Life Insurance Company of New York, or to Insurance
Companies directly, in connection with variable annuity contracts and/or
variable life insurance contracts (the 'Contracts') issued by such companies. In
accordance with their view of, and to the extent required by present applicable
law and interpretations thereof, the Insurance Companies generally will vote the
shares of the Funds held in such separate accounts based on the instructions
timely received from owners of the Contracts (the 'Contract Owners') having a
voting interest in the shares to be voted. Each Insurance Company generally will
also vote shares of a Fund held in such separate accounts for which no voting
instructions from Contract Owners are timely received, as well as shares of the
Funds which such Insurance Company owns directly, in the same proportion as
those shares of a Fund for which voting instructions from Contract Owners are
timely received. In connection with the solicitation of such instructions from
Contract Owners, it is expected that the Insurance Companies will furnish a copy
of this Proxy Statement--Prospectus to Contract Owners. Contract Owners
providing voting instructions should consult carefully the detailed information
regarding each proposal to be voted on by stockholders of the Company, and the
recommendations of the Company's Board of Directors, set forth in this Proxy
Statement--Prospectus.
The rights of the Insurance Companies as stockholders 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, the
terms 'stockholder' and 'stockholders' in this Proxy Statement--Prospectus refer
to the Insurance Companies.
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THE MEETING
GENERAL
This Proxy Statement--Prospectus is being furnished to the stockholders of
the Company in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the Company's outstanding shares of
common stock for use at an Annual Meeting of Stockholders of the Company (the
'Meeting') to be held at the offices of Merrill Lynch Asset Management, L.P.
('MLAM' or the 'Investment Adviser'), 800 Scudders Mill Road, Plainsboro, New
Jersey, on Monday, October 11, 1996, at 9:00 a.m., and at any and all
adjournments thereof. The cost of printing and mailing the enclosed proxy,
accompanying notice and Proxy Statement--Prospectus to Contract Owners will be
paid by the Insurance Companies, and all other costs will be paid by the
Company. Additional solicitation may be made by letter, telephone or telegraph
by officers of the Company, by officers or employees of Merrill Lynch & Co. or
MLAM, or by dealers and their representatives.
The Board of Directors of the Company has fixed the close of business on
August 12, 1996 as the record date (the 'Record Date') for the determination of
stockholders entitled to notice of and to vote at the Meeting and at any
adjournment thereof. Stockholders on the Record Date will be entitled to one
vote for each share held and a fractional vote for each fractional share held,
with no shares having cumulative voting rights.
This Proxy Statement--Prospectus is first being mailed to stockholders of
the Funds on or about September 9, 1996.
VOTING; PROXIES
All properly marked proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted 'FOR' election of the Board of Directors, 'FOR' the ratification of the
selection of Deloitte & Touche LLP to serve as independent auditors for the
Company's current fiscal year, 'FOR' the proposal to amend the fundamental
investment restrictions of each of the Company's Funds other than the Merrill
Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets Fund, 'FOR'
the proposal to amend the investment objective of the Merrill Lynch Intermediate
Government Bond Fund and to change the name of that Fund, 'FOR' the proposal to
amend the investment objective of the Merrill Lynch World Income Focus Fund and
to change the name of that Fund, 'FOR' the proposal to approve the Agreement and
Plan of Reorganization between the Company's Merrill Lynch International Bond
Fund and its Merrill Lynch World Income Focus Fund and Articles of Amendment to
the Company's Charter in connection therewith, and 'FOR' the proposal to approve
the Agreement and Plan of Reorganization between the Company's Merrill Lynch
Flexible Strategy Fund and its Merrill Lynch Global Strategy Focus Fund and
Articles of Amendment to the Company's Charter in connection therewith.
ALL STOCKHOLDERS WILL BE PERMITTED TO VOTE ON PROPOSALS 1 AND 2. WITH
RESPECT TO EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY HOLDERS OF SHARES OF THE
FUNDS AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO VOTE ON SUCH PROPOSALS.
A quorum of stockholders is required to take action at the Meeting. A
majority of the shares entitled to vote at the Meeting, represented in person or
by proxy, will constitute a quorum of stockholders at that Meeting. Votes cast
by proxy or in person at the Meeting will be tabulated by the inspectors of
elections appointed for the Meeting. The inspectors of election will determine
whether or not a quorum is present at the Meeting. The inspectors of election
will treat abstentions as shares that are present and entitled to vote for
purposes of determining a quorum.
For purposes of determining the approval of the matters submitted to the
stockholders for a vote, an abstention with respect to a proposal (except
Proposal No. 1) will be treated as a vote against approval of such proposal. The
details of each proposal to be voted on by the stockholders and the vote
required for approval of each proposal are set forth under the description of
each proposal below. Stockholders who execute proxies may
15
<PAGE>
revoke them at any time before they are voted by filing with the Company a
written notice of revocation, by delivering a duly executed proxy bearing a
later date, or by attending the meeting and voting in person.
PROPOSAL NO. 1--ELECTION OF DIRECTORS
At the Meeting, each Board member will be elected to serve for an
indefinite term until his successor is elected and qualified, until his death,
until he resigns or its otherwise removed under the charter or until December 31
of the year in which he reaches age 72. It is the intention of the persons named
in the enclosed proxy to nominate and vote in favor of the election of the
persons listed below.
The Board knows of no reason why any of these nominees will be unable to
serve, but in the event of any such unavailability, the proxies received will be
voted for such substitute nominee or nominees as the Board may recommend.
Certain information concerning the nominees is set forth as follows:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
PRINCIPAL OCCUPATIONS OF THE COMPANY
NAME AND ADDRESS DURING PAST FIVE YEARS DIRECTOR BENEFICIALLY OWNED AT
OF NOMINEES AGE AND PUBLIC DIRECTORSHIPS SINCE AUGUST 12, 1996
- ----------------------------------- --- ----------------------------------------- -------- ----------------------
<S> <C> <C> <C> <C>
Arthur Zeikel(1) .................. 64 President of MLAM (which term 1981 0
P.O. Box 9011 as used herein includes its corporate
Princeton, New Jersey predecessors) since 1977; President of
08543-9011 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; Executive Vice President of
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch') from
1990 to 1995 and Senior Vice President
thereof from 1985 to 1990; Director of
Merrill Lynch Funds Distributor, Inc.
('MLFD').
Joe Grills(2) ..................... 61 Member of the Committee of Investment of 1994 0
183 Soundview Lane Employee Benefit Assets of the Fi-
New Canaan, Connecticut nancial Executives Institute ('CIEBA')
06840 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
(real estate management) since 1993;
Director, LaSalle Street Fund since
1995.
Walter Mintz(2) ................... 67 Special Limited Partner of Cumberland 1993 0
1114 Avenue of the Americas Partners (investment partnership) since
New York, New York 10036 1982.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
PRINCIPAL OCCUPATIONS OF THE COMPANY
NAME AND ADDRESS DURING PAST FIVE YEARS DIRECTOR BENEFICIALLY OWNED AT
OF NOMINEES AGE AND PUBLIC DIRECTORSHIPS SINCE AUGUST 12, 1996
- ----------------------------------- --- ----------------------------------------- -------- ----------------------
<S> <C> <C> <C> <C>
Robert S. Salomon, Jr.(2)(3) ...... 59 Principal of STI Management (investment 1996 0
106 Dolphin Cove Quay adviser); Chairman and CEO of Salomon
Stamford, Connecticut 06902 Brothers Asset Management from 1992
until 1995; Chairman 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;
Director, Common Fund and the Norwalk
Community Technical College Foundation.
Melvin R. Seiden(2) ............... 65 President of Silbanc Properties, Ltd. 1993 0
780 Third Avenue (real estate, investment and consulting)
New York, New York 10017 since 1987.
Stephen B. Swensrud(2) ............ 62 Principal of Fernwood Associates (finan- 1981 0
24 Federal Street cial consultants) since 1975; Principal
Boston, Massachusetts 02110 of Fernwood Advisers (investment ad-
viser) since 1996.
</TABLE>
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the
Company.
(2) Member of Audit and Nominating Committee of the Board of Directors.
(3) On January 17, 1996, Robert S. Salomon, Jr. was elected a Director of the
Company to fill the vacancy created by the retirement of Harry Woolf, who
retired as a Director, effective December 31, 1995, pursuant to the
Company's retirement policy.
Committees and Board of Directors' Meetings. The Board has a standing
Audit and Nominating Committee (the 'Committee'), which consists of the Board
members who are not 'interested persons' of the Company within the meaning of
the Investment Company Act. The principal purpose of the Committee is to review
the scope of the annual audit conducted by the Company's independent auditors
and the evaluation by such auditors of the accounting procedures followed by the
Company. The Committee will also select and nominate the Board members who are
not 'interested persons' of the Company within the meaning of the Investment
Company Act. The Committee generally will not consider nominees recommended by
stockholders of the Company. The non-interested Board members have retained
independent legal counsel to assist them in connection with these duties.
During the Company's last fiscal year, each of the nominees served as a
Board member of the Company, except Mr. Salomon. During the Company's last
fiscal year, the Board of Directors held four meetings. Each of the Board
members attended at least 75% of the aggregate of (i) the total number of
meetings of the Board held during the last fiscal year and (ii) if a member, the
total number of meetings of the Committee held during the last fiscal year.
Interested Persons. The Fund considers Mr. Zeikel to be an 'interested
person' of the Fund within the meaning of Section 2(a)(19) of the Investment
Company Act as a result of the position he holds with MLAM and its affiliates.
Mr. Zeikel is the President of the Company and the President of MLAM and FAM.
Compensation of Directors. MLAM, the investment adviser for each of the
Funds of the Company, pays all compensation of all officers of the Company and
all Directors of the Company who are affiliated with ML & Co. or its
subsidiaries. The Company pays each Director not affiliated with ML & Co. or its
subsidiaries a fee of $5,000 per year plus $1,250 per quarterly meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Company also pays each member of its Audit
Committee a fee of $5,000 per year plus $1,250 per meeting attended if such
meeting is held on a day other than a day on which the Board of Directors meets,
together with such Director's out-of-pocket expenses relating to attendance at
meetings. These fees and expenses aggregated $79,458 for the fiscal year ended
December 31, 1995.
17
<PAGE>
The following table sets forth for the fiscal year ended December 31, 1995,
compensation paid by the Company to the non-affiliated Directors and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies (including the Company) advised by MLAM and its affiliate,
FAM ('MLAM/FAM Advised Funds'), to the non-affiliated Directors:
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM
PENSION OR RETIREMENT COMPANY AND
AGGREGATE COMPENSATION BENEFITS ACCRUED AS MLAM/FAM ADVISED
NAME OF DIRECTOR FROM COMPANY PART OF COMPANY EXPENSE FUNDS PAID TO DIRECTORS(1)
- -------------------------------------- ---------------------- ----------------------- ---------------------------
<S> <C> <C> <C>
Joe Grills(1)......................... $ 15,500 NONE $ 153,883
Walter Mintz(1)....................... $ 15,500 NONE $ 153,883
Robert S. Salomon, Jr.(1)(2).......... $ 0 NONE $ 0
Melvin R. Seiden(1)................... $ 15,500 NONE $ 153,883
Stephen B. Swensrud(1)................ $ 15,500 NONE $ 161,883
Harry Woolf*(1)....................... $ 15,500 NONE $ 153,883
</TABLE>
- ------------------
* Mr. Woolf retired as a Director of the Company on December 31, 1995.
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Mintz (18 registered investment companies consisting of 38 portfolios);
Mr. Seiden (18 registered investment companies consisting of 38
portfolios); Mr. Salomon (18 registered investment companies consisting
of 38 portfolios); Mr. Swensrud (20 registered investment companies
consisting of 49 portfolios); Mr. Grills (18 registered investment
companies consisting of 38 portfolios); and Mr. Woolf, prior to his
retirement, effective December 31, 1995, pursuant to the Fund's retirement
policy (18 registered investment companies consisting of 38 portfolios).
(2) Mr. Salomon was elected a Director of the Company on January 17, 1996.
Officers of the Company. The Board of Directors has elected twenty
officers of the Company. The following sets forth information concerning each of
these officers:
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- ----------------------------------------------------------------------- -------------- --- -------
<S> <C> <C> <C>
Arthur Zeikel ......................................................... President 64 1986
President of MLAM and FAM since 1977; President and Director of
Princeton Services since 1993; Executive Vice President of ML & Co.
since 1990; Executive Vice President of Merrill Lynch from 1990 to
1995 and Senior Vice President thereof from 1985 to 1990; Director of
MLFD.
Terry K. Glenn ........................................................ Executive 55 1986
Executive Vice President of MLAM and FAM since 1983; Executive Vice Vice President
President and Director of Princeton Services since 1993; President of
MLFD since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
Norman R. Harvey ...................................................... Senior 62 1986
Senior Vice President of MLAM and FAM since 1982. Vice President
N. John Hewitt ........................................................ Senior 61 1986
Senior Vice President of MLAM and FAM since 1980. Vice President
Joseph T. Monagle, Jr. ............................................... Senior 47 1990
Senior Vice President of MLAM since 1990; Vice President of MLAM from Vice President
1978 to 1990.
Christopher G. Ayoub .................................................. Vice President 40 1992
Vice President of MLAM since 1985.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- ----------------------------------------------------------------------- -------------- --- -------
<S> <C> <C> <C>
Andrew John Bascand ................................................... Vice President 33 1993
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.
Donald C. Burke ....................................................... Vice President 36 1990
Vice President and Director of Taxation of MLAM since 1990.
Jay C. Harbeck ........................................................ Vice President 61 1992
Vice President of MLAM since 1986.
Vincent T. Lathbury, III .............................................. Vice President 54 1993
Vice President of MLAM and FAM since 1982.
Peter A. Lehman ....................................................... Vice President 37 1994
Vice President of MLAM since 1994 and employee of MLAM since 1992.
Fredric Lutcher ....................................................... Vice President 47 1990
Vice President of MLAM since 1990 and Portfolio Manager since 1989;
Senior Vice President, Lazard Freres Asset Management, Inc. from 1988
to 1989; Director, E. F. Hutton Capital Management, Inc. from 1981 to
1988.
Robert Parish ......................................................... Vice President 40 1993
Vice President and Portfolio Manager of MLAM since 1991; Portfolio
Manager of Templeton International from 1986 to 1991 and Vice
President thereof from 1989.
Grace Pineda .......................................................... Vice President 38 1993
Vice President of MLAM since 1989.
Kevin Rendino ......................................................... Vice President 29 1993
Vice President of MLAM since December 1993; Senior Research Analyst
from 1990 to 1992; Corporate Analyst from 1988 to 1990.
Thomas R. Robinson .................................................... Vice President 52 1995
Senior Portfolio Manager of MLAM since November 1995; Manager of
International Equity Strategy of ML & Co.'s Global Securities
Research and Economics Group from 1989 to 1995.
Walter D. Rogers ...................................................... Vice President 53 1993
Vice President of MLAM since 1987.
Aldona A. Schwartz .................................................... Vice President 47 1993
Vice President of MLAM since 1991 and an employee of MLAM since 1986.
Gerald M. Richard ..................................................... Treasurer 47 1986
Senior Vice President and Treasurer of MLAM and FAM since 1984;
Treasurer of MLFD since 1984 and Vice President since 1981; Senior
Vice President and Treasurer of Princeton Services since 1993.
Ira P. Shapiro ........................................................ Secretary 33 1996
Attorney associated with MLAM and FAM since 1993.
</TABLE>
19
<PAGE>
Stock Ownership. As of the Record Date, the Directors and officers of the
Company as a group beneficially owned less than 1% of the shares of Common Stock
of each Fund of the Company outstanding at such date.
Voting. The election of the six nominees requires the affirmative vote of
a majority of the votes cast at a meeting at which a quorum is present. The
presence in person or by proxy of stockholders entitled to cast a majority of
the votes entitled to be cast thereat shall constitute a quorum. For this
purpose, abstentions and broker non-votes will be counted in determining whether
a quorum is present at the Meeting, but will not be counted as votes cast at the
Meeting. ALL OF THE STOCKHOLDERS OF THE COMPANY ON THE RECORD DATE WILL BE
ELIGIBLE TO VOTE ON THIS PROPOSAL.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE 'FOR' THIS PROPOSAL.
PROPOSAL NO. 2--SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of the Company, including a majority of the
Directors who are not interested persons of the Company, has selected the firm
of Deloitte & Touche LLP ('D&T'), Independent Auditors, to examine the financial
statements of the Company for the current fiscal year. The Company knows of no
direct or indirect financial interest of D&T in the Company. Such appointment is
subject to ratification or rejection by the stockholders of the Company. Unless
a contrary specification is made, the accompanying proxy will be voted in favor
of ratifying the selection of such auditors.
D&T also acts as independent auditors for ML & Co. and all of its
subsidiaries and for most other investment companies for which MLAM or FAM acts
as investment adviser. The fees received by D&T from these other entities are
substantially greater, in the aggregate, than the total fees received by it from
the Company. The Board of Directors of the Company considered the fact that D&T
has been retained as the independent auditors for ML & Co. and the other
entities described above in its evaluation of the independence of D&T with
respect to the Company.
Representatives of D&T are expected to be present at the meeting and will
have the opportunity to make a statement if they so desire and to respond to
questions from stockholders.
The ratification of the selection of D&T as independent accountants
requires the affirmative vote of a majority of the votes cast at a meeting at
which a quorum is present. For this purpose, abstentions and broker non-votes
will be counted in determining whether a quorum is present at the Meeting, but
will not be counted as votes cast at the Meeting. ALL OF THE STOCKHOLDERS OF THE
COMPANY ON THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON THIS PROPOSAL.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE 'FOR' THIS PROPOSAL.
PROPOSAL NO. 3--AMENDMENT TO THE FUNDAMENTAL
INVESTMENT RESTRICTIONS OF EACH OF THE FUNDS
General. The Company has adopted investment restrictions that govern
generally the operations of each of its seventeen Funds. Investment restrictions
applicable to a Fund that are deemed fundamental may not be changed without a
vote of the outstanding shares of the Fund, while non-fundamental investment
restrictions may be changed by the Company's Board if it deems it in the best
interest of the Fund and its stockholders to do so. In addition to investment
restrictions, each of the Funds operates pursuant to investment objectives and
policies, described in the Company's Prospectus dated April 26, 1996 and
Statement of Additional Information dated April 26, 1996, that govern the
investment activities of the Fund and further limit its ability to invest in
certain types of securities or engage in certain types of transactions. These
investment objectives and policies will be unaffected by the adoption of the
proposed investment restrictions (but, for certain Funds, may be affected by the
adoption of other proposals contained in this Proxy Statement--Prospectus).
Generally the investment objective
20
<PAGE>
of a Fund is a fundamental policy of the Fund that may be changed only by
stockholder vote. The investment policies of a Fund are non-fundamental and may
not be changed unless and until (i) the Board of Directors of the Company
explicitly authorizes, by resolution, a change in the investment policy of the
Fund and (ii) the Prospectus of the Fund is amended to reflect the change in
policy and, if appropriate, to include additional disclosure. Stockholders
should note that certain of the proposed fundamental investment restrictions are
stated in terms of 'to the extent permitted by applicable law.' Applicable law
can change over time and may become more or less restrictive as a result. The
restrictions have been drafted in this manner so that a change in law would not
require the Fund to seek a stockholder vote to amend the restriction to conform
to applicable law, as revised.
The existing investment restrictions may differ among Funds depending on
prevailing regulations and the nature of the securities markets at the time the
particular Fund commenced operations. As a result, similar Funds have different
investment restrictions, which may disadvantage one Fund over another in the
current marketplace and make administration and compliance monitoring
unnecessarily difficult.
To address this problem, MLAM has analyzed the various fundamental and
non-fundamental investment restrictions of the Funds, as well as the investment
restrictions of all of the other MLAM-advised non-money market mutual funds, in
light of each Fund's investment objectives and policies, and has created a set
of standard fundamental and non-fundamental investment restrictions. The
proposed uniform restrictions are designed to provide each Fund with as much
investment flexibility as possible under the Investment Company Act and
applicable state insurance regulations, and to help promote operational
efficiencies and facilitate monitoring of compliance. Substantially all of the
MLAM/FAM Advised Funds operate under investment restrictions substantially
similar to the proposed restrictions.
The proposed changes to the investment restrictions are not expected to
affect materially the current operations of the Funds. Although adoption of new
or revised investment restrictions is not likely to have any effect on the
current investment techniques employed by a Fund, it will contribute to the
overall goal of uniformity and standardization, as well as provide each Fund
with a greater ability to make future changes in non-fundamental investment
restrictions through Board action. In this regard, the Board proposes that each
Fund adopt, as described below, the uniform, updated investment restrictions.
The proposed restrictions restate many of the fundamental and
non-fundamental restrictions currently in effect for each Fund. In some
instances, certain fundamental or non-fundamental restrictions have been
modified or eliminated in accordance with developments in Federal regulations or
in the securities markets since the inception of the Fund. In other instances,
certain restrictions previously deemed fundamental have been redesignated
non-fundamental. Fundamental investment restrictions may not be changed without
a vote of the stockholders of the Fund, and the costs of stockholder meetings
for these purposes generally are borne by the Fund and its stockholders. By
making certain restrictions non-fundamental, the Board may amend a restriction
as it deems appropriate and in the best interest of the Fund and its
stockholders, without incurring the costs of seeking a stockholder vote.
Each Fund's current investment restrictions are set forth in Appendix C.
Set forth below is each proposed restriction, followed by a commentary
describing the proposed restriction and detailing the significance, if any, of
the proposed changes for the Funds.
Proposed Fundamental Investment Restrictions. The fundamental investment
restrictions discussed below are proposed for each of the Funds except the
Domestic Money Market and Reserve Assets Funds and except as otherwise noted
below. Under the proposed fundamental investment restrictions, a Fund may not:
21
<PAGE>
1. MAKE ANY INVESTMENT INCONSISTENT WITH THE FUND'S(1) CLASSIFICATION AS A
DIVERSIFIED COMPANY UNDER THE INVESTMENT COMPANY ACT.
Commentary: Current applicable law regarding diversification of assets
requires that with respect to 75% of its total assets, a Fund may not
invest more than 5% of its total assets (taken at market value at the time
of each investment) in the securities of any one issuer or acquire more
than 10% of the voting securities of any one issuer. The U.S. Government,
its agencies and instrumentalities are not included within the definition
of 'issuer' for purposes of these limitations. Certain Funds apply this
diversification restriction to 100% of total assets.
At one time, state blue sky regulations applied the diversification
restriction to 100% of a mutual fund's assets, thereby prohibiting an
investment company from investing more than 5% of total assets in a single
issuer or from holding more than 10% of the voting securities of a single
issuer. These state blue sky limitations, however, have been eliminated.
If the uniform restrictions are approved, each Fund currently
classified as 'diversified' would be subject, as a matter of investment
policy, to the diversification restriction described above only with
respect to 75% of its total assets. As to the remaining 25% of total
assets, there would be no fundamental investment limitation on the amount
of (i) total assets the Fund could invest in a single issuer or (ii) voting
securities of a single issuer that could be held by the Fund. A Fund could,
for example, invest up to 25% of its assets in a single issuer without
limitation as to the percentage ownership of that issuer's outstanding
securities. The primary purpose of the proposal is to give the Funds that
presently have a diversification restriction with respect to 100% of their
assets the same investment flexibility as MLAM Funds that have a
diversification restriction with respect to 75% of their assets, as well as
to enable the Funds to comply with any future changes in applicable law
regarding diversification requirements without incurring the costs of
soliciting a stockholder vote.
2. INVEST MORE THAN 25% OF ITS ASSETS, TAKEN AT MARKET VALUE, IN THE
SECURITIES OF ISSUERS IN ANY PARTICULAR INDUSTRY (EXCLUDING THE U.S. GOVERNMENT
AND ITS AGENCIES AND INSTRUMENTALITIES)(2).
Commentary: The proposed restriction, which addresses concentration in
a particular industry, is in substance identical to the applicable
restriction in effect for each Fund (except the Intermediate Government
Bond Fund and except as noted in the footnote below). If this restriction
is adopted by the stockholders of the Intermediate Government Bond Fund, it
will have no substantive effect on the operations of that Fund because that
Fund invests in securities only if such securities are issued or guaranteed
by the U.S. Government or one of its agencies or instrumentalities. Certain
Funds currently do not exclude explicitly the U.S. Government, its agencies
and instrumentalities from the definition of 'industry.' However, such
entities have not been considered to constitute 'industries' for purposes
of concentration, and therefore explicit reference to such entities in the
proposed restriction does not change a Fund's concentration policy. In
addition, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Further, utilities will be divided according to their services; for
- ------------------
(1) The Natural Resource 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,
and therefore this restriction is not proposed to be adopted by such Funds.
In addition, the Code contains its own, less restrictive, diversification
requirements in order for a fund to qualify as a 'regulated investment
company' under the Code. The Natural Resource Focus, Global Strategy Focus,
World Income Focus, Developing Capital Markets Focus and International Bond
Funds will continue to comply with the Code diversification requirements.
(2) None of the Funds concentrate in a particular industry (i.e., more than
25%). However, the Global Utility Focus Fund invests, under normal
circumstances, 65% or more of its total assets in equity and debt securities
issued by domestic and foreign companies in the utilities industries (i.e.,
electricity, telecommunications, gas or water), and the Natural Resources
Focus Fund may invest greater than 25% of its assets in gold-related
companies. The adoption of this restriction will be subject to the
foregoing.
22
<PAGE>
example, gas, gas transmission, electricity, telecommunications and water
each will be considered a separate industry for purposes of this
restriction.
3. MAKE INVESTMENTS FOR THE PURPOSE OF EXERCISING CONTROL OR MANAGEMENT.
Commentary: The proposed restriction is in substance identical to the
applicable restriction in effect for each Fund. The Developing Capital
Markets Focus Fund goes on to state in this restriction that investment 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. This language, which is
considered by the Fund to be explanatory in nature, will continue to be set
forth in the investment restrictions.
4. PURCHASE OR SELL REAL ESTATE, EXCEPT THAT A FUND MAY INVEST IN
SECURITIES DIRECTLY OR INDIRECTLY SECURED BY REAL ESTATE OR INTERESTS THEREIN OR
ISSUED BY COMPANIES WHICH INVEST IN REAL ESTATE OR INTERESTS THEREIN.
Commentary: The proposed restriction is substantially similar to the
applicable restriction in effect for each Fund. Under the proposed uniform
restrictions, investment in real estate limited partnerships is prohibited
in non-fundamental investment restriction (g) to provide the flexibility to
the Board to modify the restriction in response to future changes in
applicable law without incurring the expense of a stockholder vote.
5. MAKE LOANS TO OTHER PERSONS, EXCEPT THAT THE ACQUISITION OF BONDS,
DEBENTURES OR OTHER CORPORATE DEBT SECURITIES AND INVESTMENT IN GOVERNMENT
OBLIGATIONS, COMMERCIAL PAPER, PASS-THROUGH INSTRUMENTS, CERTIFICATES OF
DEPOSIT, BANKERS ACCEPTANCES, REPURCHASE AGREEMENTS OR ANY SIMILAR INSTRUMENTS
SHALL NOT BE DEEMED TO BE THE MAKING OF A LOAN, AND EXCEPT FURTHER THAT THE FUND
MAY LEND ITS PORTFOLIO SECURITIES, PROVIDED THAT THE LENDING OF PORTFOLIO
SECURITIES MAY BE MADE ONLY IN ACCORDANCE WITH APPLICABLE LAW AND THE GUIDELINES
SET FORTH IN THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION, AS THEY MAY
BE AMENDED FROM TIME TO TIME.
Commentary: The proposed restriction, with respect to the making of
loans, is in substance similar to the applicable restrictions in effect for
each Fund. Certain Funds address loans to other persons and securities
lending in two separate restrictions. A Fund may, as an investment policy,
restrict investment in the instruments specifically permitted in the
exception beyond the limitations set forth in the proposed restriction.
Each Fund is permitted to engage in securities lending but the Funds
have a variety of different investment restrictions in this regard. For
example, certain Funds have a fundamental investment restriction limiting
securities lending to less than 20% of total assets. In addition to
investment restrictions, certain Funds have imposed limitations on
securities lending as an investment policy.
Applicable law generally permits the lending of a Fund's portfolio
securities in an amount up to 33% of the Fund's total assets, provided that
such loans are made in accordance with prescribed guidelines which are set
forth in the Company's Statement of Additional Information. Each Fund will
continue to be subject to the lending limitations set forth as an
investment policy in the Prospectus and Statement of Additional Information
following approval of the proposed uniform investment restrictions, unless
and until the Board determines that an amendment to such investment policy
is in the best interest of the Fund and its stockholders and the Prospectus
of the Fund is amended.
6. ISSUE SENIOR SECURITIES TO THE EXTENT SUCH ISSUANCE WOULD VIOLATE
APPLICABLE LAW.
Commentary: Certain Funds currently limit the extent to which the Fund
may issue senior securities, while other Funds have no restriction on the
issuance of senior securities. The proposed restriction substitutes instead
a limitation on the issuance of senior securities based upon applicable
law.
23
<PAGE>
Applicable law currently prohibits the issuance of senior securities,
defined as any bond, debenture, note or similar obligation or instrument
evidencing indebtedness, and any stock of any class having priority as to
any other class as to distribution of assets or payment of dividends, but
not including (i) bank borrowings provided that immediately thereafter the
Fund has 300% asset coverage for all borrowings, or (ii) any note or other
evidence of indebtedness representing a loan made to the Fund for temporary
purposes (i.e., to be repaid in 60 days without extension or renewal) in an
amount not exceeding 5% of the Fund's total assets when the loan is made.
Certain other investment techniques, which involve leverage or
establish a prior claim to the Fund's assets, may be considered senior
securities, absent appropriate segregation of assets or exemptive relief.
These techniques include standby commitment agreements, contracts for the
purchase of securities on a delayed delivery basis (i.e., firm commitment
agreements), reverse repurchase agreements, engaging in financial futures
and options thereon, forward foreign currency contracts, put and call
options, the purchase of securities on a when-issued basis and short sales.
The manner and extent to which a Fund can issue senior securities is
governed by applicable law, must be set forth in the Prospectus and
Statement of Additional Information and may be changed only upon resolution
of the Board.
Investments in swaps, to the extent permitted, are not treated as
senior securities so long as the Fund segregates liquid securities with the
Fund's custodian in an amount equal to any net payments required to be made
on the swaps.
7. BORROW MONEY, EXCEPT THAT (I) THE FUND MAY BORROW FROM BANKS (AS
DEFINED IN THE INVESTMENT COMPANY ACT) IN AMOUNTS UP TO 33 1/3% OF ITS TOTAL
ASSETS (INCLUDING THE AMOUNT BORROWED), (II) THE FUND MAY BORROW UP TO AN
ADDITIONAL 5% OF ITS TOTAL ASSETS FOR TEMPORARY PURPOSES, (III) THE FUND MAY
OBTAIN SUCH SHORT-TERM CREDIT AS MAY BE NECESSARY FOR THE CLEARANCE OF PURCHASES
AND SALES OF PORTFOLIO SECURITIES AND (IV) THE FUND MAY PURCHASE SECURITIES ON
MARGIN TO THE EXTENT PERMITTED BY APPLICABLE LAW. THE FUND MAY NOT PLEDGE ITS
ASSETS OTHER THAN TO SECURE SUCH BORROWINGS OR, TO THE EXTENT PERMITTED BY THE
FUND'S INVESTMENT POLICIES AS SET FORTH IN THE PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM TIME TO TIME, IN CONNECTION
WITH HEDGING TRANSACTIONS, SHORT SALES, WHEN-ISSUED AND FORWARD COMMITMENT
TRANSACTIONS AND SIMILAR INVESTMENT STRATEGIES.
Commentary: Each Fund has one or more express limitations on various
forms of borrowing, a number of which are more restrictive than the
limitations set forth in the proposed restriction. For example, a number of
Funds limit borrowings to 5% of total assets. To the extent the Fund's
investment policies, as stated in the Prospectus and Statement of
Additional Information, include a limitation on borrowing, or on the
pledging of assets to secure borrowings, that is more restrictive than the
restrictions in proposed restriction (7), the Fund will continue to be
limited by such investment policy on a non-fundamental basis. Moreover, if
a Fund intends to borrow from a bank or to offer debt securities privately
as part of its investment policies, it will so state in its Prospectus. If
the Fund limits borrowing to 5% of total assets, a statement to that effect
in the Prospectus will suffice. On the other hand, if the Fund intends as
an investment policy to engage in a higher level of borrowing for
investment purposes, additional disclosure with respect to the purposes of
such borrowing and the consequences of leverage will be included in the
Prospectus and Statement of Additional Information.
With regard to purchases on margin, under current applicable law, a
Fund may not establish or use a margin account with a broker for the
purpose of effecting securities transactions on margin, except that a Fund
may obtain such short-term credit as necessary for the clearance of
transactions. However, a Fund may pay initial or variation margin in
connection with futures and related options transactions, as set forth in
investment restriction (9) below, without regard to this prohibition.
8. UNDERWRITE SECURITIES OF OTHER ISSUERS EXCEPT INSOFAR AS THE FUND
TECHNICALLY MAY BE DEEMED AN UNDERWRITER UNDER THE SECURITIES ACT OF 1933 IN
SELLING PORTFOLIO SECURITIES.
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Commentary: The proposed restriction is in substance identical to the
applicable restriction in effect for each Fund.
9. PURCHASE OR SELL COMMODITIES OR CONTRACTS ON COMMODITIES, EXCEPT TO THE
EXTENT THE FUND MAY DO SO IN ACCORDANCE WITH APPLICABLE LAW AND THE PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM TIME TO
TIME, AND WITHOUT REGISTERING AS A COMMODITY POOL OPERATOR UNDER THE COMMODITY
EXCHANGE ACT.
Commentary: Certain Funds prohibit investment in commodities; others
have no restriction on investment in commodities. Under the Investment
Company Act, a Fund must state its policy relating to the purchase and sale
of commodities. In general, the Funds currently do not anticipate
investment directly in tangible commodities other than currency and would
be greatly restricted from making such direct investments by the current
provisions of the Federal tax laws; however, the Funds may invest in
financial instruments linked to commodities as described below. Adoption of
the proposed uniform restrictions will enable a Fund to invest in
commodities only in accordance with applicable law and with the Fund's
investment policies as stated in the Prospectus and Statement of Additional
Information.
The Company has obtained an exemptive order from the Commission which,
among other things, permits investment in the commodities markets to the
extent such investment is limited to financial futures and options thereon
for hedging purposes only. The terms of the exemptive order are slightly
more restrictive than currently applicable law.
Regulations of the Commodity Futures Trading Commission applicable to
the Funds provide that futures trading activities, as described in the
Prospectus and Statement of Additional Information, will not result in the
Fund being deemed a 'commodity pool operator' as defined under such
regulations if the Fund adheres to certain restrictions. In particular, a
Fund that may, as a matter of investment policy, purchase and sell futures
contracts and options thereon may do so (i) for bona fide hedging purposes
and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options do
not exceed 5% of the liquidation value of such Fund's portfolio, after
taking into account unrealized profits and unrealized losses on any such
contracts and options. In addition, certain of the Funds may invest in
securities whose potential investment returns are based on the change in
value of specific commodities.
------------------
If approved by the stockholders, the above-listed restrictions will replace the
fundamental investment restrictions for each Fund (other than for the Domestic
Money Market and Reserve Assets Funds) and, accordingly, will become the only
fundamental investment restrictions under which each such Fund will operate. If
approved, the above restrictions may not be changed without the approval of the
holders of a majority of a Fund's outstanding shares (which for this purpose and
under the Investment Company Act means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares). PERSONS WHO ARE
STOCKHOLDERS OF EACH FUND (EXCEPT THE DOMESTIC MONEY MARKET AND RESERVE ASSETS
FUNDS) ON THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON AMENDING THE INVESTMENT
RESTRICTIONS, AS DESCRIBED HEREIN, AS A SEPARATE FUND. Unless the Board of
Directors determines otherwise, it is anticipated that this proposal, if
approved by the stockholders of the Funds, will be implemented on the Effective
Date (as defined under the heading 'Proposal No. 6 and Proposal No. 7--The
Reorganizations') of the Reorganizations.
Proposed Non-Fundamental Investment Restrictions. The Board has adopted
the following non-fundamental investment restrictions, subject to approval of
the fundamental investment restrictions described above. Certain of the proposed
non-fundamental restrictions are in substance similar or identical to current
fundamental investment restrictions. Redesignating a restriction as
non-fundamental allows the Board the flexibility to modify the restriction in
response to changes in the securities markets or applicable law if the Board
deems it in the best interest of the Fund and its stockholders to do so.
Although future modification of a non-fundamental investment restriction would
not require a stockholder vote, modification of these restrictions would require
both (i) authorization by resolution by the Board and (ii) amendment of the
Fund's Prospectus.
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Under the proposed non-fundamental investment restrictions, each Fund may
not:
A. PURCHASE SECURITIES OF OTHER INVESTMENT COMPANIES, EXCEPT TO THE EXTENT
SUCH PURCHASES ARE PERMITTED BY APPLICABLE LAW.
Commentary: Each of the Funds currently states a restriction relating
to securities of other investment companies as a fundamental, rather than a
non-fundamental, restriction. In addition, a number of the restrictions
currently in effect set forth specifically the applicable law. Applicable
law currently allows a Fund to purchase the securities of other investment
companies if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment company.
Certain Funds have excepted from the prohibition on purchases of
securities of other investment companies purchases made in connection with
a plan of merger, consolidation, reorganization, or acquisition, or
purchases made in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
the customary broker's commission, is involved. This exception is not
required and has therefore been deleted from the proposed restriction.
B. MAKE SHORT SALES OF SECURITIES OR MAINTAIN A SHORT POSITION EXCEPT TO
THE EXTENT PERMITTED BY APPLICABLE LAW.
Commentary: In a short sale, an investor sells a borrowed security and
has a corresponding obligation to 'cover' by delivering at a later date the
identical security. In a short sale 'against the box,' an investor sells
the securities short while either owning the same securities in the same
amount or having the right to obtain securities to cover through, for
example, the investor's ownership of warrants, options, or convertible
securities. Certain Funds currently prohibit short sales under any
circumstances; others are specifically authorized to engage in short sales
in forward currency contracts, options, futures contracts and options on
futures contracts.
Under current applicable law, short sales are considered to involve
the creation of senior securities. A Fund that includes short sales in its
investment policies must secure its obligation to replace the borrowed
security by depositing collateral in a segregated account in compliance
with Commission guidelines.
Short sales 'against the box' are not considered speculative sales and
do not create senior securities. Funds that are not specifically authorized
to engage in short sales 'against the box' have not considered short sales
'against the box' to be short sales for purposes of their investment
restrictions.
The majority of the Funds, as a matter of investment policy, do not
enter into short sales of any kind. If the proposed investment restrictions
are adopted, the Funds that currently are authorized to make short sales
will continue to have that ability within the confines of applicable law;
the Funds that are not currently authorized to make short sales will not
make short sales unless and until such policy is amended by resolution of
the Board and the Prospectus is amended. However, short sales 'against the
box' will continue to be authorized to the extent permitted under
applicable law.
C. INVEST IN SECURITIES WHICH CANNOT BE READILY RESOLD BECAUSE OF LEGAL OR
CONTRACTUAL RESTRICTIONS OR WHICH CANNOT OTHERWISE BE MARKETED, REDEEMED OR PUT
TO THE ISSUER OR A THIRD PARTY, IF AT THE TIME OF ACQUISITION MORE THAN 15% OF
ITS TOTAL ASSETS WOULD BE INVESTED IN SUCH SECURITIES. THIS RESTRICTION SHALL
NOT APPLY TO SECURITIES WHICH MATURE WITHIN SEVEN DAYS OR SECURITIES WHICH THE
BOARD OF DIRECTORS HAS OTHERWISE DETERMINED TO BE LIQUID PURSUANT TO APPLICABLE
LAW.
Commentary: Certain Funds limit investment in restricted and illiquid
securities to 5% or 10% of Fund assets. Under the Investment Company Act,
open-end investment companies are required to determine net asset value and
offer redemption on a daily basis with payment to follow within seven days.
In order to
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ensure that adequate cash is available at all times to cover redemptions, a
Fund is required to limit its investments in securities deemed illiquid to
15% of the Fund's net assets.
Under current applicable law, an illiquid asset is any asset which may
not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which a Fund has valued the investment.
The types of securities that will be considered illiquid will vary over
time based on changing market conditions and regulatory interpretations.
Under current Commission interpretations, a Fund may purchase, without
regard to the foregoing limitation, securities which are not registered
under the Securities Act of 1933, as amended (the 'Securities Act'),
provided that they are determined to be liquid pursuant to guidelines and
procedures established by the Board. Included among such securities are
foreign securities traded in a foreign securities market and securities
which can be offered and sold to 'qualified institutional buyers,' as
defined in Rule 144A under the Securities Act ('Rule 144A Securities'). The
Funds are currently permitted to invest in Rule 144A Securities.
The proposed investment restriction would increase the Funds'
flexibility with respect to the amount of securities deemed illiquid in
which the Fund may invest up to the current Commission limit, assuming that
the Fund is not otherwise limited with respect to investment in illiquid
securities. The Company, in the Prospectus and Statement of Additional
Information, may limit investment in illiquid securities by a Fund to a
percentage of less than 15% for certain reasons.
Current applicable law does not require a Fund to state its limitation
on investment in illiquid securities as a fundamental policy; however, the
Funds currently state their limitations on illiquid securities as a
fundamental, rather than a non-fundamental, restriction.
D. 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 TOTAL ASSETS; INCLUDED WITHIN SUCH LIMITATION, BUT NOT TO EXCEED 2% OF
THE FUND'S TOTAL ASSETS, ARE WARRANTS WHICH ARE NOT LISTED ON THE NEW YORK STOCK
EXCHANGE OR AMERICAN STOCK EXCHANGE OR A MAJOR FOREIGN EXCHANGE. FOR PURPOSES OF
THIS RESTRICTION, WARRANTS ACQUIRED BY THE FUND IN UNITS OR ATTACHED TO
SECURITIES MAY BE DEEMED TO BE WITHOUT VALUE.
Commentary: If a Fund is otherwise authorized to invest in warrants as
a matter of investment policy, such Fund will now be subject to the
limitation set forth in proposed non-fundamental investment restriction
(d). A Fund that is currently prohibited from investing in warrants as a
matter of investment policy will not invest in warrants unless and until
such policy is amended by resolution of the Board and the Prospectus is
amended.
E. INVEST IN SECURITIES OF COMPANIES HAVING A RECORD, TOGETHER WITH
PREDECESSORS, OF LESS THAN THREE YEARS OF CONTINUOUS OPERATION, EXCEPT TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW. THIS RESTRICTION SHALL NOT APPLY TO
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES OR OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
Commentary: The proposed restriction, which addresses investment by a
Fund in 'unseasoned issuers,' is in substance identical to the applicable
restriction in effect for certain Funds; however, each of the Funds except
the Developing Capital Markets Focus Fund state this restriction as a
fundamental, rather than a non-fundamental, restriction. There is currently
no applicable legal limitation concerning investment in unseasoned issuers.
F. PURCHASE OR RETAIN THE SECURITIES OF ANY ISSUER, IF THOSE INDIVIDUAL
OFFICERS AND DIRECTORS OF THE COMPANY, THE OFFICERS AND GENERAL PARTNER OF THE
INVESTMENT ADVISER, THE DIRECTORS OF SUCH GENERAL PARTNER OR THE OFFICERS AND
DIRECTORS OF ANY SUBSIDIARY THEREOF EACH OWNING BENEFICIALLY MORE THAN ONE-HALF
OF ONE PERCENT OF THE SECURITIES OF SUCH ISSUER OWN IN THE AGGREGATE MORE THAN
5% OF THE SECURITIES OF SUCH ISSUER.
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<PAGE>
Commentary: The proposed restriction, which addresses investment by a
Fund in securities of an issuer in which management of the Fund owns
shares, is in substance similar to the applicable restriction in effect for
the Funds; however, each of the Funds except the Developing Capital Markets
Focus and the International Bond Funds currently state this restriction as
a fundamental, rather than a non-fundamental, restriction.
The proposed restriction applies only to MLAM and certain affiliates.
MLFD, the distributor of the shares of the Company, is specifically
referenced in the restriction set forth in the International Bond Fund.
However, under the revised restriction, MLFD will no longer be included in
and covered by the revised restriction.
G. INVEST IN REAL ESTATE LIMITED PARTNERSHIP INTERESTS OR INTERESTS IN
OIL, GAS OR OTHER MINERAL LEASES, OR 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.
Commentary: The proposed restriction is in substance similar to the
applicable restriction in effect for each Fund; however, each of the Funds
except the Developing Capital Markets Focus Fund state this restriction, in
whole or in part, as a fundamental, rather than a non-fundamental,
restriction.
H. WRITE, PURCHASE OR SELL PUTS, CALLS, STRADDLES, SPREADS OR COMBINATIONS
THEREOF, EXCEPT TO THE EXTENT PERMITTED IN THE PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM TIME TO TIME.
Commentary: The proposed restriction is in substance similar to the
applicable restriction in effect for each Fund. However, certain Funds
state the restriction as a fundamental restriction while the Funds
authorized to engage in these types of transactions do not state any
restrictions. As a practical matter, the adoption of the foregoing as a
non-fundamental restriction will not change the current policy of the
Funds.
If the proposed restrictions are approved, Funds that currently are
authorized to engage in puts, calls, straddles, spreads and combinations
thereof will be subject to the proposed restriction and will continue to
engage in such transactions to the extent set forth in the Prospectus and
Statement of Additional Information. Funds that are not currently
authorized to engage in these types of transactions would not be permitted
to engage in such transactions unless and until the Board determines to
establish an investment policy in this regard and the Prospectus is
amended.
Elimination of Restrictions Applicable to Foreign Securities. Investment
restrictions relating to investment in foreign securities have been eliminated
in the proposed uniform restrictions. Certain Funds that commenced operations
more than 10 years ago included an investment restriction limiting or
prohibiting investment in foreign securities. If this proposal is adopted, these
Funds will no longer state this policy as an investment restriction but instead
include investment policies with respect to foreign securities in their
prospectuses and statements of additional information. Such investment policies
with respect to foreign securities may include diversification requirements set
forth under applicable state insurance laws or regulations.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE 'FOR' THIS PROPOSAL.
PROPOSAL NO. 4--TO CHANGE THE INVESTMENT OBJECTIVE OF THE COMPANY'S MERRILL
LYNCH INTERMEDIATE GOVERNMENT BOND FUND AND RENAME THAT FUND AS THE 'MERRILL
LYNCH GOVERNMENT BOND FUND'
The investment objective of the Merrill Lynch Intermediate Government Bond
Fund (the 'Government Bond Fund') presently 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.' It is proposed that the Government Bond Fund's investment
objective be changed to read as follows: 'The investment objective of the
Government Bond Fund is to seek the highest possible current income consistent
with the protection of capital
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<PAGE>
afforded by investing in debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.' Accordingly, adoption of this
proposal would permit the Fund to invest in debt securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities with a maturity
greater than fifteen years.
Modifying the Fund's investment objective in the manner proposed would
permit the Fund to expand the eligible investments in which it may invest. It is
important to note that MLAM, the investment adviser for the Fund, and the Board
of Directors of the Company believe that the Fund can meet its investment
objective of providing the highest possible current income consistent with the
protection of capital without this additional flexibility, and the proposed
change does not reflect a concern about the ability of the Fund to meet its
investment objective; rather, the Board and MLAM believe that stockholders will
benefit from an expansion of the available range of eligible investments in
which the Fund can invest. If the Fund is permitted to invest in securities with
longer maturities, the Fund may be able to provide a higher return because
securities with longer maturities tend to have greater yields than securities
with shorter maturities. At the same time, the net asset value of the Fund would
be subject to greater volatility because the prices at which securities with
longer maturities trade tend to vary more with changes in interest rates than do
securities with shorter maturities. Under the Fund's present investment
objective, the Fund, depending on market conditions, anticipates an average
maturity of six to eight years. If the proposal is approved by the stockholders
of the Fund, the Fund anticipates that the average maturity of its portfolio
will be from six to fifteen years.
In addition, the name of the Government Bond Fund is proposed to be changed
by dropping the term 'Intermediate' from the Fund's name to reflect the fact
that the Fund will, if the proposal is approved by the stockholders, be able to
invest in debt securities with maturities exceeding fifteen years.
This proposal must be approved by the lesser of a majority of the
outstanding shares of the Government Bond Fund or 67% of the shares of the
Government Bond Fund voting at the Meeting if a quorum is present. ONLY PERSONS
WHO ARE STOCKHOLDERS OF THE GOVERNMENT BOND FUND ON THE RECORD DATE WILL BE
ELIGIBLE TO VOTE ON THIS PROPOSAL. Unless the Board of Directors determines
otherwise, it is anticipated that this proposal, if approved by the stockholders
of the Intermediate Government Bond Fund, will be implemented on the Effective
Date (as defined under the heading 'Proposal No. 6 and Proposal No. 7--The
Reorganizations') of the Reorganizations.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE 'FOR' THIS PROPOSAL.
PROPOSAL NO. 5--TO CHANGE THE INVESTMENT OBJECTIVE OF THE COMPANY'S MERRILL
LYNCH WORLD INCOME FOCUS FUND AND RENAME THAT FUND AS THE 'MERRILL LYNCH GLOBAL
BOND FOCUS FUND'
The investment objective of the Merrill Lynch World Income Focus Fund
presently is 'to seek to provide stockholders with high current income by
investing in a global portfolio of fixed income securities denominated in
various currencies, including multinational currency units.' It is proposed that
the World Income Focus Fund's investment objective be changed to read as
follows: 'The investment objective of the Fund is to seek to provide
stockholders with a high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units.' Accordingly, adoption of this proposal
would change the investment objective of the Fund from seeking 'to provide to
stockholders high current income' to seeking 'to provide to stockholders a high
total investment return'.
If this proposal is approved by the stockholders of the Fund, high current
income will only be one of the factors that MLAM will consider in selecting
portfolio securities for the Fund. As a general matter, in evaluating
investments for the Fund, MLAM 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.
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If this proposal is adopted, the Fund will cease investing in high yield,
high risk securities (commonly known as 'junk bonds') and will only invest in
securities 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 MLAM
has determined to be of similar creditworthiness. In addition, if this proposal
is adopted, the Fund will, as a matter of operating policy, cease investing in
mortgage-related securities. Further, if this proposal is adopted, the Fund, in
seeking capital appreciation, 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. Investments not meeting the Fund's
new credit quality criteria or not otherwise consistent with the Fund's revised
investment policy will be sold as soon as practicable, and such sales are
expected to be completed within 60 days following the implementation of this
proposal.
Although the implementation of the proposed change in the investment
objective of the Fund may have the effect of reducing the Fund's current yield
to stockholders, the Board of Directors of the Company believes that the change
in the Fund's investment objective will give the Fund the opportunity to seek an
overall greater longer term investment return to stockholders of the Fund.
However, no assurances can be given that the Fund's new investment objective, if
approved by the stockholders of the Fund, will be achieved.
In addition, the name of the World Income Focus Fund is proposed to be
changed so that the name of the Fund will more appropriately reflect that its
investment objective will, if the proposal is approved by the stockholders, no
longer be to seek to provide to stockholders 'high current income' but rather
will be to seek to provide to stockholders 'a high total investment return'.
Please see Appendix C to this Proxy Statement--Prospectus for a description
of the investment objective and policies of the Fund as such investment
objective and policies of the Fund will read if this proposal is approved.
This proposal must be approved by the lesser of a majority of the
outstanding shares of the World Income Focus Fund or 67% of the shares
outstanding at the Meeting if a quorum is present. ONLY PERSONS WHO ARE
STOCKHOLDERS OF THE WORLD INCOME FOCUS FUND ON THE RECORD DATE WILL BE ELIGIBLE
TO VOTE ON THIS PROPOSAL. THEREFORE, STOCKHOLDERS OF THE COMPANY'S MERRILL LYNCH
INTERNATIONAL BOND FUND ON THE RECORD DATE, WHO WILL VOTE ON PROPOSAL NO. 6
DISCUSSED BELOW, WILL NOT BE ELIGIBLE TO VOTE FOR ON THIS PROPOSAL. HOWEVER,
THIS PROPOSAL WILL NOT BE IMPLEMENTED IF PROPOSAL NO. 6 IS NOT APPROVED, AND IF
THIS PROPOSAL IS NOT APPROVED, THE REORGANIZATION CONTEMPLATED BY PROPOSAL NO. 6
WILL NOT BE CONSUMMATED. Unless the Board of Directors determines otherwise, it
is anticipated that this proposal, if approved by the stockholders of the World
Income Focus Fund, will be implemented on the Effective Date (as defined under
the heading 'Proposal No. 6 and Proposal No. 7--The Reorganizations') of the
Reorganizations.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE 'FOR' THIS PROPOSAL.
PROPOSAL NO. 6 AND PROPOSAL NO. 7--THE REORGANIZATIONS
The terms and conditions under which the proposed Reorganizations may be
consummated are set forth in each Agreement and Plan of Reorganization for the
Funds involved. Significant provisions of the Agreements are summarized below;
however, this summary is qualified in its entirety by reference to the
Agreements, the form of which is attached as Appendix B to this Proxy
Statement--Prospectus.
GENERAL
Based on the recommendation of MLAM, at a meeting of the Board of Directors
held on July 10, 1996, the Board approved the combination of the Merrill Lynch
International Bond Fund and the Merrill Lynch World Income Focus Fund and the
combination of the Merrill Lynch Flexible Strategy Fund and the Merrill Lynch
Global Strategy Focus Fund. The International Bond Fund and the Flexible
Strategy Fund are sometimes referred to herein as the 'Transferor Funds' or the
'Corresponding Transferor Funds', and the World Income Focus
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Fund and the Global Strategy Focus Fund are sometimes referred to herein as the
'Acquiring Funds' or the 'Corresponding Acquiring Funds'. The Board of Directors
of the Company recommends to the stockholders of each Transferor Fund that they
approve the combination of each Transferor Fund and its Corresponding Acquiring
Fund by means of a tax-free acquisition of substantially all the assets of each
Transferor Fund by its Corresponding Acquiring Fund in exchange for shares of
its Corresponding Acquiring Fund and the assumption by the Corresponding
Acquiring Fund of substantially all the liabilities of the Transferor Fund,
which shares would then be distributed to the stockholders of each Transferor
Fund in liquidation of each Transferor Fund. The Board, in accepting the
recommendation of MLAM, concluded that each Reorganization would be in the best
interest of each Transferor Fund and its stockholders in recommending that the
stockholders approve the proposed Reorganization.
MLAM made its recommendation to the Board based on the similarities in
investment objectives, policies and styles of each Transferor Fund and its
Corresponding Acquiring Fund and based on the fact that each Transferor Fund and
Corresponding Acquiring Fund utilizes the same management personnel. MLAM
believes that each Reorganization would eliminate any existing or future
competition between a Transferor Fund and Corresponding Acquiring Fund for
investment opportunities and for stockholders and would provide economies of
scale by eliminating duplicative functions and permitting larger portfolio
transactions.
The Board reviewed the pro forma combined funds and noted that the expense
ratio of each pro forma combined fund following each Reorganization would be no
greater than the expense ratio, prior to any reimbursement, of the Corresponding
Transferor Fund prior to the Reorganization. Additionally, the Board noted that
the World Income Focus Fund, with its much larger asset base and resulting
economies of scale, has a significantly lower expense ratio before reimbursement
of expenses than does the smaller International Bond Fund, and it expects
holders of the International Bond Fund to benefit from this lower expense ratio.
The Board also noted that the proposed combination of Acquiring Funds and
Transferor Funds would eliminate the need for separate outside audits of the
respective Funds and that the relatively fixed cost of auditing the Acquiring
Funds would be spread across the larger asset base of each combined Fund,
resulting in lower auditing expenses per dollar of assets. Other costs of the
Company which vary based on the number of Funds in existence would be subject to
similar consolidation and cost-spreading, to the benefit of stockholders of both
Funds.
The Board also noted that the combination of the Transferor Funds with the
Corresponding Acquiring Funds is expected to facilitate portfolio management.
Because the securities in which the combining Funds may invest are substantially
similar, their combination will eliminate the need for the portfolio managers to
track and allocate purchases by the separate funds. The combinations also may
enable each combined Fund to purchase in greater volume, creating the potential
for more favorable pricing of the securities purchased by the Funds. To the
extent that these operational and economic benefits are realized, they too will
work to the advantage of stockholders of the Transferor Funds and Corresponding
Acquiring Funds.
The Board also considered among other things: (i) the terms and conditions
of each Reorganization; (ii) the Reorganization would not result in a dilution
of stockholders' interests; (iii) the investment objectives and policies of each
Transferor Fund and each Acquiring Fund; (iv) the fact that certain expenses in
connection with printing and mailing this Proxy Statement--Prospectus and other
proxy materials to Contract Owners would be borne by the Insurance Companies
while other expenses incurred in connection with the Reorganization would be
borne by the Company; (v) the benefits of each Reorganization to persons other
than the Transferor Funds; (vi) the fact that each Acquiring Fund will assume
all the liabilities of the Corresponding Transferor Fund; (vii) the expected
U.S. federal income tax consequences of each Reorganization; and (viii) the pro
forma information contained in the SAI.
Based on the factors described above, the Board of Directors of the
Company, including the Board members who are not interested persons (as such
term is defined under the Investment Company Act), unanimously determined that
each Reorganization (including the Articles of Amendment to the Charter
necessary to consummate each Reorganization under Maryland law) would be in the
best interests of each Transferor Fund and each Transferor Fund's stockholders
and would not result in dilution of the interests of stockholders, and
recommends that each Transferor Fund's stockholders approve the proposed
Reorganization.
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<PAGE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
International Bond Fund and World Income Focus Fund. The investment
objective of the World Income Focus Fund is to seek to provide stockholders with
high current income. The investment objective of the International Bond Fund is
to seek a high total investment return. However, the investment objective of the
World Income Focus Fund will be the same as the investment objective of the
International Bond Fund if stockholders of the World Income Focus Fund approve a
change in the World Income Focus Fund's investment objective as discussed above
in Proposal No. 5. If Proposal No. 5 is not approved, the Reorganization
contemplated by Proposal No. 6 will not be consummated. The investment
objectives and policies of each of the Funds are described more fully in
Appendix C to this Proxy Statement--Prospectus. Assuming Proposal No. 5 is
approved by the stockholders of the World Income Focus Fund, the investment
objectives and policies of the World Income Focus Fund and the International
Bond Fund will be substantially similar with one noteworthy exception. The focus
of the World Income Focus Fund is on both U.S and non-U.S. debt instruments,
including government and corporate fixed income securities, whereas the focus of
the International Bond Fund is primarily non-U.S. debt instruments. Therefore,
investors in the World Income Focus Fund are likely to have a greater exposure
to debt securities in the U.S. market, although there is no requirement that the
World Income Focus Fund have any fixed percentage of its assets in U.S.
government or corporate fixed income securities.
Each of the Funds is classified as a non-diversified investment company
under the Investment Company Act. Additionally, each Fund may engage in certain
of the options, futures and currency transactions discussed Appendix C to this
Proxy Statement--Prospectus. However, unlike the International Bond Fund, the
World Income 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 World Income Focus Fund
enters into futures transactions. The World Income Focus Fund may purchase put
options or write call options on futures contracts rather than selling the
underlying futures contracts in anticipation of a decline in the equities
markets or in the value of a foreign currency. Similarly, the World Income Focus
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. The World Income
Focus Fund's transactions in options on futures contracts are limited in the
same manner as futures transactions in general are limited for each of the
Funds. See 'Transactions in Options, Futures and Currency--Restrictions on Use
of Futures Transactions' discussed in Annex A to Appendix C of this Proxy
Statement--Prospectus.
A more detailed description of the types of securities in which the World
Income Focus Fund invests, its fundamental and non-fundamental investment
policies and the risks associated with an investment in the Fund is contained in
more detail in Appendix C to this Proxy Statement--Prospectus and in the SAI,
which is available upon request.
Flexible Strategy Fund and Global Strategy Focus Fund. The investment
objectives, policies and styles of the Funds are substantially similar. The
investment objective of the Flexible Strategy Fund and the Global Strategy Focus
Fund is to seek high total investment return. However, the Global Strategy Focus
Fund is a non-diversified investment company, and the Flexible Strategy Fund is
a diversified investment company. The investment objectives of each of the Funds
is stated more fully in Appendix C to this Proxy Statement-- Prospectus. The
main difference between these Funds is that the Flexible Strategy Fund seeks to
meet its investment objective by investing primarily in the securities of U.S.
issuers whereas the Global Strategy Focus Fund seeks to achieve its investment
objective by investing primarily in the securities of issuers located in the
United States, Canada, Western Europe and the Far East. The Flexible Strategy
Fund has, as a matter of operating policy, limited its investment in foreign
issuers to no more than 25% of its total assets. The Global Strategy Focus Fund
has no similar limitation. Additionally, the Flexible Strategy Fund emphasizes
investment in common stocks of larger-capitalization issuers. The Global
Strategy Focus Fund invests in issuers that MLAM believes to be quality
companies, which includes such companies that have a strong balance sheet, good
financial resources, a satisfactory rate of return on capital, a good industry
position and superior management. The capitalization of such quality companies
may be considered by MLAM but is not a controlling factor. Both Funds limit
investment in corporate debt securities to those securities rated investment
grade by S&P or Moody's or of comparable quality. The Global Strategy Focus Fund
may invest a greater percentage of its assets in non-U.S. securities than
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<PAGE>
the Flexible Strategy Fund, and investing on an international basis involves
special considerations. See 'Special Considerations Regarding the
Reorganization.'
Unlike the Flexible Strategy Fund, the Global Strategy Focus 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. Additionally, the Global Strategy Focus Fund may write call options
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 objective
sought to be realized through the use of the foregoing instruments will be
achieved. The Global Strategy Focus Fund's use of such instruments may be
limited by certain Code requirements for qualification of such Fund for the
favorable tax treatment afforded investment companies. There can be no assurance
that the Global Strategy Focus Fund's hedging transactions will be effective.
Furthermore, the Global Strategy Focus Fund will only engage in hedging
activities from time to time and will not necessarily engage in hedging
transactions in all the markets in which it may be invested in any given time.
See 'Transactions in Options, Futures and Currency--Restrictions on Use of
Futures Transactions' discussed in Annex A to Appendix C of this Proxy
Statement--Prospectus and 'Special Considerations Regarding the Reorganization.'
A more detailed description of the types of securities in which the Global
Strategy Focus Fund invests, its fundamental and non-fundamental investment
policies and the risks associated with an investment in the Fund is contained in
more detail in Appendix C to this Proxy Statement--Prospectus and in the SAI,
which is available upon request.
COMPARISON OF INVESTMENT RESTRICTIONS
International Bond Fund and World Income Focus Fund. Each of the Funds
currently has similar investment restrictions, and, if the stockholders of each
Fund adopt the uniform investment restrictions proposed in Proposal No. 3, each
Fund would have identical fundamental investment restrictions. The current
investment restrictions of the World Income Focus Fund and the International
Bond Fund substantively differ as follows: (i) the World Income Focus Fund may
maintain short positions in forward currency contracts, options, futures
contracts and options on futures contracts whereas the International Bond Fund
may not; (ii) the World Income Focus Fund may lend its portfolio securities up
to 20% of its total assets whereas the International Bond Fund may lend its
portfolio securities up to 33% of its total assets; (iii) the World Income Focus
Fund may not borrow amounts in excess of 20% of its total assets whereas the
International Bond Fund may not borrow amounts in excess of 10% of its total
assets. However, each Fund is limited in the same manner in which it may utilize
borrowings (i.e., for temporary emergency purpose or to meet redemption
requests), except that the World Income Focus Fund will not purchase securities
while borrowings exceeding 5% of its total assets are outstanding; (iv) the
World Income Focus Fund is limited to investing no more than 10% of its total
assets in illiquid securities whereas the International Bond Fund is limited to
15%; (v) the World Income Focus Fund has a fundamental restriction that it will
not purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, MLAM 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, whereas the
International Bond Fund has such investment restriction as a non-fundamental
investment restriction and refers only to MLFD, the distributor of the shares of
the Company, in place of 'any subsidiary'. If the uniform investment
restrictions set forth above in Proposal No. 3 are adopted by the World Income
Focus Fund, then the restriction will also be non-fundamental for such Fund; and
(vi) the World Income Focus Fund is not prohibited from issuing senior
securities whereas the International Bond Fund is so prohibited, although it is
not the current intention of the World Income Focus Fund to issue senior
securities.
Flexible Strategy Fund and Global Strategy Focus Fund. The investment
restrictions of the Funds are substantially similar, and, if the stockholders of
each Fund adopt the uniform investment restrictions proposed in Proposal No. 3,
each Fund would have identical fundamental investment restrictions. However, the
investment restrictions of the Funds differ in several ways because the Global
Strategy Focus Fund is permitted to engage in transactions in options on
securities, forward currency contracts and options thereon. The current
investment restrictions of the Flexible Strategy Fund and the Global Strategy
Focus Fund differ as follows: (i) the Flexible Strategy Fund limits investment
in any one issuer to no more than 5% of its total assets, whereas the Global
33
<PAGE>
Strategy Focus Fund has no similar restriction; (ii) the Global Strategy Focus
Fund may purchase securities of issuers which invest in oil, gas or other
mineral exploitation or development programs or commodities or commodity
contracts and the Global Strategy Focus Fund may engage in transactions in
currency and options on interests in oil, gas or other mineral exploitation or
development programs or commodities or commodity contracts, forward currency
contracts, futures contracts and options thereon and purchase, sell or otherwise
invest or deal in commodities or commodities contracts. The Flexible Strategy
Fund may not purchase such securities or engage in any of the foregoing
transactions. The Global Strategy Focus Fund currently does not anticipate
investment directly in tangible commodities other than currency and would be
greatly restricted from making such direct investments by the current provisions
of the federal tax laws; however, the Global Strategy Focus Fund may invest in
financial instruments linked to commodities as described above; (iii) the
Flexible Strategy Fund may not write, purchase or sell puts, calls, straddles,
spreads or combinations thereof (such Fund may write cover call options under
its investment restrictions but does not as a matter of non-fundamental
investment policy). The Global Strategy Focus Fund is not so limited by its
investment restrictions; (iv) the Global Strategy Focus Fund may make margin
payments in connection with, and maintain short positions in, options, forward
currency contracts, futures contracts and options on futures contracts whereas
the Flexible Strategy Fund may not; and (v) the Global Strategy Focus Fund may
not borrow amounts in excess of 10% of its total assets whereas the Flexible
Strategy Fund is limited to 5% of its total assets. However, the Global Strategy
Focus Fund will borrow only to meet redemption requests and will not purchase
securities while borrowings are outstanding.
INFORMATION ABOUT THE REORGANIZATIONS
Agreement and Plan of Reorganization. The Agreement and Plan of
Reorganization (the 'Plan') for each Reorganization provides that upon the
closing of the transaction, each Acquiring Fund will acquire substantially all
the assets of its Corresponding Transferor Fund and assume substantially all the
liabilities of the Corresponding Transferor Fund in exchange for the shares of
such Acquiring Fund on the effective date of the Reorganization (the 'Effective
Date'), which is expected to be on or about Friday, December 13, 1996 or such
earlier or later date as the Company's Board of Directors determines. The number
of full and fractional shares of an Acquiring Fund to be issued to the holders
of shares of the Corresponding Transferor Fund, is to be determined on the basis
of the net asset value per share of such Acquiring Fund.
On the Effective Date, each Transferor Fund will liquidate and will
distribute pro rata to its holders of record the shares of the Corresponding
Acquiring Fund received by the Transferor Fund. The liquidation and distribution
will be accomplished by the establishment of an account on the share records of
the Company with respect to each Acquiring Fund in the name of each stockholder
of the Corresponding Transferor Fund representing the number of full and
fractional shares of the Acquiring Fund due such stockholder. Fractional shares
of the Acquiring Funds will be carried to the fourth decimal place.
Simultaneously with the establishment of accounts on the share records of the
Company with respect to the shares of an Acquiring Fund due to the Transferor
Fund stockholders, Transferor Fund shares held by those stockholders will be
cancelled. New certificates for shares will be issued only upon written
stockholder request, and any certificate representing shares of an Acquiring
Fund to be issued in replacement of a certificate representing shares of a
Transferor Fund will be issued only upon the surrender of the certificate
representing the Transferor Fund shares.
As a result of the Reorganizations, each Acquiring Fund will add to its
gross assets substantially all the assets of the Corresponding Transferor Fund,
other than cash to be used to make a final distribution of ordinary income and
capital gains to the stockholders of the Corresponding Transferor Fund as of the
Effective Date, and the stockholders of each Transferor Fund will become
stockholders of the Corresponding Acquiring Fund. For Federal income tax
reasons, each Transferor Fund must distribute all of its income and capital
gains prior to the end of its fiscal year, which would occur on the Effective
Date. Additionally, although not required, each Acquiring Fund intends to
distribute all of its income and capital gains prior to the Effective Date.
On or before the Effective Date, the Company will file Articles of
Amendment to its Charter which will make the Reorganization effective for
purposes of Maryland corporate law (the 'Charter Amendment'). A copy of the form
of the Charter Amendment is included in the Plan, which is attached hereto as
Appendix B.
Consummation of the Plan is subject to the conditions set forth therein,
including the condition that all necessary orders or exemptions under the
Investment Company Act with respect to the Reorganization shall have
34
<PAGE>
been granted by the Commission. The Plan may be terminated, in its entirety or
with respect to any Transferor Fund and its Corresponding Acquiring Fund, by the
Board and the Reorganization abandoned at any time prior to the closing of the
Reorganization on the Effective Date.
Charter Amendment. Because the Company is organized as a Maryland
corporation, the Charter Amendment must be filed with the Department of
Assessments and Taxation of the State of Maryland in order to implement the
terms of the Reorganizations. From a Maryland state corporate law perspective,
each Reorganization does not involve a transfer of assets in exchange for
issuance of shares, because the Funds are series of shares issued by the same
corporate entity. For Maryland state corporate law purposes, each Reorganization
is a reclassification of shares. Therefore, the Charter Amendment will
reclassify unissued shares of each class of the Transferor Fund into unissued
shares of the Corresponding Acquiring Fund and reclassify all of the outstanding
shares of the Transferor Fund into outstanding shares of the Corresponding
Acquiring Fund in accordance with a formula that reflects the terms of each
Reorganization described above (i.e., based on relative net asset values of the
outstanding shares of the Transferor Fund and Corresponding Acquiring Fund). The
text of the Charter Amendment is attached as an exhibit to the Plan, which is
attached hereto as Appendix B.
Description of Shares of the Acquiring Fund. Full and fractional shares of
the Acquiring Funds will be issued without the imposition of a sales load or
other fee to the stockholders of the Corresponding Transferor Funds in
accordance with the procedures described above. The shares of each Acquiring
Fund to be issued in the Reorganization will be fully paid and nonassessable
when issued and will have no preemptive or conversion rights. In addition, the
voting procedures of the Transferor Funds and the Acquiring Funds are identical.
U.S. Federal Income Tax Consequences of the Reorganization. On the
Effective Date, the Company will receive an opinion from Rogers & Wells, counsel
to the Company, with respect to the U.S. federal income tax consequences of the
Reorganization. The tax opinion will be substantively to the effect that, with
respect to each Transferor Fund and its Corresponding Acquiring Fund, on the
basis of then current law and certain representations and assumptions, and
subject to certain limitations: (i) the Reorganization will constitute a
reorganization within the meaning of Section 368(a)(1)(D) of the Code; (ii) the
stockholders of the Transferor Fund who receive shares of the Acquiring Fund
pursuant to the Reorganization will not recognize any gain or loss upon the
exchange of their shares of the Transferor Fund for shares of the Acquiring
Fund; (iii) the aggregate tax basis of the shares of the Acquiring Fund received
by each stockholder of the Transferor Fund will be the same as the aggregate tax
basis of the shares of the Transferor Fund surrendered in the exchange; and (iv)
the holding period of shares of the Acquiring Fund received by each stockholder
of the Transferor Fund will include the holding period of the shares of the
Transferor Fund which are surrendered in exchange thereof, provided that the
shares of the Transferor Fund constitute capital assets of such stockholder on
the Effective Date. The tax opinion will address certain U.S. federal income tax
consequences of the Reorganization in addition to those set forth above and is
described in greater detail in Section 7(f) of the Plan which is attached hereto
as Appendix B. The Company has no intention of consulting the Internal Revenue
Service as to the foregoing matters.
THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION AND SHOULD NOT BE
CONSIDERED TO BE TAX ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE
SERVICE WILL CONCUR ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE. TRANSFEROR FUND
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL,
STATE AND LOCAL TAX CONSEQUENCES WITH RESPECT TO THE FOREGOING MATTERS AND ANY
OTHER CONSIDERATIONS WHICH MAY BE APPLICABLE TO THEM.
Capitalization. The following tables show the capitalization and net asset
values per share of each Transferor Fund and each Acquiring Fund as of December
31, 1995 and on a pro forma basis as of that date after giving effect to each
Reorganization.
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<PAGE>
WORLD INCOME FOCUS FUND AND INTERNATIONAL BOND FUND
PRO FORMA CAPITALIZATION
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL WORLD INCOME PRO FORMA PRO FORMA
BOND FUND FOCUS FUND ADJUSTMENTS COMBINED
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net assets....................................... $ 18,120,544 $81,844,632 ($1,093,675)(1) $98,871,501
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Shares outstanding............................... 1,722,139 8,360,366 126,663(2) 10,209,168
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Net asset value per share
As of December 31, 1995........................ $ 10.52 $ 9.79
------------- ------------
------------- ------------
After distribution of net investment income and
realized capital gains(3)................... $ 10.41 $ 9.70
------------- ------------
------------- ------------
After Reorganization-related expense and
distribution of net investment income and
realized capital gains...................... $ 9.67
-----------
-----------
</TABLE>
- ------------------
(1) The adjusted balances are presented as if the Reorganization were effective
as of the beginning of the period ending December 31, 1995 for information
purposes only. The actual Effective Date of the Reorganization is expected
to be December 13, 1996, at which time the results would be reflective of
the actual composition of stockholders' equity at that date. Assumes
distributions of net investment income and realized capital gains and
accrual of estimated Reorganization-related expenses of $135,000.
Additionally, the pro forma adjustment includes an adjustment of $112,261 to
reflect the fact that MLAM does not intend voluntarily to reimburse the
combined Fund for certain expenses or to waive its management fee with
respect to the combined Fund.
(2) Assumes the issuance of 1,848,802 Acquiring Fund shares in exchange for the
net assets of the Transferor Fund, which number is based on the net asset
value of the Acquiring Fund shares, and the net asset value of the
Transferor Fund, as of December 31, 1995, after adjustment for the
distributions referred to in (3) below. The issuance of such number of
Acquiring Fund shares would result in the distribution of 1.073550 Acquiring
Fund shares for each Transferor Fund share upon liquidation of the
Transferor Fund. Based on the issuance of 1,848,802 additional Acquiring
Fund shares and the cancellation of 1,722,139 Transferor Fund shares.
(3) Assumes the Transferor Fund distributes all its undistributed net investment
income and realized capital gains to its stockholders and the Acquiring Fund
distributes all of its undistributed net investment income and realized
capital gains to its stockholders.
36
<PAGE>
GLOBAL STRATEGY FOCUS FUND AND FLEXIBLE STRATEGY FUND
PRO FORMA CAPITALIZATION
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL
FLEXIBLE STRATEGY PRO FORMA PRO FORMA
STRATEGY FUND FOCUS FUND ADJUSTMENTS COMBINED
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net assets.................................. $ 320,233,663 $540,241,613 ($39,199,386)(1) $821,275,890
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
Shares outstanding.......................... 19,443,457 43,064,280 3,889,916(2) 66,397,653
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
Net asset value per share
As of December 31, 1995................... $ 16.47 $ 12.55
------------- ------------
------------- ------------
After distribution of net investment
income and realized capital gains(3)... $ 14.85 $ 12.37
------------- ------------
------------- ------------
After Reorganization-related expense and
distribution of net investment income
and realized capital gains............. $ 12.37
------------
------------
</TABLE>
- ------------------
(1) The adjusted balances are presented as if the Reorganization were effective
as of the beginning of the period ending December 31, 1995 for information
purposes only. The actual Effective Date of the Reorganization is expected
to be December 13, 1996, at which time the results would be reflective of
the actual composition of stockholders' equity at that date. Assumes
distributions of net investment income and realized capital gains and
accrual of estimated Reorganization-related expenses of $135,000.
(2) Assumes the issuance of 23,333,373 Acquiring Fund shares in exchange for the
net assets of the Transferor Fund, which number is based on the net asset
value of the Acquiring Fund shares, and the net asset value of the
Transferor Fund, as of December 31, 1995, after adjustment for the
distributions referred to in (3) below. The issuance of such number of
Acquiring Fund shares would result in the distribution of 1.200063 Acquiring
Fund shares for each Transferor Fund share upon liquidation of the
Transferor Fund. Based on the issuance of 23,333,373 additional Acquiring
Fund shares and the cancellation of 19,443,457 Transferor Fund shares.
(3) Assumes the Transferor Fund distributes all its undistributed net investment
income and realized capital gains to its stockholders and the Acquiring Fund
distributes all of its undistributed net investment income and realized
capital gains to its stockholders.
Valuation. The value of each Transferor Fund's assets to be acquired and
the liabilities to be assumed by the Corresponding Acquiring Fund and the net
asset value per share for the shares to be issued by the Corresponding Acquiring
Fund will be determined by MLAM as of the Effective Date of the Reorganization.
To determine the net asset value per share for the Funds, the value of the
securities held by each Fund plus any cash or other assets (including interest
and dividends accumulated but not yet received) minus all liabilities (including
accrued expenses) is divided by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Investment Adviser, are
accrued daily. The number of shares of an Acquiring Fund to be issued to the
Corresponding Transferor Fund pursuant to the Reorganization will be calculated
based on the determinations of MLAM.
Accordingly, as a result of the Reorganization, every stockholder of the
Transferor Fund would own shares of the Corresponding Acquiring Fund that would
have an aggregate net asset value immediately after the Effective Date equal to
the aggregate net asset value of that stockholder's Transferor Fund shares
immediately prior to the Effective Date. Because the Acquiring Fund shares would
be issued at net asset value in exchange of net assets of the Transferor Fund
having a value equal to the aggregate net asset value of those shares, the net
asset value per share of the Acquiring Fund shares should remain virtually
unchanged by the Reorganization. Thus, the Reorganization should result in
virtually no dilution of net asset value of any stockholder's holdings. See 'Pro
Forma Financial Information' in the SAI. However, as a result of the
Reorganization, a stockholder of
37
<PAGE>
either a Transferor Fund or a Corresponding Acquiring Fund would likely hold a
reduced percentage of ownership in the larger combined entity than he or she did
in either of such Funds.
MANAGEMENT OF THE FUNDS
MLAM acts as the investment adviser for, and manages the investment and
reinvestment of the assets of, each Transferor Fund and its Corresponding
Acquiring Fund. The terms of the investment management agreement for each
Transferor Fund and Corresponding Acquiring Fund are substantively identical,
including the fees payable by each Transferor Fund and its Corresponding
Acquiring Fund to MLAM. Such fees will remain the same after the Reorganization.
Each of the World Income Focus Fund and the International Bond Fund has agreed
to pay MLAM a monthly fee at an annual rate of 0.60% of such Fund's average
daily net assets for the services and facilities furnished by MLAM. Each of the
Global Strategy Focus Fund and the Flexible Strategy Fund has agreed to pay MLAM
a monthly fee at an annual rate of 0.65% of such Fund's average daily net assets
for the services and facilities furnished by MLAM.
Thomas R. Robinson has served as the portfolio manager of the Flexible
Strategy Focus Fund and Global Strategy Focus Fund since November 1995, and will
continue to serve as the portfolio manager of the Global Strategy Focus Fund, as
the surviving Fund. Vincent Lathbury, III and Robert Parish have served as the
World Income Focus Fund's portfolio managers since July 1993, and Mr. Parish
also has served as the International Bond Fund's portfolio manager since May
1994. Mr. Parish will continue to serve as the portfolio manager of the World
Income Focus Fund, as the surviving Fund.
EXPENSES
The Company's Investment Advisory Agreements require MLAM to reimburse each
Fund (up to the amount of the advisory fee earned by MLAM 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 MLAM 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. MLAM believes, however,
that the most restrictive expense limitations imposed by state securities laws
or published regulations thereunder are an appropriate standard.
MLAM 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 MLAM 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, 1995, the expense ratios of the
Flexible Strategy, Global Strategy Focus and World Income Focus Funds were .71%,
.72% and .68%, respectively, and no expenses were reimbursed under the
Reimbursement Agreements. For the fiscal year ended December 31, 1995, the
expense ratio of the International Bond Fund was .95% prior to reimbursement by
MLAM. During the fiscal year ended December 31, 1995, MLAM earned fees of
$70,573, all of which was voluntarily waived, from the International Bond Fund
and also voluntarily reimbursed the International Bond Fund for $41,688 in
additional expenses, which resulted in an expense ratio (net of such
reimbursement) of 0%. During 1996, MLAM has continued to waive all of its fees
and reimburse all expenses of the International Bond Fund, and MLAM has no
current intention to cease reimbursing the International Bond Fund for certain
expenses and waiving its fee (but may cease to do so at any time). However,
other than as may be required under the Reimbursement Agreements, MLAM has no
present intention of waiving its fee payable by the World Income Focus Fund or
reimbursing the World Income Focus Fund for any expenses.
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<PAGE>
INFORMATION ABOUT THE FUNDS
Information about the Acquiring Funds and the Transferor Funds is included
in Appendix C to this Proxy Statement--Prospectus. Additional information
concerning the Acquiring Funds and Transferor Funds is included in the Statement
of Additional Information dated August 30, 1996, which is also incorporated
herein by reference. A copy of the SAI can be obtained without charge by writing
to the Company at P.O. Box 9011, Princeton, New Jersey 08543-9011 or by calling
(800) 456-4587, ext. 123. Please see 'Available Information' for additional
information available at the offices of the Commission.
VOTING INFORMATION
Approval of the Plan and the Charter Amendment, with respect to a
Transferor Fund, requires the affirmative vote of the holders of greater than
50% of the outstanding shares of a Transferor Fund.
ONLY PERSONS WHO ARE STOCKHOLDERS OF THE INTERNATIONAL BOND FUND ON THE
RECORD DATE WILL BE ELIGIBLE TO VOTE ON PROPOSAL NO. 6--APPROVAL OF THE
AGREEMENT AND THE PLAN OF REORGANIZATION BETWEEN THE INTERNATIONAL BOND FUND AND
THE WORLD INCOME FOCUS FUND AND ARTICLES OF AMENDMENT TO THE COMPANY'S CHARTER
IN CONNECTION THEREWITH. ONLY PERSONS WHO ARE STOCKHOLDERS OF THE FLEXIBLE
STRATEGY FUND ON THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON PROPOSAL NO.
7--APPROVAL OF THE AGREEMENT AND THE PLAN OF REORGANIZATION BETWEEN THE FLEXIBLE
STRATEGY FUND AND THE GLOBAL STRATEGY FOCUS FUND AND ARTICLES OF AMENDMENT TO
THE COMPANY'S CHARTER IN CONNECTION THEREWITH. HOWEVER, IF PROPOSAL NO. 5 IS NOT
APPROVED, THE REORGANIZATION CONTEMPLATED BY PROPOSAL NO. 6 WILL NOT BE
CONSUMMATED, AND IF PROPOSAL NO. 6 IS NOT APPROVED, PROPOSAL NO. 5 WILL NOT BE
IMPLEMENTED. Shares represented by proxies that reflect abstentions will be
shares present and entitled to vote on the matter for purposes of determining
the presence of a quorum. However, an abstention has the effect of a negative
vote on the proposals. Shares that are not voted and for which no proxy has been
given will not be counted as present at the Meeting. Dissenting stockholders do
not have any appraisal rights in connection with the Reorganization.
Votes of the stockholders of the Acquiring Funds are not being solicited in
connection with the Reorganizations, since their approval or consent is not
necessary for the consummation of the Reorganization.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE 'FOR' PROPOSAL NO. 6 AND PROPOSAL NO.
7, AS APPLICABLE.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party.
LEGAL OPINIONS
Certain legal matters in connection with the shares to be issued pursuant
to the Reorganization will be passed upon by Rogers & Wells, New York, New York.
Rogers & Wells will rely as to matters of Maryland law on the opinion of Wilmer,
Cutler & Pickering, Baltimore, Maryland.
EXPERTS
The audited financial statements of the Funds, incorporated into the SAI by
reference, have been so included in reliance on the report of Deloitte & Touche
LLP, independent auditors, and on their authority as experts in auditing and
accounting. The principal business address of Deloitte & Touche LLP is 117
Campus Drive, Princeton, New Jersey 08540.
39
<PAGE>
MEETINGS OF SHAREHOLDERS
The Company's by-laws do not require that the Company hold an annual
meeting of stockholders in any year in which none of the following is required
to be acted on by the stockholders of the Company under the Investment Company
Act: (1) election of directors, (2) approval of the investment advisory
agreement, (3) ratification of the election of independent public accountants,
and (4) approval of a distribution agreement. The Company will be required to
call an annual or special meeting of stockholders of a Fund in accordance with
the requirements of the Investment Company Act to seek approval of a change in
the fundamental policies, objectives or restrictions with respect to such Fund.
The Company also would be required to hold a special stockholders' meeting to
elect new Board members at such time as less than a majority of the Board
members holding office have been elected by stockholders. In addition, the
by-laws of the Company provide for the calling of meetings of stockholders of a
Fund at the request a majority of the Board members, the President or upon the
written request of at least 25% of the outstanding shares entitled to vote at
such meeting.
------------------------
STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WHO WISH TO
HAVE THEIR SHARES VOTED ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
40
<PAGE>
APPENDIX A
OUTSTANDING SHARES OF EACH FUND
<TABLE>
<CAPTION>
SHARES OUTSTANDING
NAME OF FUND ON RECORD DATE
- -------------------------------------------------------------------------- ------------------
<S> <C>
American Balanced Fund.................................................... 14,158,091
Basic Value Focus Fund.................................................... 30,764,247
Developing Capital Markets Focus Fund..................................... 8,268,042
Domestic Money Market Fund................................................ 270,456,987
Equity Growth Fund........................................................ 16,378,491
Flexible Strategy Fund.................................................... 20,726,743
Global Strategy Focus Fund................................................ 42,409,161
Global Utility Focus Fund................................................. 12,588,215
High Current Income Fund.................................................. 35,001,444
Intermediate Government Bond Fund......................................... 6,193,794
International Bond Fund................................................... 1,819,062
International Equity Focus Fund........................................... 28,149,264
Natural Resources Focus Fund.............................................. 3,615,285
Prime Bond Fund........................................................... 42,308,981
Quality Equity Fund....................................................... 23,711,827
Reserve Assets Fund....................................................... 23,265,291
World Income Focus Fund................................................... 8,716,591
</TABLE>
SECURITY OWNERSHIP OF CERTAIN OWNERS
To the knowledge of the Company's management, on the Record Date the
following persons owned five percent or more of the outstanding shares of a
Fund.
<TABLE>
<CAPTION>
PERCENT
NAME OF FUND NAME OF RECORD OWNER* OF CLASS
- --------------------------------------------------------- --------------------------------------------- --------
<S> <C> <C>
American Balanced Fund................................... Merrill Lynch Life Insurance Company 91.62
ML Life Insurance Company of New York 8.15
Basic Value Focus Fund................................... Merrill Lynch Life Insurance Company 94.34
ML Life Insurance Company of New York 5.62
Developing Capital Markets Focus Fund.................... Merrill Lynch Life Insurance Company 95.42
Domestic Money Market Fund............................... Merrill Lynch Life Insurance Company 92.38
ML Life Insurance Company of New York 7.61
Equity Growth Fund....................................... Merrill Lynch Life Insurance Company 94.03
ML Life Insurance Company of New York 5.69
Flexible Strategy Fund................................... Merrill Lynch Life Insurance Company 94.94
Global Strategy Focus Fund............................... Merrill Lynch Life Insurance Company 93.60
ML Life Insurance Company of New York 6.38
Global Utility Focus Fund................................ Merrill Lynch Life Insurance Company 93.93
ML Life Insurance Company of New York 6.04
High Current Income Fund................................. Merrill Lynch Life Insurance Company 94.76
ML Life Insurance Company of New York 5.08
Intermediate Government Bond Fund........................ Merrill Lynch Life Insurance Company 95.25
(Table continued on next page)
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
PERCENT
NAME OF FUND NAME OF RECORD OWNER* OF CLASS
- --------------------------------------------------------- --------------------------------------------- --------
<S> <C> <C>
International Bond Fund**................................ Merrill Lynch Life Insurance Company 97.41
International Equity Focus Fund.......................... Merrill Lynch Life Insurance Company 94.70
ML Life Insurance Company of New York 5.22
Natural Resources Focus Fund............................. Merrill Lynch Life Insurance Company 95.04
Prime Bond Fund.......................................... Merrill Lynch Life Insurance Company 91.98
ML Life Insurance Company of New York 7.64
Quality Equity Fund...................................... Merrill Lynch Life Insurance Company 93.85
ML Life Insurance Company of New York 5.72
Reserve Assets Fund...................................... Merrill Lynch Life Insurance Company 90.91
ML Life Insurance Company of New York 6.14
World Income Focus Fund.................................. Merrill Lynch Life Insurance Company 93.23
ML Life Insurance Company of New York 6.75
</TABLE>
- ------------------
* The shares of the Funds are sold only to 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'), or to Insurance Companies directly, in connection with variable
annuity contracts and/or variable life insurance contracts ('Contracts')
issued by such companies. MLLIC and ML of New York generally will vote the
shares of the Funds held in such separate accounts based on the instructions
timely received from owners of the Contracts (the 'Contract Owners') having a
voting interest in the shares to be voted. MLLIC and ML of New York generally
will also vote shares of a Fund held in such separate accounts for which no
voting instructions from Contract Owners are timely received, as well as
shares of the Funds which such Insurance Company owns directly, in the same
proportion as those shares of a Fund for which voting instructions from
Contract Owners are timely received. The business address of Merrill Lynch
Life Insurance Company is 800 Scudders Mill Road, Plainsboro, New Jersey
08543. The business address of ML Life Insurance Company of New York is 100
Church Street, New York, New York 10080.
** One Contract Owner has an interest of greater than 5% in the shares of the
Fund.
A-2
<PAGE>
APPENDIX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this 'Agreement') is made as of
the [ ] day of [ ], 1996, by and between the [Merrill Lynch World
Income Focus Fund/Merrill Lynch Global Strategy Focus Fund] (the 'Acquiring
Fund'), a fund of the Merrill Lynch Variable Series Funds, Inc., a Maryland
corporation (the 'Company'), and [Merrill Lynch International Bond Fund/Merrill
Lynch Flexible Strategy Fund] (the 'Transferor Fund'), also a fund of the
Company.
The Company is an open-end management investment company which has a wide
range of investment objectives among its seventeen separate funds, of which the
Transferor Fund and Acquiring Fund constitute two. A separate class of common
stock is issued for each of the seventeen funds of the Company. The shares of
the Company are sold only to separate accounts of certain insurance companies
(the 'Insurance Companies'), including Merrill Lynch Life Insurance Company and
ML Life Insurance Company of New York, to fund benefits under variable annuity
contracts and/or variable life insurance contracts (the 'Contracts') issued by
such companies. In accordance with their respective legal obligations, it is
expected that the Insurance Companies will generally vote the shares of the
Transferor Fund based on the instructions received from the owners of the
Contracts (the 'Contract Owners') having the voting interest in the shares to be
voted.
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by the Acquiring Fund of
substantially all of the assets, and the assumption of all of the liabilities,
of the Transferor Fund in exchange solely for an equal aggregate value of
Acquiring Fund's shares of common stock, with a par value of $0.10 per share
('Acquiring Fund Common Stock'), and the subsequent distribution to Transferor
Fund stockholders in liquidation of the Transferor Fund of all of the Acquiring
Fund Common Stock received in exchange for their corresponding shares of common
stock of Transferor Fund, with a par value of $0.10 per share ('Transferor Fund
Common Stock'), upon and subject to the terms hereinafter set forth (the
'Reorganization').
In the course of the Reorganization, Acquiring Fund Common Stock will be
distributed to Transferor Fund stockholders as follows: each holder of
Transferor Fund Common Stock will be entitled to receive the number of shares of
Acquiring Fund Common Stock to be received by Transferor Fund equal to the
aggregate net asset value of the Transferor Fund Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 6 of this Agreement). In
consideration therefor, on the Exchange Date the Acquiring Fund shall assume all
of the Transferor Fund's obligations and liabilities then existing, whether
absolute, accrued, contingent or otherwise. It is intended that the
Reorganization described in this Plan shall be a reorganization within the
meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended
(the 'Code'), and any successor provision.
As used in this Agreement, the term 'Investments' shall mean (i) the
investments of the Transferor Fund shown on the schedule of its investments as
of the Valuation Time (as defined in Section 2(c) of this Agreement) furnished
to the Acquiring Fund, with such additions thereto and deletions therefrom as
may have arisen in the course of the Transferor Fund's business up to the
Valuation Time; and (ii) all other assets owned by the Transferor Fund or
liabilities incurred as of the Valuation Time, except that the Transferor Fund
shall retain cash, bank deposits or cash equivalent securities in an estimated
amount necessary to (1) pay its income dividends and capital gains
distributions, if any, payable for the period prior to the Valuation Time, and
(2) pay such contingent and other liabilities as the Directors of the Company
reasonably shall deem to exist against the Transferor Fund, if any, at the
Valuation Time, for which contingent and other appropriate liability reserves
shall be established on the Transferor Fund's books. The Transferor Fund also
shall retain any and all rights which it may have over and against any other
person which may have accrued up to the Valuation Time. Any unexpended portion
of the foregoing funds so retained by the Transferor Fund shall be disbursed by
the Transferor Fund pro rata to its stockholders upon termination of the
Transferor Fund as a final liquidating dividend.
B-1
<PAGE>
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, the Transferor Fund and the Acquiring Fund hereby agree as
follows:
1. Representations and Warranties of the Funds.
(a) The Acquiring Fund and the Transferor Fund represents and
warrants to, and agrees with, each other that:
(i) The execution, delivery and performance of this Agreement
has been duly authorized by all necessary action of the Company's
Board of Directors, and this Agreement will constitute a valid and
binding obligation of such Fund enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
(ii) Such Fund has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of the other
Fund, each as of December 31, 1995, said financial statements having
been audited by Deloitte & Touche LLP, independent public
accountants. An unaudited statement of assets, liabilities and
capital of such Fund and an unaudited schedule of investments of such
Fund, each as of the Valuation Time, will be furnished to the other
Fund at or prior to the Exchange Date for the purpose of determining
the number of shares of the Acquiring Fund Common Stock to be issued
pursuant to Section 3 of this Agreement; and each unaudited statement
will fairly present the financial position of such Fund as of the
Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
(iii) Such Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in
the ordinary course of its business as an investment company since
December 31, 1995 and those incurred in connection with the
Reorganization. As of the Valuation Time, such Fund will advise the
other Fund in writing of all known liabilities, contingent or
otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(iv) Such Fund has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be
filed by it, and has paid or has obtained extensions to pay, all
Federal, state and local taxes shown on said returns to be due and
owing and all assessments received by it, up to and including the
taxable year in which the Exchange Date occurs. All tax liabilities
of such Fund have adequately been provided for on its books, and no
tax deficiency or liability of such Fund has been asserted and no
question with respect thereto has been raised by the Internal Revenue
Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the
Exchange Date occurs.
(b) The Transferor Fund represents and warrants to, and agrees
with, the Acquiring Fund that:
(i) The Transferor Fund will not sell or otherwise dispose of
any of the shares of the Acquiring Fund to be received in the
Reorganization, except in distribution to the stockholders of the
Transferor Fund.
(ii) At both the Valuation Time and the Exchange Date, the
Transferor Fund will have full right, power and authority to sell,
assign, transfer and deliver the Investments. At the Exchange Date,
subject only to the delivery of the Investments as contemplated by
this Agreement, the Transferor Fund will have good and marketable
title to all of the Investments, and the Acquiring Fund will acquire
all of the Investments free and clear of any encumbrances, liens or
security interests and without any restrictions upon the transfer
thereof (except those imposed by the Federal or state securities laws
and those imperfections of title or encumbrances as do not materially
detract from the value or use of the Investments or materially affect
title thereto).
B-2
<PAGE>
(c) The Acquiring Fund represents and warrants to, and agrees with,
the Transferor Fund that:
(i) The Acquiring Fund Common Stock to be issued to the
Transferor Fund pursuant to this Agreement will have been duly
authorized and, when issued and delivered pursuant to this Agreement,
will be legally and validly issued and will be fully paid and
nonassessable and will have full voting rights, and no stockholder of
the Acquiring Fund will have any preemptive right of subscription or
purchase in respect thereof.
(ii) At or prior to the Exchange Date, the Acquiring Fund Common
Stock to be transferred to the Transferor Fund on the Exchange Date
will be duly qualified for offering to the public in all states of
the United States in which the sale of shares of the Acquiring Fund
presently are qualified, and there are a sufficient number of such
shares registered under the Securities Act of 1933, as amended (the
'1933 Act'), and with each pertinent state securities commission to
permit the transfers contemplated by this Agreement to be
consummated.
(iii) At or prior to the Exchange Date, the Acquiring Fund will
have obtained any and all regulatory and Director approvals necessary
to issue the Acquiring Fund Common Stock to the Transferor Fund.
2. The Reorganization. (a) Subject to the requisite approval of the
stockholders of the Transferor Fund, and to the other terms and conditions
contained herein, the Transferor Fund agrees to convey, transfer and
deliver to the Acquiring Fund for the benefit of the Acquiring Fund, and
the Acquiring Fund agrees to acquire from the Transferor Fund for the
benefit of the Acquiring Fund, on the Exchange Date all of the Investments
(including interest accrued as of the Valuation Time on debt instruments)
of the Transferor Fund, and assume all of the liabilities of the Transferor
Fund, in exchange solely for that number of shares of the Acquiring Fund
Common Stock provided in Section 3 of this Agreement. Pursuant to this
Agreement, as soon as practicable the Transferor Fund will distribute all
the Acquiring Fund Common Stock received by it to its stockholders in
exchange for their corresponding Transferor Fund Common Stock. Such
distribution shall be accomplished by the opening of stockholder accounts
on the stock ledger records of the Acquiring Fund in the amounts due the
stockholders of the Transferor Fund based on their respective holdings in
the Transferor Fund as of the Valuation Time.
(b) The Transferor Fund will pay or cause to be paid any interest
it receives on or after the Exchange Date with respect to the
Investments transferred to the Acquiring Fund hereunder.
(c) The Valuation Time shall be 4:15 P.M., New York time, (or such
earlier or later time as each Fund's net asset value is determined) on
December 13, 1996, or such earlier or later day and time as mutually
may be agreed upon in writing (the 'Valuation Time').
(d) The Acquiring Fund will acquire substantially all of the assets
of, and assume all of the known liabilities of, the Transferor Fund,
except that recourse for such liabilities will be limited to the
Acquiring Fund. The known liabilities of each Fund as of the Valuation
Time shall be confirmed in writing to the other Fund pursuant to Section
1(a)(iii) of this Agreement.
3. Issuance and Valuation of the Acquiring Fund Common Stock in the
Reorganization. Full shares of the Acquiring Fund Common Stock of an
aggregate net asset value or liquidation preference, as the case may be,
equal (to the nearest one ten thousandth of one cent) to the value of the
assets of the Transferor Fund acquired determined as hereinafter provided,
reduced by the amount of liabilities assumed by the Acquiring Fund, shall
be issued by the Acquiring Fund in exchange for such assets of the
Transferor Fund. The assets of the Transferor Fund and the Acquiring Fund
shall be determined in accordance with the procedures described in the
Acquiring Fund Offering Documents as of the Valuation Time, and no formula
will be used to adjust the net asset value so determined of either the
Transferor Fund or the Acquiring Fund to take into account differences in
realized and unrealized gains and losses. Values in all cases shall be
determined as of the Valuation Time. The value of the Investments of the
Transferor Fund to be transferred to the Acquiring Fund shall be determined
by the Acquiring Fund pursuant to the procedures utilized by the Acquiring
Fund in valuing its own assets and determining its own liabilities for
purposes of the Reorganization. Such valuation and determination shall be
made by the Acquiring Fund in cooperation with the Transferor Fund and
shall be confirmed in writing to the Acquiring Fund by the Transferor Fund.
The net asset value per share of the Acquiring Fund Common Stock shall be
determined in accordance with such
B-3
<PAGE>
procedures and the Acquiring Fund shall certify the computations involved.
The Acquiring Fund shall issue to the Transferor Fund separate certificates
or share deposit receipts for the Acquiring Fund Common Stock registered in
the name of the Transferor Fund. The Transferor Fund then shall distribute
the Acquiring Fund Common Stock to its corresponding stockholders of the
Transferor Fund Common Stock by redelivering the certificates or share
deposit receipts evidencing ownership of the Acquiring Fund Common Stock to
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), as the transfer
agent and registrar for the Acquiring Fund Common Stock. With respect to
any Transferor Fund stockholder holding certificates evidencing ownership
of the Transferor Fund Common Stock as of the Exchange Date, and subject to
the Acquiring Fund being informed thereof in writing by the Transferor
Fund, the Acquiring Fund will not permit such stockholder to receive new
certificates evidencing ownership of the Acquiring Fund Common Stock,
exchange the Acquiring Fund Common Stock credited to such stockholder's
account for shares of other investment companies managed by Merrill Lynch
Asset Management, L.P. or any of its affiliates, or pledge or redeem such
the Acquiring Fund Common Stock, in any case, until notified by the
Transferor Fund or its agent that such stockholder has surrendered his or
her outstanding certificates evidencing ownership of the Transferor Fund
Common Stock or, in the event of lost certificates, posted adequate bond.
The Transferor Fund will request its stockholders to surrender their
outstanding certificates evidencing ownership of the Transferor Fund Common
Stock or post adequate bond therefor.
4. Payment of Expenses. (a) With respect to expenses incurred in
connection with the Reorganization, the Acquiring Fund shall pay,
subsequent to the Exchange Date, all expenses incurred by the Acquiring
Fund or the Transferor Fund in connection with the Reorganization,
including, but not limited to, all costs related to the preparation and
distribution of the registration statement filed by the Company on Form
N-14 relating to the Acquiring Fund Common Stock to be issued pursuant to
this Agreement, and any supplement or amendment thereto or to the documents
therein (as amended, the 'N-14 Registration Statement'), all costs related
to the preparation and filing of an exemptive order application with the
Securities and Exchange Commission (the 'Commission') with respect to the
transactions contemplated herein and the fees of special counsel to the
Reorganization. Such fees and expenses shall include legal, accounting and
state securities or blue sky fees, printing costs, filing fees, stock
exchange fees, portfolio transfer taxes (if any), and any similar expenses
incurred in connection with the Reorganization. Neither the Transferor Fund
nor the Acquiring Fund shall pay any expenses of its respective
stockholders arising out of or in connection with the Reorganization, and
neither the Transferor Fund nor the Acquiring Fund shall pay for the costs
of printing and mailing the form of proxy, the notice of the Company's
annual meeting of stockholders and the Proxy Statement--Prospectus forming
part of the N-14 Registration Statement to Contract Owners.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting
therefrom, including, without limitation, consequential damages,
provided, however, that the Transferor Fund and the Acquiring Fund will
bear all expenses incurred by the Acquiring Fund or the Transferor Fund
in connection with the Reorganization in proportion to the net assets of
each Fund.
5. Covenants of the Transferor Fund and the Acquiring Fund. (a) The
Transferor Fund agrees to call a meeting of its stockholders as soon as is
practicable after the effective date of the N-14 Registration Statement for
the purpose of considering the Reorganization as described in this
Agreement. As a condition to the obligations of each of the parties hereto,
the holders of more than fifty percent of the shares of the Transferor Fund
Common Stock issued and outstanding and entitled to vote thereon shall have
approved this Agreement at such a meeting at or prior to the Valuation
Time.
(b) The Transferor Fund and the Acquiring Fund each covenants to
operate its respective business as presently conducted between the date
hereof and the Exchange Date.
(c) The Transferor Fund agrees that following the consummation of
the Reorganization, it will liquidate in accordance with the laws of the
State of Maryland and any other applicable law, it will not make any
distributions of any Acquiring Fund Common Stock other than to the
stockholders of the Transferor Fund and without first paying or
adequately providing for the payment of all of the Transferor Fund's
liabilities not assumed by the Acquiring Fund, if any, and on and after
the Exchange Date it shall not conduct any business except in connection
with its liquidation.
B-4
<PAGE>
(d) The Company will file the N-14 Registration Statement with the
Commission and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as practicable. The
Transferor Fund and the Acquiring Fund agree to cooperate fully with
each other, and each will furnish to the other the information relating
to itself to be set forth in the N-14 Registration Statement as required
by the 1933 Act, the Investment Company Act of 1940, as amended (the
'1940 Act'), and the rules and regulations thereunder and the state
securities or blue sky laws.
(e) The Acquiring Fund agrees to advise the Transferor Fund
promptly in writing if at any time prior to the Exchange Date the assets
of the Transferor Fund include any assets which the Acquiring Fund is
not permitted, or reasonably believes to be unsuitable for it, to
acquire, including without limitation any security which, prior to its
acquisition by the Transferor Fund, the Acquiring Fund has informed the
Transferor Fund is unsuitable for the Acquiring Fund to acquire.
Moreover, the Acquiring Fund has no plan or intention to sell or
otherwise dispose of the assets of the Transferor Fund to be acquired in
the Reorganization, except for dispositions made in the ordinary course
of business.
(f) Each of the Transferor Fund and the Acquiring Fund agrees that
by the Exchange Date all of its Federal and other tax returns and
reports required to be filed on or before such date shall have been
filed and all taxes shown as due on said returns either have been paid
or adequate liability reserves have been provided for the payment of
such taxes. In connection with this covenant, the Funds agree to
cooperate with each other in filing any tax return, amended return or
claim for refund, determining a liability for taxes or a right to a
refund of taxes or participating in or conducting any audit or other
proceeding in respect of taxes. The Acquiring Fund agrees to retain for
a period of ten years following the Exchange Date all returns, schedules
and work papers and all material records or other documents relating to
tax matters of the Transferor Fund for its taxable period first ending
after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential
except as otherwise may be necessary in connection with the filing of
returns or claims for refund or in conducting an audit or other
proceeding. After the Exchange Date, the Transferor Fund shall prepare,
or cause its agents to prepare, any Federal, state or local tax returns,
including any Forms 1099, required to be filed by the Transferor Fund
with respect to the Transferor Fund's final taxable year ending with its
complete liquidation and for any prior periods or taxable years and
further shall cause such tax returns and Forms 1099 to be duly filed
with the appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses incurred by
the Transferor Fund (other than for payment of taxes) in connection with
the preparation and filing of said tax returns and Forms 1099 after the
Exchange Date shall be borne by the Transferor Fund to the extent such
expenses would have been accrued by the Transferor Fund in the ordinary
course without regard to the Reorganization; any excess expenses shall
be borne by the Acquiring Fund at the time such tax returns and Forms
1099 are prepared.
(g) The Transferor Fund agrees to mail to its respective
stockholders of record entitled to vote at the meeting of stockholders
at which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice thereof, a
combined Proxy Statement and Prospectus which complies in all material
respects with the applicable provisions of the 1933 Act and Section
20(a) of the 1940 Act, and the rules and regulations, respectively,
thereunder.
(h) Following the consummation of the Reorganization, the Acquiring
Fund expects to stay in existence and continue its business.
6. Exchange Date. (a) An instrument of transfer conveying the assets
of the Transferor Fund to be transferred, together with any other
Investments, and an instrument ordering the issuance to the Transferor Fund
of the Acquiring Fund Common Stock to be issued, shall be delivered at the
offices of Rogers & Wells, 200 Park Avenue, New York, New York 10166, at
10:00 A.M. on the next full business day following the Valuation Time, or
at such other place, time and date agreed to by the Transferor Fund and the
Acquiring Fund, the date and time upon which such delivery is to take place
being referred to herein as the 'Exchange Date.' To the extent that any
Investments, for any reason, are not transferable on the Exchange Date, the
Transferor Fund shall cause such Investments to be transferred to the
Acquiring Fund's account with The Bank of New York at the earliest
practicable date thereafter.
B-5
<PAGE>
(b) The Transferor Fund will deliver to the Acquiring Fund on the
Exchange Date confirmations or other adequate evidence as to the tax
basis of each of the Investments delivered to the Acquiring Fund
hereunder, certified by Deloitte & Touche LLP.
(c) The Acquiring Fund shall have made prior arrangements for the
delivery on the Exchange Date of the Investments to The Bank of New York
as the custodian for the Acquiring Fund.
(d) As soon as practicable after the close of business on the
Exchange Date, the Transferor Fund shall deliver to the Acquiring Fund a
list of the names and addresses of all of the stockholders of record of
the Transferor Fund on the Exchange Date and the number of shares of the
Transferor Fund Common Stock owned by each such stockholder, certified
by MLFDS as its transfer agent or by the President of the Company to the
best of their knowledge and belief.
7. Conditions to Consummation of the Reorganization. The obligations
of Funds hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of more than fifty percent of the Transferor Fund Common Stock,
issued and outstanding and entitled to vote thereon; and that the Board
of Directors of the Company, including a majority of the members of the
Board of Directors of the Company who are not 'interested persons' as
defined under the 1940 Act, shall have approved this Agreement.
(b) That each Fund shall have furnished to the other Fund a
statement of its assets, liabilities and capital, with values determined
as provided in Section 3 of this Agreement, together with a schedule of
its investments, all as of the Valuation Time, certified by the
Company's President (or any Vice President) and its Treasurer, and a
certificate signed by the Company's President (or any Vice President)
and its Treasurer, dated as of the Exchange Date, certifying that as of
the Valuation Time and as of the Exchange Date there has been no
material adverse change in the financial position of each Fund since
December 31, 1995, other than changes in its portfolio securities since
that date or changes in the market value of its portfolio securities.
For purposes of this paragraph, a decline in the net asset value per
share of a Fund, the discharge or incurrence of a Fund's liabilities in
the ordinary course of business or the redemption of a Fund's Common
Stock by stockholders of such Fund shall not constitute a material
adverse change.
(c) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(d) That the Company shall have received an opinion of Wilmer,
Cutler & Pickering, Maryland counsel to the Company, in form
satisfactory to the Company and dated the Exchange Date, to the effect
that: (i) the Company is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of
Maryland; (ii) the Acquiring Fund Common Stock to be delivered to the
Transferor Fund stockholders as provided for by this Agreement is duly
authorized and, upon delivery, will be validly issued and outstanding
and fully paid and nonassessable by the Acquiring Fund, and no
stockholder of the Acquiring Fund has any preemptive right to subscribe
or purchase in respect thereof (pursuant to the Company's Articles of
Incorporation, as amended (the 'Charter'), or by-laws or, to the best of
such counsel's knowledge, otherwise); (iii) the Company has the
corporate power to reclassify the Transferor Fund Common Stock in
accordance with the terms of the Articles of Amendment and at the
Exchange Date will have duly transferred the assets and liabilities of
the Transferor Fund Common Stock as contemplated by this Agreement; (iv)
this Agreement has been duly authorized, executed and delivered by the
Company, and represents a valid and binding obligation, enforceable in
accordance with its terms, subject to the effects of bankruptcy,
insolvency, moratorium, fraudulent conveyance and similar laws relating
to or affecting creditors' rights generally and court decisions with
respect thereto; provided, that such counsel need not express an opinion
with respect to the application of equitable principles in any
proceeding, whether at law or in equity; (v) the execution and delivery
of this Agreement did not, and the consummation of the Reorganization
will not, violate the Company's Charter or by-laws or Maryland General
Corporate Law; (vi) no consent, approval, authorization or order of any
Maryland court or governmental authority
B-6
<PAGE>
is required for the consummation by the Acquiring Fund and the
Transferor Fund of the Reorganization, except such as have been obtained
under Maryland law; (vii) all necessary corporate action, including
stockholder action, has been taken in connection with the consummation
of the Reorganization; and (viii) such opinion is solely for the benefit
of the Company and its Directors and officers. In giving the opinion set
forth above, Wilmer Cutler & Pickering may state that it is relying on
certificates of officers of the Company with regard to matters of fact
and certain certificates and written statements of governmental
officials with respect to the good standing of the Company.
(e) That the Company shall have received an opinion of Rogers &
Wells, in form satisfactory to the Company and dated the Exchange Date,
to the effect that (i) no consent, approval, authorization or order of
any United States Federal court or governmental authority is required
for the consummation by the Transferor Fund and the Acquiring Fund of
the Reorganization, except such as have been obtained under the 1933 Act
and the 1940 Act and the published rules and regulations of the
Commission thereunder and such as may be required under state securities
or blue sky laws; (ii) the N-14 Registration Statement has become
effective under the 1933 Act, to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the N-14 Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act, and the
N-14 Registration Statement, and each amendment or supplement thereto,
as of their respective effective dates, appear on their face to be
appropriately responsive in all material respects to the requirements of
the 1933 Act and the 1940 Act and the published rules and regulations of
the Commission thereunder; (iii) the descriptions in the N-14
Registration Statement of statutes, legal and governmental proceedings
and contracts and other documents are accurate and fairly present the
information required to be shown; (iv) such counsel does not know of any
statutes, legal or governmental proceedings or contracts or other
documents related to the Reorganization of a character required to be
described in the N-14 Registration Statement which are not described
therein or, if required to be filed, filed as required; (v) the
execution and delivery of this Agreement does not, and the consummation
of the Reorganization will not, violate any material provision of any
agreement (known to such counsel) to which the Acquiring Fund or the
Transferor Fund is a party or by which the Acquiring Fund or the
Transferor Fund is bound; (vi) the Company, to the knowledge of such
counsel, is not required to qualify to do business as a foreign
corporation in any jurisdiction except as may be required by state
securities or blue sky laws, and except where it has so qualified or the
failure so to qualify would not have a material adverse effect on the
Acquiring Fund or the Transferor Fund, or their respective stockholders;
(vii) such counsel does not have actual knowledge of any material suit,
action or legal or administrative proceeding pending or threatened
against the Acquiring Fund or the Transferor Fund, the unfavorable
outcome of which would materially and adversely affect the Acquiring
Fund or the Transferor Fund; and (viii) all corporate actions required
to be taken by the Company to authorize this Agreement and to effect the
Reorganization have been duly authorized by all necessary corporate
actions on the part of the Company. Such opinion also shall state that
(x) while such counsel cannot make any representation as to the accuracy
or completeness of statements of fact in the N-14 Registration Statement
or any amendment or supplement thereto, nothing has come to their
attention that would lead them to believe that, on the respective
effective dates of the N-14 Registration Statement and any amendment or
supplement thereto, (1) the N-14 Registration Statement or any amendment
or supplement thereto contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and (2) the
prospectus and statement of additional information included in the N-14
Registration Statement contained any untrue statement of a material fact
or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and (y) such counsel does not express any opinion or
belief as to the financial statements, other financial data, statistical
data or information relating to the Acquiring Fund or the Transferor
Fund contained or incorporated by reference in the N-14 Registration
Statement. In giving the opinion set forth above, Rogers & Wells may
state that it is relying on certificates of officers of the Company with
regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing
of the Company and on the opinion of Wilmer, Cutler & Pickering as to
matters of Maryland law.
B-7
<PAGE>
(f) That the Company shall have received an opinion of Rogers &
Wells, to the effect that for Federal income tax purposes (i) the
transfer of substantially all of the Investments of the Transferor Fund
to the Acquiring Fund in exchange solely for the Acquiring Fund Common
Stock as provided in this Agreement will constitute a reorganization
within the meaning of Section 368(a)(1)(D) of the Code; the Transferor
Fund and the Acquiring Fund will be a 'party to a reorganization' within
the meaning of Section 368(b) of the Code; (ii) no gain or loss will be
recognized to the Transferor Fund as a result of the Reorganization;
(iii) no gain or loss will be recognized to the Acquiring Fund as a
result of the Reorganization; (iv) no gain or loss will be recognized to
the stockholders of the Transferor Fund on the distribution to them by
the Transferor Fund of the Acquiring Fund Common Stock in exchange for
their corresponding Transferor Fund Common Stock, gain, if any, will be
recognized with respect to any cash or property other than the Acquiring
Fund Common Stock received; (v) no gain or loss will be recognized by
the stockholders of the Acquiring Fund upon the issuance of the
Acquiring Fund Common Stock and the distribution of such Acquiring Fund
Common Stock to the Transferor Fund stockholders in the Reorganization;
(vi) the basis to the Acquiring Fund of the Investments will be the same
as the basis of the Investments in the hands of the Transferor Fund
immediately prior to the consummation of the Reorganization; (vii) after
the Reorganization, the basis of the Acquiring Fund Common Stock
received by each stockholder of the Transferor Fund in the
Reorganization will equal the basis of the stock of the Transferor Fund
exchanged therefor; (viii) a stockholder's holding period for its
Acquiring Fund Common Stock received in the Reorganization will be
determined by including the period for which it held the Transferor Fund
Common Stock exchanged therefor, provided that it held such Transferor
Fund Common Stock as a capital asset; (ix) the Acquiring Fund's holding
period with respect to the Investments will include the period for which
such Investments were held by the Transferor Fund; and (x) no gain or
loss will be recognized to the Transferor Fund or its stockholders upon
the liquidation of the Transferor Fund in connection with the
Reorganization. In addition, such opinion shall state that, without any
independent investigation having been made with respect to the
qualification of either the Transferor Fund or the Acquiring Fund as a
regulated investment company under the Code and based upon certain
representations by the Transferor Fund and the Acquiring Fund, the
status of the Transferor Fund and the Acquiring Fund as regulated
investment companies under Sections 851-855 of the Code will not be
affected as a result of the Reorganization, except that upon the
liquidation of the Transferor Fund in connection with the Reorganization
its regulated investment company status will terminate.
(g) That all proceedings taken by each Fund in connection with the
Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to the other Fund.
(h) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of the
Company, contemplated by the Commission.
(i) That the Company shall have received from Deloitte & Touche LLP
a letter dated as of the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the
Exchange Date, in form and substance satisfactory to the Company, to the
effect that (i) they are independent public accountants with respect to
the Funds within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder; (ii) in their opinion, the
financial statements and supplementary information of the Funds included
or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; (iii) on the basis of limited
procedures agreed upon by the Company and described in such letter (but
not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of the Funds included
in the N-14 Registration Statement, and inquiries of certain officials
of the Company responsible for financial and accounting matters, nothing
came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder, (b) such unaudited financial
statements are not
B-8
<PAGE>
fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to
the unaudited financial statements taken as a whole; and (iv) on the
basis of limited procedures agreed upon by the Company and described in
such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to the Funds
appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) (with
the exception of performance comparisons, if any), if any, has been
obtained from the accounting records of the Funds or from schedules
prepared by officials of the Company having responsibility for financial
and reporting matters and such information is in agreement with such
records, schedules or computations made therefrom.
(j) That the Company shall have received a letter from Deloitte &
Touche LLP, dated the Exchange Date, stating that such firm has
performed a limited review of the Federal, state and local income tax
returns of the Transferor Fund for the period ended December 31, 1995
(which returns originally were prepared and filed by the Transferor
Fund), and that based on such limited review, nothing came to their
attention which caused them to believe that such returns did not
properly reflect, in all material respects, the Federal, state and local
income taxes of the Transferor Fund for the period covered thereby; and
that for the period from December 31, 1995 to and including the Exchange
Date such firm has performed a limited review to ascertain the amount of
applicable Federal, state and local taxes, and has determined that
either such amount has been paid or reserves established for payment of
such taxes, this review to be based on unaudited financial data; and
that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside
for payment of such taxes were not adequate in all material respects for
the satisfaction of Federal, state and local taxes for the period from
December 31, 1995 to and including the Exchange Date and for any taxable
year of the Transferor Fund ending upon the liquidation of the
Transferor Fund or that the Transferor Fund would not continue to
qualify as a regulated investment company for Federal income tax
purposes.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened
which would materially affect the financial condition of the Acquiring
Fund or would prohibit the Reorganization.
(l) That the Company shall have received from the Commission an
order of exemptive relief from the provisions of Section 17 of the 1940
Act as may, in the view of its counsel, be required in order to
consummate the Reorganization, and that the Company shall have received
from the Commission such other orders as counsel for the Company deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, and all such orders shall be in full
force and effect.
(m) That the Investments to be transferred to the Acquiring Fund
shall not include any assets or liabilities which the Acquiring Fund may
not properly acquire or assume.
(n) That prior to the Exchange Date, the Transferor Fund shall have
declared a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to its stockholders all
of its net investment company taxable income for the period from the
first day of the fiscal year in which the Exchange Date falls to and
including the Exchange Date, if any (computed without regard to any
deduction or dividends paid), and all of its net capital gain, if any,
realized for the period from the first day of the fiscal year in which
the Exchange Date falls to and including the Exchange Date.
(o) That any condition stated in the N-14 Registration Statement as
a precondition to the consummation of the Reorganization shall have been
met prior to the Exchange Date.
B-9
<PAGE>
8. Articles of Amendment. For purposes of Maryland law, the
transactions contemplated by this Agreement will be effectuated by Articles
of Amendment, substantially in the form attached hereto as Exhibit A, which
will amend the Charter of the Company to provide, among other things, that
all shares of the Transferor Fund will be exchanged for, and converted and
reclassified into shares of the Acquiring Fund. The Board of Directors may
modify the Articles of Amendment as it deems appropriate if the necessary
consents of stockholders has not been obtained or one or more of the
transactions contemplated in the Articles of Amendment has been abandoned.
9. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
stockholders of the Transferor Fund) prior to the Exchange Date, or the
Exchange Date may be postponed by action of the Board of Directors of
the Company for any reason, including if any condition set forth in
Section 7 of this Agreement has not been fulfilled or waived by the
Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by December 31, 1996, this Agreement automatically shall
terminate on that date, unless a later date is approved by the Board of
Directors of the Company.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further
effect, and there shall not be any liability on the part of either the
Transferor Fund or the Acquiring Fund or persons who are their
directors, officers, agents or stockholders in respect of this
Agreement.
(d) At any time prior to the Exchange Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of
the Company on behalf of either the Transferor Fund or the Acquiring
Fund, respectively (whichever is entitled to the benefit thereof), if,
in the judgment of the Board after consultation with its counsel, such
action or waiver will not have a material adverse effect on the benefits
intended under this Agreement to the stockholders of their respective
fund, on behalf of which such action is taken. In addition, the Board of
Directors of the Company hereby delegates to Merrill Lynch Asset
Management, L.P. the ability to make non-material changes to the
transaction if it deems it to be in the best interests of both the
Transferor Fund and the Acquiring Fund to do so.
(e) The representations and warranties of each Fund contained in
Section 1 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither the Transferor Fund, the
Acquiring Fund nor any of their stockholders nor any agents, officers or
directors of the Company shall have any liability with respect to such
representations or warranties after the Exchange Date. This provision
shall not protect any agent, officer or director of the Company or any
stockholder of the Transferor Fund or the Acquiring Fund against any
liability to the entity for which that officer, director or trustee,
agent or stockholder so acts or to its stockholders to which that
officer, director or trustee, agent or stockholder otherwise would be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose
any terms or conditions which are determined by action of the Board of
Directors of the Company to be acceptable, such terms and conditions
shall be binding as if a part of this Agreement without further vote or
approval of the stockholders of the Transferor Fund, unless such terms
and conditions shall result in a change in the method of computing the
number of shares of the Acquiring Fund Common Stock to be issued to the
Transferor Fund in which event, unless such terms and conditions shall
have been included in the proxy solicitation materials furnished to the
stockholders of the Transferor Fund prior to the meeting at which the
Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless the Company promptly shall call a
special meeting of stockholders of the Transferor Fund at which such
conditions so imposed shall be submitted for approval.
B-10
<PAGE>
10. Other Matters.
(a) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each
of the parties, notwithstanding any investigation made by them or on
their behalf.
(b) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be deemed to
have been given if delivered or mailed, first class postage prepaid,
addressed to the Transferor Fund or the Acquiring Fund, in either case
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Arthur
Zeikel, President.
(c) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization,
may not be changed except by a letter of agreement signed by each party
and shall be governed by and construed in accordance with the laws of
the State of New York applicable to agreements made and to be performed
in said state.
(d) Copies of the Charter of the Company are on file with the
Department of Assessments and Taxation of the State of Maryland and
notice is hereby given that this instrument is executed on behalf of the
Directors of the Company.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH VARIABLE SERIES FUNDS,
INC.,
on behalf of the Acquiring Fund
By: __________________________________
WITNESS:
- -----------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS,
INC.,
on behalf of the Transferor Fund
By: __________________________________
WITNESS:
- ----------------------------------------
B-11
<PAGE>
EXHIBIT A
FORM OF ARTICLES OF AMENDMENT TO THE CHARTER
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
ARTICLES OF AMENDMENT
Merrill Lynch Variable Series Funds, Inc., a Maryland corporation, having
its principal office in Baltimore City, Maryland (which is hereinafter called
the 'Corporation'), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended as follows:
(1) ARTICLE V of the charter of the Corporation is hereby amended to
add Section (d) to read in its entirety as follows:
'(d) The Corporation currently has classified capital stock
consisting of Common Stock, par value $0.10 per share, that are
designated in seventeen (17) classes as separate funds, including
classes of Common Stock, par value $0.10 per share, that are designated
as funds as follows:
<TABLE>
<CAPTION>
NAME OF FUND AND NUMBER OF SHARES
CLASS OF COMMON STOCK OF COMMON STOCK
- ------------------------------------------------------------------ ----------------
<S> <C>
Merrill Lynch International Bond Fund............................. 100,000,000
Merrill Lynch World Income Focus Fund............................. 100,000,000
Merrill Lynch Flexible Strategy Fund.............................. 100,000,000
Merrill Lynch Global Strategy Focus Fund.......................... 100,000,000
</TABLE>
Merrill Lynch International Bond Fund, a separate fund and class of Common
Stock ('International Bond Fund'), Merrill Lynch World Income Focus Fund, a
separate fund and class of Common Stock ('World Income Focus Fund'), and the
Corporation have entered into an Agreement and Plan of Reorganization dated even
date herewith (the 'International/World Income Plan of Reorganization'), that
provides for the transfer of substantially all of assets of International Bond
Fund to World Income Focus Fund in exchange for consideration in the form of
stock designated as World Income Focus Fund and the assumption of the
liabilities of International Bond Fund by World Income Focus Fund.
Merrill Lynch Flexible Strategy Fund, a separate fund and class of Common
Stock ('Flexible Strategy Fund'), Merrill Lynch Global Strategy Focus Fund, a
separate fund and class of Common Stock ('Global Strategy Focus Fund'), and the
Corporation have entered into an Agreement and Plan of Reorganization dated even
date herewith (the 'Flexible Strategy/Global Strategy Plan of Reorganization'),
that provides for the transfer of substantially all of the assets of Flexible
Strategy Fund to Global Strategy Focus Fund in exchange for consideration in the
form of stock designated as Global Strategy Focus Fund and the assumption of the
liabilities of Flexible Strategy Fund by Global Strategy Focus Fund.
In furtherance of, and to consummate the transactions contemplated by, each
of those Agreements and Plans of Reorganization the following actions shall be
simultaneously effective as of the 'Effective Time' (as defined hereinafter):
(i) Pursuant to the authority expressly vested in the Board of
Directors of the Corporation pursuant to the Maryland General Corporation
Law and Article V, Section (c) of the charter of the Corporation, each
authorized and unissued share of Common Stock of the Corporation designated
as International Bond Fund is hereby duly reclassified as one authorized and
unissued share of Common Stock of the Corporation designated as World Income
Focus Fund.
(ii) Pursuant to the authority expressly vested in the Board of
Directors of the Corporation pursuant to the Maryland General Corporation
Law and Article V, Section (c) of the charter of the Corporation, each
authorized and unissued share of Common Stock of the Corporation designated
as
B-A-1
<PAGE>
Flexible Strategy Fund is hereby duly reclassified as one share of Common
Stock of the Corporation designated as Global Strategy Focus Fund.
(iii) Each issued and outstanding share of Common Stock of the
Corporation designated as International Bond Fund is hereby exchanged and
duly reclassified into such number of share(s), or fraction thereof, of
Common Stock of the Corporation designated as World Income Focus Fund
calculated at the International Bond Fund Conversion Rate (as hereinafter
defined).
(iv) Each issued and outstanding share of Common Stock of the
Corporation designated as Flexible Strategy Fund is hereby exchanged and
duly reclassified into such number of share(s), or fraction thereof, of
Common Stock of the Corporation designated as Global Strategy Focus Fund
calculated at the Flexible Strategy Fund Conversion Rate (as hereinafter
defined).
(v) All assets and liabilities belonging to the shares of Common Stock
of the Corporation designated as International Bond Fund shall at the
Effective Time be transferred and belong to the class of Common Stock of
the Corporation designated as World Income Focus Fund.
(vi) All assets and liabilities belonging to the shares of Common
Stock of the Corporation designated as Flexible Strategy Fund shall at the
Effective Time be transferred and belong to the class of Common Stock of
the Corporation designated as Global Strategy Focus Fund.
(vii) Pursuant to Article V, Section (b)(3) of the charter of the
Corporation, all general liabilities of the Corporation shall be
reallocated among the authorized classes of Common Stock of the Corporation
based on the proportionate interest in the assets of the Corporation
belonging to each designated class of Common Stock of the Corporation.
(viii) The term 'International Bond Fund Conversion Rate' means the
number (or fraction) of share(s) of World Income Focus Fund into which each
share of International Bond Fund shall have been exchanged and reclassified
as determined by multiplying each share of Common Stock designated as
International Bond Fund by a fraction, of which the numerator shall be the
aggregate net asset value of all assets belonging to the shares of Common
Stock designated as International Bond Fund and the denominator shall be
the aggregate net asset value of all assets belonging to the shares of
Common Stock designated as World Income Focus Fund. The assets belonging to
each such class of Common Stock and the net asset value thereof have been
determined in accordance with the provisions of the International
Bond/World Income Plan of Reorganization.
(ix) The term 'Flexible Strategy Fund Conversion Rate' means the
number (or fraction) of share(s) of Global Strategy Focus Fund into which
each share of Flexible Strategy Fund shall have been exchanged and
reclassified determined by multiplying each share of Common Stock
designated as Flexible Strategy Fund by a fraction, of which the numerator
shall be the aggregate net asset value of all assets belonging to the
shares of Common Stock designated as Flexible Strategy Fund and the
denominator shall be the aggregate net asset value of all assets belonging
to the shares of Common Stock designated as Global Strategy Focus Fund. The
assets belonging to each such class of Common Stock and the net asset value
thereof have been determined in accordance with the provisions of the
Flexible Strategy/Global Strategy Plan of Reorganization.
(x) The classifications of the Common Stock designated as
International Bond Fund and Flexible Strategy Fund are hereby canceled and
references thereto in the charter of the Corporation are deleted.
(xi) 'Effective Time' means the later of (a) the date on which these
Articles of Amendment, having been duly advised and approved shall be filed
with, and accepted for record by, the Maryland State Department of
Assessments and Taxation, or (b) 4:00 p.m. Eastern Time on
, 1996.
(2) ARTICLE V of the charter of the Corporation is hereby amended to
add Section (e) to read in its entirety as follows:
'(e) Pursuant to Section 2-605(a)(4) of the Maryland General
Corporation Law and Article X of the charter of the Corporation, the
name of the class of shares of Common Stock, par value $0.10 per share,
of the Corporation designated as 'Merrill Lynch Intermediate Government
Bond Fund' is
B-A-2
<PAGE>
changed and redesignated as 'Merrill Lynch Government Bond Fund', and
the name of the class of shares of Common Stock, par value $0.10 per
share, of the Corporation designated as 'Merrill Lynch World Income
Focus Fund' is changed and redesignated as 'Merrill Lynch Global Bond
Focus Fund.'
SECOND: The amendments do not increase the authorized stock of the
Corporation.
THIRD: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
FOURTH: The foregoing amendments to the charter of the Corporation set
forth in Article FIRST (1) hereof have been advised by the Board of Directors
and approved by the stockholders of the Corporation entitled to vote on the
amendments.
FIFTH: The foregoing amendments to the charter of the Corporation set
forth in Article FIRST (2) hereof are limited to changes expressly permitted by
Section 2-605(a)(4) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused
these presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on , 1996.
<TABLE>
<S> <C>
WITNESS MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- ----------------------------------- -----------------------------------------
Name: Ira P. Shapiro Name: Arthur Zeikel
Title: Secretary Title: President
</TABLE>
THE UNDERSIGNED, President of Merrill Lynch Variable Series Funds, Inc.,
who executed on behalf of the Corporation the foregoing Articles of Amendment of
which this Certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles of Amendment to be the
corporate act of said Corporation and hereby certifies that to the best of his
knowledge, information, and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
______________________________________
President
B-A-3
<PAGE>
APPENDIX C
INFORMATION REGARDING THE ACQUIRING FUNDS AND TRANSFEROR FUNDS
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Acquiring Funds and Transferor 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
are incorporated into the SAI. The information in the following table should be
read in conjunction with the financial statements.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
----------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995++ 1994++ 1993 1992 1991 1990 1989 1988
------------ ------------ -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
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>
FOR THE
PERIOD
MAY 1,
1986+ TO
DEC. 31,
1987 1986
------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
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.
C-1
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
------------------------------------------------
FOR THE
PERIOD
FEBRUARY 28,
FOR THE YEAR ENDED DECEMBER 31, 1992+ TO
-------------------------------- DECEMBER 31,
1995 1994 1993 1992
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
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.
C-2
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND
----------------------------
FOR THE
PERIOD
FOR THE YEAR MAY 2,
ENDED 1994+ TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
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...................................................................... (.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%
------------ ------------
------------ ------------
</TABLE>
- ------------------
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
C-3
<PAGE>
FINANCIAL HIGHLIGHTS--(CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
----------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED JULY 1,
DECEMBER 31, 1993+ TO
------------------ DECEMBER 31,
1995++ 1994 1993
------- ------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
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)
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 year.
# Aggregate total investment return.
C-4
<PAGE>
MANAGEMENT'S DISCUSSION OF PERFORMANCE
OF THE ACQUIRING FUNDS AND THE TRANSFEROR FUNDS(1)
THE ENVIRONMENT
As 1995 drew to a close, the pace of U.S. economic activity apparently
slowed. There was strong evidence of a slowing economy by mid-year, a trend that
was quickly reversed as gross domestic product growth rebounded to a 4.2% pace
during the third calendar quarter of 1995. However, recent economic releases
suggest that this rate of expansion has not been sustained.
A number of key measures of economic growth indicate evidence of slowing
momentum. Retail sales for November were soft, a trend that continued throughout
the all-important holiday season, reflecting ongoing caution on the part of
debt-burdened consumers. At the same time, there has been an increase in initial
unemployment claims, along with weak job and income growth. As labor costs
continue to decelerate and commodity price pressures remain subdued,
inflationary pressures continue to be well under control.
These developments led the Federal Reserve Board to ease its monetary
policy slightly at the December 19, 1995 Federal Open Market Committee meeting.
However, the Clinton Administration and Congress have yet to reach an agreement
in their current Federal budget deliberations. While the probable direction of
economic activity will continue to be the primary focus of investors in the
months ahead, a credible plan for reducing the Federal budget deficit will also
be an important factor in the investment outlook.
FLEXIBLE STRATEGY FUND
The US equity sector, particularly the commitments in selected technology,
financial services and healthcare stocks, was a positive contributor to overall
performance. On the other hand, foreign equities as a whole provided returns
that were significantly below those of the US market. US and foreign bonds also
provided returns below US equities. However, the major factor in holding down
the overall return was the cash position, given the large differential between
the returns on US money market instruments and the US stock market during 1995.
As of December 31, 1995, the asset allocation of Flexible Strategy
Portfolio was: US equities, 29%; foreign equities, 6%; dollar-denominated
government and corporate bonds, 13%; and cash reserves, 52%. In the bond sector,
we liquidated commitments in Deutschemark- and lira-denominated bonds as well as
commitments in Danish kroner bonds established in prior months. These sales
reflected our belief that a rally in the US dollar versus these currencies could
offset any yield pick-up over dollar-denominated bonds. On the other hand, we
did not significantly change the US bond commitment. We expect the decline in
intermediate-term and longer-term US interest rates, which commenced in late
1994, to continue during 1996.
We significantly increased the cash reserve position of the Fund during the
last two months of 1995, reflecting a restructuring and reduction of the
commitments in US and foreign equities. We became increasingly cautious toward
the US equity market following the strong gains during much of 1995. In the
remaining US equity holdings, we retained commitments in the consumer staples
area as well as credit-sensitive and energy areas, which we expect to do well in
an environment of sluggish economic growth. In expectation of additional
monetary easing by the Federal Reserve Board, we retained commitments in 'early
cycle' equities in the consumer cyclical and basic industry sectors. We reduced
our position in technology equities and maintained representation in the
aerospace industry. On balance, we are not uncomfortable with the large cash
position over the near term. Our intention is to recommit the cash primarily to
US and foreign equities in the months ahead as opportunities present themselves.
GLOBAL STRATEGY FOCUS FUND
The primary positive contributor to overall Fund returns was the US equity
sector, since the US stock market was among the highest-returning equity markets
in 1995. With the exception of Switzerland, the returns of other equity markets
represented in the portfolio lagged those of the United States. Although
attractive on a
- ------------------
(1) The information under this heading has been taken from the Company's Annual
Report for the fiscal year ended December 31, 1995.
C-5
<PAGE>
historic basis, returns on the portfolio's US and foreign bonds were below that
of US equities. The Fund's average cash position, which was 34.4% of net assets,
was also a major factor in holding down the portfolio's return during 1995.
As of December 31, 1995, Global Strategy Focus Fund's asset allocation was:
foreign equities, 22%; US equities, 18%; US bonds, 19%; foreign bonds, 6%; and
cash reserves, 35%. The positions in Deutschemark- and lira-denominated bonds
were liquidated in late 1995, leaving foreign bond positions in the United
Kingdom and Canada. On the other hand, we maintained our position in US bonds.
In our opinion, the potential exists for a further interest rate decline in the
United States during 1996, reflecting a historically low rate of inflation.
The cash reserve position as of December 31, 1995 reflects a significant
increase during the last two months of 1995 and resulted from the reduction of
foreign equity positions. Evidence of slowing economic growth in Europe and the
emerging economies, particularly those of Asia, resulted in a less-optimistic
assessment of prospects for these markets. Our remaining positions in these
markets reflect a highly selective approach. We retained a significant
commitment to Japanese equities, since we believed that an improving economic
and financial background could lead to favorable relative performance for the
Japanese stock market in the coming months. We reduced our commitment in US
equities in response to our cautious outlook. In the remaining US equity
holdings, we retained significant commitments in areas which we expected to
perform well in a sluggish economic environment, including consumer staples,
financial services and energy. Our current intention is to recommit the cash
primarily to US and foreign equities as opportunities present themselves in
coming months.
INTERNATIONAL BOND FUND
Bond markets provided positive rates of return in the December calendar
quarter. The decline in economic activity throughout most of the world led to a
steady decline in interest rates. A significant part of the decline in interest
rates was in response to the continued low inflation levels reached across the
economies. While in general financial trends have been similar worldwide, there
have been noteworthy differences.
In Japan, the government implemented strong stimulative fiscal packages to
revive economic activity. Sectors of the economy have been negatively affected
by the strong yen and banking crisis. In an effort to promote consumer and
capital spending, the monetary authority has reflated the money supply. The
effect thus far has been a low level of short-term interest rates at
approximately 0.5%. On the other hand, long-term interest rates have been kept
high to assist the banks' earnings.
In contrast, European authorities have implemented fiscal austerity
programs to reign in government deficits. This has had the unfavorable
consequence of slowing their economies at a time of unacceptably high
unemployment levels. Accordingly, central banks have been keen to lower interest
rates. Short-term interest rates that are more easily controlled by the monetary
authorities on a near-term basis have been lowered. However, long-term interest
rates have remained relatively high given present and expected inflation levels.
In the dollar bloc countries, Canada and Australia, economies remain
lackluster. Fiscal austerity also remains the norm in these two countries. While
monetary policy is on the side of easing, its consequent impact on exchange
rates makes it a slower process and one dependent on outside factors.
We remain underweighted in Japanese assets late in the fiscal year as
investments in this sector appear to be defensive in nature and the other
markets appear to offer better value at greater absolute yield levels.
Investments in Europe were at the long end of the yield curve in those
countries with a steep curve, such as Germany, Belgium and Denmark. In contrast,
in countries with a flatter curve, such as Spain and Sweden, investments were
kept at the shorter end of the maturity spectrum. In the United Kingdom and
Italy, prospects for lower interest rates and the favorable yield pick ups
suggested that an appropriate portfolio strategy would be to have maturities
longer than the JP Morgan Government Bond Index which has an average maturity of
7.1 years. In France, investments were kept neutral to this index as the
volatility of the market in response to social unrest appeared to warrant a more
cautious approach.
In Canada and Australia, investments continued to be at the longer end of
the yield curve as the favorable yield pick-up and expectations of lower
interest rates appeared to make these investments particularly attractive.
C-6
<PAGE>
With respect to currency, the US dollar currently appears to be in a
consolidation phase. Although the outlook for the dollar over the longer term
appears favorable, there is a near-term risk that the fragility and instability
of the Japanese banking system may place pressure on the US dollar. Hence, the
currency exposure in the portfolio is neutral to the index and unhedged, in
general.
The favorable inflation levels and low growth experienced by the major
industrialized countries over the past year put in place the necessary
ingredients for the international bond market. For the year, yields declined
worldwide providing better-than expected returns. Additionally, the decline in
the US dollar benefited foreign investments. However, this trend was reversed
during the second half of the year. Nevertheless, returns on international
investments were favorable for the year. For the portfolio, the volatility of
the dollar affected returns particularly during the first half of the year when
the Fund underperformed the JP Morgan International Government Bond Index.
However, by the second half of the year investment strategies were changed and
the Fund outperformed the index but did not completely recoup the relative
underperformance of the first half.
WORLD INCOME FOCUS FUND
World growth continues to slow and inflation remains subdued, although the
US economy remains the most resilient, owing largely to the substantial interest
rate declines seen this year. The 4.2% annualized increase in US third quarter
1995 gross domestic product, while overstating the economy's underlying
strength, suggests the fourth quarter began at an above-trend pace. However, a
decline in October industrial production and retail sales without a rebound in
November brought this notion into question.
European growth continues to disappoint as demand has remained weak with
interest rate-sensitive spending not yet responding to this year's decline in
interest rates. German economic weakness clearly can be seen in the drop in
third quarter capacity utilization, the sharp drop in fourth quarter industrial
production and waning business and consumer confidence. The Bundesbank lowered
interest rates over 100 basis points (1.00%) in 1995 from 4.85% at year-end
1994, with its latest reduction in December, but the continued softness suggests
more needs to be done. Meanwhile, France announced a very tough fiscal reform
package coupled with an immediate sharp hike in taxes, in an effort to ensure
growth will stay soft, especially given France's desire to maintain a 'Franc
fort' policy. The risks of a sharp inventory correction in the United Kingdom
have risen, posing a dilemma for policymakers following the United Kingdom's
relatively tight November budget. Italy shows clear signs of slowing but
interest rate declines are unlikely while inflation stays high and political
stability remains uncertain, as Prime Minister Dini's resignation at year-end
could lead to elections over the next few months. The 'no' vote on Quebec
separatism has lifted a major cloud over the Canadian market, while in Australia
inflation drifts upward, albeit against a slowdown in economic activity. A
brighter picture for Latin American markets emerged over the last six months
resulting from stable political environments, a firm dollar and US bond market,
and rising global liquidity.
During the fourth quarter of 1995, virtually all of the major markets in
which your Fund is invested continued their 1995 rallies. The dollar remained in
a fairly narrow range as compared to all other currencies other than the yen,
which declined just over 4% relative to the dollar. Since August, the US bond
market rally has continued as economic growth remained soft and inflationary
pressures remained subdued. Expectations for a constructive Federal budget
agreement have faded but have not been dashed. With the background of a poor
holiday selling season and a weather-induced weak start to the new year, a
positive tone to the US bond market is likely to persist over the near term.
European economic activity remains below trend which, along with continued low
inflation, has allowed many countries to lower interest rates. Continued
below-trend growth is expected for the first quarter of 1996, which should
provide a solid underpinning to the European markets. Not surprisingly, in this
environment of a steady dollar and rising bond prices, the higher-yielding
markets in Europe have outperformed Germany. Although the Australian market
underperformed the US market during the December quarter, the Australian market
finished the year ahead of the two other dollar bloc markets, the United States
and Canada.
During the December quarter, the Fund's exposure to the US high-yield
sector remained unchanged at 42%, while the European exposure dropped slightly
following a reduction in the United Kingdom. In the dollar bloc (Canada,
Australia and New Zealand), we moved 1% from New Zealand to Australia while
slightly extending the average portfolio maturity. In Europe, we raised the
Danish exposure to 5% of net assets from 3% while
C-7
<PAGE>
extending the average portfolio maturity from 5.2 years to 6.5 years. We also
extended the average portfolio maturities in the United Kingdom, Italy and
Denmark. These extensions, while allowing us to maintain overweighted positions
in the higher-yielding European markets, substantially boosted performance in
the December quarter. In the emerging markets arena, we reduced our small
exposure to Mexico, given the recent sharp deterioration in the peso and
continued negative growth announced for the third quarter.
The outlook for global bond prices remains positive, given sluggish world
economic activity, falling inflation and/or inflationary expectations and
expanding liquidity. However, since these positive factors are recognized
globally, there is little value to insulate prices from adverse news regarding
any of the aforementioned factors. We will continue to utilize emerging markets
debt as a dollar bloc alternative, constantly maintaining our preference for the
most liquid and creditworthy issuers.
From a currency perspective, the dollar is likely to remain within a broad
trading range given the easier monetary policy stances of the Bank of Japan and
the Bundesbank, while set against a background of what appears to be much slower
fourth quarter economic growth relative to the third quarter in the United
States. The performance of the European economies over the next year will be
critical in determining the continued adherence to the current monetary union
timetable. Failure to maintain the present timetable could cause undue
volatility within European markets.
The market driver in the high-yield market for the year and quarter was
falling interest rates. Yields on ten-year US Treasury bonds fell from 7.85% to
5.63% over the course of the year as investors reacted positively to moderate
economic growth, low inflation and falling short-term interest rates. Because of
its greater sensitivity to overall interest rates, the higher-quality BB-rated
sector of the high-yield market outperformed issues rated B or less. The air
transportation industry (Delta Air Lines Inc., United Air Lines Inc., USAir
Inc.) outperformed all other high-yield industry groups with a return of 33.8%.
Other above-average performers included: homebuilders, +28.2%; cable TV, +26%;
telecommunications, +24.7%; electric utilities, +23%; and, broadcasting, +22%.
The weak performers were: retailers, -0.7%, and restaurants, +7.2%. Companies in
these industries struggled with weak earnings and a number of defaults. Default
rates rose from 1.4% in 1994 to 2.8% in 1995. The average annual default rate
since 1978 has been 3.1%, and 1995 represents a normalization after several very
low years, in our opinion. The portfolio experienced a surprise bankruptcy in
November when Harrah's Jazz Company, a casino project in New Orleans, filed for
protection after the bank lenders withdrew financing. We are pursuing recovery
vigorously.
At year-end 1995, the high-yield portion of the Fund was structured in a
fashion that we believe will enhance returns over the new year. As modest
economic growth and relatively stable interest rates seem the most likely
environment, at least for the next six months, corporate profits may become the
dominant force behind high-yield bond prices. Therefore, in 1996 industry and
company selection seem likely to dominate investment performance to an even
greater degree than in 1995.
During the fiscal year, we attempted to stay fully invested in the
high-yield portion of the Fund's portfolio to seek to reap the benefits of
generally rising bond prices. While maintaining an overweighted position in
higher-quality credits, we added to holdings in undervalued companies with
rising earnings and sold bonds of issuers with weak earnings. This strategy
enhanced the total return for our high-yield investments. Overall, however, the
Fund underperformed its benchmark for the fiscal year ended December 31, 1995,
largely because of its overweighted exposures to the dollar and higher-yielding
European markets entering the year. This posture reflected our belief that solid
growth in the United States would continue in the first half of the year as
would the dollar rally which had begun in October 1994. At the end of the 1995
fiscal year, in an environment of a rising dollar, your Fund is overweighted in
the higher-yielding European markets as their currencies are generally rising
versus the Deutschemark. The Mexican peso devaluation in late December 1994
began to seriously affect the higher-yielding currencies in February by casting
a negative light on all high-deficit countries. This led to massive 'safe haven'
capital flows from the high-yielding European countries into the Deutschemark
and Swiss Franc. This, coupled with negative implications regarding the US
bailout of Mexico, caused new historic lows for the dollar. At the end of the
first quarter of 1995, with the recovery beginning in the emerging markets along
with the first easing by the Bundesbank, the higher-yielding markets started
their recovery. Adjusting our investment posture allowed us to take advantage of
this recovery, which helped enhance total return.
C-8
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
YEAR FIVE YEARS TEN YEARS SINCE
ENDED ENDED ENDED INCEPTION TO
12/31/95 12/31/95 12/31/95 12/31/95
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Flexible Strategy Fund+................................ +17.40% +11.16% -- +9.90%
Global Strategy Focus Fund+............................ +10.60% -- -- +8.20%
International Bond Fund+............................... +16.35% -- -- +9.76%
World Income Focus Fund+............................... +16.69% -- -- +6.98%
</TABLE>
- ------------------
+ The Flexible Strategy Fund, the Global Strategy Focus Fund, the International
Bond Fund and the World Income Focus Fund commenced operations on May 1, 1986,
February 28, 1992, May 2, 1994 and July 1, 1993, respectively.
FLEXIBLE STRATEGY FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the S&P 500 Index and a Weighted Index. Beginning and
ending values are:
<TABLE>
5/01/86**12/95
- --------- -------
<S><C> <C>
Flexible Strategy Fund*+.....................$ 10,000 $24,918
S&P 500 Index++.............................. $ 10,000 $35,482
Weighted Index+++............................ $ 10,000 $28,891
</TABLE>
- ------------------
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ Flexible Strategy Fund, through a flexible investment policy, invests in
equity securities, intermediate- and long-term debt obligations and money
market securities of domestic and foreign issuers.
++ This unmanaged broad-based Index is comprised of common stocks.
+++ This unmanaged Index, which is an equally weighted blend of the S&P 500
Index and the Merrill Lynch B0A0 Index, is comprised of common stocks as
well as investment-grade bonds.
Past performance is not predictive of future performance.
C-9
<PAGE>
GLOBAL STRATEGY FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the Morgan Stanley Capital International World Index
and a Weighted Index. Beginning and ending values are:
<TABLE>
2/28/92**12/95
- --------- -------
<S><C> <C>
Global Strategy Focus Fund*+.................$ 10,000 $13,537
Morgan Stanley Capital International World
Index++................................... $ 10,000 $15,277
Weighted Index+++............................ $ 10,000 $14,634
</TABLE>
- ------------------
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ Global Strategy Focus Fund invests primarily in a portfolio of equity
and fixed-income securities of US and foreign issuers.
++ This unmanaged market capitalization-weighted index is comprised of a
representative sampling of stocks of large-, medium-, and small-
capitalization companies in 22 countries, including the United States.
+++ This unmanaged Index, which is an equally weighted blend of the Morgan
Stanley World Index, the Salomon Brothers World Government Bond Index,
and the Salomon Brothers World Money Market Index, is comprised of a
representative sampling of stocks of large-, medium-, and small-
capitalization companies in 22 countries, government bonds and money
market securities in the major markets, including the United States.
Past performance is not predictive of future performance.
C-10
<PAGE>
INTERNATIONAL BOND FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the JP Morgan Non-US Dollar Government Bond Index.
Beginning and ending values are:
<TABLE>
5/02/94**12/95
- --------- -------
<S><C> <C>
International Bond Fund*+....................$ 10,000 $11,678
JP Morgan Non-US Dollar Government Bond
Index++................................... $ 10,000 $12,500
</TABLE>
- -----------------
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ International Bond Fund invests only in a non-US international portfolio
of debt instruments denominated in various currencies and multinational
currency units.
++ This unmanaged Index is comprised of global government bonds of the
economies of the Organization for Economic Organization and Development,
other than the United States.
Past performance is not predictive of future performance.
C-11
<PAGE>
WORLD INCOME FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the Merrill Lynch G5AO Index and a Weighted Index.
Beginning and ending values are:
<TABLE>
7/01/93**12/95
- --------- -------
<S><C> <C>
World Income Focus Fund*+....................$ 10,000 $11,834
Merrill Lynch G5A0 Index++................... $ 10,000 $11,526
Weighted Index+++............................ $ 10,000 $14,188
</TABLE>
- ------------------
* Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ World Income Focus Fund invests in US and foreign government and corporate
bonds, including US high-yield bonds.
++ This unmanaged Index is comprised of intermediate-term Government bonds
maturing in one to ten years.
+++ The weighted index consists of 40% High Yield Master Index MLJ0A0 and 60%
JP Morgan Global Government Bond Index excluding Japan.
Past performance is not predictive of future performance.
C-12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
OF THE ACQUIRING FUNDS AND TRANSFEROR FUNDS(2)
INVESTMENT OBJECTIVES
Each Acquiring Fund and Corresponding Transferor Fund has a similar
investment objective, which each pursues through separate investment policies as
described below. The Flexible Strategy Fund is classified as 'diversified,' as
defined in the Investment Company Act of 1940, and each of the Global Strategy
Focus Fund, the World Income Focus Fund and International Bond Fund 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. 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 Annex
A hereto for a fuller description of corporate bond ratings.
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. 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.
Because of the flexible investment policy of the Fund, portfolio turnover
may be greater resulting in increased transaction costs to the Fund.
- ------------------
(2) The investment objectives and policies discussed below are the current
investment objectives and policies of the Acquiring Funds and Transferor
Funds except that the discussion below with respect to the World Income
Focus Fund assumes that Proposals 5 and 6 have been approved.
C-13
<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 'Special Considerations Regarding the Reorganizations.'
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 'Special Considerations Regarding the Reorganizations.'
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 S&P 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'
below.
WORLD INCOME FOCUS FUND
The investment objective of the World Income Focus Fund is currently 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. However, it is proposed in Proposal No.
5 that the World Income Focus Fund's investment objective be changed to read as
follows: 'The investment objective of the Fund is to seek to provide
stockholders with a high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units.' Accordingly,
C-14
<PAGE>
adoption of Proposal No. 5 would change the investment objective of the Fund
from seeking 'to provide to stockholders high current income' to seeking 'to
provide to stockholders a high total investment return'. The discussion of the
investment objective and policies of the World Income Focus Fund set forth below
assumes that the Fund's investment objective has been changed in accordance with
Proposal No. 5.
The Fund may invest in United States and foreign government and corporate
fixed income securities 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 MLAM has determined to be of similar creditworthiness. The Fund
will, under normal conditions, invest at least 90% of its total assets in such
fixed income 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, potential appreciation and currency considerations
affecting such securities. Investing on an international basis involves special
considerations. See 'Special Considerations Regarding the Reorganizations.' The
Fund should be considered as a long-term investment and a vehicle for
diversification and not as a balanced investment program.
The Fund may purchase fixed income securities issued by United States or
foreign corporations or financial institutions, including debt securities of all
types and maturities, convertible securities and preferred stocks. The Fund also
may purchase securities issued or guaranteed by United States or foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities') or issued or guaranteed
by international organizations designated or supported by multiple governmental
entities to promote economic reconstruction or development ('supranational
entities').
International Investing. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of a
multinational currency unit is the European Currency Unit ('ECU') which is a
'basket' consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities (described further below), in particular, issue
ECU-denominated obligations. The Fund may invest in securities denominated in
the currency of one nation although issued by a governmental entity, corporation
or financial institution of another nation. For example, the Fund may invest in
a British pound sterling-denominated obligation issued by a United States
corporation. Such investments involve credit risks associated with the issuer
and currency risks associated with the currency in which the obligation is
denominated.
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well as
in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at least
three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States
dollar-denominated obligations only for temporary defensive purposes.
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
C-15
<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. In seeking to meet its investment objective,
high current income will only be one of the factors that the Investment Adviser
will consider in selecting portfolio securities for the World Income Focus Fund.
As a general matter, in evaluating investments for the Fund, the Investment
Adviser 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. Additionally, the Fund, in seeking
capital appreciation, 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 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. In its evaluating the portfolio, 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 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.
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. 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.
C-16
<PAGE>
In evaluating obligations, the Investment Adviser will utilize its internal
credit analysis resources as well as financial and economic information obtained
from other sources. With respect to foreign corporate issuers, the Investment
Adviser will consider the financial condition of the issuer and market and
economic conditions relevant to its operations. In terms of foreign governmental
obligations, the Investment Adviser will review the financial position of the
issuer and political and economic conditions in the country. Investment in
securities of supranational entities is subject to the additional risk to be
considered by the Investment Adviser that member governments will fail to make
required capital contributions and that a supranational entity will thus be
unable to meet its obligations.
The Fund's fully managed approach enables it to seek high total investment
return by investing in debt instruments denominated in various currencies and
currency units on the basis of the potential capital appreciation of such
instruments in U.S. dollars and the rates of income paid on such instruments. As
a general matter, in evaluating investments, the Fund will consider, among other
factors, the relative levels of interest rates prevailing in various countries,
the potential appreciation of such investments in their denominated currencies
and, for debt instruments not denominated in U.S. dollars, the potential
movement in the value of such currencies compared to the U.S. dollar. In seeking
capital appreciation, the Fund may invest in relatively low-yielding instruments
in expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short-term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. As
with all debt securities, changes in market yields will affect the Fund's asset
value as the prices of portfolio securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer-term
securities generally fluctuate more in response to interest rate changes than do
shorter-term securities. The Fund does not expect the average maturity of its
portfolio to exceed ten years.
The Fund may invest in debt instruments denominated in any currency or
multinational currency unit. An illustration of a multinational currency unit is
the European Currency Unit ('ECU') which is a 'basket' consisting of specified
amounts of the currencies of certain of the twelve member states of the European
Community, a Western European economic cooperative association including France,
Germany, the Netherlands and the United Kingdom. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Investment Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranationals, in particular, issue ECU-denominated
obligations. The Fund may invest in debt instruments denominated in the currency
of one nation although issued by a governmental entity, corporation or financial
institution of another nation. For example, the Fund may invest in a Japanese
yen-denominated obligation issued by a German corporation. Such investments
involve credit risks associated with the issuer and currency risks associated
with the currency in which the obligation is denominated. It is anticipated that
the Fund will invest primarily in marketable instruments denominated in the
currencies of the U.S., Japan, Canada, Western European nations, New Zealand and
Australia as well as in ECUs. Further, it is anticipated that such instruments
will be issued primarily by entities located in such countries and by
supranational entities. Under certain adverse conditions, the 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.
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<PAGE>
NON-DIVERSIFIED FUNDS
The Global Strategy Focus, World Income 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 or
of any two or more issues that the Fund controls and that are determined to be
in the same business or similar or related businesses 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 SAI for a complete description of such
restrictions and policies.(3)
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,
- ------------------
(3) However, it is proposed in Proposal No.3 that each Fund adopt uniform
fundamental investment restrictions as set forth in such proposal.
C-18
<PAGE>
hedge other portfolio positions, or vary the degree of portfolio leverage
relatively efficiently under different market conditions.
Foreign Securities. The Flexible Strategy, Global Strategy Focus, World
Income 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. See 'Special
Considerations Regarding the Reorganizations.'
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.
TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
The Flexible Strategy, Global Strategy Focus, World Income Focus and
International Bond Funds may engage in certain of the options, futures and
currency transactions discussed in Annex A hereto. 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 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.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Contract Owners, 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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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for each Acquiring Fund and
each Transferor 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 $1,941,598
related to the Flexible Strategy Fund (representing .65% of its average net
assets), $3,348,535 related to the Global Strategy Focus Fund (representing .65%
of its average net assets), $464,049 related to the World Income Focus Fund
(representing .60% of its average net assets), $70,573 related to the
International Bond Fund (representing .60% of its average net assets).
During the Company's fiscal year ended December 31, 1995, the total
operating expenses of the Acquiring Funds and Transferor Funds (including the
advisory fees paid to the Investment Adviser), before reimbursement of a portion
of such expenses, were as follows: $2,128,925 related to the Flexible Strategy
Fund (representing .71% of its average net assets), $3,719,425 related to the
Global Strategy Focus Fund (representing .72% of its average net assets),
$527,752 related to the World Income Focus Fund (representing .68% 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.
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 International Bond
Fund was reimbursed for operating expenses. Such reimbursement amounted to
$112,261. MLLA sells the Contracts described in the Prospectus for the
Contracts.
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The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including Merrill Lynch Life Insurance Company
('MLLIC') and ML Life Insurance Company 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
Thomas R. Robinson has served as the Portfolio Manager of the Flexible
Strategy Focus Fund and Global Strategy Focus Fund since November 1995, and is
primarily responsible for each such Fund's day-to-day management. 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 that Fund's
day-to-day management. Robert Parish also 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.
Mr. Robinson has served as a Senior Portfolio Manager of MLAM since
November 1995. Mr. Lathbury has served as Vice President of MLAM since 1982. Mr.
Parish 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 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 Commission. Affiliated
persons of the Company may serve as its broker in over-the-counter transactions
conducted on an agency basis. For the year ended December 31, 1995, the Company
paid brokerage commissions of $5,789,335, of which $264,999 was paid to Merrill
Lynch.
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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 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 Flexible Strategy 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 Funds, 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 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 dividends, interest or sales proceeds, the Fund
may, shareholders will be allocated income greater than the amount of cash
distributed to it, and therefore, 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 of United States issues, 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
C-22
<PAGE>
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 accounts. 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 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 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 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 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 Abbotson 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 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.
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<PAGE>
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 Fund 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 with a remaining maturity of 60 days
or less are valued on an amortized cost basis, unless particular circumstances
dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
Pricing Service ('MLSPS'), to value bonds held by certain of the 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, the Flexible Strategy Fund and the World Income Focus Fund
paid MLSPS $368 and $4,613, respectively.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981 under the laws of the
State of Maryland. The Flexible Strategy Fund, the Global Strategy Focus Fund,
the World Income Focus Fund and the International Bond Fund commenced operations
on May 1, 1986, February 28, 1992, July 1, 1993 and May 2, 1994, respectively.
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 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
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<PAGE>
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 the Global Strategy Focus Fund on
February 6, 1992, $2,000,000 worth of shares of the Global Strategy Focus Fund
on February 28, 1992, $100 worth of shares of the World Income Focus Fund on
June 28, 1993, $8,000,000 worth of shares of the World Income Focus Fund on July
1, 1993 and $5,000,000 worth of shares of the International Bond Fund on May 2,
1994. 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 assets of each Acquiring Fund and Transferor
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 redemption fee of $5,000 per Fund and will be entitled to
reimbursement of out-of-pocket expenses. Prior to June 1, 1990, BONY was the
Company's transfer agent.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
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<PAGE>
ANNEX A
U.S. GOVERNMENT SECURITIES
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, 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
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest in
government agency securities, which are debt 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
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest in
depositary institutions money instruments, such as certificates of deposits
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.
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, 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.
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, 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'
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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
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, 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 will 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 on
an amortized cost basis, unless particular circumstances dictate otherwise.
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, 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 set forth in the SAI
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
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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 Flexible Strategy, Global
Strategy Focus, World Income Focus and International Bond Funds may from time to
time sell ('write') cover 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 effect 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.
Each of the Global Strategy Focus, World Income Focus and International
Bond 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 Global Strategy Focus, World Income Focus and International Bond 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.
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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, World Income Focus
and International Bond 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 in which
the Fund invests. 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 SAI.
Stock Index and Financial Futures Contracts. The Global Strategy Focus,
World Income Focus and International Bond 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 Global Strategy Focus, World Income
Focus and International Bond 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
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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 Global Strategy Focus, World Income Focus and International Bond 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 Global Strategy Focus, World Income Focus and International Bond 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 Global Strategy Focus and World Income
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 Global Strategy Focus, World Income Focus
and International Bond 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.
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Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Company require that each of the
Global Strategy Focus, World Income Focus and International Bond 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 ensuring
that the use of such futures is unleveraged.
As 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 judgement 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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APPENDIX D
EXISTING INVESTMENT RESTRICTIONS OF THE FUNDS
CURRENT 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 for trading on the New York
Stock Exchange (see 'Other Portfolio Strategies--Foreign Securities' in the
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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.
CURRENT 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.
(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.
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(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 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 owing 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).
D-3
<PAGE>
(17) participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not include the 'bunching' of orders for
the sale or purchase of portfolio securities with the other Funds or with
individually managed accounts advised or sponsored by the Investment Adviser or
any of its affiliates to reduce brokerage commissions or otherwise to achieve
best overall execution).
(18) purchase, either alone or together with any other Fund or Funds, more
than either 10% (a) in principal amount of the outstanding securities of an
issuer, or (b) of the outstanding voting securities of an issuer except that
such restriction will not apply to U.S. Government or government agency
securities, bank money instruments or bank repurchase agreements.
CURRENT 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 deposit,
bankers' acceptances and variable amount notes shall not be deemed the making of
a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are made
according to the guidelines set forth below and the guidelines of the Securities
and Exchange Commission and the Company's Board of Directors, including
maintaining collateral from the borrower equal at all times to the current
market value of the securities loaned; and provided further that the Fund may
only make loans to New York Stock Exchange Member firms, other brokerage firms
having net capital of at least $10 million and financial institutions, such as
registered investment companies, banks and insurance companies, having at least
$10 million in capital and surplus.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, or acquisition cost if it is lower, and then only from banks as a
temporary measure for extraordinary or emergency purposes. The Fund will not
purchase securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with 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
D-4
<PAGE>
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 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 Equity
Growth 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 and 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.
(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.)
CURRENT 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.
D-5
<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 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 may
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 the securities of foreign issuers except that the Equity
Growth 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) 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.
D-6
<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.)
CURRENT 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
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, 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 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 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 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 in such securities.
D-7
<PAGE>
(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.)
CURRENT 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 option 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.
D-8
<PAGE>
(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 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 in such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by 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.
CURRENT 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.
D-9
<PAGE>
(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 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 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 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 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.
(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 the 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.)
D-10
<PAGE>
CURRENT RESTRICTIONS APPLICABLE TO THE GLOBAL STRATEGY FOCUS FUND
The Global Strategy Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10% of
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 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.
D-11
<PAGE>
(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 in such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by 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.)
CURRENT 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
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, 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 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.
D-12
<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 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 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 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 less 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).
CURRENT RESTRICTIONS APPLICABLE TO THE WORLD INCOME FOCUS FUND
The World Income Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commissions, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
the Fund may invest in securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or interest therein,
and except further, that the Fund may engage in transactions in currency and
options thereon, forward currency contracts, futures contracts and options
thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin
D-13
<PAGE>
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 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 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 in such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by 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 less 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).
CURRENT 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).
D-14
<PAGE>
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10% of
the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(6) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(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 futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(8) above), as security for indebtedness, any securities owned or held by the
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 in such securities.
D-15
<PAGE>
(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.
CURRENT 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
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 and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities or
commodities contracts.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(6) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase obligations
in private placements; and provided further that for purposes of this
restriction the acquisition of a portion of an issue of publicly distributed
bonds, debentures or other corporate debt securities or of government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed the making of a loan.
(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
D-16
<PAGE>
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 futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(8) above), as security for indebtedness, any securities owned or held by the
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 or 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 in 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).
CURRENT 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).
(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.
D-17
<PAGE>
(8) lend its portfolio securities in excess of 33% 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 an 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 sell stock index and currency options,
stock index futures, financial futures and currency futures contracts and
related options on such futures. (ii) 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.
CURRENT 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.
D-18
<PAGE>
(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 the 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% 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 assets except that
the Fund may borrow from a bank as a temporary measure for extraordinary or
emergency purposes or to meet redemption in amounts not exceeding 10% (taken at
the market value) of its total assets and pledge its assets to secure such
borrowings. (For the purpose of this restriction, collateral arrangements with
respect to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge of assets and neither such arrangements nor
the purchase or sale of options, futures or related options are deemed to be the
issuance of a senior security.)
(10) invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable if,
regarding all such securities, more than 15% of its net assets, taken at market
value, would be invested in such securities.
(11) underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) purchase or sell interests in oil, gas or other mineral exploration or
development programs.
(13) invest in securities of corporate issuers having a record, together
with predecessors, of less than three years of continuous operation if more than
5% of its total assets, taken at market value, would be invested in such
securities.
The Directors have established the policy that the Fund will not purchase
or retain the securities of any issuer if those individual officers and Trustees
of the Company, the Investment Adviser or Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), each owning beneficially more than 1/2 of 1% of the
securities of each issuer, own in the aggregate more than 5% of the securities
of such issuer.
CURRENT 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.
D-19
<PAGE>
(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% 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 of 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.
D-20
<PAGE>
August 30, 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'). A separate class of common stock is issued for each
Fund.
The Company is holding an Annual Meeting of Stockholders of the Company
(the 'Meeting') at the offices of Merrill Lynch Asset Management, L.P. ('MLAM'
or the 'Investment Adviser'), 800 Scudders Mill Road, Plainsboro, New Jersey, on
Monday, October 11, 1996, at 9:00 a.m. The Board of Directors of the Company has
fixed the close of business on August 12, 1996 as the record date (the 'Record
Date') for the determination of stockholders entitled to notice of and to vote
at the Meeting and at any adjournment thereof. Stockholders on the Record Date
will be entitled to one vote for each share held and a fractional vote for each
fractional share held, with no shares having cumulative voting rights.
At the Meeting, stockholders will be asked to vote on (i) Proposal No.
1--the election of the Board of Directors, (ii) Proposal No. 2--the ratification
of the selection of Deloitte & Touche LLP to serve as independent auditors for
the Company's current fiscal year, (iii) Proposal No. 3--to amend the
fundamental investment restrictions of each of the Company's Funds other than
the Merrill Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets
Fund, (iv) Proposal No. 4--to amend the investment objective of the Merrill
Lynch Intermediate Government Bond Fund and to change the name of that Fund; (v)
Proposal No. 5--to amend the investment objective of the Merrill Lynch World
Income Focus Fund and to change the name of that Fund, (vi) Proposal No. 6--to
approve the Agreement and Plan of Reorganization between the Company's Merrill
Lynch International Bond Fund and its Merrill Lynch World Income Focus Fund, and
(vii) Proposal No. 7--to approve the Agreement and Plan of Reorganization
between the Company's Merrill Lynch Flexible Strategy Fund and its Merrill Lynch
Global Strategy Focus Fund. The International Bond Fund and the Flexible
Strategy Fund are sometimes referred to herein as the 'Transferor Funds' or the
'Corresponding Transferor Funds', and the World Income Focus Fund and the Global
Strategy Focus Fund are sometimes referred to herein as the 'Acquiring Funds' or
the 'Corresponding Acquiring Funds'. ALL STOCKHOLDERS WILL BE PERMITTED TO VOTE
ON PROPOSALS 1 AND 2. WITH RESPECT TO EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY
HOLDERS OF SHARES OF THE FUNDS AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO
VOTE ON SUCH PROPOSALS. For further information concerning the Meeting and the
proposals to considered, please see the Proxy Statement--Prospectus dated August
30, 1996.
------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION OF THE COMPANY IS NOT A PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION WITH THE PROXY STATEMENT--PROSPECTUS
OF THE COMPANY DATED AUGUST 30, 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.
<PAGE>
TABLE OF CONTENTS
Incorporation by Reference.................... 3
Pro Forma Financial Information............... 4
2
<PAGE>
INCORPORATION BY REFERENCE
This Statement of Additional Information is accompanied by the Statement of
Additional Information of the Company dated April 26, 1996 (the 'Company SAI').
The information in the Company SAI is incorporated herein by reference. The
Company SAI has been filed with the Securities and Exchange Commission (the
'Commission') by the Company.
3
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital for the Combined Fund has been derived from the Statements of Assets
and Liabilities of the respective Funds at December 31, 1995, and such
information has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred at December 31, 1995. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial condition
that actually would have resulted if the Reorganization had been consummated at
December 31, 1995. The pro forma Combined Statement of Assets, Liabilities and
Capital should be read in conjunction with the Company's financial statements
and related notes thereto which are incorporated by reference into this
Statement of Additional Information.
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
WORLD PRO FORMA
INTERNATIONAL INCOME FOR
BOND FOCUS COMBINED
FUND FUND ADJUSTMENTS FUNDS
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value*................................. $ 17,459,395 $79,448,018 $ -- $96,907,413
Cash................................................... 812 13,497 14,309
Foreign cash........................................... 2,251 -- 2,251
Interest receivable.................................... 475,274 2,445,075 2,920,349
Receivable for securities sold......................... 537,598 -- 537,598
Receivable for capital shares sold..................... 183,421 17,699 201,120
Receivable from investment adviser..................... 9,242 -- (9,242)(2) 0
Deferred organization expenses......................... 2,667 3,944 (2,667) 3,944
Prepaid registration fees and other assets............. 3,008 6,032 9,040
------------- ----------- ------------ -----------
Total assets....................................... 18,673,668 81,934,265 (11,909) 100,596,024
------------- ----------- ------------ -----------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts............................................ -- 5,151 5,151
Payable for dividends to shareholders.................. -- -- 956,008(1) 956,008
Payable for securities purchased....................... 536,115 -- 536,115
Payable to investment adviser.......................... -- 38,386 103,019(2) 141,405
Payable for capital shares redeemed.................... 384 28,906 29,290
Accrued expenses and other liabilities................. 16,625 17,190 135,000(3) 168,815
------------- ----------- ------------ -----------
Total liabilities.................................. 553,124 89,633 1,194,027 1,836,784
------------- ----------- ------------ -----------
NET ASSETS............................................. $ 18,120,544 $81,844,632 ($ 1,205,936) $98,759,240
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+......................... $ 172,214 $ 836,037 $ 12,666 $ 1,020,917
Paid-in capital in excess of par....................... 17,186,094 83,350,355 (262,594) 100,273,855
Undistributed investment income-net.................... 88,192 765,308 (853,500) 0
Undistributed (accumulated) realized capital gains
(losses) on investments and foreign currency
transactions-net..................................... 102,508 (2,777,024) (102,508) (2,777,024)
Accumulated distributions in excess of realized capital
gains-net............................................ -- -- --
Unrealized appreciation on investments and foreign
currency transactions-net............................ 571,536 (330,044) 241,492
------------- ----------- ------------ -----------
NET ASSETS............................................. $ 18,120,544 $81,844,632 ($ 1,205,936) $98,759,240
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
CAPITAL SHARES OUTSTANDING............................. 1,722,139 8,360,366 126,663 10,209,168
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE................................................ $ 10.52 $ 9.79 $ 9.67
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
*Identified cost....................................... $ 16,888,004 $79,792,576 $96,680,580
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
+Authorized shares..................................... 100,000,000 100,000,000 200,000,000
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</TABLE>
- ------------------
(1) Assumes the distribution of undistributed net investment income and realized
capital gains from each of the Funds.
(2) MLAM does not intend voluntarily to reimburse the Combined Fund for certain
expenses or to waive its management fee with respect to the Combined Fund.
The adjustment reflects this intention.
(3) Reflects the charge for estimated reorganization expenses of $135,000.
4
<PAGE>
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital for the Combined Fund has been derived from the Statements of Assets
and Liabilities of the respective Funds at December 31, 1995, and such
information has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred at December 31, 1995. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial condition
that actually would have resulted if the Reorganization had been consummated at
December 31, 1995. The pro forma Combined Statement of Assets, Liabilities and
Capital should be read in conjunction with the Company's financial statements
and related notes thereto which are incorporated by reference into this
Statement of Additional Information.
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL PRO FORMA
FLEXIBLE STRATEGY FOR
STRATEGY FOCUS COMBINED
FUND FUND ADJUSTMENTS FUNDS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value*........................... $321,042,917 $527,857,629 $ -- $848,900,546
Unrealized appreciation on forward foreign
exchange contracts............................. -- 9,681,629 9,681,629
Cash............................................. 24,217 576,498 600,715
Interest receivable.............................. 603,012 2,034,611 2,637,623
Receivable for securities sold................... 119,466 645,794 765,260
Dividends receivable............................. 169,134 584,726 753,860
Receivable for capital shares sold............... 13,787 426,771 440,558
Prepaid registration fees and other assets....... 26,761 41,934 68,695
------------ ------------ ------------ ------------
Total assets..................................... 321,999,294 541,849,592 -- 863,848,886
------------ ------------ ------------ ------------
LIABILITIES:
Payable for dividends to shareholders............ -- -- 39,064,386(1) 39,064,386
Payable for securities purchased................. 1,277,730 1,066,036 2,343,766
Payable to investment adviser.................... 164,372 275,588 439,960
Payable for capital shares redeemed.............. 269,553 98,531 368,084
Accrued expenses and other liabilities........... 53,976 167,824 135,000(2) 356,800
------------ ------------ ------------ ------------
Total liabilities................................ 1,765,631 1,607,979 39,199,386 42,572,996
------------ ------------ ------------ ------------
NET ASSETS....................................... $320,233,663 $540,241,613 ($39,199,386) $821,275,890
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+................... $ 1,944,346 $ 4,306,428 $ 388,991 $ 6,639,765
Paid-in capital in excess of par................. 274,133,560 505,710,448 (523,991) 779,320,017
Undistributed investment income-net.............. 4,603,408 7,489,615 (12,093,023) 0
Undistributed (accumulated) realized capital
gains (losses) on investments and foreign
currency transactions-net...................... 26,971,363 (23,380,052) (26,971,363) (23,380,052)
Accumulated distributions in excess of realized
capital gains-net.............................. -- (369,180) (369,180)
Unrealized appreciation on investments and
foreign currency transactions-net.............. 12,580,986 46,484,354 59,065,340
------------ ------------ ------------ ------------
NET ASSETS....................................... $320,233,663 $540,241,613 ($39,199,386) $821,275,890
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CAPITAL SHARES OUTSTANDING....................... 19,443,457 43,064,280 3,889,916 66,397,653
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE...................................... $ 16.47 $ 12.55 $ 12.37
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
*Identified cost................................. $308,461,552 $491,055,965 $799,517,517
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
+Authorized shares............................... 100,000,000 100,000,000 200,000,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ------------------
(1) Assumes the distribution of undistributed net investment income and realized
capital gains from each of the Funds.
(2) Reflects the charge for estimated reorganization expenses of $135,000.
5
<PAGE>
The following unaudited pro forma condensed combined statement of
operations for the Combined Fund has been derived from the statements of
operations of the respective Funds for the fiscal year ended December 31, 1995,
and such information has been adjusted to give effect to the Reorganization as
if the Reorganization had occurred on January 1, 1995. The pro forma condensed
combined statement of operations is presented for informational purposes only
and does not purport to be indicative of the results of operations that actually
would have resulted if the Reorganization had been consummated on January 1,
1995 nor which may result from future operations. The pro forma condensed
combined statement of operations should be read in conjunction with the
Company's financial statements and related notes thereto which are incorporated
by reference into this Statement of Additional Information.
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
JANUARY 1, 1995 THROUGH DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR
INTERNATIONAL WORLD INCOME PRO FORMA COMBINED
BOND FUND FOCUS FUND ADJUSTMENTS FUNDS
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income*.................................... $ 829,012 $ 7,350,623 $ -- $ 8,179,635
Dividends........................................... -- 26,246 -- 26,246
Other Income........................................ -- 103,874 -- 103,874
EXPENSES:
Management fees..................................... 70,573 464,049 -- 534,622
All other expenses.................................. 41,688 63,703 135,000(1) 240,391
------------- ------------ ----------- -----------
Expenses before reimbursement....................... 112,261 527,752 135,000 775,013
Reimbursement of expenses........................... (112,261) -- 112,261(2) --
------------- ------------ ----------- -----------
Total expenses after reimbursement............... -- 527,752 247,261 775,013
------------- ------------ ----------- -----------
Net investment income................................. 829,012 6,952,991 (247,261) 7,534,742
------------- ------------ ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from investment and foreign
currency transactions............................ 201,199 510,287 -- 711,486
Net change in unrealized appreciation/depreciation
of investments................................... 735,220 4,502,738 -- 5,237,958
------------- ------------ ----------- -----------
Net gain from investments........................ 936,419 5,013,025 -- 5,949,444
------------- ------------ ----------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............ $ 1,765,431 $11,966,016 ($247,261) $13,484,186
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
* Net of withholding tax on interest.................. $ 3,338 $ 60,326 -- $ 63,664
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
</TABLE>
- ------------------
(1) Reflects charge for estimated reorganization expenses of $135,000.
(2) MLAM does not intend voluntarily to reimburse the combined Fund for certain
expenses or to waive its management fee with respect to the combined Fund.
6
<PAGE>
The following unaudited pro forma condensed combined statement of
operations for the Combined Fund has been derived from the statements of
operations of the respective funds for the fiscal year ended December 31, 1995,
and such information has been adjusted to give effect to the Reorganization as
if the Reorganization had occurred on January 1, 1995. The pro forma condensed
combined statement of operations is presented for informational purposes only
and does not purport to be indicative of the results of operations that actually
would have resulted if the Reorganization had been consummated on January 1,
1995 nor which may result from future operations. The pro forma condensed
combined statement of operations should be read in conjunction with the
Company's financial statements and related notes thereto which are incorporated
by reference into this Statement of Additional Information.
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
JANUARY 1, 1995 THROUGH DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FLEXIBLE GLOBAL PRO FORMA FOR
STRATEGY STRATEGY PRO FORMA COMBINED
FUND FOCUS FUND ADJUSTMENTS FUNDS
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income*.................................. $ 8,453,860 $14,006,863 $ -- $22,460,723
Dividends**....................................... 2,824,136 6,858,616 -- 9,682,752
Other Income...................................... 17,632 -- -- 17,632
EXPENSES:
Management fees................................... 1,941,598 3,348,535 -- 5,290,133
All other expenses................................ 187,327 370,890 135,000(1) 693,217
----------- ----------- ----------- -------------
Total expenses................................. 2,128,925 3,719,425 135,000 5,983,350
----------- ----------- ----------- -------------
Net investment income............................. 9,166,703 17,146,054 (135,000) 26177,757
----------- ----------- ----------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from investment and
foreign currency transactions.................. 27,052,018 (23,380,052) -- 3,671,966
Net change in unrealized appreciation/depreciation
of investments................................. 11,822,579 58,162,628 -- 69,985,207
----------- ----------- ----------- -------------
Net gain from investments...................... 38,874,597 34,782,576 -- 73,657,173
----------- ----------- ----------- -------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......... $48,041,300 $51,928,630 ($135,000) $99,834,930
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
- ------------------
* Net of withholding tax on interest............... $ -- $ 50,929 $ -- $ 50,929
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
** Net of withholding tax on dividends.............. $ 84,307 $ 535,933 $ -- $ 620,240
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
(1) Reflects charge for estimated reorganization expenses of $135,000
7
<PAGE>
The following pro forma combined schedule of investments for the Combined
Fund has been derived from the schedule of investments of the respective Funds
at December 31, 1995, and such information has been adjusted to give effect to
the Reorganization as if the Reorganization had occurred at December 31, 1995.
The pro forma combined schedule of investments is presented for informational
purposes only and does not purport to be indicative of the schedule of
investments that actually would have resulted if the Reorganization had been
consummated at December 31, 1995. The pro forma combined schedule of investments
should be read in conjunction with the Company's financial statements and
related notes thereto which are incorporated by reference into this Statement of
Additional Information.
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
(UNAUDITED)
WORLD INCOME FOCUS FUND AND INTERNATIONAL BOND FUND AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
FIXED-INCOME PERCENT OF
AFRICA INDUSTRY FACE AMOUNT INVESTMENTS COST VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
South Africa Foreign Government US$ 500,000 Republic of South $ 498,425 $ 540,000 0.6%
Obligations Africa, 9.625% due
12/15/1999(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 498,425 540,000 0.6
Investments in South
Africa
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 498,425 540,000 0.6
Investments in
Africa
- -------------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA AND THE CARIBBEAN
- -------------------------------------------------------------------------------------------------------------------------------
Argentina Telecommunications 500,000 Telefonica de 490,040 517,500 0.5
Argentina, S.A.,
11.875% due
11/01/2004(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 490,040 517,500 0.5
Investments in
Argentina
- -------------------------------------------------------------------------------------------------------------------------------
Brazil Banking 500,000 +UNIBANCO--Uniao de 498,750 502,500 0.5
Bancos Brasilerios,
S.A., 10.25% due
6/12/1997(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 498,750 502,500 0.5
Investments in
Brazil
- -------------------------------------------------------------------------------------------------------------------------------
Mexico Energy 500,000 Petroleos Mexicanos, 521,875 488,750 0.5
8.25% due
2/04/1998(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 521,875 488,750 0.5
Investments in
Mexico
- -------------------------------------------------------------------------------------------------------------------------------
Trinidad & Tobago Foreign Government 350,000 Republic of Trinidad 368,500 369,250 0.4
Obligations & Tobago, 11.50% due
11/20/1997(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 368,500 369,250 0.4
Investments in
Trinidad & Tobago
------------------------------------------------------------------------------------------------------------
Total Investments in 1,879,165 1,878,000 1.9
Latin American and
Caribbean Securities
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NORTH
AMERICA
- -------------------------------------------------------------------------------------------------------------------------------
<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 0.4
600,000 8.75% due 12/01/2005 478,644 491,461 0.5
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 892,177 916,514 0.9
Investments in
Canada
- -------------------------------------------------------------------------------------------------------------------------------
United States Airlines US$ 500,000 United Air Lines, 506,250 598,175 0.6
Inc., 10.02% due
3/22/2014(d)
100,000 United Air Pass 109,036 120,015 0.1
Through, 10.125% due
3/22/2015(d)
500,000 USAir Inc., 10.375% 504,688 465,000 0.5
due 3/01/2013(d)
---------- ---------- -----
1,119,974 1,183,190 1.2
------------------------------------------------------------------------------------------------------------
Automotive 500,000 Walbro Corp., 9.875% 490,000 498,750 0.5
due 7/15/2005(d)
------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 500,000 SCI Television Inc., 520,625 528,750 0.5
11.00% due
6/30/2005(d)
250,000 Sinclair Broadcast 250,000 255,625 0.3
Group Inc., 10.00%
due 9/30/2005(d)
---------- ---------- -----
770,625 784,375 0.8
------------------------------------------------------------------------------------------------------------
Broadcasting/Cable 1,011,242 American Telecasting 642,918 695,229 0.7
Inc., 12.59* due
6/15/2004(d)
1,000,000 Videotron Holdings 652,360 697,500 0.7
PLC, 11.05%* due
7/01/2004(d)
---------- ---------- -----
1,295,278 1,392,729 1.4
------------------------------------------------------------------------------------------------------------
Building Materials 500,000 Pacific Lumber Co., 492,000 473,750 0.5
10.50% due
3/01/2003(d)
------------------------------------------------------------------------------------------------------------
Chemicals 1,225,000 G-I Holdings, Inc., 886,971 946,313 1.0
12.86%* due
10/01/1998(d)
------------------------------------------------------------------------------------------------------------
Communications 1,375,000 Panamsat L.P., 987,186 1,127,500 1.1
11.35%* due
8/01/2003(d)
1,000,000 Rogers 1,007,500 1,045,000 1.1
Communications,
Inc., 10.875% due
4/15/2004(d)
500,000 USA Mobile 454,375 495,000 0.5
Communications
Holdings, Inc.,
9.50% due
2/01/2004(d)
---------- ---------- -----
2,449,061 2,667,500 2.7
------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NORTH FIXED-INCOME PERCENT OF
AMERICA INDUSTRY FACE AMOUNT INVESTMENTS COST VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Conglomerates
Coltec Industries
Inc.:
(continued)
US$ 150,000 9.75% due $ 159,000 $ 154,500 0.2%
11/01/1999(d)
600,000 10.25% due 622,000 616,500 0.6
4/01/2002(d)
500,000 J.B. Poindexter & 500,000 401,250 0.4
Co., Inc., 12.50%
due 5/15/2004(d)
500,000 Jordan Industries, 495,688 445,000 0.4
Inc., 10.375% due
8/01/2003(d)
500,000 Sequa Corp., 9.375% 508,750 465,000 0.5
due 12/15/2003(d)
500,000 Sherritt Gordon, 503,625 532,500 0.5
Ltd., 9.75% due
4/01/2003(d)
---------- ---------- -----
2,789,063 2,614,750 2.6
------------------------------------------------------------------------------------------------------------
Customer Products 1,000,000 Polymer Group Inc., 1,001,250 1,030,000 1.0
12.25% due
7/15/2002(d)
1,000,000 Revlon Consumer 872,167 1,012,500 1.0
Products Corp.,
9.375% due
4/01/2001(d)
1,000,000 Samsonite Corp., 963,125 960,000 1.0
11.125% due
7/15/2005(d)
---------- ---------- -----
2,836,542 3,002,500 3.0
------------------------------------------------------------------------------------------------------------
Diversified Foamex L.P.(d):
191,000 9.50% due 6/01/2000 186,464 188,613 0.2
500,000 11.25% due 498,125 500,000 0.5
10/01/2002
---------- ---------- -----
684,589 688,613 0.7
------------------------------------------------------------------------------------------------------------
Energy 2,000,000 Clark R & M 1,268,150 1,330,000 1.3
Holdings, Inc.,
10.52* due
12/15/2000(d)
250,000 Consolidated-Hydro 186,735 145,937 0.2
Inc., 16.05* due
7/15/2003(d)
500,000 TransTexas Gas 500,000 516,250 0.5
Corp., 12.55% due
6/15/2002(d)
---------- ---------- -----
1,954,885 1,992,187 2.0
------------------------------------------------------------------------------------------------------------
Entertainment 500,000 Marvel Holdings, 448,000 460,000 0.5
Inc., 9.125% due
2/15/1998(d)
350,000 SpectraVision Inc., 303,557 70,000 0.0
11.50%* due
10/01/2001(d)
---------- ---------- -----
751,557 530,000 0.5
------------------------------------------------------------------------------------------------------------
Financial Services 500,000 Penn Financial 498,750 507,500 0.5
Corp., 9.25% due
12/15/2003(d)
500,000 Reliance Group 460,000 514,375 0.5
Holdings, Inc.,
9.00% due
11/15/2000(d)
---------- ---------- -----
958,750 1,021,875 1.0
------------------------------------------------------------------------------------------------------------
Food & Beverage 500,000 Chiquita Brands 497,500 495,000 0.5
International Corp.,
9.125% due
3/01/2004(d)
750,000 Del Monte Corp., 740,000 665,625 0.7
10.00% due
5/01/2003(d)
500,000 Envirodyne 509,375 367,500 0.4
Industries, Inc.,
10.25% due
12/01/2001(d)
250,000 Specialty Foods 250,000 235,000 0.2
Corp., 10.25% due
8/15/2001(d)
---------- ---------- -----
1,996,875 1,763,125 1.8
------------------------------------------------------------------------------------------------------------
Gaming 1,000,000 Bally's Park Place 920,000 1,017,500 1.0
Funding, Inc., 9.25%
due 3/15/2004(d)
1,100,000 Greate Bay 990,750 965,250 1.0
Properties, Inc.,
10.875% due
1/15/2004(d)
500,000 Harrah's Jazz 482,500 137,500 0.1
Company, 14.25% due
11/15/2001(d)
500,000 Showboat, Inc., 500,000 562,500 0.6
13.00% due
8/01/2009(d)
750,000 Trump Plaza Funding, 741,250 776,250 0.8
Inc., 10.875% due
6/15/2001(d)
103,633 Trump Taj Mahal 98,002 92,411 0.1
Funding, Inc.,
11.35% due ---------- ---------- -----
11/15/1999(a)(c)(d) 3,732,502 3,551,411 3.6
------------------------------------------------------------------------------------------------------------
Home Building 500,000 Del E. Webb Corp. 500,000 475,000 0.5
9.00% due
2/15/2006(d)
------------------------------------------------------------------------------------------------------------
Hotel(s) 500,000 +HMC Acquisition 500,000 505,000 0.5
Properties, 9.00%
due 12/15/2007(d)
1,000,000 John Q. Hammons 887,500 990,000 1.0
Hotel, Inc., 8.875%
due 2/15/2004(d)
---------- ---------- -----
1,387,500 1,495,000 1.5
------------------------------------------------------------------------------------------------------------
Metals & Mining 250,000 Maxxam Group, Inc., 183,690 171,250 0.2
14.04%* due
8/01/2003(d)
------------------------------------------------------------------------------------------------------------
Packaging 500,000 Anchor Glass 493,125 295,000 0.3
Container Co.,
9.875% due
12/15/2008(d)
500,000 Owens-Illinois, 512,500 565,000 0.6
Inc., 11.00% due
12/01/2003(d)
500,000 Portola Packaging 500,000 515,000 0.5
Inc., 10.75% due
10/01/2005(d)
---------- ---------- -----
1,505,625 1,375,000 1.4
------------------------------------------------------------------------------------------------------------
Paper 250,000 Riverwood 274,813 271,250 0.3
International Corp.,
11.25% due
6/15/2002(d)
500,000 S.D. Warren Co., 500,000 551,250 0.5
12.00% due
12/15/2004(d)
100,000 Stone Container 99,000 103,250 0.1
Group, 10.75% due
10/01/2002(d)
---------- ---------- -----
873,813 925,750 0.9
------------------------------------------------------------------------------------------------------------
Restaurants 750,000 Flagstar Corp., 762,500 532,500 0.6
11.375% due
9/15/2003(d)
250,000 Foodmaker, Inc., 246,563 230,000 0.2
9.75% due
11/01/2003(d)
---------- ---------- -----
1,009,063 762,500 0.8
------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NORTH SHARES HELD/ FIXED-INCOME PERCENT OF
AMERICA INDUSTRY FACE AMOUNT INVESTMENTS COST VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Specialty Retailing US$ 500,000 Bradlees Inc., $ 489,375 $ 125,000 0.1%
(continued) 11.00% due
8/01/2002(d)
487,000 +Cumberland Farms, 476,651 448,040 0.5
10.50% due
10/01/2003(d)
---------- ---------- -----
966,026 573,040 0.6
------------------------------------------------------------------------------------------------------------
Steel 500,000 WCI Steel Inc., 500,000 486,250 0.5
10.50% due
3/01/2002(d)
------------------------------------------------------------------------------------------------------------
Textiles 500,000 Tultex Corp., 500,000 512,500 0.5
10.625% due
3/15/2005(d)
1,500,000 WestPoint Stevens 1,451,875 1,481,250 1.5
Inc., 9.375% due
12/15/2005(d)
---------- ---------- -----
1,951,875 1,993,750 2.0
------------------------------------------------------------------------------------------------------------
Transport Services 250,000 Eletson Holdings 250,000 245,937 0.3
Inc., 9.25% due
11/15/2003(d)
1,050,000 Transtar Holdings 699,453 693,000 0.7
L.P., 12.52%* due
12/15/1999(d)
250,000 Viking Star Shipping 250,937 256,250 0.2
Co., 9.625%, due
7/15/2003(d)
---------- ---------- -----
1,200,390 1,195,187 1.2
------------------------------------------------------------------------------------------------------------
Utilities 494,000 Beaver Valley 466,212 416.679 0.4
Funding Corp., 9.00%
due 6/01/2017(d)
86,583 Midland 84,851 91,310 0.1
Congeneration
Venture L.P., 10.33%
due 7/23/2002(d)
233,383 +Tucson Electric 223,464 234,865 0.3
Power Co., 10.732%
due 1/01/2013(d)
---------- ---------- -----
774,527 742,854 0.8
------------------------------------------------------------------------------------------------------------
Waste Management 500,000 Mid-American Waste 511,250 470,000 0.5
System, Inc., 12.25%
due 2/15/2003(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 34,572,431 33,776,649 34.2
Investments in the
United States
------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STOCKS & WARRANTS
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
Broadcasting/Cable 4,700 American Telecasting 11,222 29,375 0.0
Inc. (Warrants)(b)(d)
------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 2,572 K-III Communications 253,090 254,628 0.3
Corp.
(Non-Convertible
Preferred)(d)
------------------------------------------------------------------------------------------------------------
Supermarkets 17,675 Grand Union Co.(d) 917,437 130,346 0.1
------------------------------------------------------------------------------------------------------------
Total Stocks & 1,181,749 414,349 0.4
Warrants in the
United States
------------------------------------------------------------------------------------------------------------
Total Investments in 36,646,357 35,107,512 35.5
North American
Securities
------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PACIFIC FIXED-INCOME
BASIN INVESTMENTS
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Australia Foreign Government Australian
Obligations-Regional & Government Bonds:
Agency A$ 7,000,000 10.00% due 5,743,662 5,744,771 5.8
10/15/2002
1,200,000 9.50% due 8/15/2003 962,680 963,982 1.0
350,000 9.00% due 9/15/2004 261,381 274,124 0.3
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 6,967,723 6,982,877 7.1
Investments in
Australia
- -------------------------------------------------------------------------------------------------------------------------------
Japan Foreign Government yen 65,000,000 Asian Development 750,697 737,578 0.7
Obligations Bank,
5.625% due 2/18/2002
50,000,000 European Investment 545,588 539,762 0.5
Bank,
4.625% due 2/26/2003
40,000,000 Japanese Government 395,762 385,420 0.4
Bond-182
3.00% due 9/20/2005
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 1,692,047 1,662,760 1.6
Investments in Japan
- -------------------------------------------------------------------------------------------------------------------------------
New Zealand Foreign Government New Zealand
Obligations Government Bond:
NZ$ 4,100,000 10.00% due 7/15/1997 $2,780,898 $2,752,102 2.8
800,000 8.00% due 7/15/1998 515,668 525,292 0.5
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 3,296,566 3,277,394 3.3
Investments in New
Zealand
- -------------------------------------------------------------------------------------------------------------------------------
Philippines Telecommunications US$ 1,000,000 Philippine Long 1,000,000 1,051,250 1.1
Distance Telephone
Co., 9.125% due
8/01/2002(d)
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 1,000,000 1,051,250 1.1
Investments in the
Philippines
------------------------------------------------------------------------------------------------------------
Total Investments in 12,956,336 12,974,281 13.1
Pacific Basin
Securities
------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
WESTERN SHARES HELD/ FIXED-INCOME PERCENT OF
EUROPE INDUSTRY FACE AMOUNT INVESTMENTS COST VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Austria Foreign Government Ats 4,000,000 Republic of Austria, $ 419,440 $ 429,864 0.5%
Obligations 7.625% due
10/18/2004
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 419,440 429,864 0.5
Investments in
Austria
- -------------------------------------------------------------------------------------------------------------------------------
Denmark Foreign Government
Obligations Denmark Government
Bonds:
Dkr 13,250,000 9.00% due 11/15/2000 2,569,181 2,655,020 2.7
2,500,000 8.00% due 5/15/2003 468,522 480,471 0.5
4,730,000 8.00% due 3/15/2006 854,226 897,616 0.9
3,300,000 7.00% due 11/10/2024 530,814 530,334 0.5
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 4,422,743 4,563,441 4.6
Investments in
Denmark
- -------------------------------------------------------------------------------------------------------------------------------
France Foreign Government
Obligations French Government
'B-Tran':
Frf 2,500,000 4.75% due 4/12/1999 423,692 499,509 0.5
2,000,000 7.00% due 10/12/2000 420,453 427,462 0.4
4,500,000 French Oat Strips, 600,123 647,668 0.7
++6.33757* due
10/25/2001
2,000,000 Government of 423,657 440,165 0.5
France, 7.75% due
10/25/2005
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 1,867,925 2,014,804 2.1
Investments in
France
- -------------------------------------------------------------------------------------------------------------------------------
Germany Foreign Government DM 890,000 Bundes Obligations, 569,521 579,137 0.6
6.25% due 1/04/2024
Obligations 1,000,000 Bundesrepublic 733,343 739,225 0.7
Deutschland, 6.875%
due 5/12/2005
1,000,000 Export Import Bank, 729,491 761,439 0.8
7.75% due 2/21/2005
5,000,000 German Unity, 8.00% 3,938,016 3,936,430 4.0
due 1/21/2002
800,000 Kingdom of Belgium, 472,882 568,914 0.6
6.25% due 10/06/2003
500,000 Landes Banken 344,882 360,112 0.3
Badenwurtt, 6.75%
due 6/22/2005
800,000 World Bank, 6.125% 541,224 572,546 0.6
due 9/27/2002
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 7,329,359 7,517,803 7.6
Investments in
Germany
- -------------------------------------------------------------------------------------------------------------------------------
Italy Foreign Government
Obligations Buoni Poliennali del
Tesoro (Italian
Government Bonds):
Lit 6,750,000,000 10.50% due 4/01/2000 4,129,686 4,291,041 4.3
600,000,000 10.50% due 4/01/2005 356,303 376,088 0.4
1,760,000,000 10.50% due 9/01/2005 1,038,832 1,100,750 1.1
2,600,000,000 Credit Local de 1,627,204 1,646,120 1.7
France S.A., 12.20%
due 6/12/1996
yen 80,000,000 Government of Italy, 800,625 787,679 0.8
3.75% due 6/08/2005
Lit 600,000,000 Nordic Investment 368,311 382,107 0.4
Bank, 10.80% due
5/24/2003
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 8,320,961 8,583,785 8.7
Investments in Italy
- -------------------------------------------------------------------------------------------------------------------------------
Netherlands Foreign Government Nlg 1,000,000 Netherlands 647,163 656,634 0.7
Obligations Government Bond,
6.75% due 11/15/2005
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 647,163 656,634 0.7
Investments in the
Netherlands
- -------------------------------------------------------------------------------------------------------------------------------
Spain Foreign Government
Obligations Government of Spain:
Pta 50,000,000 7.40% due 7/30/1999 333,061 390,062 0.4
775,000,000 12.25% due 3/25/2000 6,468,254 7,018,144 7.1
190,000,000 10.50% due 1,505,519 1,640,503 1.6
10/30/2003
50,000,000 10.15% due 1/31/2006 386,365 420,247 0.4
yen 65,000,000 Kingdom of Spain, 753,715 742,300 0.8
5.75% due 3/23/2002
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 9,446,914 10,211,256 10.3
Investments in Spain
- -------------------------------------------------------------------------------------------------------------------------------
Sweden Foreign Government Skr 10,500,000 Government of 1,627,156 1,702,758 1.7
Obligations--Regional & Sweden, 11.00% due
Agency 1/21/1999
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 1,627,156 1,702,758 1.7
Investments in
Sweden
- -------------------------------------------------------------------------------------------------------------------------------
United Kingdom Foreign Government
United Kingdom
Treasury Gilt:
Obligations pounds 1,880,000 8.50% due 12/07/2005 3,038,054 3,138,806 3.1
320,000 9.00% due 8/06/2012 548,620 556,507 0.6
------------------------------------------------------------------------------------------------------------
Total Fixed-Income 3,586,674 3,695,313 3.7
Investments in
United Kingdom
------------------------------------------------------------------------------------------------------------
Total Investments in 37,668,335 39,375,658 39.9
Western European
Securities
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
SHORT-TERM SECURITIES INDUSTRY FACE AMOUNT ISSUE COST VALUE NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper** US$ 4,089,000 General Electric $ 4,086,990 $ 4,086,990 4.1%
Capital Corp., 5.90%
due 1/02/1996
2,000,000 Preferred 1,991,767 1,991,767 2.0
Receivables Funding
Corp., 5.70% due
1/25/1996
----------- ----------- -----
6,078,757 6,078,757 6.1
---------------------------------------------------------------------------------------------------------
US Government & 555,000 Federal Home Loan 553,519 553,519 0.6
Bank, 5.65% due
1/16/1996
Agency Obligations** 400,000 Federal Home Loan 399,686 399,686 0.4
Mortgage Corp.,
5.65% due 1/04/1996
----------- ----------- -----
953,205 953,205 1.0
---------------------------------------------------------------------------------------------------------
Total Investments in 7,031,962 7,031,962 7.1
Short-Term
Securities
---------------------------------------------------------------------------------------------------------
Total Investments $96,680,580 96,907,413 98.1
-----------
-----------
Unrealized Depreciation on Forward Foreign Exchange
Contracts*** (5,151) 0.0
Other Assets Less Liabilities 1,856,978 1.9
----------- -----
Net Assets $98,759,240 100.0%
----------- -----
----------- -----
</TABLE>
(a) Each $1,000 face amount contains one non-detachable share of Taj Mahal
Holding Corp.'s Class B redeemable Common Stock.
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustments under certain conditions until the expiration date.
(c) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(d) Investments not meeting the Combined Fund's new credit quality criteria or
not otherwise consistent with the Combined Fund's revised investment
objective as set forth under Proposal No. 5 in the Proxy
Statement--Prospectus are expected to be sold within 60 days following the
Reorganization. Such sales may cause the Combined Fund to recognize capital
gains or losses and ordinary income or losses.
* 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>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Unrealized
Foreign Appreciation
Currency Purchased Expiration Date (Depreciation)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
DM 2,000,000 January 1996 $ 9,657
- ----------------------------------------------------------------------------------------------
Total US$ Commitment-$1,388,600 $ 9,657
-------
- ----------------------------------------------------------------------------------------------
Foreign
Currency Sold
- ----------------------------------------------------------------------------------------------
Lit 2,229,100,000 January 1996 $(14,808)
- ----------------------------------------------------------------------------------------------
Total US$ Commitment $1,388,600 $(14,808)
-------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts-Net $ (5,151)
-------
-------
</TABLE>
+ Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $1,690,000, representing 1.7% of net
assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
ACQUISITION
ISSUE DATE COST VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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>
++ Separate Trading of Registered Interest and Principal of Securities
(STRIPS).
12
<PAGE>
The following pro forma combined schedule of investments for the Combined
Fund has been derived from the schedule of investments of the respective Funds
at December 31, 1995, and such information has been adjusted to give effect to
the Reorganization as if the Reorganization had occured at December 31, 1995.
The pro forma combined schedule of investments is presented for informational
purposes only and does not purport to be indicative of the schedule of
investments that actually would have resulted if the Reorganization had been
consummated at December 31, 1995. The pro forma combined schedule of investments
should be read in conjunction with the Company's financial statements and
related notes thereto which are incorporated by reference into this Statement of
Additional Information.
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
(UNAUDITED)
GLOBAL STRATEGY FOCUS FUND AND FLEXIBLE STRATEGY FUND AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY SHARES US STOCK & WARRANTS COST VALUE NET ASSETS
- ------------------------------ ------------- ------------------------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Aerospace 90,000 Boeing Company $ 5,972,248 $ 7,053,750 0.9%
121,500 United Technologies Corp. 8,609,004 11,527,312 1.4
----------- ----------- ---
14,581,252 18,581,062 2.3
- ----------------------------------------------------------------------------------------------------------------------
Aluminum 105,000 Aluminum Co. of America 5,943,466 5,551,875 0.7
- ----------------------------------------------------------------------------------------------------------------------
Appliances 120,000 Whirlpool Corporation 6,759,398 6,390,000 0.8
- ----------------------------------------------------------------------------------------------------------------------
Auto & Truck 270,000 Ford Motor Co. 7,671,879 7,830,000 1.0
- ----------------------------------------------------------------------------------------------------------------------
Banking 165,000 Bank of New York, Inc. 5,972,388 8,043,750 1.0
Bank of New York, Inc.
40,000 (Warrants) (b) 300,937 1,445,000 0.2
----------- ----------- ---
6,273,325 9,488,750 1.2
- ----------------------------------------------------------------------------------------------------------------------
Chemicals 107,050 Eastman Chemical Co. 5,409,683 6,704,006 0.8
- ----------------------------------------------------------------------------------------------------------------------
Communications Equipment 20,000 ADC Telecommunication Inc. 599,662 725,000 0.1
- ----------------------------------------------------------------------------------------------------------------------
Computer Services 160,000 General Motors Corp. (Class E) 7,053,053 8,320,000 1.0
- ----------------------------------------------------------------------------------------------------------------------
Electric/Instruments 153,600 Corning Inc. 4,240,713 4,915,200 0.6
75,000 Texas Instruments 5,016,256 3,881,250 0.5
----------- ----------- ---
9,256,969 8,796,450 1.1
- ----------------------------------------------------------------------------------------------------------------------
Energy Related 17,400 +California Energy Co., Inc. 279,096 339,300 0.0
- ----------------------------------------------------------------------------------------------------------------------
Wheelabrator Technologies,
Environmental Control 611,800 Inc. 10,399,359 10,247,650 1.2
- ----------------------------------------------------------------------------------------------------------------------
Hardware Products 118,800 Stanley Works Co. (The) 5,082,873 6,118,200 0.7
- ----------------------------------------------------------------------------------------------------------------------
Healthcare 310,000 +Humana Inc. 6,963,532 8,486,250 1.0
- ----------------------------------------------------------------------------------------------------------------------
Insurance 95,000 Aetna Life & Casualty Co. 6,061,914 6,578,750 0.8
135,000 Allstate Corp. 4,845,422 5,551,875 0.7
81,100 National Re Corp. 2,483,488 3,081,800 0.4
----------- ----------- ---
13,390,824 15,212,425 1.9
- ----------------------------------------------------------------------------------------------------------------------
Natural Gas 62,000 Enron Corp. 2,343,766 2,363,750 0.3
- ----------------------------------------------------------------------------------------------------------------------
Oil Services 292,900 Dresser Industries, Inc. 6,442,797 7,139,438 0.9
- ----------------------------------------------------------------------------------------------------------------------
Petroleum 68,800 Pennzoil Co 2,719,382 2,906,800 0.4
- ----------------------------------------------------------------------------------------------------------------------
Petroleum & Service Equipment 50,200 Schlumberger Ltd. 2,972,633 3,476,350 0.4
- ----------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 190,000 Abbott Laboratories 6,346,854 7,932,500 0.9
160,000 Merck & Co., Inc. 6,847,145 10,520,000 1.3
----------- ----------- ---
13,193,999 18,452,500 2.2
- ----------------------------------------------------------------------------------------------------------------------
Photography 162,200 Eastman Kodak Co. 8,157,324 10,867,400 1.3
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY SHARES US STOCK & WARRANTS COST VALUE NET ASSETS
- ------------------------------ ------------- ------------------------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Retail 126,000 Sears, Roebuck & Co. $ 4,625,577 $ 4,914,000 0.6%
- ----------------------------------------------------------------------------------------------------------------------
Fisher Scientific
Scientific Equipment 151,900 International Inc. 4,825,933 5,069,662 0.6
- ----------------------------------------------------------------------------------------------------------------------
Telecommunications 120,100 AT&T Corp. 7,005,930 7,776,475 0.9
70,300 Bell Atlantic Corp. 3,816,168 4,701,312 0.6
----------- ----------- ---
10,822,098 12,477,787 1.5
- ----------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS & WARRANTS 155,767,880 180,458,655 22.0
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COUNTRY FOREIGN STOCKS++++
- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
Banco de Galicia S.A.
Argentina 150,473 (ADR)(a)(20) 2,868,834 3,084,696 0.4
Banco Frances del Rio de la
Plata S.A. (Class
134,550 A)(ADR)(a)(2) 3,272,016 3,616,031 0.4
Yacimientos Petroliferos
Fiscales S.A.
100,000 (Sponsored)(ADR)(a)(4) 2,345,882 2,162,500 0.3
----------- ----------- ---
8,486,732 8,863,227 1.1
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
Canada 172,100 Canadian Pacific Ltd.(3) 2,710,067 3,119,312 0.4
Magna International Inc.
35,000 (Class A)(6) 1,374,340 1,513,750 0.2
Northern Telecommunications,
77,400 Ltd (5) 2,137,422 3,328,200 0.4
----------- ----------- ---
6,221,829 7,961,262 1.0
- ----------------------------------------------------------------------------------------------------------------------
Cristalerias de Chile S.A.
Chile 18,400 (ADR)(a)(7) 335,560 409,400 0.1
- ----------------------------------------------------------------------------------------------------------------------
Germany 10,250 Mannesmann AG (21) 2,195,390 3,270,119 0.4
9,750 Preussag AG (3) 2,569,641 2,731,226 0.3
6,150 Siemens AG (8) 2,507,770 3,372,511 0.4
----------- ----------- ---
7,272,801 9,373,856 1.1
- ----------------------------------------------------------------------------------------------------------------------
Hong Kong Telecommunications
Hong Kong 2,600,000 Ltd. (ADR)(a)(5) 4,614,276 4,640,455 0.6
- ----------------------------------------------------------------------------------------------------------------------
P.T. Indonesian Satellite
Indonesia 66,380 Corp. (ADR)(a)(5) 2,559,233 2,422,870 0.3
- ----------------------------------------------------------------------------------------------------------------------
Italy 680,000 Danieli & Co. (21) 2,451,794 1,844,795 0.2
Societa Finanziara Telefonica
800,000 S.p.A. (STET)(5) 2,442,272 2,266,246 0.3
----------- ----------- ---
4,894,066 4,111,041 0.5
- ----------------------------------------------------------------------------------------------------------------------
Japan 245,000 Canon, Inc. (9) 3,783,188 4,437,718 0.5
Dai Nippon Printing Co., Ltd.
165,000 (13) 2,681,206 2,796,881 0.3
455,000 Hitachi Cable, Ltd. (14) 3,313,228 3,221,668 0.4
57,000 Ito-Yokado Co., Ltd. (15) 2,773,666 3,511,430 0.4
381,000 Kamigumi Co., Ltd. (16) 4,232,708 3,657,216 0.5
242,000 Maeda Corp. (17) 2,444,979 2,367,493 0.3
Matsushita Electric
166,000 Industries, Ltd. (8) 2,324,955 2,701,279 0.3
430,000 Mitsubishi Electric Co. (19) 2,778,342 3,094,634 0.4
Mitsubishi Heavy Industry,
486,000 Ltd. (14) 3,075,981 3,874,254 0.5
Mitsubishi Trust & Banking
180,000 Corp. (20) 3,089,062 2,998,838 0.4
Nomura Securities Co., Ltd.
310,000 (ADR)(a)(8) 6,244,910 6,756,103 0.8
310,000 Okumura Corp. (17) 2,626,893 2,822,549 0.3
60,000 Rohm Company Ltd. (8) 3,105,057 3,388,222 0.4
60,000 SMC Corp. (21) 3,085,930 4,341,341 0.5
130,000 Sanwa Bank, Ltd. (20) 2,639,823 2,644,324 0.3
285,000 Sumitomo Corp. (22) 2,414,459 2,898,586 0.4
Tokio Marine & Fire Insurance
425,000 Co. (ADR)(a)(2) 5,279,663 5,557,439 0.7
555,000 Toray Industries Ltd. (23) 3,773,274 3,622,627 0.4
----------- ----------- ---
59,667,324 64,692,602 7.8
- ----------------------------------------------------------------------------------------------------------------------
Grupo Carso, S.A. de C.V.
Mexico 146,400+ (ADR)(a)(3)++ 1,702,240 1,482,300 0.2
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
NET
COUNTRY SHARES FOREIGN STOCKS++++ COST VALUE ASSETS
- ------------------------------ ------------- ------------------------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ABN-AMRO Holdings N.V.
Netherlands 466 (Preferred)(20) $ 15,383 $ 20,019 0.0%
Royal Dutch Petroleum Co. N.V.
49,000 (ADR)(a)(4) 5,679,094 6,915,125 0.8
230,000 Singer Co. N.V. (d) (1) 6,971,629 6,411,250 0.8
----------- ----------- ---
12,666,106 13,346,394 1.6
- ----------------------------------------------------------------------------------------------------------------------
Philippine Long Distance
Philippines 40,000 Telephone Co. (ADR)(a)(5) 2,829,796 2,165,000 0.3
- ----------------------------------------------------------------------------------------------------------------------
Spain 137,400 Repsol S.A. (ADR) (a) (4) 4,186,234 4,517,025 0.5
- ----------------------------------------------------------------------------------------------------------------------
Switzerland 3,300 BBC Brown Boveri & Cie AG (14) 2,297,018 3,842,878 0.5
4,600 Sandoz A.G. (10) 3,993,544 4,221,430 0.5
----------- ----------- ---
6,290,562 8,064,308 1.0
- ----------------------------------------------------------------------------------------------------------------------
United Kingdom 294,000 GKN PLC (24) 2,318,167 3,554,942 0.4
585,000 General Electric Co. PLC (19) 2,809,289 3,223,531 0.4
Imperial Chemical Industries
207,000 PLC (25) 2,402,001 2,449,954 0.3
----------- ----------- ---
7,529,457 9,228,427 1.1
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 129,256,216 141,278,167 17.2
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
COUNTRY AMOUNT* CORPORATE AND FOREIGN BONDS
- ------------------------------ ------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Government of Canada, 7.25%
Foreign-Canada C$ 15,800,000 due 6/01/2003 (26) 11,839,689 11,791,527 1.4
Hydro-Electric Quebec, 6.35%
5,000,000 due 1/15/2002 (12) 5,000,000 5,065,500 0.6
----------- ----------- ---
16,839,689 16,857,027 2.0
- ----------------------------------------------------------------------------------------------------------------------
Republic of Italy, 8.75% due
Foreign-Italy 500,000 2/08/2001 (1) 537,305 558,282 0.1
- ----------------------------------------------------------------------------------------------------------------------
Foreign-United Kingdom UK Treasury Gilt (26):
pounds
8,190,000 7.25% due 3/30/1998 12,651,800 12,946,911 1.6
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 0.6
----------- ----------- ---
17,623,901 17,946,793 2.2
- ----------------------------------------------------------------------------------------------------------------------
Ford Motor Credit Co., 7.125%
US-Financial Services 1,000,000 due 12/01/1997 995,000 1,025,420 0.1
- ----------------------------------------------------------------------------------------------------------------------
International Business
Machines Corp., 6.375% due
US-Industrial 1,000,000 6/15/2000 1,000,000 1,024,700 0.1
- ----------------------------------------------------------------------------------------------------------------------
Chesapeake & Potomac Telecom
US-Telecommunications 5,000,000 Co., 6.125% due 7/15/2005 4,503,300 5,032,350 0.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE & FOREIGN
BONDS 41,499,195 42,444,572 5.1
- ----------------------------------------------------------------------------------------------------------------------
Federal National Mortgage
Federal Agency Obligations Association:
5,000,000 7.85% due 9/10/2004 4,992,969 5,317,950 0.7
4,726,069 8.00% due 11/01/2024 (c) 4,512,658 4,894,412 0.6
Series 93D, 5.85% due
2,000,000 2/25/2006 1,996,250 1,999,360 0.2
----------- ----------- ---
11,501,877 12,211,722 1.5
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS
------------------------------
Government Obligations US Treasury Notes:
1,000,000 8.625% due 8/15/1997 1,027,344 1,052,500 0.1
6,000,000 7.50% due 11/15/2001 6,143,336 6,608,460 0.8
5,000,000 6.25% due 2/15/2003 4,990,469 5,216,400 0.7
14,000,000 5.75% due 8/15/2003 14,037,891 14,168,420 1.7
29,000,000 7.25% due 8/15/2004 29,290,000 32,248,870 3.9
40,000,000 7.875% due 11/15/2004 39,980,781 46,300,000 5.6
10,000,000 6.5% due 8/15/2005 9,966,406 10,653,100 1.3
US Treasury STRIPS+++,
3,000,000 7.77%(e) due 5/15/2000 2,283,715 2,382,120 0.3
------------ ------------ -----
107,719,942 118,629,870 14.4
- -------------------------------------------------------------------------------------------------------------------------
Government National Mortgage
Mortgage-Backed Securities Association (c):
982,310 9.00% due 11/15/2019 973,397 1,046,465 0.1
444,482 9.00% due 11/15/2019 441,427 473,512 0.1
------------ ------------ -----
1,414,824 1,519,977 0.2
- -------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY
OBLIGATIONS $120,636,643 $132,361,569 16.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FACE PERCENT OF
AMOUNT* SHORT-TERM SECURITIES COST VALUE NET ASSETS
-------------- ------------------------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
ABN-AMRO North America
Finance, Inc., 5.54% due
Commercial Paper** $ 10,000,000 1/26/1996 $ 9,958,450 $ 9,958,450 1.2%
Ciesco L.P.:
10,000,000 5.72% due 1/31/1996 9,949,156 9,949,156 1.2
10,000,000 5.53% due 2/20/1996 9,920,122 9,920,122 1.2
Corporate Asset Funding Co.
Inc.:
20,000,000 5.72% due 1/04/1996 19,984,111 19,984,111 2.4
10,000,000 5.67% due 1/09/1996 9,984,250 9,984,250 1.2
General Electric Capital
37,806,000 Corp., 5.90% due 1/02/1996 37,787,412 37,787,412 4.6
Monsanto Company, 5.72% due
12,000,000 1/23/1996 11,954,240 11,954,240 1.5
Morgan Stanley Group, Inc.,
12,000,000 5.65% due 1/17/1996 11,966,100 11,966,100 1.5
National Australia Funding
(Delaware) Inc., 5.73% due
15,000,000 1/12/1996 14,968,963 14,968,963 1.8
National Fleet Funding Corp.,
15,000,000 5.75% due 1/12/1996 14,968,854 14,968,854 1.8
Preferred Receivable Funding
10,000,000 Corp., 5.78% due 1/02/1996 9,995,183 9,995,183 1.2
Sandoz Corporation, 5.75% due
12,000,000 1/29/1996 11,942,500 11,942,500 1.5
USAA Capital Corp., 5.70% due
10,000,000 1/29/1996 9,952,500 9,952,500 1.2
Xerox Corp., 5.69% due
12,000,000 1/18/1996 11,963,963 11,963,963 1.5
------------ ------------ ---
195,295,804 195,295,804 23.8
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES
------------------------------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Bank, 5.58%
US Government & Agency 43,495,000 due 1/19/1996 43,360,166 43,360,166 5.3
Obligations** Federal National Mortgage
Association:
15,000,000 5.67% due 1/08/1996 14,978,738 14,978,738 1.8
20,000,000 5.65% due 1/12/1996 19,959,195 19,959,195 2.4
10,000,000 5.67% due 1/17/1996 9,971,650 9,971,650 1.2
20,000,000 5.59% due 1/18/1996 19,940,994 19,940,994 2.4
30,000,000 5.67% due 1/18/1996 29,910,225 29,910,225 3.6
7,000,000 5.50% due 1/19/1996 6,978,611 6,978,611 0.9
12,000,000 5.67% due 1/19/1996 11,962,200 11,962,200 1.5
------------ ------------ -----
157,061,779 157,061,779 19.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 352,357,583 352,357,583 42.9
- ------------------------------------------------------------------------------------------------------------------------
Total Investments 799,517,517 848,900,546 103.3
------------
------------
Unrealized Appreciation on
Forward Foreign Exchange
Contracts+++++ 9,681,629 1.2
Liabilities in Excess of Other
Assets (37,306,285) (4.5)
------------ -----
Net Assets $821,275,890 100.0%
------------ -----
------------ -----
- ------------------------------------------------------------------------------------------------------------------------
</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.
16
<PAGE>
+ 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>
ACQUISITION
ISSUE DATES COST VALUE
---------------------------------------- ------------------- ---------- ----------
<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>
<S> <C> <C>
(1) Government Entities (14) Capital Goods
(2) Insurance (15) Retail Stores
(3) Multi-Industry (16) Shipping
(4) Petroleum (17) Building & Construction
(5) Telecommunications (18) Electronics
(6) Auto Parts--Original (19) Electrical Equipment
(7) Containers (20) Banking
(8) Financial (21) Machinery
(9) Photography (22) Trading
(10) Pharmaceuticals (23) Textiles
(11) Appliances (24) Business & Public Services
(12) Public Utilities (25) Chemicals
(13) Printing & Publishing (26) Government (Bonds)
</TABLE>
+++++ Forward foreign exchange contracts as of December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
FOREIGN CURRENCY SOLD EXPIRATION DATE APPRECIATION
---------------------------------------- --------------- ------------
<S> <C> <C>
yen 4,819,200,000 January 1996 $9,681,629
--------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS (US$
COMMITMENT--$56,457,357) $9,681,629
------------
------------
</TABLE>
17
<PAGE>
PART C--OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a 'corporate representative') of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the corporate representative in connection with the proceeding, if: (i) he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant; and (ii) with respect to any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the Maryland
General Corporation Law to indemnify a corporate representative under certain
circumstances against expenses incurred in connection with the defense of a suit
or action by or in the right of the Registrant. Under the Distribution Agreement
between the Registrant and MLFD, the Registrant has agreed to indemnify MLFD
against any loss, liability, claim, damage or expense arising out of any untrue
statement of a material fact, or an omission to state a material fact, in any
registration statement, prospectus or report to stockholders of the Registrant.
Reference is made to Article VI of Registrant's Certificate of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Act'), may be provided to directors, officers and
controlling persons of the Company, pursuant to the foregoing provisions or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Fund in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
(1)(a) -- Articles of Incorporation of Registrant (a)
(b) -- Form of Articles Supplementary of Registrant (b)
(c) -- Form of Articles of Amendment of Registrant (c)
(d) -- Form of Articles Supplementary of Registrant (d)
(e) -- Form of Articles Supplementary of Registrant (e)
(f) -- Form of Articles Supplementary of Registrant (f)
(g) -- Articles Supplementary to Registrant's Articles of Incorporation relating to the redesignation of
shares of common stock as Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World
Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock and Merrill
Lynch International Equity Focus Fund Common Stock (s)
(h) -- Articles Supplementary to Registrant's Articles of Incorporation relating to the designation of
shares of common stock as Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill
Lynch International Bond Fund Common Stock and Merrill Lynch Intermediate Government Bond Fund Common
Stock (u)
(2) -- By-Laws, as amended (g)
(3) -- Not applicable
(4) -- Form of Agreement and Plan of Reorganization (Included in the Proxy Statement--Prospectus as Appendix
B)
(5) -- Specimen certificate for Common Stock, par value $.10 per share (h)
(6)(a) -- Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund (i)
</TABLE>
Part C-1
<PAGE>
<TABLE>
<S> <C> <C>
(b) -- Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund, Merrill Lynch High Current
Income Fund, Merrill Lynch Quality Equity Fund and Merrill Lynch Equity Growth Fund (j)
(c) -- Investment Advisory Agreement for Merrill Lynch Flexible Strategy Fund (k)
(d) -- Form of Investment Advisory Agreement for Merrill Lynch Natural Resources Focus Fund and Merrill
Lynch American Balanced Fund (l)
(e) -- Form of Investment Advisory Agreement for Merrill Lynch Domestic Money Market Fund and Merrill Lynch
Global Strategy Focus Fund (m)
(f) -- Form of Investment Advisory Agreement for Merrill Lynch Basic Value Focus Fund, Merrill Lynch World
Income Focus Fund, Merrill Lynch Global Utility Focus Fund and Merrill Lynch International Equity
Focus Fund (t)
(g) -- Form of Investment Advisory Agreement for Merrill Lynch Development Capital Markets Focus Fund,
Merrill Lynch International Bond Fund and Merrill Lynch Intermediate Government Bond Fund (u)
(7) -- Form of Distribution Agreement (n)
(8) -- Not applicable
(9) -- Form of Custodian Agreement (o)
(10) -- Not applicable
(11) -- Opinion and consent of Rogers & Wells*
(12) -- Tax opinion and consent of Rogers & Wells*
(13)(a) -- Form of Transfer Agency, and Dividend Disbursing Agreement (p)
(b) -- Form of Agreement relating to the use of the 'Merrill Lynch' name (q)
(c) -- Form of Participation Agreement (r)
(14) -- Consent of Deloitte & Touche LLP, independent accountants for the Fund*
(15) -- Not applicable
(16) -- Not applicable
(17)(a) -- Declaration under Rule 24f-2*
(b) -- Statement of Additional Information of the Company, dated April 26, 1996*
(c) -- Form of Proxy for Stockholders of the Company*
(d) -- Form of Letter to Contract Owners*
(e) -- Form of Proxy for Contract Owners*
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Filed herewith.
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form N-1
(the 'Registration Statement').
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1 to the Registration Statement.
(c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 7 to the Registration Statement.
(d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 10 to the Registration Statement.
(e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No. 12 to the Registration Statement.
(f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No. 16 to the Registration Statement
('Post-Effective Amendment No. 16').
(g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11 to the Registration Statement
('Post-Effective Amendment No. 11').
(h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4 to the Registration
Statement ('Post-Effective Amendment No. 4').
(i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No. 8 to the Registration Statement
('Post-Effective Amendment No. 8').
(j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 8.
</TABLE>
Part C-2
<PAGE>
<TABLE>
<S> <C>
(k) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No. 9 to Registrant's Registration
Statement.
(l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No. 11.
(m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No. 16.
(n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to Registrant's Registration Statement
('Amendment No. 1').
(o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4.
(p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 4.
(q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1.
(r) Incorporated by reference to Exhibit 9(c) to Post-Effective Amendment No. 24 to the Registration Statement.
(s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No. 20 to the Registration Statement.
(t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment No. 20 to the Registration Statement.
(u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment No. 21 to the Registration Statement.
</TABLE>
ITEM 17. UNDERTAKINGS
(1) The Registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
Part C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 29th day of August, 1996.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
BY: /S/ ARTHUR ZEIKEL
--------------------------------
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS TO
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------------- ----------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Director August 29, 1996
- ------------------------------------------ (Principal Executive Officer)
(Arthur Zeikel)
* Director
- ------------------------------------------
(Joe Grills)
* Director
- ------------------------------------------
(Walter Mintz)
* Director
- ------------------------------------------
(Melvin R. Seiden)
* Director
- ------------------------------------------
(Robert S. Salomon, Jr.)
* Director
- ------------------------------------------
(Stephen B. Swensrud)
/s/ GERALD M. RICHARD Treasurer (Principal Financial August 29, 1996
- ------------------------------------------ and Accounting Officer)
(Gerald M. Richard)
* /s/ ARTHUR ZEIKEL Attorney-in-fact August 29, 1996
- ------------------------------------------
(Arthur Zeikel)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ----------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
(1)(a) -- Articles of Incorporation of Registrant (a)
(b) -- Form of Articles Supplementary of Registrant (b)
(c) -- Form of Articles of Amendment of Registrant (c)
(d) -- Form of Articles Supplementary of Registrant (d)
(e) -- Form of Articles Supplementary of Registrant (e)
(f) -- Form of Articles Supplementary of Registrant (f)
(g) -- Articles Supplementary to Registrant's Articles of Incorporation relating to the
redesignation of shares of common stock as Merrill Lynch Basic Value Focus Fund Common
Stock, Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch Global Utility
Focus Fund Common Stock and Merrill Lynch International Equity Focus Fund Common Stock
(s)
(h) -- Articles Supplementary to Registrant's Articles of Incorporation relating to the
designation of shares of common stock as Merrill Lynch Developing Capital Markets Focus
Fund Common Stock, Merrill Lynch International Bond Fund Common Stock and Merrill Lynch
Intermediate Government Bond Fund Common Stock (u)
(2) -- By-Laws, as amended (g)
(3) -- Not applicable
(4) -- Form of Agreement and Plan of Reorganization (Included in the Proxy Statement--
Prospectus as Appendix B)
(5) -- Specimen certificate for Common Stock, par value $.10 per share (h)
(6)(a) -- Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund (i)
(b) -- Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund, Merrill Lynch High
Current Income Fund, Merrill Lynch Quality Equity Fund and Merrill Lynch Equity Growth
Fund (j)
(c) -- Investment Advisory Agreement for Merrill Lynch Flexible Strategy Fund (k)
(d) -- Form of Investment Advisory Agreement for Merrill Lynch Natural Resources Focus Fund and
Merrill Lynch American Balanced Fund (l)
(e) -- Form of Investment Advisory Agreement for Merrill Lynch Domestic Money Market Fund and
Merrill Lynch Global Strategy Focus Fund (m)
(f) -- Form of Investment Advisory Agreement for Merrill Lynch Basic Value Focus Fund, Merrill
Lynch World Income Focus Fund, Merrill Lynch Global Utility Focus Fund and Merrill Lynch
International Equity Focus Fund (t)
(g) -- Form of Investment Advisory Agreement for Merrill Lynch Development Capital Markets Focus
Fund, Merrill Lynch International Bond Fund and Merrill Lynch Intermediate Government
Bond Fund (u)
(7) -- Form of Distribution Agreement (n)
(8) -- Not applicable
(9) -- Form of Custodian Agreement (o)
(10) -- Not applicable
(11) -- Opinion and consent of Rogers & Wells*
(12) -- Tax opinion and consent of Rogers & Wells*
(13)(a) -- Form of Transfer Agency, and Dividend Disbursing Agreement (p)
(b) -- Form of Agreement relating to the use of the 'Merrill Lynch' name (q)
(c) -- Form of Participation Agreement (r)
(14) -- Consent of Deloitte & Touche LLP, independent accountants for the Fund*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ----------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
(15) -- Not applicable
(16) -- Not applicable
(17)(a) -- Declaration under Rule 24f-2*
(b) -- Statement of Additional Information of the Company, dated April 26, 1996*
(c) -- Form of Proxy for Stockholders of the Company*
(d) -- Form of Letter to Contract Owners*
(e) -- Form of Proxy for Contract Owners*
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Filed herewith.
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form N-1
(the 'Registration Statement').
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1 to the Registration Statement.
(c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 7 to the Registration Statement.
(d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 10 to the Registration Statement.
(e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No. 12 to the Registration Statement.
(f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No. 16 to the Registration Statement
('Post-Effective Amendment No. 16').
(g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11 to the Registration Statement
('Post-Effective Amendment No. 11').
(h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4 to the Registration
Statement ('Post-Effective Amendment No. 4').
(i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No. 8 to the Registration Statement
('Post-Effective Amendment No. 8').
(j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 8.
(k) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No. 9 to Registrant's Registration
Statement.
(l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No. 11.
(m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No. 16.
(n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to Registrant's Registration Statement
('Amendment No. 1').
(o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4.
(p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 4.
(q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1.
(r) Incorporated by reference to Exhibit 9(c) to Post-Effective Amendment No. 24 to the Registration Statement.
(s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No. 20 to the Registration Statement.
(t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment No. 20 to the Registration Statement.
(u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment No. 21 to the Registration Statement.
</TABLE>
<PAGE>
[ROGERS & WELLS LETTERHEAD]
August 29, 1996
Merrill Lynch Variable Series Funds, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Dear Sirs:
We have acted as counsel for Merrill Lynch Variable Series Funds, Inc., a
Maryland corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), of a Registration Statement on Form
N-14 (the "Registration Statement") relating to the issuance by the Company of
shares of its common stock, par value $0.10 per share (the "Shares"), of Merrill
Lynch World Income Focus Fund (the "World Income Focus Fund") and Merrill Lynch
Global Strategy Focus Fund (the "Global Strategy Focus Fund", and together with
the World Income Focus Fund, the "Funds"), each a separate fund of the Company
issuing separate classes of shares of common stock of the Company. The issuance
of the Shares of the Funds is to be made pursuant to the terms and conditions of
an Agreement and Plan of Reorganization, in the form included in the
Registration Statement, between the World Income Focus Fund and the Merrill
Lynch International Bond Fund (a separate fund of the Company) and an Agreement
and Plan of Reorganization, in the form included in the Registration Statement,
between the Global Strategy Focus Fund and Merrill Lynch Flexible Strategy Fund
(a separate fund of the Company) (the "Agreements").
In so acting, we have examined and relied upon originals or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed below. As
to matters governed by the laws of the State of Maryland, we have relied on the
opinion of Wilmer, Cutler & Pickering, a copy of which is attached hereto.
Based upon the foregoing, and such examination of law as we have deemed
necessary, we are of the opinion that:
1. The Shares of the Funds, when issued and delivered by the Company
pursuant to, and upon satisfaction of the conditions contained in, the
Agreements, will be duly authorized, validly issued, fully paid and
non-assessable.
<PAGE>
Merrill Lynch Variable
Series Funds, Inc. 2 August 29, 1996
2. The statements set forth under the headings "U.S. Federal Income Tax
Consequences of the Reorganizations" in the Summary and "Proposal No. 6 and
Proposal No. 7--The Reorganizations--Information About The Reorganizations--U.S.
Federal Income Tax Consequences of the Reorganizations" in the Proxy
Statement--Prospectus contained in the Registration Statement, insofar as such
statements constitute a summary of matters of law, are fair summaries of the
material provisions thereof and accurately present the information called for
with respect to such matters.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an Exhibit to the Registration Statement. In giving this
consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act or rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Rogers & Wells
<PAGE>
[Letterhead of Wilmer, Cutler & Pickering]
August 29, 1996
Rogers & Wells
200 Park Avenue
New York, New York 10166
Re: Merrill Lynch Variable Series Funds, Inc./
Shares to be Issued Pursuant to Agreements
and Plans of Reorganization
Ladies and Gentlemen:
We have acted as special Maryland counsel to Merrill Lynch Variable
Series Funds, Inc., a Maryland corporation (the "Company"), in connection with
the Company's authorization and proposed issuance of its common shares, par
value $.10 per share (the "Shares"). The Shares are to be issued pursuant to
Agreements and Plans of Reorganization (the "Agreements"), by and between
Merrill Lynch World Income Focus Fund and Merrill Lynch Global Strategy Focus
Fund, each a series of the Company (each an "Acquiring Fund"), and Merrill Lynch
International Bond Fund and Merrill Lynch Flexible Strategy Fund, each another
series of the Company (each a "Transferred Fund"). The form of the Agreements is
included as Appendix B to the Prospectus/Proxy Statement relating to the
transactions contemplated by the Agreement included in the Company's
Registration Statement on Form N-14 (Registration Nos. 333-7919; 811-3290) filed
with the Securities and Exchange Commission (as may be amended, the
"Registration Statement").
In rendering the opinions hereinafter expressed, we have reviewed
the corporate proceedings taken by the Company in connection with the
authorization and issuance of the Shares, and we have reviewed such questions of
law and examined copies of such corporate records of the Company, certificates
of public officials and of responsible officers of the Company, and other
documents as we have deemed necessary as a basis for such opinions. As to the
various matters of fact material to such opinions, we have, when such facts were
not independently established, relied to the extent we deem proper on
certificates of public officials and of responsible officers of the Company. In
connection with such review and examination, we have assumed that all copies of
documents provided to us conform to the originals, that all signatures are
genuine, and that prior to the consummation of the transctions contemplated
thereby, the Agreements will have been duly and validly executed and delivered
on behalf of each of the parties thereto in substantially the form included in
the Registration Statement.
Based on the foregoing, it is our opinion that:
1. The Company is validly existing as a corporation in good
standing under the laws of the State of Maryland.
2. The Shares, when issued and delivered by the Company pursuant
to, and upon satisfaction of the conditions contained in, the Agreements, will
be duly authorized, validly issued, fully paid and non-assessable.
In rendering the foregoing opinions (a) we express no opinion as to
the laws of any jurisdiction other than the State of Maryland; and (b) we have
assumed, with your concurrence, (i) that the conditions to closing set forth in
the Agreements will have been satisfied; (ii) all shares of Common Stock, par
value $.10 per share, previously issued by the Company were duly and validly
authorized and issued; (iii) the issuance of the Shares will not result in the
issuance of shares of any class or series of the Company in excess of the number
of shares authorized by the Company's Articles of Incorporation, as amended; and
(iv) at no time prior to the date that the Shares are issued will the existing
corporate authorization to issue the Shares be amended, repealed or revoked.
You are hereby authorized to rely upon this opinion in rendering
your legality opinion to the Company to be filed as an exhibit to the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to this firm under
the caption "Legal Opinions" in the Company's final Prospectus/Proxy Statement
relating to the Shares included in the Registration Statement.
Very truly yours,
WILMER, CUTLER & PICKERING
By: /s/ John B. Watkins
_______________________________
John B. Watkins, a partner
<PAGE>
[ROGERS & WELLS LETTERHEAD]
August 27, 1996
Merrill Lynch Variable Series Funds, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Dear Sirs:
We have acted as counsel to Merrill Lynch Variable
Series Funds, Inc., a Maryland corporation (the "Company"), in
connection with a transaction involving the Company's Merrill Lynch
International Bond Fund and the Company's Merrill Lynch World Income
Focus Fund, and a transaction involving the Company's Merrill Lynch
Flexible Strategy Fund and the Company's Merrill Lynch Global Strategy
Focus Fund. Each transaction (each, a "Reorganization") will be
undertaken pursuant to an Agreement and Plan of Reorganization, (a
"Plan") between, respectively, the Merrill Lynch International Bond
Fund and the Merrill Lynch Flexible Strategy Fund on the one hand
(each, respectively, a "Transferor Fund"), and the Merrill Lynch World
Income Focus Fund and the Merrill Lynch Global Strategy Focus Fund on
the other hand (each, respectively, an "Acquiring Fund"). On the
effective date of each Reorganization (the "Effective Date"), each
Transferor Fund will transfer its assets to the corresponding
Acquiring Fund in exchange for the assumption by the Acquiring Fund of
the liabilities of the Transferor Fund and shares of the Acquiring
Fund, and the Transferor Fund will distribute the shares received from
the Acquiring Fund to its shareholders in liquidation of the
Transferor Fund.
In connection with each Reorganization, the transfer
by each Transferor Fund of its assets to its corresponding Acquiring
Fund, the assumption by the Acquiring Fund of the liabilities of the
Transferor Fund and the distribution of shares of the Acquiring Fund
to the shareholders of the Transferor Fund in liquidation of the
Transferor Fund will be accomplished through an amendment to the
Articles of Incorporation of the Company reclassifying shares of each
Transferor Fund as shares of its corresponding Acquiring Fund. The
aggregate number of Acquiring Fund shares to be issued in each
Reorganization will be determined by dividing the value (on the date
preceding the Effective Date) of the Transferor Fund's net assets by
the net asset value of one Acquiring Fund share on the same date.
Fractional shares will be calculated to the fourth decimal place.
<PAGE>
Following each Reorganization, the Acquiring Fund
may make dispositions of assets received from the corresponding
Transferor Fund in the ordinary course of its business, including to
adjust its overall assets following the Reorganization to correspond
to its investment policies and objectives. At the time of each
Reorganization, the investment adviser of each Acquiring Fund will
have a specific intention to dispose of substantially less than 50% of
the assets transferred by the corresponding Transferor Fund as part of
such adjustments. The Reorganization of the Merrill Lynch
International Bond Fund and the Merrill Lynch World Income Focus Fund
will be conditioned on the approval by the current shareholders of the
Merrill Lynch World Income Focus Fund of a change of such fund's
investment objective, which is currently to provide stockholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational
currency units, to an investment objective of seeking a high total
investment return, again by investing in a global portfolio of fixed
income securities, denominated in various currencies, including
multinational currency units. The proposed investment objective and
investment policies of the Merrill Lynch World Income Focus Fund are
similar to the investment objective and investment policies of the
Merrill Lynch International Bond Fund. In connection with the change
in its investment objective, the Merrill Lynch World Income Focus Fund
will dispose of substantially all its portfolio of high yield
obligations ("junk bonds"), which currently represents more than half
of the fund's total assets. The investment objective and investment
policies of the Merrill Lynch Flexible Strategy Fund are similar to
those of the Merrill Lynch Global Strategy Focus Fund.
In rendering the opinions expressed herein, we have
examined originals or copies, certified or otherwise identified to our
satisfaction, of such documents, corporate records and other
instruments as we have deemed necessary or appropriate for the purpose
of rendering this opinion, including the financial statements of each
Acquiring Fund and Transferor Fund, the Certificate of the Secretary
of the Company attached hereto as Exhibit A (the "Certificate") and
the Plan.
In addition, we have examined the Company's
Registration Statement on Form N-14 (the "Form N-14") relating to
shares of the Acquiring Funds to be offered in connection with their
respective Reorganizations, filed with the Securities and Exchange
Commission (the "Commission") pursuant to the provisions of the
Securities Act of 1933 and the Investment Company Act of 1940 (the
"1940 Act"), each as amended, and the rules and regulations of the
Commission thereunder.
As to questions of fact material to this opinion, we
have, with your approval, where relevant facts were not independently
established, relied upon, among other things, the representations made
in the Plan and the Certificate.
2
<PAGE>
Based on and subject to the draft documents attached
to the Form N-14, the disclosures in the Form N-14, and the
representations made in the Plan and the Certificate, and provided the
Reorganizations occur substantially on the terms set forth in the
Form N-14 and the draft documents attached thereto, it is our opinion
that pursuant to the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated by the Treasury Department,
published administrative announcements and rulings of the Internal
Revenue Service and court decisions, all as of the date of this
letter, the Reorganizations will qualify as tax-free reorganizations
for U.S. Federal income tax purposes.
Specifically, it is our opinion that for U.S. Federal
income tax purposes:
(1) The transfer of substantially all the assets of a
Transferor Fund to the corresponding Acquiring Fund in exchange solely
for the assumption of the liabilities of the Transferor Fund and the
stock of the Acquiring Fund as provided in the related Plan will
constitute a reorganization within the meaning of Section 368(a)(1)(D)
of the Code. Each Transferor Fund and each Acquiring Fund will be a
"party to a reorganization" within the meaning of Section 368(b) of
the Code.
(2) No gain or loss will be recognized to a Transferor Fund
as a result of its Reorganization (other than gain or loss under provisions of
the Code providing for the revaluation of property at the close of a taxable
year resulting from the closing of the Transferor Fund's taxable year on the
Effective Date).
(3) No gain or loss will be recognized to an Acquiring Fund
as a result of its Reorganization.
(4) No gain or loss will be recognized to the shareholders of
a Transferor Fund on the distribution to them by the Transferor Fund
of the stock of the corresponding Acquiring Fund in exchange for their
stock in the Transferor Fund, and gain, if any, will be recognized
with respect to any cash or property other than stock of the Acquiring
Fund received.
(5) No gain or loss will be recognized by the shareholders of
an Acquiring Fund upon the issuance of stock of the Acquiring Fund and
the distribution of such stock to shareholders of the corresponding
Transferor Fund in the Reorganization.
(6) The basis to an Acquiring Fund of the assets received
from the corresponding Transferor Fund will be the same as the basis
of those assets in the hands of the Transferor Fund immediately prior
to the consummation of the Reorganization.
(7) After each Reorganization, the basis of the stock of each
Acquiring Fund received by each shareholder of the corresponding
Transferor Fund in the Reorganization will equal the basis of the
stock of the corresponding Transferor Fund exchanged therefor.
(8) A Transferor Fund shareholder's holding period for shares
of the corresponding Acquiring Fund received in a Reorganization will
be determined by including the period for which it held the
3
<PAGE>
shares of the corresponding Transferor Fund exchanged therefor,
provided that it held such Transferor Fund shares as capital assets.
(9) An Acquiring Fund's holding period with respect to the
assets received from the corresponding Transferor Fund will include
the period for which such assets were held by the Transferor Fund.
(10) No gain or loss will be recognized to a Transferor Fund
or its shareholders upon the liquidation of the Transferor Fund in
connection with its Reorganization.
(11) The status of a Transferor Fund and its corresponding
Acquiring Fund as a regulated investment company (a "RIC") under
Sections 851 through 855 of the Code will not be affected as a result
of their Reorganization, except that upon the liquidation of the
Transferor Fund its status as a RIC will terminate.
The opinion set forth in (11) above is subject to
the qualification that we have made no independent investigation with
respect to the qualification of the Transferor Funds or the Acquiring
Funds as regulated investment companies under the Code.
The opinions set forth in this letter represent our
conclusions as to the application of Federal income tax law existing
as of the date of this letter to the facts and transactions described
in the Form N-14, the draft documents attached thereto and the
transactions described therein and in this letter. We can give no
assurance that legislative enactments, administrative changes or court
decisions may not be forthcoming that would modify or supersede our
opinions.
The opinions contained herein are limited to those
matters expressly covered; no opinion is to be implied in respect of
any other matter. The opinions set forth herein are as of the date
hereof and we disclaim any undertaking to update this letter or
otherwise advise you as to any changes of law or fact that may
hereinafter be brought to our attention. The opinions set forth herein
may not be relied on by any person or entity other than you without
our prior written consent. Notwithstanding the foregoing, we hereby
consent to the filing of this opinion with the Commission as an
Exhibit to the Form N-14. In giving this consent, we do not admit that
we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933 or rules and regulations of
the Commission thereunder.
Very truly yours,
/s/ Rogers & Wells
<PAGE>
Exhibit A
CERTIFICATE
The undersigned, being the Secretary of Merrill Lynch Variable
Series Funds, Inc. (the "Company"), in connection with an opinion letter (the
"Opinion Letter") to be rendered by Rogers & Wells with regard to transactions
involving the Company's Merrill Lynch International Bond Fund, the Company's
Merrill Lynch World Income Focus Fund, the Company's Merrill Lynch Flexible
Strategy Fund and the Company's Merrill Lynch Global Strategy Focus Fund (each,
a "Fund"), does hereby represent the facts set forth below. Capitalized terms
not otherwise defined herein shall have the meanings set forth in the Opinion
Letter.
1. The fair market value of the Acquiring Fund stock and other consideration
received by each Transferor Fund shareholder in a Reorganization will be
approximately equal to the fair market value of the Transferor Fund stock
surrendered by each shareholder in the exchange.
2. There is no plan or intention by the shareholders of a Transferor
Fund who own five percent or more of the Transferor Fund stock, and to the best
of the knowledge of the management of each Transferor Fund, there is no plan or
intention on the part of the remaining shareholders of a Transferor Fund to
sell, exchange, or otherwise dispose of a number of shares of Acquiring Fund
stock received in a Reorganization that would reduce the Transferor Fund
shareholders' ownership of the Acquiring Fund stock to a number of shares having
a value, as of the Effective Date, of less than 50 percent of the value of all
the formerly outstanding stock of the Transferor Fund as of the Effective Date.
For purposes of this representation, shares of Transferor Fund stock and shares
of the corresponding Acquiring Fund's stock held by the Transferor Fund
shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to
the Reorganization will be considered in making this representation, except for
shares of the Transferor Fund stock and shares of the Acquiring Fund stock that
are required to be redeemed by the Transferor Fund or the Acquiring Fund in the
ordinary course of its business as an open-end investment company pursuant to
Section 22(e) of the 1940 Act. There will be no dissenters to the
Reorganization, and no cash will be paid to shareholders of a Transferor Fund in
lieu of fractional shares.
3. Each Acquiring Fund will acquire at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets held by the corresponding Transferor Fund immediately prior
to its Reorganization. For purposes of this representation, amounts paid by the
Transferor Fund to shareholders who receive cash or other property and all
redemptions and distributions (except for distributions and redemptions
occurring in the ordinary course of the Transferor Fund's business as an
open-end investment company) made by the Transferor Fund immediately preceding
the transfer will be included
<PAGE>
as assets of the Transferor Fund held immediately prior to the
Reorganization.
4. Before each Reorganization, Merrill Lynch Life Insurance Company and
ML Life Insurance Company of New York will together hold more than 50% of the
outstanding stock of the corresponding Transferor Fund, and after the
Reorganization, Merrill Lynch Life Insurance Company and ML Life Insurance
Company of New York will together hold more than 50% of the outstanding stock of
the corresponding Acquiring Fund.
5. Except to the extent necessary to comply with its legal obligation
to redeem its own shares pursuant to Section 22(e) of the 1940 Act, no Acquiring
Fund has a plan or intention to reacquire any of its stock issued in its
Reorganization.
6. No Acquiring Fund has a plan or intention to sell or otherwise
dispose of any of the assets of the corresponding Transferor Fund acquired in
its Reorganization, except for dispositions made in the ordinary course of
business.
7. The liabilities of a Transferor Fund assumed by the corresponding
Acquiring Fund plus the liabilities, if any, to which the transferred assets are
subject were incurred by the Transferor Fund in the ordinary course of its
business and are associated with the assets transferred.
8. Following its Reorganization, each Acquiring Fund will continue the
historic business of the corresponding Transferor Fund or will use a significant
portion of the Transferor Fund's historic business assets in the Acquiring
Fund's business.
9. At the time of its Reorganization, an Acquiring Fund will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in the Acquiring Fund.
10. Each Fund will bear its respective expenses incurred in connection
with its Reorganization. The shareholders of the Transferor Fund and the
Acquiring Fund will pay their respective expenses, if any, incurred in
connection with the Reorganization.
11. There is no intercorporate indebtedness existing between
an Acquiring Fund and the corresponding Transferor Fund that was
issued, acquired, or will be settled at a discount.
12. The fair market value of the assets of a Transferor Fund
transferred to the corresponding Acquiring Fund will equal or exceed the sum of
the liabilities assumed by the Acquiring Fund, plus the amount of liabilities,
if any, to which the transferred assets are subject.
13. The total adjusted basis of the assets of a Transferor
Fund transferred to the corresponding Acquiring Fund will equal or
2
<PAGE>
exceed the sum of the liabilities to be assumed by the Acquiring Fund, plus the
amount of liabilities, if any, to which the transferred assets are subject.
14. No Transferor Fund is under the jurisdiction of a court
in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
15. Each Acquiring Fund and each Transferor Fund has elected to be
taxed as a RIC under Section 851 of the Code and, for all their respective
taxable periods (including the last short taxable period ending on the Effective
Date for each Transferor Fund's Reorganization), has qualified, or in the case
of the current taxable period and the last short taxable period ending on the
Effective Date of each Transferor Fund's Reorganization, will qualify, for the
special tax treatment afforded RICs under the Code, and after the
Reorganization, each Acquiring Fund intends to continue to so qualify. The
foregoing representation is without regard to the effect, if any, that a
Reorganization may have on the related Transferor Fund's or Acquiring Fund's
status as a RIC.
16. Prior to its Reorganization, a Transferor Fund will have declared
to its shareholders of record a dividend or dividends payable prior to closing,
which together with all previous dividends will have the effect of distributing
all the Transferor Fund's investment company taxable income plus the excess of
its interest income, if any, excludable from gross income under Section 103(a)
of the Code over its deductions disallowed under Sections 265 and 171(a)(2) of
the Code for the taxable year of the Transferor Fund ending on the Effective
Date of its Reorganization.
The foregoing representations are based on the assumption that
the transactions described in the Form N-14 and the draft agreements attached
thereto will be effected on subtantially the terms described therein.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate this 27th day of August, 1996.
/s/ Ira Shapiro
-------------------------
Ira Shapiro
Secretary
Merrill Lynch Variable
Series Funds, Inc.
3
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Variable Series Funds, Inc.:
We consent to the incorporation by reference in Pre-Effective Amendment No. 1 to
Registration Statement No. 333-7919 on Form N-14 of our report dated February
20, 1996 relating to the December 31, 1995 financial statements of Merrill Lynch
Variable Series Funds, Inc., and to the reference to us under the captions
"Financial Highlights" and "Experts" appearing in the Proxy Statement and
Prospectus, which is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
August 26, 1996
<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 24F-2
Annual Notice of Securities Sold
Pursuant to Rule 24f-2
1. Name and address of Issuer:
Merrill Lynch Variable Series Fund, Inc.
P.O. Box 9011
Princeton, N.J. 08543-9011
2. Name of each series or class of funds for which this notice is filed:
Domestic Money Market Fund
Reserve Assets Fund
Prime Bond Fund
High Current Income Fund
Quality Equity Fund
Equity Growth 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
International Bond Fund
Intermediate Government Bond Fund
3. Investment Company Act File Number: 811-3290
Securities Act File Number: 2-74452
4. Last day of fiscal year for which this notice is filed:
<PAGE>
December 31, 1995
5. Check box if this notice is being filed more than 180 days after the close
of the issuer's fiscal year for purposes of reporting securities sold after
the close of the fiscal year but before termination of the issuer's 24f-2
declaration:
[ ]
6. Date of termination of issuer's declaration under rule 24f-2(a)(1), if
applicable :
2
<PAGE>
7. Number and amount of securities of the same class or series which had been
registered under the Securities Act of 1933 other than pursuant to rule
24f-2 in a prior fiscal year, but which remained unsold at the beginning of
the fiscal year:
Domestic Money Market Fund 0 shares
Reserve Assets Fund 0 shares
Prime Bond Fund 0 shares
High Current Income Fund 0 shares
Quality Equity Fund 0 shares
Equity Growth Fund 0 shares
Flexible Strategy Fund 0 shares
Natural Resources Focus Fund 0 shares
American Balanced Fund 0 shares
Global Strategy Focus Fund 0 shares
Basic Value Focus Fund 0 shares
World Income Focus Fund 0 shares
Global Utility Focus Fund 0 shares
International Equity Focus Fund 0 shares
Developing Capital Markets Focus Fund 0 shares
International Bond Fund 0 shares
Intermediate Government Bond Fund 0 shares
8. Number and amount of securities registered during the fiscal year other
than pursuant to rule 24f-2:
Domestic Money Market Fund 0 shares
Reserve Assets Fund 0 shares
Prime Bond Fund 0 shares
High Current Income Fund 0 shares
Quality Equity Fund 0 shares
Equity Growth Fund 0 shares
Flexible Strategy Fund 0 shares
Natural Resources Focus Fund 0 shares
American Balanced Fund 0 shares
Global Strategy Focus Fund 0 shares
Basic Value Focus Fund 0 shares
World Income Focus Fund 0 shares
Global utility Focus Fund 0 shares
International Equity Focus Fund 0 shares
Developing Capital Markets Focus Fund 0 shares
International Bond Fund 0 shares
Intermediate Government Bond Fund 0 shares
9. Number and aggregate sale price of securities sold during
3
<PAGE>
the fiscal year:
Domestic Money Market Fund 111,267,159 shares $111,267,159
Reserve Assets Fund 6,811,139 shares $ 6,811,139
Prime Bond Fund 3,880,829 shares $ 45,621,465
High Current Income Fund 5,980,682 shares $ 65,910,048
Quality Equity Fund 2,793,165 shares $ 82,433,320
Equity Growth Fund 3,628,361 shares $ 86,301,010
Flexible Strategy Fund 1,290,613 shares $ 19,615,145
Natural Resources Focus Fund 474,971 shares $ 5,198,077
American Balanced Fund 2,201,026 shares $ 30,814,364
Global Strategy Focus Fund 2,383,467 shares $ 28,913,701
Basic Value Focus Fund 7,762,209 shares $ 98,591,635
World Income Focus Fund 481,318 shares $ 4,592,255
4
<PAGE>
Global utility Focus Fund 782,432 shares $ 7,896,815
International Equity Focus Fund 2,540,187 shares $ 26,767,717
Developing Capital Markets Focus Fund 2,555,725 shares $ 23,265,598
International Bond Fund 937,367 shares $ 9,691,745
Intermediate Government Bond Fund 2,173,331 shares $ 22,410,622
Total 157,943,981 shares $676,101,815
10. Number and aggregate sale price of securities sold during the fiscal year
in reliance upon registration pursuant to rule 24f-2:
Domestic Money Market Fund 111,267,159 shares $111,267,159
Reserve Assets Fund 6,811,139 shares $ 6,811,139
Prime Bond Fund 3,880,829 shares $ 45,621,465
High Current Income Fund 5,980,682 shares $ 65,910,048
Quality Equity Fund 2,793,165 shares $ 82,433,320
Equity Growth Fund 3,628,361 shares $ 86,301,010
Flexible Strategy Fund 1,290,613 shares $ 19,615,145
Natural Resources Focus Fund 474,971 shares $ 5,198,077
American Balanced Fund 2,201,026 shares $ 30,814,364
Global Strategy Focus Fund 2,383,467 shares $ 28,913,701
Basic Value Focus Fund 7,762,209 shares $ 98,591,635
World Income Focus Fund 481,318 shares $ 4,592,255
Global utility Focus Fund 782,432 shares $ 7,896,815
International Equity Focus Fund 2,540,187 shares $ 26,767,717
Developing Capital Markets Focus Fund 2,555,725 shares $ 23,265,598
International Bond Fund 937,367 shares $ 9,691,745
Intermediate Government Bond Fund 2,173,331 shares $ 22,410,622
Total 157,943,981 shares $676,101,815
11. Number and aggregate sale price of securities issued during the fiscal year
in connection with dividend reinvestment plans, if applicable :
Domestic Money Market Fund 17,571,280 shares $ 17,571,280
Reserve Assets Fund 1,582,801 shares $ 1,582,801
Prime Bond Fund 2,612,921 shares $ 30,585,478
High Current Income Fund 2,792,967 shares $ 30,645,264
Quality Equity Fund 651,881 shares $ 18,002,604
Equity Growth Fund 41,296 shares $ 889,063
Flexible Strategy Fund 896,275 shares $ 13,101,282
Natural Resources Focus Fund 63,806 shares $ 835,170
American Balanced Fund 529,259 shares $ 7,173,644
Global Strategy Focus Fund 1,452,481 shares $ 17,112,643
Basic Value Focus Fund 1,538,264 shares $ 10,403,524
World Income Focus Fund 727,949 shares $ 6,851,555
5
<PAGE>
Global Utility Focus Fund 517,492 shares $ 5,144,108
International Equity Focus Fund 898,135 shares $ 9,331,626
Developing Capital Markets Focus Fund 36,009 shares $ 332,002
International Bond Fund 77,732 shares $ 795,218
Intermediate Government Bond Fund 161,544 shares $ 1,670,786
Total 32,152,092 shares $172,028,048
6
<PAGE>
12. Calculation of registration fee:
A) Domestic Money Market Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $111,267,159
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 17,571,280
(iii) Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $188,460,308
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii), $0
less line (iii), plus line (iv)] (if
applicable): $0
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $0
B) Reserve Assets Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 6,811,139
7
<PAGE>
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 1,582,801
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 15,081,975
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
8
<PAGE>
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $0
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $0
C) Prime Bond Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 45,621,465
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 30,585,478
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 27,181,488
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 49,025,455
(vi) Multiplier prescribed by Section
9
<PAGE>
6(b) of the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $16,905.33
D) High Current Income Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 65,910,048
10
<PAGE>
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 30,645,264
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 13,092,078
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 83,463,234
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $28,780.43
E) Quality Equity Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 82,433,320
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 18,002,604
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 15,180,783
11
<PAGE>
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 85,255,141
(vi) Multiplier prescribed by Section
12
<PAGE>
6(b) of the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $29,398.32
F) Equity Growth Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 86,301,010
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 889,063
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 8,536,475
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 78,653,598
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 27,121.93
G) Flexible Strategy Fund
13
<PAGE>
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 19,615,145
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 13,101,282
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 21,921,049
14
<PAGE>
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 10,795,378
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 3,722.54
H) Natural Resources Focus Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 5,198,077
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 835,170
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 6,852,669
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii), $0
15
<PAGE>
less line (iii), plus line (iv)] (if
applicable):
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 0
I) American Balanced Fund
(i) Aggregate sale price of securities
16
<PAGE>
sold during the fiscal year in reliance on
rule 24f-2 (from Item 10): $ 30,814,364
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 7,173,644
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 12,151,661
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 25,836,347
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 8,909.09
J) Global Strategy Focus Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 28,913,701
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 17,112,643
(iii) Aggregate price of shares redeemed
17
<PAGE>
or repurchased during the fiscal year (if
applicable): - $ 56,008,034
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] $ 0
18
<PAGE>
(if applicable):
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 0
K) Basic Value Focus Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 98,591,635
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 10,403,524
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 8,076,571
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 100,918,588
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 34,799.51
19
<PAGE>
L) World Income Focus Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 4,592,255
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 6,851,555
(iii)Aggregate price of shares redeemed
20
<PAGE>
or repurchased during the fiscal year (if
applicable): - $ 9,863,555
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 1,580,255
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 544.92
M) Global Utility Focus Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 7,896,815
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 5,144,108
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 15,567,315
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
21
<PAGE>
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 0
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 0
22
<PAGE>
N) International Equity Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 26,767,717
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 9,331,626
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 21,945,941
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 14,153,402
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 4,880.48
O) Developing Capital Markets Focus Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 23,265,598
23
<PAGE>
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 332,002
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 4,592,826
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24
<PAGE>
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 19,004,774
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation : x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 6,553.37
P) International Bond Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule
24f-2 (from Item 10): $ 9,691,745
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 795,218
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 3,269,924
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 7,217,039
25
<PAGE>
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 2,488.63
Q) Intermediate Government Bond Fund
(i) Aggregate sale price of securities sold
during the fiscal year in reliance on rule 24f-2
26
<PAGE>
(from Item 10): $ 22,410,622
(ii) Aggregate price of shares issued in
connection with dividend reinvestment plans
(from Item 11, if applicable): + $ 1,670,786
(iii)Aggregate price of shares redeemed or
repurchased during the fiscal year (if
applicable): - $ 3,238,873
(iv) Aggregate price of shares redeemed or
repurchased and previously applied as a
reduction to filing fees pursuant to rule
24e-2 (if applicable): + $0
(v) Net aggregate price of securities sold
and issued during the fiscal year in reliance
upon rule 24f-2 [line (i), plus line (ii),
less line (iii), plus line (iv)] (if
applicable): $ 20,842,535
(vi) Multiplier prescribed by Section 6(b) of
the Securities Act of 1933 or other
applicable law or regulation: x 1/2900
(vii)Fee due [line (i) or line (v) multiplied
by line (vi)]: $ 7,187.08
13. Check box if fees are being remitted to the Commission's
lockbox depository as described in section 3a of the
Commission's Rules of Informal and Other Procedures
(17 CFR 202.3a).
[X]
Date of mailing or wire transfer of filing fees to the Commission's lockbox
depository:
February 26, 1996
SIGNATURES
27
<PAGE>
This report has been signed below by the
following persons on behalf of the issuer and
in the capacities and on the dates indicated.
By
/s/Jaclyn Scheck
Jaclyn Scheck, Assistant Secretary
Date February 26, 1996
28
<PAGE>
February 20, 1996
Merrill Lynch Variable
Series Funds, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Gentlemen:
We have acted as counsel to Merrill Lynch Variable Series Funds, Inc. (the
"Fund") in connection with the sale of its seventeen classes of shares of common
stock (the "Common Stock") pursuant to the Distribution Agreement between the
Fund and Merrill Lynch Funds Distributor, Inc. (the "Distribution Agreement").
You have asked us to furnish certain legal opinions in connection with the
filing of a notice (the "Notice") under Rule 24f-2 of the Investment Company Act
of 1940, as amended (the "Act").
For purposes of the opinions expressed in this letter, we have examined the
Articles of Incorporation, as amended through the date hereof, the Distribution
Agreement and such other documents and questions of law as we have deemed
necessary or advisable. As to relevant matters of fact, we have relied upon such
documents as we deemed appropriate.
29
<PAGE>
Based on the foregoing, we are of the opinion that when (a) the 6,811,139
shares of the Fund's Reserve Assets Fund Common Stock referred to in paragraph
10 of the Notice; (b) the 3,880,829 shares of the Fund's Prime Bond Fund Common
Stock referred to in paragraph 10 of the Notice; (c) the 5,980,682 shares of the
Fund's High Current Income Fund Common Stock referred to in paragraph 10 of the
Notice; (d) the 3,628,361 shares of the Fund's Equity Growth Fund Common Stock
referred to in paragraph 10 of the Notice; (e) the 2,793,165 shares of the
Fund's Quality Equity Fund Common Stock referred to in paragraph 10 of the
Notice; (f) the 474,971 shares of the Fund's Natural
30
<PAGE>
Resources Focus Fund Common Stock referred to in paragraph 10 of the Notice; (g)
the 1,290,613 shares of the Fund's Flexible Strategy Fund Common Stock referred
to in paragraph 10 of the Notice; (h) the 2,201,026 shares of the Fund's
American Balanced Fund Common Stock referred to in paragraph 10 of the Notice;
(i) the 111,267,159 shares of the Fund's Domestic Money Market Fund Common Stock
referred to in paragraph 10 of the Notice; (j) the 2,383,467 shares of the
Fund's Global Strategy Focus Fund Common Stock referred to in paragraph 10 of
the Notice; (k) the 481,318 shares of the Fund's World Income Focus Fund Common
Stock referred to in paragraph 10 of the Notice; (l) the 782,432 shares of the
Fund's Global Utility Focus Fund Common Stock referred to in paragraph 10 of the
Notice; (m) the 7,762,209 shares of the Fund's Basic Value Focus Fund Common
Stock referred to in paragraph 10 of the Notice; (n) the 2,540,187 shares of the
Fund's International Equity Focus Fund Common Stock referred to in paragraph 10
of the Notice; (o) the 937,367 shares of the Fund's International Bond Fund
Common Stock referred to in paragraph 10 of the Notice; (p) the 2,173,331 shares
of the Fund's Intermediate Government Bond Fund Common Stock referred to in
paragraph 10 of the Notice and (q) the 2,555,725 shares of the Fund's Developing
Capital Markets Focus Fund Common Stock referred to in paragraph 10 of the
Notice were sold during the fiscal year ended December 31, 1995 pursuant to the
Distribution Agreement in reliance upon registration pursuant to Rule 24f-2 of
the Act and in accordance with the currently effective prospectus of the Fund,
the shares referred to in clauses (a), (b), (c), (d), (e), (f), (g), (h), (i),
(j), (k), (l), (m), (n), (o), (p) and (q) were legally issued, fully
31
<PAGE>
paid and non-assessable.
Very truly yours,
/s/ Rogers & Wells
32
<PAGE>
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 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.
- ------------------
(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. 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
<PAGE>
PROXY
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS.
The undersigned hereby appoints each of Terry K. Glenn,
Gerald M. Richard and Ira P. Shapiro as proxies, each with the power
to appoint his substitute, and authorizes each of them to represent
and to vote, as designated below, all shares of common stock of
Merrill Lynch Variable Series Funds, Inc. (the "Company") held of
record by the undersigned on August 12, 1996 at an annual meeting of
stockholders of the Company to be held on October 11, 1996 or any
adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED
IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER WITH
RESPECT TO ALL SHARES OF THE COMPANY HELD OF RECORD BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, 3, 4, 5, 6 AND 7.
1. To consider and act upon a proposal to elect the following persons as
Directors of the Company:
- --------% FOR all nominees listed --------% WITHHOLD AUTHORITY to
below (except as indicated vote for all nominees listed
to the contrary below) below
FOR WITHHOLD
Arthur Zeikel _______________ _______________
Joe Grills _______________ _______________
Walter Mintz _______________ _______________
Robert S. Salomon, Jr. _______________ _______________
Melvin R. Seiden _______________ _______________
Stephen B. Swensrud _______________ _______________
2. To consider and act upon a proposal to ratify the selection
of Deloitte & Touche LLP as the independent auditors of the
Company to serve for the current fiscal year.
___________% FOR ___________% AGAINST ___________% ABSTAIN
3. To consider and act upon a proposal to amend the investment
restrictions applicable to all of the Company's Funds other
than the Merrill Lynch Domestic Money Market Fund and Merrill
Lynch Reserve Assets Fund. (ONLY HOLDERS OF SHARES OF THE
COMPANY'S FUNDS, OTHER THAN THE MERRILL LYNCH DOMESTIC MONEY
MARKET FUND AND THE MERRILL LYNCH RESERVE ASSETS FUND, WILL
BE PERMITTED TO VOTE ON THIS MATTER.)
American Balanced Fund ____% FOR ____% AGAINST ____% ABSTAIN
Basic Value Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
Developing Capital Markets
Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
Equity Growth Fund ____% FOR ____% AGAINST ____% ABSTAIN
Flexible Strategy Fund ____% FOR ____% AGAINST ____% ABSTAIN
Global Strategy Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
Global Utility Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
High Current Income Fund ____% FOR ____% AGAINST ____% ABSTAIN
Intermediate Government
Bond Fund ____% FOR ____% AGAINST ____% ABSTAIN
International Bond Fund ____% FOR ____% AGAINST ____% ABSTAIN
International Equity Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
Natural Resources Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
Prime Bond Fund ____% FOR ____% AGAINST ____% ABSTAIN
Quality Equity Fund ____% FOR ____% AGAINST ____% ABSTAIN
World Income Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
<PAGE>
4. To consider and act upon a proposal to approve a change in the investment
objective of the Company's Merrill Lynch Intermediate Government Bond Fund
and to rename that Fund as the "Merrill Lynch Government Bond Fund". (ONLY
HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH INTERMEDIATE GOVERNMENT
BOND FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
Intermediate Government Bond Fund ____% FOR ____% AGAINST ____% ABSTAIN
5. To consider and act upon a proposal to approve a change in the investment
objective of the Company's Merrill Lynch World Income Focus Fund and to
change the name of that Fund to the "Merrill Lynch Global Bond Focus Fund".
(ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH WORLD INCOME FOCUS
FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
World Income Focus Fund ____% FOR ____% AGAINST ____% ABSTAIN
(This proposal will only be implemented if Proposal No. 6 is approved.)
6. To consider and act upon a proposal to approve the Agreement and the Plan of
Reorganization between the Company's Merrill Lynch International Bond Fund
and Merrill Lynch World Income Focus Fund and Articles of Amendment to the
Company's Charter in connection therewith. (ONLY HOLDERS OF SHARES OF THE
COMPANY'S MERRILL LYNCH INTERNATIONAL BOND FUND WILL BE PERMITTED TO VOTE ON
THIS MATTER.)
International Bond Fund ____% FOR ____% AGAINST ____% ABSTAIN
(This proposal will only be implemented if Proposal No. 5 is approved.)
7. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Company's Merrill Lynch Flexible Strategy Fund
and Merrill Lynch Global Strategy Focus Fund and Articles of Amendment to
the Company's Charter in connection therewith. (ONLY HOLDERS OF SHARES OF
THE COMPANY'S MERRILL LYNCH FLEXIBLE STRATEGY FUND WILL BE PERMITTED TO VOTE
ON THIS MATTER.)
Flexible Strategy Fund ____% FOR ____% AGAINST ____% ABSTAIN
8. In the discretion of such proxies, upon such other business as may properly
come before the meeting or any adjournment thereof.
Please sign this proxy in the
space provided below. Execution
by stockholders who are not
individuals must be made by an
authorized signatory.
Dated:_____________________________
___________________________________
Name of Record Owner
___________________________________
Signature
Please sign, date and return this Proxy promptly using the enclosed
envelope.
2
<PAGE>
[Date]
Dear Contract Owner:
As an owner of a variable annuity contract or a variable life insurance policy
(a "Contract") issued by Merrill Lynch Life Insurance Company or ML Life
Insurance Company of New York (each, an "Insurance Company"), you have the right
to instruct your Insurance Company how to vote certain shares of the Funds of
Merrill Lynch Variable Series Funds, Inc. (the "Company") at the October 11,
1996 annual meeting of stockholders of the Fund (the "Annual Meeting").
To assist you in giving us those instructions, enclosed is the following:
(1) A Notice of the Annual Meeting;
(2) A Voting Instruction Form; and
(3) A Proxy Statement to the Company's Stockholders.
The Annual Meeting is being held in connection with a number of proposed changes
affecting various Funds of the Company, including changes in investment
objectives and/or investment restrictions, and the reorganization of certain of
the Funds. See the Proxy Statement for details. At the Annual Meeting,
stockholders will also be asked to elect directors of the Company and to ratify
the selection of the Company's independent auditors for the current fiscal year.
The recommendations of the Company's Board of Directors regarding each proposal
for which Contract Owner voting instructions are being requested are set forth
in the Proxy Statement.
Shares of the Funds are owned exclusively by the Insurance Companies and certain
other insurers not affiliated with Merrill Lynch. Although you are not a
stockholder of the Company, some or all of your Contract's account value or
investment base is indirectly invested, as provided by your Contract, in one or
more of the Funds. You have the right to instruct your Insurance Company how to
vote Fund shares that are attributable to your Contract. The enclosed Voting
Instruction Form shows the number of proxy votes in each Fund attributable to
your Contract for which you are entitled to give your Insurance Company voting
instructions.
To be given effect at the Annual Meeting, your properly executed Voting
Instruction Form must be received by us at 800 Scudders Mill Road, Plainsboro,
NJ 08536, no later than ________________.
We will vote the shares of a Fund for which timely voting instructions are not
received in the same proportion as shares in the respective subaccounts or
investment divisions for which timely instructions are received. Shares of a
Fund owned by an Insurance Company but not attributable to Contracts will also
be voted in the same proportion as shares in the respective subaccounts or
investment divisions for which timely voting instructions are received. We will
vote a Fund's shares in our best judgment on any other matters that come before
the Annual Meeting.
The number of shares of a Fund for which a Contract Owner may give voting
instructions is determined by dividing the Contract Owner's interest in the
subaccount or investment division corresponding to that Fund by the net asset
value per share of that Fund, each as of the record date established by the
Company's Board of Directors for the Annual Meeting.
Please complete the enclosed Voting Instruction Form and promptly return the
Form pursuant to the instructions provided thereon. Your instructions are very
important, and we would appreciate your return of the Form as soon as possible.
If you own more than one Contract, you will receive a separate mailing for each
Contract. It is important that you return a signed Voting Instruction Form for
each Contract.
<PAGE>
Thank you for your prompt cooperation.
Very truly yours,
Anthony J. Vespa
Chairman, President and Chief Executive Officer
Merrill Lynch Life Insurance Company
ML Life Insurance Company of New York
- 2 -
<PAGE>
VOTING INSTRUCTION FORM
Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
THIS VOTING INSTRUCTION FORM IS SOLICITED ON BEHALF OF THE INSURANCE
COMPANIES.
The undersigned hereby instructs the insurance company issuing the variable
insurance contract owned by the undersigned (each, an "Insurance Company"), to
vote shares of common stock of Merrill Lynch Variable Series Fund, Inc. (the
"Company") as to which the undersigned is entitled to give voting instructions,
as shown below, at the Annual Meeting of stockholders of the Company to be held
on October 11, 1996 or any adjournment thereof. THIS VOTING INSTRUCTION FORM
WHEN PROPERLY EXECUTED WILL BE USED BY THE INSURANCE COMPANY TO VOTE SHARES OF
THE COMPANY PURSUANT TO SUCH INSTRUCTIONS BY THE UNDERSIGNED.
An Insurance Company will determine the number of shares of a Fund for
which a Contract Owner is entitled to provide voting instructions, in
accordance with procedures described in a letter from the Insurance
Company to its Contract Owners that will accompany the Proxy Statement
- -- Prospectus.
This Voting Instruction Form has been personalized to reflect only those
Funds for which you are entitled to give voting instructions as of the
Record Date of the Annual Meeting. Therefore, your Voting Instruction
Form may not contain all of the matters to be acted upon at the meeting.
Fund Positions:
<TABLE>
<S> <C>
00000000 shares American Balanced Fund 00000000 shares Intermediate Government Bond Fund
00000000 shares Basic Value Focus Fund 00000000 shares International Bond Fund
00000000 shares Developing Capital Markets Focus Fund 00000000 shares International Equity Focus Fund
00000000 shares Domestic Money Market Fund 00000000 shares Natural Resources Focus Fund
00000000 shares Equity Growth Fund 00000000 shares Prime Bond Fund
00000000 shares Flexible Strategy Fund 00000000 shares Quality Equity Fund
00000000 shares Global Strategy Focus Fund 00000000 shares Reserve Assets Fund
00000000 shares Global Utility Focus Fund 00000000 shares World Income Focus Fund
00000000 shares High Current Income
</TABLE>
Contract Owners providing voting instructions should consult carefully
the detailed information regarding each proposal to be voted on by
stockholders of the Company, and the recommendations of the Company's
Board of Directors, set forth in the Proxy Statement -- Prospectus.
If your address has changed please
indicate the new address here: [NAME AND ADDRESS]
_________________________________
_________________________________
_________________________________
PLEASE COMPLETE AND SIGN THE REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
Please mark boxes / / in blue or black ink.
- --------------------------------------------------------------------------------
1. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
Arthur Zeikel, Joe Grills, Walter Mintz, Robert S. Salomon, Jr., Melvin
R. Seiden and Stephen B. Swenstrud
/ / FOR all / / WITHHOLD all To withhold authority for any Nominee,
print the name on the following line:
- --------------------------------------
- --------------------------------------------------------------------------------
2. To consider and act upon a proposal to ratify the selection of Deloitte &
Touche LLP as the independent auditors of the Company to serve for the
current fiscal year.
/ / FOR/ / AGAINST / / ABSTAIN
- --------------------------------------------------------------------------------
3. To consider and act upon a proposal to amend the investment restrictions
applicable to all of the Company's Funds other than the Merrill Lynch
Domestic Money Market Fund and Merrill Lynch Reserve Assets Fund. (ONLY
HOLDERS OF SHARES OF THE COMPANY'S FUNDS OTHER THAN THE DOMESTIC MONEY
MARKET FUND AND THE RESERVE ASSETS FUND, WILL BE PERMITTED TO VOTE ON THIS
MATTER.)
<TABLE>
<CAPTION>
For Against Abstain For Against Abstain
<S> <C> <C> <C> <C> <C> <C> <C>
American Balanced Fund / / / / / / Intermediate Government Bond Fund / / / / / /
Basic Value Focus Fund / / / / / / International Bond Fund / / / / / /
Developing Capital Markets Focus Fund / / / / / / International Equity Focus Fund / / / / / /
Domestic Money Market Fund / / / / / / Natural Resources Focus Fund / / / / / /
Equity Growth Fund / / / / / / Prime Bond Fund / / / / / /
Flexible Strategy Fund / / / / / / Quality Equity Fund / / / / / /
Global Strategy Focus Fund / / / / / / Reserve Assets Fund / / / / / /
Global Utility Focus Fund / / / / / / World Income Focus Fund / / / / / /
High Current Income / / / / / /
</TABLE>
- --------------------------------------------------------------------------------
4. To consider and act upon a proposal to approve a change in the investment
objective of the Company's Merrill Lynch Intermediate Government Bond Fund
and to rename that Fund as the "Merrill Lynch Government Bond Fund". (ONLY
HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH INTERMEDIATE GOVERNMENT
BOND FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
Intermediate Government Bond Fund / / FOR / / AGAINST / / ABSTAIN
- -------------------------------------------------------------------------------
5. To consider and act upon a proposal to approve a change in the investment
objective of the Company's Merrill Lynch World Income Focus Fund and to
change the name of that Fund to the "Merrill Lynch Global Bond Focus Fund"
(ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH WORLD INCOME FOCUS
FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
World Income Focus Fund / / FOR / / AGAINST / / ABSTAIN
(This proposal will only be implemented if proposal No. 6 is approved)
- -------------------------------------------------------------------------------
6. To consider and act upon a proposal to approve the Agreement and the
Plan of Reorganization between the Company's Merrill Lynch International
Bond Fund and Merrill Lynch World Income Focus Fund and Articles of
Amendment to the Company's Charter in connection therewith. (ONLY HOLDERS
OF SHARES OF THE COMPANY'S MERRILL LYNCH INTERNATIONAL BOND FUND WILL BE
PERMITTED TO VOTE ON THIS MATTER.)
International Bond Fund / / FOR / / AGAINST / / ABSTAIN
(This proposal will only be implemented if proposal No. 5 is approved)
- -------------------------------------------------------------------------------
7. To consider and act upon a proposal to approve the Agreement and the
Plan of Reorganization between the Company's Merrill Lynch Flexible
Strategy Fund and Merrill Lynch Global Strategy Focus Fund and
Articles of Amendment to the Company's Charter in connection therewith.
(ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH FLEXIBLE
STRATEGY FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
Flexible Strategy Fund / / FOR / / AGAINST / / ABSTAIN
- -------------------------------------------------------------------------------
In the discretion of shareholder proxies, upon such other business as
may properly come before the meeting or any adjournment thereof.
Please sign this Voting Instruction Form in the space provided.
Execution by contract owners who are not individuals must be made by
an authorized signatory.
---------------------------------------------------------------------
Please sign, date and return this Form promptly using the enclosed
envelope.
Signature: _____________________________________ Date _______________
Co-owner Signature: ____________________________ Date _______________
