<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1996.
FILE NO. 2-74452
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 26 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 27 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011 08543-9011
PRINCETON, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
MERRILL LYNCH ASSET MANAGEMENT, L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/x/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/x/ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT
FISCAL YEAR WAS FILED ON FEBRUARY 29, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM
FORM N1-A LOCATION
- ----------------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
PART A
1. Cover Page...................................... Cover Page
2. Synopsis........................................ *
3. Financial Highlights............................ Financial Highlights; Performance Data
4. General Description of Registrant............... Investment Objectives and Policies of the Funds;
Additional Information
5. Management of the Fund.......................... Investment Adviser; Directors; Portfolio
Transactions and Brokerage; Additional
Information
5A. Management Discussion of Fund Performance....... *
6. Capital Stock and Other Securities.............. Cover Page; Dividends, Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered............ Purchase of Shares; Additional Information
8. Redemption or Repurchase........................ Redemption of Shares
9. Pending Legal Proceedings....................... *
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION CAPTION
---------------------------------------------------
<S> <C> <C>
PART B
10. Cover Page...................................... Cover Page
11. Table of Contents............................... Table of Contents
12. General Information and History................. Additional Information
13. Investment Objectives and Policies.............. Investment Objectives and Policies; Investment
Restrictions; Portfolio Transactions and
Brokerage
14. Management of the Registrant.................... Management of the Company
15. Control Persons and Principal Holders of
Securities.................................... Management of the Company; Additional Information
16. Investment Advisory and Other Services.......... Management of the Company
17. Brokerage Allocation and Other Practices........ Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities.............. *
19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Determination of Net Asset Value; Redemption of
Shares
20. Tax Status...................................... Dividends, Distributions and Taxes
21. Underwriters.................................... Distribution Arrangements
22. Calculation of Performance Data................. Performance Data
23. Financial Statements............................ Financial Statements
<CAPTION>
PART C
<S> <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.
</TABLE>
- ------------
* Item inapplicable or answer negative.
<PAGE>
EXPLANATORY NOTE
This registration statement contains three forms of prospectus: the first
prospectus to be found herein is to be used in connection with the sale of
shares of the Funds to fund variable annuity contracts and/or variable life
insurance contracts issued by insurance companies including Merrill Lynch Life
Insurance Company ('MLLIC') or Merrill Lynch Life Insurance Company of New York
('ML of New York'); the second prospectus to be found herein is to be used in
connection with the sale of shares of the Funds to fund benefits under variable
life insurance contracts issued by MLLIC or ML of New York; and the third
prospectus to be found herein is to be used in connection with the sale of
shares of certain Funds to certain insurance companies, including insurance
companies owned by Merrill Lynch & Co., Inc., for certain separate accounts to
fund benefits under variable life insurance contracts and/or variable annuities
contracts issued by the insurance companies.
<PAGE>
PROSPECTUS
DECEMBER 9, 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o 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 sixteen separate funds (hereinafter referred to as the 'Funds' or
individually as a 'Fund'). A separate class of common stock ('Common Stock') is
issued for each Fund.
The shares of the Funds are sold to separate accounts ('Separate Accounts')
of certain insurance companies (the 'Insurance Companies'), including Merrill
Lynch Life Insurance Company ('MLLIC') and ML Life Insurance Company of New York
('ML of New York'), to fund benefits under variable annuity contracts ('Variable
Annuity Contracts') and/or variable life insurance contracts (together with the
Variable Annuity Contracts, the 'Contracts') issued by such companies. The
Insurance Companies will redeem shares to the extent necessary to provide
benefits under the respective Contracts or for such other purposes as may be
consistent with the respective Contracts. MLLIC and ML of New York are wholly
owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment
adviser, Merrill Lynch Asset Management, L.P. (the 'Investment Adviser'). The
investment objectives of the Funds, each of whose name is preceded by 'Merrill
Lynch,' are as follows:
DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the
highest possible current income consistent with the foregoing objectives by
investing in short-term domestic money market securities.
RESERVE ASSETS FUND. Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing objectives by
investing in short-term money market securities.
PRIME BOND FUND. As high a level of current income as is consistent
with prudent investment management, and capital appreciation to the extent
consistent with the foregoing objective, by investing primarily in long-term
corporate bonds rated A or better by either Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Rating Group ('Standard & Poor's').
HIGH CURRENT INCOME FUND. As high a level of current income as is
consistent with its investment policies and prudent investment management,
and capital appreciation to the extent consistent with the foregoing
objective. The Fund invests principally in fixed-income securities that are
rated in the lower rating categories of the established rating services or
in unrated securities of comparable quality.
(continued on next page)
THE RESERVE ASSETS FUND AND THE DOMESTIC MONEY MARKET FUND ATTEMPT TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO DO SO. AN INVESTMENT IN THE RESERVE ASSETS
FUND OR THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND AND DEVELOPING CAPITAL MARKETS
FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS 'JUNK
BONDS'), WHICH INVOLVE SPECIAL RISKS. SEE 'INVESTMENT OBJECTIVES AND POLICIES OF
THE FUNDS--RISKS OF HIGH YIELD SECURITIES.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY
THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED DECEMBER 9, 1996, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET
FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(continuation of cover page)
QUALITY EQUITY FUND. Highest total investment return consistent with
prudent risk through a fully managed investment policy utilizing equity
securities, primarily common stocks of large-capitalization companies, as
well as investment grade debt and convertible securities.
EQUITY GROWTH FUND. Long-term capital growth by investing primarily in
common shares of small companies and emerging growth companies regardless of
size.
NATURAL RESOURCES FOCUS FUND. Long-term growth of capital and
protection of the purchasing power of shareholders' capital by investing
primarily in equity securities of domestic and foreign companies with
substantial natural resource assets.
AMERICAN BALANCED FUND. A level of current income and a degree of
stability of principal not normally available from an investment solely in
equity securities and the opportunity for capital appreciation greater than
is normally available from an investment solely in debt securities by
investing in a balanced portfolio of fixed income and equity securities.
GLOBAL STRATEGY FOCUS FUND. High total investment return by investing
primarily in a portfolio of equity and fixed income securities of U.S. and
foreign issuers.
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income
by investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND). High
total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational
currency units.
GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation through
investment in securities, principally equities, of issuers in countries
other than the United States.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation
by investing in securities, principally equities, of issuers in countries
having smaller capital markets.
GOVERNMENT BOND FUND (FORMERLY, THE INTERMEDIATE GOVERNMENT BOND
FUND). Highest possible current income consistent with the protection of
capital afforded by investing in debt securities issued or guaranteed by the
United States Government, its agencies or instrumentalities.
INDEX 500 FUND. Investment results that, before expenses, correspond to
the aggregate price and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the 'S&P 500 Index').
For more information on the Funds' investment objectives and policies,
please see 'Investment Objectives and Policies of the Funds,' page 17.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................................................... 4
The Insurance Companies.................................................................................... 16
Reserve Assets Fund and Domestic Money Market Fund Yield Information....................................... 16
Investment Objectives and Policies of the Funds............................................................ 17
Directors.................................................................................................. 43
Investment Adviser......................................................................................... 44
Portfolio Transactions and Brokerage....................................................................... 47
Purchase of Shares......................................................................................... 47
Redemption of Shares....................................................................................... 47
Dividends, Distributions and Taxes......................................................................... 47
Performance Data........................................................................................... 48
Additional Information..................................................................................... 49
Appendix A................................................................................................. A-1
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Company's Funds, other than the Index 500 Fund which is
expected to commence operations on December 13, 1996. With the exception of the
six month period ending June 30, 1996, the information in the table has been
audited by Deloitte & Touche LLP, independent auditors, in connection with their
annual audits of the Company's financial statements. Financial statements for
the year ended December 31, 1995 and the independent auditors' report thereon
appear in the Statement of Additional Information. The information in the
following table should be read in conjunction with the financial statements.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
-----------------------------------------------------------------------------------------------
FOR THE FOR THE
SIX PERIOD
MONTHS JUNE 1,
ENDED FOR THE YEAR ENDED DECEMBER 31, 1988+ TO
JUNE 30, ------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- ------- ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82 $11.26 $11.74 $10.41 $10.00
-------- -------- -------- -------- ------- ------ ------ ------ -----
Investment income--net........ .26 .59 .48 .32 .31 .47 .47 .44 .29
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ .11 2.06 (1.06) 1.37 .37 1.76 (.35) 1.40 .12
-------- -------- -------- -------- ------- ------ ------ ------ -----
Total from investment
operations................... .37 2.65 (.58) 1.69 .68 2.23 .12 1.84 --
-------- -------- -------- -------- ------- ------ ------ ------ -----
Less dividends and
distributions:
Investment income--net....... (.30) (.56) (.37) (.34) (.37) (.49) (.46) (.50) --
Realized gain on
investments--net........... (.02) -- -- (.12) (.28) (.18) (.14) (.01) --
In excess of realized gain on
investments--net............. -- -- (.05) -- -- -- -- -- --
-------- -------- -------- -------- ------- ------ ------ ------ -----
Total dividends and
distributions................ (.32) (.56) (.42) (.46) (.65) (.67) (.60) (.51) --
-------- -------- -------- -------- ------- ------ ------ ------ -----
Net asset value, end of
period....................... $ 15.22 $ 15.17 $ 13.08 $ 14.08 $ 12.85 $12.82 $11.26 $11.74 $10.41
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 2.48%# 20.81% (4.19%) 13.49% 5.72% 20.65% 1.22% 18.11% 4.10%#
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .60%* .61% .63% .70% .97% 1.20% 1.25% 1.25% 1.25%*
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
Expenses...................... .60%* .61% .63% .70% .97% 1.20% 1.50% 2.29% 1.25%*
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
Investment income--net........ 3.46%* 4.22% 3.95% 3.20% 3.71% 4.16% 4.71% 4.71% 5.13%*
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $215,437 $212,912 $158,951 $115,420 $24,918 $7,937 $5,675 $3,854 $2,276
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
Portfolio turnover............ 111.96% 38.40% 35.36% 12.55% 36.34% 50.82% 23.52% 37.60% 2.04%
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
Average commission rate
paid##....................... $ .0613 -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------ ------ ------ -----
-------- -------- -------- -------- ------- ------ ------ ------ -----
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
---------------------------------------------------------------------------
FOR THE FOR THE YEAR ENDED FOR THE PERIOD
SIX MONTHS DECEMBER 31, JULY 1, 1993+
ENDED JUNE ----------------------------------------- TO DECEMBER
30, 1996 1995 1994 31, 1993
---------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 13.10 $ 11.10 $ 10.95 $ 10.00
-------- -------- -------- --------
Investment income--net....................... .08 .18 .17 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... 1.28 2.49 .08 .91
-------- -------- -------- --------
Total from investment operations............. 1.36 2.67 .25 .95
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net...................... (.10) (.19) (.10) --
Realized gain on investments--net........... (.72) (.48) -- --
-------- -------- -------- --------
Total dividends and distributions............ (.82) (.67) (.10) --
-------- -------- -------- --------
Net asset value, end of period............... $ 13.64 $ 13.10 $ 11.10 $ 10.95
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 11.03%# 25.49% 2.36% 9.50%#
-------- -------- -------- --------
-------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............... .64%* .66% .72% .86%*
-------- -------- -------- --------
-------- -------- -------- --------
Expenses..................................... .64%* .66% .72% .86%*
-------- -------- -------- --------
-------- -------- -------- --------
Investment income--net....................... 1.33%* 1.68% 2.08% 1.69%*
-------- -------- -------- --------
-------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $397,189 $306,463 $164,307 $ 47,207
-------- -------- -------- --------
-------- -------- -------- --------
Portfolio turnover........................... 37.28% 74.10% 60.55% 30.86%
-------- -------- -------- --------
-------- -------- -------- --------
Average commission rate paid##............... $ .0552 -- -- --
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
DEVELOPING CAPITAL MARKETS
FOCUS FUND
---------------------------------------------
FOR THE
FOR THE FOR THE YEAR PERIOD MAY 2,
SIX MONTHS ENDED 1994+ TO
ENDED JUNE DECEMBER 31, DECEMBER 31,
30, 1996 1995 1994
---------- ------------ -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 9.32 $ 9.51 $ 10.00
--------- -------- -------
Investment income--net....................... .11 .20 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... .95 (.30) (.58)
--------- -------- -------
Total from investment operations............. 1.06 (.10) (.49)
--------- -------- -------
Less dividends and distributions:
Investment income--net...................... (.23) (.09) --
Realized gain on investments--net........... -- -- --
--------- -------- -------
Total dividends and distributions............ (.23) (.09) --
--------- -------- -------
Net asset value, end of period............... $ 10.15 $ 9.32 $ 9.51
--------- -------- -------
--------- -------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 11.69%# (1.08)% (4.90)%#
--------- -------- -------
--------- -------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............... 1.20%* 1.25% 1.29%*
--------- -------- -------
--------- -------- -------
Expenses..................................... 1.20%* 1.36% 1.35%*
--------- -------- -------
--------- -------- -------
Investment income--net....................... 2.37%* 2.73% 2.18%*
--------- -------- -------
--------- -------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 76,849 $ 55,209 $36,676
--------- -------- -------
--------- -------- -------
Portfolio turnover........................... 53.29% 62.53% 29.79%
--------- -------- -------
--------- -------- -------
Average commission rate paid##............... $ .0005 -- --
--------- -------- -------
--------- -------- -------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
-----------------------------------------------------------------------
FOR THE
SIX MONTHS FOR THE PERIOD
ENDED FOR THE YEAR ENDED DECEMBER 31, FEBRUARY 20, 1992+
JUNE 30, ---------------------------------- TO DECEMBER 31,
1996 1995 1994 1993 1992
---------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- -------- -------- -------- --------
Investment income--net..................... .0248 .0547 .0386 .0302 .0302
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................ (.0010) .0012 (.0007) .0005 .0013
--------- -------- -------- -------- --------
Total from investment operations........... .0238 .0559 .0379 .0307 .0315
--------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net................... (.0248) (.0547) (.0386) (.0302) (.0302)
Realized gain on investments--net........ --# (.0002) -- (.0005) (.0010)
--------- -------- -------- -------- --------
Total dividends and distributions.......... (.0248) (.0549) (.0386) (.0307) (.0312)
--------- -------- -------- -------- --------
Net asset value, end of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......... 4.95%* 5.65% 3.94% 3.10% 3.65%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............. .54%* .55% .50% .36% .32%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Expenses................................... .54%* .55% .57% .63% .88%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Investment income--net, and realized gain
(loss) on investments--net............... 4.97%* 5.50% 4.02% 3.03% 3.48%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $275,604 $303,912 $363,199 $170,531 $ 41,128
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Amount is less than $.0001 per share.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
--------------------------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, -------------------------------------------------------------------------------------------------
1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987 1986
----------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $11.47 $ 18.42 $15.56
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Investment
income--net...... .05 .17 .05 (.01) .01 .09 .05 (.07) (.10) (.09) .04
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net... 1.28 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01) 2.86
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Total from
investment
operations....... 1.33 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10) 2.90
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Less dividends and
distributions:
Investment
income--net.... (.10) (.09) -- --++ (.07) (.02) -- -- -- (.03) (.04)
Realized gain on
investments--net... (3.59) -- (.19) -- -- -- -- -- (.22) (2.82) --
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Total dividends
and
distributions.... (3.69) (.09) (.19) -- (.07) (.02) -- -- (.22) (2.85) (.04)
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Net asset value,
end of period.... $ 25.62 $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $11.75 $ 11.47 $18.42
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per
share............ 5.48%# 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)% 16.60% 4.25% (22.29)% 18.68%
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursement.... .79%* .81% .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25% 1.24% 1.25%
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Expenses.......... .79%* .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24% 1.44%
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Investment income
(loss)--net...... .37%* .72% .27% (.05)% .04% .51% .14% (.68)% (.56)% (.60)% .24%
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)....... $408,358 $339,921 $170,044 $98,976 $23,167 $11,318 $ 6,851 $ 6,811 $5,521 $ 6,707 $4,955
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Portfolio
turnover......... 43.26% 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91% 80.52%
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
Average commission
rate paid##...... $ .0590 -- -- -- -- -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
-------- -------- -------- ------- ------- ------- ------- ------- ------ ------- ------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average number of shares outstanding during the period.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<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 FOR THE
SIX PERIOD
MONTHS FOR THE YEAR ENDED FEBRUARY 28,
ENDED DECEMBER 31, 1992+ TO
JUNE 30, ---------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00
-------- -------- -------- -------- ------
Investment income--net................................. .18 .39 .30 .16 .13
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.................... .31 .82 (.48) 1.96 .13
-------- -------- -------- -------- ------
Total from investment operations....................... .49 1.21 (.18) 2.12 .26
-------- -------- -------- -------- ------
Less dividends and distributions:
Investment income--net................................ (.29) (.39) (.21) (.17) (.04)
Realized gain on investments--net..................... -- -- (.04) -- --
In excess of realized gain on investments--net......... -- --++ (.01) -- --
-------- -------- -------- -------- ------
Total dividends and distributions...................... (.29) (.39) (.26) (.17) (.04)
-------- -------- -------- -------- ------
Net asset value, end of period......................... $ 12.75 $ 12.55 $ 11.73 $ 12.17 $ 10.22
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 4.03%## 10.60% (1.46)% 21.03% 2.62%##
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......................... .71%* .72% .77% .88% 1.25%*
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
Expenses............................................... .71%* .72% .77% .88% 1.35%*
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
Investment income--net................................. 2.87%* 3.33% 2.85% 2.41% 2.66%*
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........................................ $550,528 $540,242 $515,407 $269,627 $ 15,527
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
Portfolio turnover..................................... 80.64% 27.23% 21.03% 17.07% 14.47%
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
Average commission rate paid###........................ $ .0290 -- -- -- --
-------- -------- -------- -------- ------
-------- -------- -------- -------- ------
<CAPTION>
GLOBAL UTILITY FOCUS FUND
---------------------------------------------------
FOR THE FOR THE
SIX PERIOD
MONTHS FOR THE YEAR ENDED JULY 1,
ENDED DECEMBER 31, 1993+ TO
JUNE 30, --------------------- DECEMBER 31,
1996 1995 1994 1993
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.30 $ 9.45 $ 10.66 $ 10.00
-------- -------- -------- ----------
Investment income--net................................. .24 .45 .35 .04
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.................... .46 1.79 (1.25) .64
-------- -------- -------- ----------
Total from investment operations....................... .70 2.24 (.90) .68
-------- -------- -------- ----------
Less dividends and distributions:
Investment income--net................................ (.27) (.39) (.29) (.02)
Realized gain on investments--net..................... -- -- -- --
In excess of realized gain on investments--net......... -- -- (.02) --
-------- -------- -------- ----------
Total dividends and distributions...................... (.27) (.39) (.31) (.02)
-------- -------- -------- ----------
Net asset value, end of period......................... $ 11.73 $ 11.30 $ 9.45 $ 10.66
-------- -------- -------- ----------
-------- -------- -------- ----------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 6.34%## 24.33% (8.51)% 6.85%##
-------- -------- -------- ----------
-------- -------- -------- ----------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......................... .66%* .66% .73% .89%*
-------- -------- -------- ----------
-------- -------- -------- ----------
Expenses............................................... .66%* .66% .73% .89%*
-------- -------- -------- ----------
-------- -------- -------- ----------
Investment income--net................................. 4.14%* 4.44% 3.68% 2.84%*
-------- -------- -------- ----------
-------- -------- -------- ----------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........................................ $150,275 $148,225 $126,243 $104,517
-------- -------- -------- ----------
-------- -------- -------- ----------
Portfolio turnover..................................... 7.73% 11.05% 9.52% 1.72%
-------- -------- -------- ----------
-------- -------- -------- ----------
Average commission rate paid###........................ $ .0596 -- -- --
-------- -------- -------- ----------
-------- -------- -------- ----------
</TABLE>
- ------------
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# On December 6, 1996, the Global Strategy Focus Fund acquired substantially all of the assets and assumed
substantially all the liabilities of the Flexible Strategy Fund, a separate Fund of the Company.
## Aggregate total investment return.
### For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities. The average commission rate paid with
respect to a fiscal year is calculated by dividing (i) the total dollar amount of commissions paid by the Fund
during such fiscal year, by (ii) the total number of equity securities purchased and sold during such fiscal
year for which commissions were paid by the Fund.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
------------------------------------------------------------------------------------
FOR THE
SIX MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------- -------- -------- -------- ------- ------ ------ -------
<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.... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85
--------- -------- -------- -------- ------- ------ ------ -------
Investment income--net.................. .52 1.09 1.05 .95 1.07 1.19 1.40 1.29
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... (.11) .65 (1.47) .95 .90 2.10 (2.08) (.64)
--------- -------- -------- -------- ------- ------ ------ -------
Total from investment operations........ .41 1.74 (.42) 1.90 1.97 3.29 (.68) .65
--------- -------- -------- -------- ------- ------ ------ -------
Less dividends and distributions:
Investment income--net................. (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29)
Realized gain on investments--net...... -- -- -- -- -- -- -- --
--------- -------- -------- -------- ------- ------ ------ -------
Total dividends and distributions....... (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29)
--------- -------- -------- -------- ------- ------ ------ -------
Net asset value, end of period.......... $ 11.13 $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21
--------- -------- -------- -------- ------- ------ ------ -------
--------- -------- -------- -------- ------- ------ ------ -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.73%# 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14%
--------- -------- -------- -------- ------- ------ ------ -------
--------- -------- -------- -------- ------- ------ ------ -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .53%* .55% .61% .72% .89% 1.10% 1.15% 1.22%
--------- -------- -------- -------- ------- ------ ------ -------
--------- -------- -------- -------- ------- ------ ------ -------
Investment income--net.................. 9.40%* 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98%
--------- -------- -------- -------- ------- ------ ------ -------
--------- -------- -------- -------- ------- ------ ------ -------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......................... $ 383,818 $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942
--------- -------- -------- -------- ------- ------ ------ -------
--------- -------- -------- -------- ------- ------ ------ -------
Portfolio turnover...................... 28.32% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52%
--------- -------- -------- -------- ------- ------ ------ -------
--------- -------- -------- -------- ------- ------ ------ -------
<CAPTION>
HIGH CURRENT INCOME FUND
------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1988 1987 1986
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.55 $ 11.42 $ 11.39
------- ------- -------
Investment income--net.................. 1.21 1.23 1.25
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... .20 (.79) .03
------- ------- -------
Total from investment operations........ 1.41 .44 1.28
------- ------- -------
Less dividends and distributions:
Investment income--net................. (1.11) (1.23) (1.25)
Realized gain on investments--net...... -- (.08) --
------- ------- -------
Total dividends and distributions....... (1.11) (1.31) (1.25)
------- ------- -------
Net asset value, end of period.......... $ 10.85 $ 10.55 $ 11.42
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 13.87% 3.82% 11.74%
------- ------- -------
------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.07% 1.01% 1.12%
------- ------- -------
------- ------- -------
Investment income--net.................. 11.22% 10.88% 10.65%
------- ------- -------
------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......................... $13,960 $13,075 $12,577
------- ------- -------
------- ------- -------
Portfolio turnover...................... 33.91% 56.07% 22.44%
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND# INTERNATIONAL EQUITY FOCUS FUND
-------------------------------------- -------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX FOR THE PERIOD SIX FOR THE YEAR ENDED PERIOD
MONTHS YEAR MAY 2, MONTHS JULY 1,
ENDED ENDED 1994+ TO ENDED DECEMBER 31, 1993+ TO
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, ------------------- DECEMBER 31,
1996 1995 1994 1996 1995 1994 1993
-------- ------------ ------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.79 $ 9.97 $ 10.00 $ 11.06 $ 10.90 $ 11.03 $ 10.00
------- -------- -------- -------- -------- -------- ------
Investment income--net....... .33 .62 .25 .11 .20 .19 .01
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (50) .81 (.07) .71 .37 (.13) 1.02
------- -------- -------- -------- -------- -------- ------
Total from investment
operations................... (.17) 1.43 .18 .82 .57 .06 1.03
------- -------- -------- -------- -------- -------- ------
Less dividends and
distributions:
Investment income--net....... (.33) (.61) (.21) (.15) (.01) (.18) --
Realized gain on
investments--net........... (.04) -- -- -- (.17) (.01) --
In excess of realized gain on
investments--net........... -- -- -- -- (.23) -- --
------- -------- -------- -------- -------- -------- ------
Total dividends and
distributions................ (.37) (.61) (.21) (.15) (.41) (.19) --
------- -------- -------- -------- -------- -------- ------
Net asset value, end of
period....................... $ 10.25 $ 10.79 $ 9.97 $ 11.73 $ 11.06 $ 10.90 $ 11.03
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ (1.63)%## 14.83% 1.79%## 7.53%## 5.48% .55% 10.30%##
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .00%* .00% .00%* .87%* .89% .97% 1.14%*
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
Expenses...................... .61%* .66% .80%* .87%* .89% .97% 1.14%*
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
Investment income--net........ 6.47%* 6.28% 4.66%* 2.23%* 1.95% 1.09% .30%*
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $54,328 $ 40,996 $ 17,811 $317,966 $265,602 $247,884 $ 76,906
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
Portfolio turnover............ 7.71% 45.39% 103.03% 27.43% 100.02% 58.84% 17.39%
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
Average commission rate
paid###...................... -- -- -- $ .0004 -- -- --
------- -------- -------- -------- -------- -------- ------
------- -------- -------- -------- -------- -------- ------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# On December 6, 1996, the Government Bond Fund (i) implemented a change in its
investment objective so that the Fund may invest in any debt securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities without regard to remaining maturity and (ii) changed its
name from the Intermediate Government Bond Fund to its current name. For the
period from the commencement of the Fund's operations through December 6,
1996, the portfolio of the Fund consisted primarily of 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. As a
result, the financial information in the financial highlights table for
operations of the Fund prior to December 6, 1996 may not be indicative of its
performance following December 6, 1996.
## Aggregate total investment return.
### For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
--------------------------------------------------------------------------------------------
FOR THE
FOR THE SIX PERIOD
MONTHS JUNE 1,
ENDED FOR THE YEAR ENDED DECEMBER 31, 1988+ TO
JUNE 30, --------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------- ------- ------- ------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 $10.00
------- ------- ------- ------- ------ ------ ------ ------ -----
Investment income--net........ .12 .20 .17 .11 .18 .25 .22 .24 .12
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ .74 1.15 (.02) .92 (.05) (.11) (.90) 1.49 (.54)
------- ------- ------- ------- ------ ------ ------ ------ -----
Total from investment
operations................... .86 1.35 .15 1.03 .13 .14 (.68) 1.73 (.42)
------- ------- ------- ------- ------ ------ ------ ------ -----
Less dividends and
distributions:
Investment income--net....... (.08) (.19) (.15) (.05) (.29) (.25) (.24) (.22) --
Realized gain on
investments--net........... (.21) (.03) -- -- (.06) -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------ -----
Total dividends and
distributions................ (.29) (.22) (.15) (.05) (.35) (.25) (.24) (.22) --
------- ------- ------- ------- ------ ------ ------ ------ -----
Net asset value, end of
period....................... $ 12.52 $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 7.34%# 12.65% 1.44% 10.47% 1.36% 1.36% (6.21)% 18.23% (4.20)%#
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................ .79%* .78% .87% 1.13% 1.25% 1.25% 1.25% 1.25% 1.24%*
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
Expenses...................... .79%* .78% .87% 1.13% 1.27% 1.30% 1.38% 1.74% 1.24%*
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
Investment income--net........ 2.06%* 1.75% 1.91% 1.34% 2.00% 2.31% 2.26% 2.26% 2.59%*
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $45,722 $43,102 $39,715 $14,778 $4,144 $3,084 $3,247 $2,704 $2,371
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
Portfolio turnover............ 15.03% 30.15% 10.94% 58.44% 22.88% 31.38% 27.61% 93.97% 16.31%
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
Average commission rate
paid##....................... $ .0202 -- -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------ -----
------- ------- ------- ------- ------ ------ ------ ------ -----
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
PRIME BOND FUND
--------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------- -------- -------- -------- ------- ------- ------- -------
<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.... $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81
--------- -------- -------- -------- ------- ------- ------- -------
Investment income--net.................. .40 .82 .77 .70 .79 .90 .88 .90
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... (.71) 1.34 (1.36) .71 .04 .84 (.12) .48
--------- -------- -------- -------- ------- ------- ------- -------
Total from investment operations........ (.31) 2.16 (.59) 1.41 .83 1.74 .76 1.38
--------- -------- -------- -------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................. (.40) (.83) (.76) (.70) (.81) (.90) (.87) (.90)
Realized gain on investments--
net.................................. -- -- -- (.11) -- -- -- --
In excess of realized gain on
investments--net....................... -- -- (.17) -- -- -- -- --
--------- -------- -------- -------- ------- ------- ------- -------
Total dividends and distributions....... (.40) (.83) (.93) (.81) (.81) (.90) (.87) (.90)
--------- -------- -------- -------- ------- ------- ------- -------
Net asset value, end of period.......... $ 11.74 $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... (2.52)%# 20.14% (4.80)% 12.02% 7.27% 16.41% 7.13% 13.29%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................... .49%* .50% .54% .63% .78% .78% 1.06% 1.16%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
Investment income--net................. 6.65%* 7.00% 6.74% 5.86% 6.76% 7.94% 8.01% 8.12%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 479,836 $489,838 $391,234 $314,091 $84,810 $39,743 $34,655 $29,593
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
Portfolio turnover...................... 48.14% 90.12% 139.89% 115.26% 82.74% 152.18% 155.17% 144.52%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
<CAPTION>
PRIME BOND FUND
------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1988 1987 1986
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.89 $ 12.04 $ 11.50
------- ------- -------
Investment income--net.................. .87 .87 .99
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... (.15) (1.00) .54
------- ------- -------
Total from investment operations........ .72 (.13) 1.53
------- ------- -------
Less dividends and distributions:
Investment income--net................. (.80) (.87) (.99)
Realized gain on investments--
net.................................. -- (.15) --
In excess of realized gain on
investments--net....................... -- -- --
------- ------- -------
Total dividends and distributions....... (.80) (1.02) (.99)
------- ------- -------
Net asset value, end of period.......... $ 10.81 $ 10.89 $ 12.04
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 6.75% (1.10)% 13.75%
------- ------- -------
------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................... 1.07% 1.07% 1.12%
------- ------- -------
------- ------- -------
Investment income--net................. 8.05% 7.66% 7.98%
------- ------- -------
------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $22,499 $17,385 $20,869
------- ------- -------
------- ------- -------
Portfolio turnover...................... 225.81% 129.46% 103.63%
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
--------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------------------------
1996+ 1995+ 1994+ 1993 1992 1991 1990 1989
----------- -------- -------- -------- ------- ------- ------- -------
<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.... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94
--------- -------- -------- -------- ------- ------- ------- -------
Investment income--net.................. .36 .58 .38 .24 .34 .43 .47 .50
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... 1.34 5.48 (.74) 3.46 .32 5.75 (.38) 4.96
--------- -------- -------- -------- ------- ------- ------- -------
Total from investment operations........ 1.70 6.06 (.36) 3.70 .66 6.18 .09 5.46
--------- -------- -------- -------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................. (.31) (.45) (.25) (.12) (.58) (.50) (.41) (.52)
Realized gain on investments--
net.................................. (4.29) (.59) (.67) (.04) (.95) (1.05) (.84) --
--------- -------- -------- -------- ------- ------- ------- -------
Total dividends and distributions....... (4.60) (1.04) (.92) (.16) (1.53) (1.55) (1.25) (.52)
--------- -------- -------- -------- ------- ------- ------- -------
Net asset value, end of period.......... $ 29.86 $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 5.94%# 22.61% (1.20)% 14.57% 2.69% 30.18% .66% 30.77%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 48%* .51% .54% .62% .74% .79% .94% 1.05%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
Investment income--net.................. 2.45%* 1.94% 1.39% 1.07% 1.54% 1.87% 2.36% 2.58%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 699,472 $644,551 $464,360 $309,420 $87,977 $55,005 $39,470 $31,467
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
Portfolio turnover...................... 48.72% 140.32% 60.57% 88.25% 62.54% 55.83% 69.05% 44.23%
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
Average commission rate paid##.......... $ .0619 -- -- -- -- -- -- --
--------- -------- -------- -------- ------- ------- ------- -------
--------- -------- -------- -------- ------- ------- ------- -------
<CAPTION>
QUALITY EQUITY FUND
-------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1988 1987 1986
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 16.00 $ 20.15 $ 17.14
------- ------- -------
Investment income--net.................. .43 .42 .43
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... 1.73 (.35) 3.01
------- ------- -------
Total from investment operations........ 2.16 .07 3.44
------- ------- -------
Less dividends and distributions:
Investment income--net................. (.22) (.60) (.43)
Realized gain on investments--
net.................................. -- (3.62) --
------- ------- -------
Total dividends and distributions....... (.22) (4.22) (.43)
------- ------- -------
Net asset value, end of period.......... $ 17.94 $ 16.00 $ 20.15
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 13.54% (.70)% 20.38%
------- ------- -------
------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.02% .93% 1.09%
------- ------- -------
------- ------- -------
Investment income--net.................. 2.25% 2.31% 2.41%
------- ------- -------
------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $20,055 $23,986 $16,704
------- ------- -------
------- ------- -------
Portfolio turnover...................... 32.53% 65.58% 50.96%
------- ------- -------
------- ------- -------
Average commission rate paid##.......... -- -- --
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
+ Based on average shares outstanding during the period.
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
-----------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, -------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------- ------- ------- ------- ------- ------- ------- -------
<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.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net.................. .0246 .0543 .0371 .0268 .0320 .0546 .0730 .0822
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... (.0008) .0018 (.0009) .0005 .0007 .0014 .0019 .0012
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations........ .0238 .0561 .0362 .0273 .0327 .0560 .0749 .0834
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................. (.0246) (.0543) (.0362) (.0268) (.0320) (.0546) (.0730) (.0822)
Realized gain on investments--net...... (.0001) (.0004) -- (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions....... (.0247) (.0547) (.0362) (.0273) (.0325) (.0560) (.0749) (.0834)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.93%* 5.63% 3.80% 2.77% 3.28% 5.68% 7.65% 8.62%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .61%* .61% .65% .70% .79% .79% .97% 1.03%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Investment income--net, and realized
gain (loss) on investments--net........ 4.96%* 5.47% 3.75% 2.73% 3.36% 5.64% 7.46%+ 8.34%+
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $23,503 $25,550 $32,196 $30,168 $26,767 $34,362 $35,871 $29,311
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
1988 1987 1986
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Investment income--net.................. .0661 .0574 .0560
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net...................... .0002 .0005 .0027
------- ------- -------
Total from investment operations........ .0663 .0579 .0587
------- ------- -------
Less dividends and distributions:
Investment income--net................. (.0661) (.0574) (.0560)
Realized gain on investments--net...... (.0002)+ (.0005)+ (.0027)+
------- ------- -------
Total dividends and distributions....... (.0663) (.0579) (.0587)
------- ------- -------
Net asset value, end of period.......... $ 1.00 $ 1.00 $ 1.00
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 6.85% 5.96% 6.05%
------- ------- -------
------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.01% 1.04% 1.18%
------- ------- -------
------- ------- -------
Investment income--net, and realized
gain (loss) on investments--net........ 6.65%+ 5.86%+ 5.89%+
------- ------- -------
------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $24,951 $23,068 $17,214
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Includes unrealized gain (loss)
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
GLOBAL BOND FOCUS FUND#
----------------------------------------------------
FOR THE
FOR THE PERIOD
SIX MONTHS FOR THE YEAR ENDED JULY 1,
ENDED DECEMBER 31, 1993+ TO
JUNE 30, ------------------- DECEMBER 31,
1996++ 1995++ 1994 1993
----------- ------- ------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 9.79 $ 9.17 $ 10.38 $ 10.00
------- ------- ------- --------
Investment income--net...................................... .39 .85 .76 .25
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ (.15) .61 (1.19) .33
------- ------- ------- --------
Total from investment operations............................ .24 1.46 (.43) .58
------- ------- ------- --------
Less dividends and distributions:
Investment income--net.................................... (.40) (.84) (.76) (.20)
Realized gain on investments--net......................... -- -- -- --
In excess of realized gain on investments--net............ -- -- (.02) --
------- ------- ------- --------
Total dividends and distributions........................... (.40) (.84) (.78) (.20)
------- ------- ------- --------
Net asset value, end of period.............................. $ 9.63 $ 9.79 $ 9.17 $ 10.38
------- ------- ------- --------
------- ------- ------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 2.56%## 16.69% (4.21)% 5.90%##
------- ------- ------- --------
------- ------- ------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .68%* .68% .75% .94%*
------- ------- ------- --------
------- ------- ------- --------
Investment income--net...................................... 8.13%* 8.99% 8.01% 6.20%*
------- ------- ------- --------
------- ------- ------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $85,732 $81,845 $75,150 $ 50,737
------- ------- ------- --------
------- ------- ------- --------
Portfolio turnover.......................................... 106.40% 132.57% 117.58% 54.80%
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# In connection with its reorganization on December 6, 1996, the Global Bond
Focus Fund (i) acquired substantially all of the assets and assumed
substantially all the liabilities of the International Bond Fund, a separate
Fund of the Company, (ii) implemented a change in its investment objective
and policies from seeking high current income from a global portfolio of
fixed income securities, including non-investment grade securities, to
seeking a high total investment return by investing in a global portfolio of
investment grade fixed income securities and (iii) changed its name from the
World Income Focus Fund to its current name. For the period from the
commencement of the Fund's operations through its reorganization on December
6, 1996, the portfolio of the Fund included debt securities rated below
investment grade (i.e., junk bonds). As a result, the financial information
in the financial highlights table for operations of the Fund prior to its
reorganization may not be indicative of its performance following its
reorganization.
## Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under Contracts issued by Family
Life Insurance Company ('Family Life'), formerly a wholly owned subsidiary of
Merrill Lynch & Co., Inc. ('ML&Co.'). On June 12, 1991, Family Life was sold to
a non-affiliated corporation and most (although not all) of its Contracts were
transferred to MLLIC and ML of New York, two wholly owned subsidiaries of ML&Co.
Shares of the Funds currently are sold to Separate Accounts of Family Life,
MLLIC and ML of New York as well as other insurance companies not affiliated
with Family Life, MLLIC or ML of New York (together with MLLIC, ML of New York
and Family Life, 'Insurance Companies') to fund certain variable life insurance
contracts and/or variable annuities issued by such companies.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only in
the Contract. The Contract is described in the Prospectus for each Contract.
That Prospectus describes the relationship between increases or decreases in the
net asset value of shares of a Fund, and any distributions on such shares, and
the benefits provided under a Contract. The Prospectus for the Contracts also
describes various fees payable to the Insurance Companies and charges to the
Separate Accounts made by the Insurance Companies with respect to the Contracts.
Since shares of the Funds will be sold only to the Insurance Companies for the
Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus
refer to the Insurance Companies. MLLIC and ML of New York are wholly owned
subsidiaries of ML&Co., as is the Investment Adviser.
RESERVE ASSETS FUND AND DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Reserve Assets Fund and the
Domestic Money Market Fund for the seven-day period ended December 31, 1995,
computed to include and exclude realized and unrealized gains and losses, and
information as to the compounded annualized yield, excluding gains and losses,
for the same periods. The yield quotations may be of limited use for comparative
purposes because they do not reflect charges imposed at the separate account
level which, if included, would decrease the yield.
<TABLE>
<CAPTION>
RESERVE
ASSETS DOMESTIC MONEY
FUND MARKET FUND
-------- --------------
<S> <C> <C>
Annualized Yield:
Including gains and losses.......................................................... 5.34% 5.28%
Excluding gains and losses.......................................................... 5.33% 5.28%
Compounded Annualized Yield........................................................... 5.47% 5.42%
Average maturity of portfolio at end of period........................................ 84 days 79 days
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described below. The differences
in objectives and policies among the Funds can be expected to affect the return
of each Fund and the degree of market and financial risk to which each Fund is
subject. Each Fund is classified as 'diversified,' as defined in the Investment
Company Act of 1940, except for the Natural Resources Focus Fund, the Global
Strategy Focus Fund, the Global Bond Focus Fund and the Developing Capital
Markets Focus Fund, each of which is classified as 'non-diversified.' The
investment objectives and classification of each Fund may not be changed without
the approval of the holders of a majority of the outstanding shares of each Fund
affected. The investment objectives and policies of each Fund are discussed
below.
Fixed Income Security Ratings. No Fund other than the High Current Income
Fund, International Equity Focus Fund and Developing Capital Markets Focus Fund
invests in fixed-income securities which are rated below investment grade (i.e.,
securities rated Ba or below by Moody's or BB or below by Standard & Poor's).
However, securities purchased by a Fund may subsequently be downgraded. Such
securities may continue to be held and will be sold only if, in the judgement of
the Investment Adviser, it is advantageous to do so. Securities in the lowest
category of investment grade debt securities may have speculative
characteristics which may lead to weakened capacity to pay interest and
principal during periods of adverse economic conditions. See Appendix A for a
fuller description of corporate bond ratings.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in
short-term domestic money market securities. The Fund will invest in short-term
U.S. Government securities, U.S. Government agency securities, domestic
depository institution money instruments (including certificates of deposit,
bankers' acceptances, time deposits and bank notes), short-term debt securities
(such as commercial paper and insurance company funding agreements), variable
amount master demand notes, repurchase and reverse repurchase agreements of U.S.
issuers and other money market instruments. As a matter of fundamental policy,
which may be changed only with the approval of a majority of the Domestic Money
Market Fund's outstanding voting securities, as defined in the Investment
Company Act of 1940, the Fund may not purchase securities of foreign issuers
(including Eurodollar or Yankeedollar bank obligations). U.S. Government
securities may be purchased on a forward commitment basis. The types of money
market securities in which the Domestic Money Market Fund may invest are
described more fully in Appendix A to this Prospectus. The Domestic Money Market
Fund will be subject to portfolio maturity, quality and diversification
restrictions discussed below under 'Money Market Fund Portfolio Restrictions.'
RESERVE ASSETS FUND
The investment objectives of the Reserve Assets Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in
short-term money market securities. The Fund will invest in short-term U.S.
Government securities, U.S. Government agency securities, depository institution
money instruments (including certificates of deposit, bankers' acceptances, time
deposits and bank notes), short-term debt securities (such as commercial paper
and insurance company funding agreements), variable amount master demand notes,
securities of foreign issuers
<PAGE>
(including Eurodollar, Yankeedollar and foreign bank obligations) and repurchase
and reverse repurchase agreements. U.S. Government securities may be purchased
on a forward commitment basis. The types of money market securities in which the
Reserve Assets Fund may invest are described more fully in Appendix A to the
Prospectus. The Reserve Assets Fund will be subject to the portfolio maturity,
quality and diversification restrictions discussed below under 'Money Market
Fund Portfolio Restrictions.'
PRIME BOND FUND
The principal investment objective of the Prime Bond Fund is to provide
shareholders with as high a level of current income as is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its principal objective.
The Prime Bond Fund invests primarily in securities rated in the top three
rating categories of either Standard & Poor's (AAA, AA and A) or Moody's (Aaa,
Aa and A). Additional information regarding various bond ratings is set forth in
Appendix A to the Prospectus. The financial risk of the Fund should be minimized
by the credit quality of the bonds in which it will invest, but the long
maturities that typically provide the best yield will subject the Fund to
possible substantial price changes resulting from market yield fluctuations. The
market prices of fixed-income securities such as those purchased by the Fund are
affected by changes in interest rates generally. As interest rates rise, the
market value of fixed-income securities will fall, adversely affecting the net
asset value of the Fund.
Fund management strategy will attempt to mitigate adverse price changes and
optimize favorable price changes through active trading that shifts the maturity
and/or quality structure of the Fund within the overall investment guidelines.
The Fund's investments will vary from time to time depending upon the judgement
of management as to prevailing conditions in the economy and the securities
markets and the prospects for interest rate changes among different categories
of fixed-income securities. The Fund anticipates that under normal circumstances
more than 90% of the assets of the Fund will be invested in fixed-income
securities, including convertible and non-convertible debt securities and
preferred stock. The Fund does not intend to invest in common stock, rights or
other equity securities. Under unusual market or economic conditions, the Fund
for defensive or other purposes may invest up to 100% of its assets in U.S.
government or government agency securities, money market or other fixed-income
securities deemed by the Investment Adviser to be consistent with the objectives
of the Fund, or the Fund may hold its assets in cash.
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund, like the
Prime Bond Fund, is to obtain the highest level of current income that is
consistent with the investment policies of the Fund and with prudent investment
management. As a secondary objective, the Fund seeks capital appreciation when
consistent with its primary objective.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard & Poor's), or in unrated securities of comparable quality.
Securities rated below Baa by Moody's and below BBB by Standard & Poor's are
commonly known as 'junk bonds.' Additional information regarding various bond
ratings is set forth in Appendix A to the Prospectus. The market price of
fixed-income securities such as those purchased by the Fund is affected by
changes in interest rates generally. As
<PAGE>
interest rates rise, the market value of fixed-income securities will fall,
adversely affecting the net asset value of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater market
fluctuations and risks of loss of income and principal than lower-yielding,
higher-rated fixed-income securities. Such securities are generally issued by
corporations which are not as financially secure or as creditworthy as issuers
of higher-rated securities. There is, accordingly, a greater risk that the
issuers of higher-yielding securities will not be able to pay principal and
interest on such securities, especially during periods of adverse economic
conditions. Because investment in such high-yield securities entails relatively
greater risk of loss of income or principal, an investment in the High Current
Income Fund may not be appropriate as the exclusive investment to fund the
Contracts for all Contract Owners. See 'Risks of High Yield Securities.'
Selection and supervision by the management of the Company of investments
in lower-rated fixed-income securities involves continuous analysis of
individual issuers, general business conditions and other factors which may be
too time consuming or too costly for the average investor. The furnishing of
these services does not, of course, guarantee successful results. The analysis
of issuers may include, among other things, historic and current financial
condition, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management, responsiveness
to business conditions, credit standing, and current and anticipated results of
operations. Analysis of general business conditions and other factors may
include anticipated changes in economic activity and interest rates, the
availability of new investment opportunities, and the economic outlook for
specific industries. While the Investment Adviser considers as one factor in its
credit analysis the ratings assigned by the rating services, the Investment
Adviser performs its own independent credit analysis of issuers and
consequently, the Fund may invest, without limit, in unrated securities if such
securities offer, in the opinion of the Investment Adviser, a relatively high
yield without undue risk. As a result, the High Current Income Fund's ability to
achieve its investment objective may depend to a greater extent on the
Investment Adviser's own credit analysis than the Funds which invest in
higher-rated securities. Although the High Current Income Fund will invest
primarily in lower-rated securities, it will not invest in securities rated Ca
or lower by Moody's and CC or lower by Standard & Poor's unless the Investment
Adviser believes that the financial condition of the issuer or the protection
afforded to the particular securities is stronger than would otherwise be
indicated by such low ratings. However, securities purchased by the Fund may
subsequently be downgraded. Such securities may continue to be held and will be
sold only if, in the judgement of the Investment Adviser, it is advantageous to
do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that the
risk of loss of income and principal may be substantially reduced with only a
relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending upon
the judgement of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. It is anticipated that under normal
circumstances more than 90% of the Fund's assets will be invested in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. Although it is expected that, in general, the
Fund will not invest in common stocks, rights or other equity securities, it
will acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in connection with an actual or proposed conversion or exchange of
fixed-income securities. In addition, under unusual market or economic
conditions, the High Current Income Fund for defensive purposes may invest up to
<PAGE>
100% of its assets in U.S. Government or Government agency securities, money
market securities or other fixed-income securities deemed by the Investment
Adviser to be consistent with a defensive posture, or may hold its assets in
cash. The yield on such securities may be lower than the yield on lower-rated
fixed-income securities.
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's rating category, of the securities held by the Fund during the
year ended December 31, 1995.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- -------------------------------------------------------------------------- ------ --------
<S> <C> <C>
BBB....................................................................... 2.5% 2.6%
BB........................................................................ 32.1 34.0
B......................................................................... 50.0 53.0
CCC....................................................................... 2.1 2.4
NR**...................................................................... 7.2 8.0
--------
100.0%
--------
--------
</TABLE>
- ------------------
* A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any other organizations.
QUALITY EQUITY FUND
The Quality Equity Fund seeks to achieve the highest total investment
return, or the aggregate of income and capital value changes, consistent with
prudent risk. To do this, management will shift the emphasis among investment
alternatives for capital growth, capital stability and income as market trends
change. This 'fully managed' investment policy distinguishes the Fund from
investment companies which seek either capital growth or income. The Fund's
investment philosophy is based on management's belief that the structure of the
United States economy and its securities markets will undergo continuous change.
The flexibility of the Fund is designed to reduce overall exposure to risk by
achieving below-average volatility in a falling market and above-average
volatility in a rising market.
The Quality Equity Fund's fully managed investment approach will make use
of equity, debt and convertible securities. The majority of the Fund's equity
portfolio will be in the common stocks of large-capitalization, 'quality'
companies. For this purpose, 'large capitalization' companies are considered to
be those companies with market capitalizations in excess of $500 million.
Management of the Company believes that a quality company is one which conforms
closely to the following criteria: good financial resources, strong balance
sheet, satisfactory rate of return on capital, good industry position and
superior management skills. The earnings of quality companies generally tend to
grow consistently. Whenever market or financial conditions warrant, the Fund
may, in order to reduce risk and achieve the highest total investment return,
invest in non-convertible, long-term debt securities, including 'deep discount'
corporate debt securities of investment grade or issues of fixed-income
convertible securities which give the owner the option of a later exchange for
common stock. Management expects that over longer periods the larger portion of
the Fund's portfolio will consist of equity securities. During defensive
periods, the Fund may invest in U.S. Government and Government agency,
<PAGE>
money-market securities or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or cash.
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Company believes have special investment value, and of emerging growth companies
regardless of size. Companies are selected by management on the basis of their
long-term potential for expanding their size and profitability or for gaining
increased market recognition for their securities. Current income is not a
factor in the selection of securities. The Fund is intended to provide an
opportunity for Contract Owners who are not ordinarily in a position to perform
the specialized type of research or analysis of small and emerging growth
companies.
Management seeks to identify those small emerging growth companies which
can show significant and sustained increases in earnings over an extended period
of time and are in sound financial condition. Management believes that, while
these companies present above-average risks, properly selected companies of this
type also have the potential to increase their earnings at a rate substantially
in excess of the general growth of the economy. The Fund attempts to achieve its
objective by focusing on the long-range view of a company's prospects through a
fundamental analysis of its management, financial structure, product
development, marketing ability and other relevant factors. Full development of
these companies frequently takes time and, for this reason, the Fund should be
considered as a long-term investment and not as a vehicle for seeking short-term
profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalizations in the $50-$300 million range and generally are
little known to most individual investors, although some may be dominant in
their respective industries. Underlying this strategy is management's belief
that relatively small companies will continue to have the opportunity to develop
into significant business enterprises. Some such companies may be in a
relatively early stage of development; others may manufacture a new product or
perform a new service. Such companies may not be counted upon to develop into
major industrial companies, but management believes that eventual recognition of
their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Emerging growth companies. In selecting investments for the Equity Growth
Fund, management also seeks emerging growth companies that either occupy a
dominant position in an emerging industry or subindustry or have a significant
and growing market share in a large, fragmented industry. Management believes
that capable and flexible management is one of the most important criteria of
emerging growth companies and that such companies should employ sound financial
and accounting policies and also demonstrate effective research, successful
product development and marketing, efficient service and pricing flexibility.
Emphasis is given to companies with rapid historical growth rates, above-average
returns on equity and strong current balance sheets, all of which should enable
the company to finance its continued growth. Management of the Company also
analyzes and weighs relevant factors beyond the company itself, such as the
level of competition in the industry, the extent of governmental regulation, the
nature of labor conditions and other related matters.
The Equity Growth Fund emphasizes investments in companies that do most of
their business in the United States and therefore are free of the currency
exchange problems, foreign tax considerations and potential political and
economic upheavals that many multinational corporations face. Moreover, the size
and kinds of markets that
<PAGE>
they serve make these companies less susceptible than larger companies to
intervention from the federal government by means of price controls, regulations
or litigation.
While the process of selection and continuous supervision by management
does not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
It should be apparent that an investment in a fund such as the Equity
Growth Fund involves greater risk than is customarily associated with more
established companies. The securities of smaller or emerging growth companies
may be subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may have
limited product lines, markets or financial resources, or they may be dependent
upon a limited management group. Because of these factors, management of the
Company believes that shares in the Equity Growth Fund are suitable for Contract
Owners who are in a financial position to assume above-average investment risk
in search of above-average long-term reward. As indicated, the Fund is designed
for Contract Owners whose investment objective is growth rather than income. It
is definitely not intended for exclusive funding of Contracts but is designed
for Contract Owners who are prepared to experience above-average fluctuations in
net asset value.
The securities in which the Equity Growth Fund invests will often be traded
only in the over-the-counter market or on a regional securities exchange and may
not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Fund or portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when in
management's judgement such disposition is not desirable or to make many small
sales over a lengthy period of time.
The investment emphasis of the Equity Growth Fund is on equities, primarily
common stock and, to a lesser extent, securities convertible into common stocks
and rights to subscribe for common stock, and the Fund will maintain at least
80% of its net assets invested in equity securities of small or emerging growth
companies except during defensive periods. The Fund reserves the right as a
defensive measure and to provide for redemptions to hold other types of
securities, including non-convertible preferred stocks and debt securities, U.S.
Government and Government agency securities, money market securities or other
fixed-income securities deemed by the Investment Adviser to be consistent with a
defensive posture, or cash, in such proportions as, in the opinion of
management, prevailing market or economic conditions warrant.
NATURAL RESOURCES FOCUS FUND
The investment objectives of the Natural Resources Focus Fund are to
achieve long-term growth of capital and to protect the purchasing power of
shareholders' capital by investing primarily in a portfolio of equity securities
(e.g., common stocks and securities convertible into common stocks) of domestic
and foreign companies with substantial natural resource assets. This investment
objective is a fundamental policy and may not be changed without a vote of the
majority of outstanding shares of the Fund. The Fund also may invest in debt,
preferred or convertible securities, the value of which is related to the market
value of some natural resource asset ('asset-based securities'). See
'Asset-Based Securities' below. Management of the Company will seek to identify
companies or asset-based securities it believes are attractively priced relative
to the intrinsic value of the underlying natural resource assets or are
especially well positioned to benefit during particular portions of inflationary
cycles. There can be no assurance the investment objectives of the Fund will be
realized.
<PAGE>
IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE
FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE COMPANY ANTICIPATES
SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY, SUCH AS HIGH
INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY EXCHANGE MARKETS, TO
INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE FOR, EXTRACT, PROCESS
OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO THE VALUE OF GOLD
BULLION. Such a switch in investment strategies could require the Fund to
liquidate portfolio securities and incur transaction costs. The Company has been
advised by counsel that it is uncertain under the current federal tax law
whether the Fund may concentrate its investments in gold and gold-related
securities without adversely affecting the federal tax status of the Contracts.
Accordingly, management of the Company has determined that the Fund will not
concentrate its investments in such securities until counsel has advised the
Company that such uncertainty has been resolved favorably.
Management attempts to achieve the investment objectives of the Fund by
seeking to identify securities of companies which, in its opinion, are
undervalued relative to the value of natural resource holdings of such companies
in light of current and anticipated economic or financial conditions. Natural
resource assets are materials derived from natural sources which have economic
value. Management will consider a company to have substantial natural resource
assets when, in its opinion, the company's holdings of the assets are of such
magnitude, when compared to the capitalization, revenues or operating profits of
the company, that changes in the economic value of the assets will affect the
market price of the equity securities of such company. Generally, a company has
substantial natural resource assets when at least 50% of the non-current assets,
capitalization, gross revenues or operating profits of the company in the most
recent or current fiscal year are involved in or result from directly or
indirectly through subsidiaries, exploring, mining, refining, processing,
fabricating, dealing in or owning natural resource assets. Examples of natural
resource assets include precious metals (e.g., gold, silver and platinum),
ferrous and nonferrous metals (e.g., iron, steel, aluminum and copper),
strategic metals (e.g., uranium and titanium), hydrocarbons (e.g., coal, oil and
natural gas), timber land, undeveloped real property and agricultural
commodities. The Fund presently does not intend to invest directly in natural
resource assets or contracts related thereto.
Management of the Company believes that, based upon past performance, the
securities of specific companies that hold different types of substantial
natural resource assets may move relatively independently of one another during
different stages of inflationary cycles due to different degrees of demand for,
or market values of, their respective natural resource holdings during
particular portions of such inflationary cycles. The Fund's fully managed
investment approach enables it to switch its emphasis among various industry
groups depending upon management's outlook with respect to prevailing trends and
developments.
The Natural Resources Focus Fund may seek to hedge its portfolio against
adverse market fluctuations by writing covered call options or purchasing put
options on portfolio securities, writing call options or purchasing put options
on stock indices, or by purchasing or selling stock index futures contracts and
options thereon. The Fund may also seek to hedge its portfolio of
non-dollar-denominated securities and other assets or liabilities against
adverse currency fluctuations by writing call options and purchasing put options
on currency, by buying or selling futures contracts on currency and options
thereon and by engaging in forward foreign exchange transactions. See 'Other
Portfolio Strategies--Portfolio Strategies Involving Options, Futures, Swaps and
Foreign Exchange Transactions.'
The Fund at all times, except during defensive periods, will maintain at
least 65% of its total assets invested in companies with substantial natural
resource assets or in asset-based securities. Current income from dividends and
interest will not be a primary consideration in selecting securities. The Fund
reserves the right as a temporary
<PAGE>
defensive measure and to provide for redemptions, to hold short-term U.S.
Government and Government agency securities, money market securities or other
fixed-income securities deemed by the Investment Adviser to be consistent with a
defensive posture, or cash, in such proportions as, in the opinion of
management, prevailing market or economic conditions warrant.
Asset-Based Securities. The Fund may invest in debt securities, preferred
stocks or convertible securities, the principal amount, redemption terms or
conversion terms of which are related to the market price of some natural
resource asset such as gold bullion. For the purposes of the Fund's investment
policies, these securities are referred to as 'asset-based securities.' The Fund
will purchase only asset-based securities which are rated, or are issued by
issuers that have outstanding debt obligations rated, investment grade (that is
AAA, AA, A or BBB by Standard & Poor's or Aaa, Aa, A or Baa by Moody's or
commercial paper rated A-1 by Standard & Poor's or Prime-1 by Moody's) or of
issuers that the Investment Adviser has determined to be of similar
creditworthiness. If the asset-based security is backed by a bank letter of
credit or other similar facility, the Investment Adviser may take such backing
into account in determining the creditworthiness of the issuer. While the market
prices for an asset-based security and the related natural resource asset
generally are expected to move in the same direction, there may not be perfect
correlation in the two price movements. Asset-based securities may not be
secured by a security interest in or claim on the underlying natural resource
asset. The asset-based securities in which the Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal) rates.
As an example, assume gold is selling at a market price of $300 per ounce and an
issuer sells a $1,000 face amount gold-related note with a seven-year maturity,
payable at maturity at the greater of either $1,000 in cash or the then market
price of three ounces of gold. If at maturity, the market price of gold is $400
per ounce, the amount payable on the note would be $1,200. Certain asset-based
securities may be payable at maturity in cash at the stated principal amount or,
at the option of the holder, directly in a stated amount of the asset to which
it is related. In such instance, because the Fund presently does not intend to
invest directly in natural resource assets, the Fund would sell the asset-based
security in the secondary market, to the extent one exists prior to maturity, if
the value of the stated amount of the asset exceeds the stated principal amount,
and thereby realize the appreciation in the underlying asset.
Risk Factors. As indicated above, under certain circumstances, the Fund
has reserved the right to invest a majority of its assets in gold-related
companies or securities. Based on historic experience, during periods of
economic or financial instability, the securities of such companies may be
subject to extreme price fluctuations, reflecting the high volatility of gold
prices during such periods. In addition, the instability of gold prices may
result in volatile earnings of gold-related companies which, in turn, may affect
adversely the financial condition of such companies. Gold mining companies also
are subject to the risks generally associated with mining operations.
The major producers of gold include the Republic of South Africa, Russia,
the United States, Australia, Canada, the People's Republic of China and the
Philippines. Sales of gold by Russia and the People's Republic of China are
largely unpredictable and often relate to political and economic considerations
rather than to market forces. The Republic of South Africa produces
approximately 38% of the gold mined in non-Communist nations. Economic, social
and political developments within Russia, the People's Republic of China and the
Republic of South Africa may affect significantly gold production in those
countries.
See 'Other Portfolio Strategies--Foreign Securities' for special
considerations concerning investments in foreign securities.
<PAGE>
AMERICAN BALANCED FUND
The investment objective of the American Balanced Fund is to seek a level
of current income and a degree of stability of principal not normally available
from an investment solely in equity securities and the opportunity for capital
appreciation greater than is normally available from an investment solely in
debt securities by investing in a balanced portfolio of fixed income and equity
securities. This investment objective is a fundamental policy and may not be
changed without a vote of the majority of the outstanding shares of the Fund.
The Fund will seek current income by investing a portion of its assets in a
portfolio of intermediate to long-term debt, convertible debt and money market
securities. The Fund will seek capital appreciation primarily by investing a
portion of its assets in equity securities, including preferred and convertible
preferred stock. At all times the Fund will maintain at least 25% of its net
assets in senior fixed income securities. As a non-fundamental policy, the Fund
is not permitted to invest in securities of foreign issuers. There can be no
assurance that the Fund's objective will be achieved.
The Fund will normally seek to maintain the allocation of its assets
between debt securities and equity securities at approximately equal percentages
of the Fund's net asset value. However, the prices of debt and equity securities
will not generally move in the same direction or to the same extent, and,
consequently, the relative percentages of the Fund's debt and equity investments
will vary. The Fund will seek to reduce such variations by investing its
available cash in securities of the appropriate type. However, except as
discussed below, the Fund is not obligated to sell portfolio securities,
including money market securities, in order to reduce such discrepancies.
The Fund will normally limit its allocation of assets to equity securities
to no more than 50% of its net assets. To the extent its equity position exceeds
this limitation, because of changes in the value of portfolio securities or
otherwise, the Fund will seek to reduce its equity position to less than 50% of
net assets by selling such securities at such times and in such amounts as
management of the Company deems appropriate in light of market conditions and
other pertinent factors. See 'Dividends, Distributions and Taxes--Tax Treatment
of the Company.'
The Fund will generally emphasize investment in common stocks of
larger-capitalization issuers and in investment-grade debt obligations. The Fund
may also seek to enhance the return on its common stock portfolio by writing
covered call options listed on United States securities exchanges. Under unusual
market or economic conditions, the Fund for defensive purposes may invest up to
100% of its assets in short-term U.S. Government or Government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or cash.
GLOBAL STRATEGY FOCUS FUND
The investment objective of the Global Strategy Focus Fund is to seek high
total investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of U.S. and foreign
issuers. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of non-dollar
denominated securities and other assets and liabilities resulting from currency
fluctuations. Investing on an international basis involves special
considerations. See 'Other Portfolio Strategies--Foreign Securities.'
The Global Strategy Focus Fund seeks to achieve its objective by investing
primarily in the securities of issuers located in the United States, Canada,
Western Europe and the Far East. There are no prescribed limits on the
geographical allocation of the Fund among these regions. Such allocation will be
made primarily on the basis of the anticipated total return from investments in
the securities of issuers wherever located, considering such
<PAGE>
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 judgement of the
Investment Adviser, economic or market conditions warrant, the Fund reserves the
right to concentrate its investments in one or more capital markets, including
the United States. For additional information concerning the risks of investing
in foreign securities, see 'Other Portfolio Strategies--Foreign Securities.'
The equity and convertible preferred securities in which the Global
Strategy Focus Fund may invest are primarily securities issued by quality
companies. Generally, the characteristics of such companies include a strong
balance sheet, good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be primarily those rated BBB or better by
Standard and Poor's or Baa or better by Moody's or of comparable quality. The
Fund may also invest in debt obligations issued or guaranteed by sovereign
governments, political subdivisions thereof (including states, provinces and
municipalities) or their agencies or instrumentalities or issued or guaranteed
by international organizations designated or supported by governmental entities
to promote economic reconstruction or development ('supranational entities')
such as the International Bank for Reconstruction and Development (the 'World
Bank') and the European Coal and Steel Community. Investments in securities of
supranational entities are subject to the risk that member governments will fail
to make required capital contributions and that a supranational entity will thus
be unable to meet its obligations.
When market or financial conditions warrant, the Global Strategy Focus Fund
may invest as a temporary defensive measure up to 100% of its assets in U.S.
Government or Government agency securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market securities
or other fixed income securities deemed by the Investment Adviser to be
consistent with a defensive posture, or may hold its assets in cash.
The Global Strategy Focus Fund may write covered call options and purchase
put options on its portfolio securities for the purpose of generating
incremental income or hedging its securities against market risk. The Fund may
seek to hedge its non-dollar denominated securities and other assets and
liabilities against adverse currency fluctuations by writing call options and
purchasing put options on currency, purchasing or selling futures contracts and
futures contract options on currency and entering into forward foreign exchange
transactions in currency. See 'Other Portfolio Strategies--Portfolio Strategies
Involving Options, Futures, Swaps and Foreign Exchange Transactions.'
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a discount, either from book value or historical
price-earnings ratios, or seem capable of recovering from temporarily out of
favor considerations. Particular emphasis is placed on securities which provide
an above-average dividend return and sell at a below-average price-earnings
ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market
<PAGE>
climates and depress prices of securities in unfavorable climates. Based on this
premise, management believes that favorable changes in market prices are more
likely to begin when securities are out of favor, earnings are depressed,
price-earnings ratios are relatively low, investment expectations are limited,
and there is no real general interest in the particular security or industry
involved. On the other hand, management believes that negative developments are
more likely to occur when investment expectations are generally high, stock
prices are advancing or have advanced rapidly, price-earnings ratios have been
inflated, and the industry or issue continues to gain new investment acceptance
on an accelerated basis. In other words, management believes that market prices
of securities with relatively high price-earnings ratios are more susceptible to
unexpected adverse developments while securities with relatively low
price-earnings ratios are more favorably positioned to benefit from favorable,
but generally unanticipated, events. This investment policy departs from
traditional philosophy. Management of the Fund believes that the market risk
involved in this policy is moderated somewhat by an emphasis on securities with
above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation of
the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities rated
investment grade and utilize covered call options with respect to portfolio
securities as described below and in the Statement of Additional Information. It
reserves the right as a defensive measure to hold other types of securities,
including U.S. Government and Government agency securities, money market
securities or other fixed-income securities deemed by the Investment Adviser to
be consistent with a defensive posture, or cash, in such proportions as, in the
opinion of management, prevailing market or economic conditions warrant. The
Fund may invest up to 10% of its total assets, taken at market value at the time
of acquisition, in the securities of foreign issuers.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND)
The investment objective of the Fund is to seek to provide shareholders a
high total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational currency
units. 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 'Other Portfolio Strategies--Foreign
Securities.' The Fund should be considered as a long-term investment and a
vehicle for diversification and not as a balanced investment program.
The Fund may invest in United States and foreign government and corporate
fixed income securities which have a credit rating of A or better by Standard &
Poor's or by Moody's or commercial paper rated A-1 by Standard & Poor's or
Prime-1 by Moody's or obligations that the Investment Adviser has determined to
be of similar creditworthiness. 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
<PAGE>
('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 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 Global Bond 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
<PAGE>
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 evaluation of 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 Global Bond 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.
GLOBAL UTILITY FOCUS FUND
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of the Investment Adviser, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk, as described below under 'Other Portfolio
Strategies--Portfolio Strategies Involving Options, Futures, Swaps and Foreign
Exchange Transactions.' Investing on an international basis involves special
considerations. See 'Other Portfolio Strategies--Foreign Securities.'
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a temporary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash in
such proportions as, in the opinion of the Investment Adviser, prevailing market
or economic conditions warrant. Except during temporary defensive periods, such
securities or cash will not exceed 20% of its total assets. Under normal
circumstances, the Fund will invest at least 65% of its total assets in issuers
domiciled in at least three countries, one of which may be the United States,
although the Investment Adviser expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
preferred stocks will vary from time to time based upon the Investment Adviser's
judgement of the extent to which investments in each category will contribute to
meeting the Fund's investment objective. Fixed income securities in which the
Fund will invest generally will be limited to those rated investment grade, that
is, rated in one of the four highest rating categories by Standard & Poor's or
Moody's (i.e., securities rated at least BBB by
<PAGE>
Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in
the judgement of the Investment Adviser. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to Standard
& Poor's, fixed income securities rated BBB normally exhibit adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal.
The Fund's commercial paper investments at the time of purchase will be rated
'A-1' or 'A-2' by Standard & Poor's or 'Prime-1' or 'Prime-2' by Moody's or, if
not rated, will be of comparable quality as determined by the Investment
Adviser. The Fund may also invest up to 5% of its total assets at the time of
purchase in fixed income securities having a minimum rating no lower than Caa by
Moody's or CCC by Standard & Poor's. The Fund may, but need not, dispose of any
security if it is subsequently downgraded. For a description of ratings of debt
securities, see Appendix A to this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ('ADRs'), European Depository Receipts ('EDRs') or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. Generally, ADRs, which are
issued in registered form, are designated for use in the United States
securities markets, and EDRs, which are issued in bearer form, are designed for
use in European securities markets. The Fund may invest in ADRs and EDRs through
both sponsored and unsponsored arrangements. In a sponsored ADR or EDR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depository's transaction fees, whereas in an unsponsored arrangement the foreign
issuer assumes no obligations and the depository's transaction fees are paid by
the ADR or EDR holders. Foreign issuers in respect of whose securities
unsponsored ADRs or EDRs have been issued are not necessarily obligated to
disclose material information in the markets in which the unsponsored ADRs or
EDRs are traded and, therefore, there may not be a correlation between such
information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of common
stocks issued by domestic utility companies historically have significantly
exceeded those of industrial companies' common stocks, while the prices of
domestic utility stocks have tended to be less volatile than stocks of
industrial companies. Total returns on domestic utility stocks have also
generally exceeded those on stocks of industrial companies. Debt securities of
domestic utility companies historically also have yielded slightly more than
similar debt securities of industrial companies, and have had higher total
returns. For certain periods, the total return of utility companies' securities
has underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in the
future. The Investment Adviser believes that the average dividend yields of
common stocks issued by foreign utility companies have also historically
exceeded those of foreign industrial companies' common stocks. To meet its
objective of capital appreciation, the Fund may invest in foreign utility
companies which pay lower than average dividends, but have a greater potential
for capital appreciation.
<PAGE>
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availability of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are
substantial differences between the regulatory practices and policies of various
jurisdictions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for these
utilities to obtain adequate relief. Certain of the issuers of securities of the
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies, and impose
additional requirements governing the licensing, construction and operation of
nuclear power plants.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. In some instances, utility companies
are operating on an unregulated basis. Because of trends toward deregulation and
the evolution of independent power producers as well as new entrants to the
field of telecommunications, non-regulated providers of utility services have
become a significant part of their respective industries. The Investment Adviser
believes that the emergence of competition and deregulation will result in
certain utility companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
businesses from increased competition and may be less profitable. The Investment
Adviser seeks to take advantage of favorable investment opportunities that are
expected to arise from these structural changes. Of course, there can be no
assurance that favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to
<PAGE>
meet any proposed pollution restrictions. Foreign regulatory systems vary from
country to country and may evolve in ways different from regulation in the
United States.
The Global Utility Focus Fund's investment policies are designed to enable
it to capitalize on evolving investment opportunities throughout the world. For
example, the rapid growth of certain foreign economies will necessitate
expansion of capacity in the utility industries in those countries. Although
many foreign utility companies currently are government-owned, thereby limiting
current investment opportunities for the Fund, the Investment Adviser believes
that, in order to attract significant capital for growth, foreign governments
are likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership
of assets rather than government ownership, is expected to occur in newer,
faster-growing economies and in mature economies. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. The Investment Adviser will take into account anticipated economic
growth rates and other economic developments when selecting securities of
utility companies. The principal sectors of the global utility industries are
discussed below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates have
declined, many utilities have refinanced high cost debt and in doing so have
improved their fixed charges coverage. Regulators, however, have lowered allowed
rates of return as interest rates have declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of, the
Nuclear Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for decommissioning of such plants.
In October 1993, Standard & Poor's stiffened its debt-ratings formula for
the electric utility industry, stating that the industry is in long-term
decline. In addition, Moody's stated that it expected a drop in the next three
years in its average credit ratings for the industry. Reasons set forth for
these outlooks included slowing demand and increasing cost pressures as a result
of competition from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access to
the telephone networks comprise the greatest portion of this segment. Telephone
companies in the United States are still experiencing the effects of the breakup
of American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone
<PAGE>
communication services have expanded their non-regulated activities into other
businesses, including cellular telephone services, data processing, equipment
retailing, computer software and hardware services, and financial services. This
expansion has provided significant opportunities for certain telephone companies
to increase their earnings and dividends at faster rates than had been allowed
in traditional regulated businesses. Increasing competition, technological
innovations and other structural changes, however, could adversely affect the
profitability of such utilities. Technological breakthroughs and the merger of
telecommunications with video and entertainment is now associated with the
expansion of the role of cable companies as providers of utility services in the
telecommunications industry and the competitive response of traditional
telephone companies. Given mergers and certain marketing tests currently
underway, it is likely that both traditional telephone companies and cable
companies will soon provide a greatly expanded range of utility services,
including two-way video and informational services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decades, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Investment
Adviser, however, environmental considerations could improve the gas industry
outlook in the future. For example, natural gas is the cleanest of the
hydrocarbon fuels, and this may result in incremental shifts in fuel consumption
toward natural gas and away from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic companies.
The Investment Adviser believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Investment Outside the Utility Industries. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that are
outside the utility industries. Such investments may include common stocks, debt
securities or preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies. Some of these
issuers may be in industries related to utility industries and, therefore, may
be subject to similar risks. Securities that are issued by foreign companies or
are denominated in foreign currencies are subject to the risks outlined above.
The Global Utility Focus Fund is also permitted to invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
('U.S. Government Securities'). Such investments may be backed by the 'full
faith and credit' of the United States, including U.S. Treasury bills, notes and
bonds as well as certain agency securities and mortgage-backed securities issued
by the Government National Mortgage Association (GNMA). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the 'full faith and credit' of the United States, such as
certain securities issued by the Federal National Mortgage
<PAGE>
Association (FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan
Marketing Association and the Farm Credit Bank.
The Global Utility Focus Fund may invest in securities issued or guaranteed
by foreign governments. Such securities are typically denominated in foreign
currencies and are subject to the currency fluctuation and other risks of
foreign securities investments. The foreign government securities in which the
Fund intends to invest generally will consist of obligations supported by
national, state or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank.
Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities including quasi-governmental agencies. Foreign
government securities will not be considered government securities for purposes
of determining the Fund's compliance with diversification and concentration
policies.
INTERNATIONAL EQUITY FOCUS FUND
The investment objective of the International Equity Focus Fund is to seek
capital appreciation and, secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal conditions, at least 65% of the Fund's net assets
will be invested in such equity securities. The investment objective of the Fund
is a fundamental policy and may not be changed without approval of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. Investing
on an international basis involves special considerations. Investing in smaller
capital markets entails the risk of significant volatility in the Fund's
security prices. See 'Other Portfolio Strategies--Foreign Securities.' The Fund
is designed for investors seeking to complement their U.S. holdings through
foreign investments. The Fund should be considered as a long-term investment and
a vehicle for diversification and not as a balanced investment program.
The International Equity Focus Fund will invest in an international
portfolio of securities of foreign companies located throughout the world. While
there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. However, for the reasons stated below, management of the Fund will give
special attention to investment opportunities in the developing countries of the
world, including, but not limited to Latin America, the Far East and Eastern
Europe. It is anticipated that a significant portion of the Fund's assets may be
invested in such developing countries.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser based primarily on its
assessment of the relative condition and growth potential of the
<PAGE>
various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. Within
such allocations, the Investment Adviser will seek to identify equity
investments in each market which are expected to provide a total return which
equals or exceeds the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called 'emerging' countries (such as
Malaysia, Mexico and Thailand), which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Fund will primarily emphasize investments in common stock, the
Fund may also invest in preferred stocks, convertible debt securities and other
instruments the return on which is linked to the performance of a common stock
or a basket or index of common stocks (collectively, 'equity securities'). The
Fund may also invest in non-equity securities, including debt securities, cash
or cash equivalents denominated in U.S. dollars or foreign currencies and
short-term securities, including money market instruments. Under certain adverse
investment conditions, for defensive purposes, the Fund may restrict the markets
in which its assets will be invested and may increase the proportion of assets
invested in short-term obligations of U.S. issuers. Under normal conditions, at
least 65% of the Fund's total assets will be invested in the securities of
issuers from at least three different foreign countries. Investments made for
defensive purposes will be maintained only during periods in which the
Investment Adviser determines that economic or financial conditions are adverse
for holding or being fully invested in equity securities of foreign issuers.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world.
The Fund also may invest up to 35% of its net assets in longer-term,
non-convertible debt securities emphasizing debt securities which offer the
opportunity for capital appreciation. Capital appreciation in debt securities
may arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels, or in the creditworthiness of issuers. In
accordance with its investment objective, the Fund will not seek to benefit from
anticipated short-term fluctuations in currency exchange rates. The Fund may,
from time to time, invest in debt securities with relatively high yields (as
compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. Such income can be used, however,
to offset the operating expenses of the Fund.
<PAGE>
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ('supranational entities'), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or 'stockholders,' usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgement, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Investment
Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign
Securities' and 'Risks of High Yield Securities' below.
<PAGE>
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental policy
and may not be changed without approval of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. Investing on an international basis involves
special considerations. Investing in smaller capital markets entails the risk of
significant volatility in the Fund's security prices. See 'Other Portfolio
Strategies--Foreign Securities.' The Fund is designed for investors seeking to
complement their U.S. holdings through foreign investments. The Fund should be
considered as a long-term investment and a vehicle for diversification and not
as a balanced investment program.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four countries
having the largest equity market capitalizations. Currently, these four
countries are Japan, the United Kingdom, the United States and Germany. At
September 30, 1996, those countries' equity market capitalizations totalled
approximately 71% of the world's equity market capitalization according to data
provided by Morgan Stanley Capital International. The Fund will at all times,
except during defensive periods, maintain investments in at least three
countries having smaller capital markets.
The Fund seeks to benefit from economic and other
developments in smaller capital markets. The investment objective of the Fund
reflects the belief that investment opportunities may result from an evolving
long-term international trend favoring more market-oriented economies, a trend
that may especially benefit certain countries having smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called 'emerging' countries (such as
Malaysia, Mexico and Thailand) which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries (such as France, the Netherlands and Spain), although
having relatively mature smaller capital markets, may also be in a position to
benefit from local or international developments encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in countries having smaller capital markets. It also
may not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Investment Adviser will emphasize
the allocation of assets among certain countries' capital markets, rather than
the selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the
<PAGE>
Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The Fund may, from time to time, invest in debt
securities with relatively high yields (as compared to other debt securities
meeting the Fund's investment criteria), notwithstanding that the Fund may not
anticipate that such securities will experience substantial capital
appreciation. See 'Risks of High Yield Securities' below. Such income can be
used, however, to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ('supranational entities'), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or 'stockholders,' usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgement, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Investment
Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign
Securities' and 'Risks of High Yield Securities' below.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market of
its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues or profits in any one
of the two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such countries. The Fund also may
consider closed-end investment companies to be located in the country or
countries in which they primarily make their portfolio investments.
Foreign investments in smaller capital markets involve risks not involved
in domestic investment, including fluctuations in foreign exchange rates, future
political and economic developments, different legal systems and the existence
or possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. These risks
are often heightened for investments in small capital markets. With respect to
certain countries, there may be the possibility of expropriation of assets,
confiscatory 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.
<PAGE>
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
GOVERNMENT BOND FUND
The investment objective of the Government Bond Fund is to seek the highest
possible current income consistent with the protection of capital afforded by
investing in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Under normal circumstances, all or substantially
all of the Fund's assets will be invested in such securities. Depending on
market conditions, an average maturity of six to fifteen years is anticipated.
When, in the opinion of management, prevailing market or economic conditions
warrant, a portion of the Fund may be invested in money market securities or a
liquid asset fund to effectively utilize cash reserves.
Certain of the securities in which the Fund invests are supported by the
full faith and credit of the U.S. Government, such as U.S. Treasury obligations.
Other of the securities in which the Fund invests are not supported by the full
faith and credit of the U.S. Government but are issued by U.S. Government
agencies, instrumentalities or government-sponsored enterprises. Such securities
are generally supported only by the credit of the agency, instrumentality or
enterprise issuing the security and are generally considered to have a low
principal risk. However, because of the longer-term maturities of the securities
in which the Fund will invest, interest rate fluctuations may adversely affect
the market value of such securities. As interest rates rise, the value of
fixed-income securities will fall, adversely affecting the net asset value of
the Fund.
The U.S. Treasury Department has enacted regulations prescribing
diversification standards to be met by investment company portfolios to which
the investment base for any variable annuity policy has been allocated as a
condition to such policies being treated as variable annuity contracts under the
Internal Revenue Code of 1986, as amended (the 'Code'). The regulations limit
the percentage of the total assets of any investment company portfolio which may
be invested in securities of any five or fewer issuers, including a requirement
that no more than 55% of a portfolio's total assets be invested in the
securities of any one issuer. Direct obligations of the U.S. Treasury are not
excepted from the diversification requirements. Each government agency or
instrumentality issuing, guaranteeing or insuring securities will be treated as
a separate issuer for purposes of the diversification standards.
<PAGE>
INDEX 500 FUND
The investment objective of the Index 500 Fund is to seek to provide
investment results that, before expenses, correspond to the aggregate price and
yield performance of the S&P 500 Index.
The S&P 500 Index is a market-weighted index composed of 500 common stocks
issued by companies in a wide range of businesses and which collectively
represent a substantial portion of all common stocks publicly traded in the U.S.
The composition of the S&P 500 Index is determined by Standard & Poor's, a
division of the McGraw-Hill Companies, Inc. Standard & Poor's criteria for
selecting common stocks to include in the S&P 500 Index is based on factors such
as market capitalization, trading activity and the adequacy of representation of
particular industries, and favors U.S.-traded stocks of large companies that are
among the most dominant in their industries. The S&P 500 Index is generally
considered broadly representative of the performance of large-capitalization
publicly traded common stocks in the U.S. The inclusion of a stock in the S&P
500 Index does not imply that Standard & Poor's believes the stock to be an
attractive investment.
The Index 500 Fund will not attempt to buy or sell securities based on the
Investment Adviser's economic, financial or market analysis, but will instead
employ a 'passive' approach that attempts to remain invested at all times in a
portfolio of assets the performance of which is expected to be strongly
correlated with that of the S&P 500 Index. The Index 500 Fund may invest in all
500 stocks in the S&P 500 Index in approximately the same proportions as their
weightings in the S&P 500 Index, or may invest in a statistically selected
sample of the 500 stocks which comprise the S&P 500 Index designed, based on
market capitalizations, industry weightings and financial attributes, to have
aggregate investment characteristics similar to those of the S&P 500 Index as a
whole. The Index 500 Fund may also (i) purchase common stocks not included in
the S&P 500 Index as a proxy for certain common stocks included in the S&P 500
Index when the Investment Adviser believes it is an efficient means of
replicating the performance of that index to do so, and (ii) invest in options
and future contracts linked to the performance of the S&P 500 Index or of common
stocks represented in the index.
Under normal circumstances, it is expected that the Index 500 Fund will
invest at least 90% (65% if the Index 500 Fund's assets are below $20 million)
of its assets in common stocks represented in the S&P 500 Index and related
options and futures contracts. The Index 500 Fund may invest a substantial
portion of its assets in options and futures contracts in order to gain market
exposure efficiently in the event of subscriptions, to maintain liquidity in the
event of redemptions and to minimize trading costs. The Index 500 Fund may also
invest in short-term fixed income instruments as cash reserves. The Index 500
Fund will not invest in short-term fixed income instruments, options or futures
contracts for the purpose of implementing a defensive market strategy by
lowering the Fund's exposure to common stocks to protect against a potential
stock market decline, but will attempt to remain fully invested without regard
to the Investment Adviser's market analysis. The Fund may, however, hold
short-term fixed income instruments for temporary cash management purposes.
The foregoing investment techniques are expected to be an effective means
of substantially duplicating the aggregate price and yield performance of the
S&P 500 Index at such times when the Fund is not fully invested in all 500
stocks in the S&P 500 Index in approximately the same proportions as their
weightings in that index. To the extent the Index 500 Fund utilizes the
foregoing investment techniques, the Fund may not track the S&P 500 Index with
the same degree of accuracy as the Fund would if it were fully invested in all
500 stocks in the S&P 500 Index in approximately the same proportions as their
weightings in that index. However, the principal advantage of the foregoing
investment techniques is to provide an efficient means to invest in the universe
of stocks of the S&P 500 Index. The Fund is expected to provide broad
diversification, and will seek to operate at low costs due to its 'passive'
approach to portfolio management and anticipated low portfolio turnover rate.
<PAGE>
NON-DIVERSIFIED FUNDS
The Natural Resources Focus, Global Strategy Focus, Global Bond Focus,
Index 500 and Developing Capital Markets Focus Funds are classified as
non-diversified investment companies under the Investment Company Act of 1940.
However, each Fund will have to limit its investments to the extent required by
the diversification requirements applicable to regulated investment companies
under the Internal Revenue Code. To qualify as a regulated investment company, a
Fund, at the close of each fiscal quarter, may not have more than 25% of its
total assets invested in the securities (except obligations of the U.S.
Government, its agencies or instrumentalities) of any one issuer and with
respect to 50% of its assets, (i) may not have more than 5% of its total assets
invested in the securities of any one issuer and (ii) may not own more than 10%
of the outstanding voting securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
MONEY MARKET FUND PORTFOLIO RESTRICTIONS
For purposes of the investment policies of the Domestic Money Market and
Reserve Assets Funds, the Company defines short-term money market securities as
securities having a maturity of no more than 762 days (25 months) in the case of
U.S. Government and agency securities and no more than 397 days (13 months) in
the case of all other securities. Management of the Company expects that
substantially all the assets of the Domestic Money Market and Reserve Assets
Funds will be invested in securities maturing in less than one year, but at
times some portion may have maturities of up to 25 months. For these purposes,
the maturity of a variable rate security is deemed to be the next coupon date on
which the interest rate is adjusted. The dollar-weighted average maturity of
each Fund's portfolio assets will not exceed 90 days.
The Domestic Money Market and Reserve Asset Funds' investments in
short-term debt and depository institution money instruments will be rated, or
will be issued by issuers who have been rated, in one of the two highest rating
categories for short-term debt obligations by a nationally recognized
statistical rating organization (an 'NRSRO') or, if not rated, will be of
comparable quality as determined by the Directors of the Company. Each Fund's
investments in corporate bonds and debentures (which must have maturities at the
date of purchase of 397 days (13 months) or less) will be in issuers which have
received from an NRSRO a rating, with respect to a class of short-term debt
obligations that is comparable in priority and security with the investment, in
one of the two highest rating categories for short-term obligations or, if not
rated, are of comparable quality as determined by the Directors of the Company.
Currently, there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services,
Inc., IBCA Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and
Thomson BankWatch.
A regulation of the Securities and Exchange Commission limits investments
by the Domestic Money Market and Reserve Assets Funds in securities issued by
any one issuer (other than the U.S. Government, its agencies or
instrumentalities) ordinarily to not more than 5% of its total assets, or in the
event that such securities do not have the highest rating, not more than 1% of
its total assets. In addition, this regulation requires that not more than 5% of
each Fund's total assets be invested in securities that have a rating lower than
the highest rating.
<PAGE>
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, as amended (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 the value of a securities
index or a basket of securities, or based on the relative changes of two
indices. In addition, certain of the Funds may invest in securities the
potential return of which is based inversely on the change in an index. For
example, a Fund may invest in securities that pay a higher rate of interest when
a particular index decreases and pay a lower rate of interest (or do not fully
return principal) when the value of the index increases. If a Fund invests in
such securities, it may be subject to reduced or eliminated interest payments or
loss of principal in the event of an adverse movement in the relevant index or
indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Company believes that indexed and inverse securities may provide portfolio
management flexibility that permits a Fund to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Foreign Securities. The Reserve Assets, Prime Bond, High Current Income,
Quality Equity, Equity Growth, Natural Resources Focus, Global Strategy Focus,
Basic Value Focus, Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets Focus Funds may invest in securities of
foreign issuers. The Index 500 Fund may also invest in securities of foreign
issuers to the extent such issuers are included in the S&P 500 Index.
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
<PAGE>
abroad than would be the case in the United States. Transaction costs in foreign
securities may be higher. The operating expense ratio of a Fund investing in
foreign securities can be expected to be higher than that of an investment
company investing exclusively in United States securities because the expenses
of the Fund, such as custodial costs, are higher. In addition, net investment
income earned by a Fund on a foreign security may be subject to withholding and
other taxes imposed by foreign governments which will reduce a Fund's net
investment income. The Investment Adviser will consider these and other factors
before investing in foreign securities, and will not make such investments
unless, in its opinion, such investments will meet the standards and objectives
of a particular Fund. No Fund which may invest in foreign securities, other than
the Natural Resources Focus and Global Strategy Focus Funds, will concentrate
its investments in any particular country. The Natural Resources Focus, Global
Strategy Focus, Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets 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. Each Fund of the Company other
than the Natural Resources Focus, Global Strategy Focus, Basic Value Focus,
Global Bond Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds will purchase only securities issued in
dollar denominations.
Each of the International Equity Focus Fund and Developing Capital Markets
Focus Fund may invest a significant portion of its assets in securities of
foreign issuers in smaller capital markets, while each of the other Funds which
is permitted to invest in foreign securities may from time to time invest in
securities of such foreign issuers. Foreign investments in smaller capital
markets involve risks not involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems and the existence or possible imposition
of exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. These risks are often heightened
for investments in small capital markets. Because a Fund which invests in
foreign securities will invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of securities in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Foreign currency exchange rates are determined by forces of
supply and demand in the foreign exchange markets. These forces are, in turn,
affected by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With respect
to certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries. In
addition, certain foreign investments may be subject to foreign withholding
taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it
<PAGE>
difficult to conduct such transactions. Further, satisfactory custodial services
for investment securities may not be available in some countries having smaller
capital markets, which may result in a Fund which invests in these markets
incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in
temporary periods when assets of such a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience. Due to its emphasis on securities
of issuers located in smaller capital markets, the Developing Capital Markets
Focus Fund and the International Equity Focus Fund should be considered as a
vehicle for diversification and not as a balanced investment program.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government debtor,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole and the political constraints to which a
government debtor may be subject. Government debtors may default on their debt
and may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. Holders of government debt, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing and
emerging market countries are among the world's largest debtors to commercial
banks, other governments, international financial organizations and other
financial institutions. The issuers of the government debt securities in which a
Fund may invest have in the past experienced substantial difficulties in
servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements.
The Developing Capital Markets Focus and International Equity Focus Funds
intend to invest in securities of foreign issuers in smaller capital markets.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries require governmental approval prior to investments
<PAGE>
by foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons to only a
specific class of securities of a company which may have less advantageous terms
than securities of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the 'Investment Company Act' or 'the
Act'), the Developing Capital Markets Focus and International Equity Focus Funds
each may invest up to 10% of its total assets in securities of such closed-end
investment companies. This restriction on investments in securities of
closed-end investment companies may limit opportunities for the Fund to invest
indirectly in certain smaller capital markets. Shares of certain closed-end
investment companies may at times be acquired only at market prices representing
premiums to their net asset values. If a Fund acquires shares in closed-end
investment companies, shareholders would bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of such closed-end investment companies. A Fund also may seek, at
its own cost, to create its own investment entities under the laws of certain
countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a Fund's
investments in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from 'securities related
activities,' as defined by the rules thereunder. These provisions may also
restrict a Fund's investments in certain foreign banks and other financial
institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash or securities issued or guaranteed by the U.S. Government which, while
the loan is outstanding, will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities plus accrued
interest. Such cash collateral will be invested in short-term securities, the
income from which will increase the return to the Fund.
Forward Commitments. Each of the Funds may purchase securities on a
when-issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be more
or less than its purchase price. A Fund entering into such transactions will
maintain a segregated account with its custodian of cash or liquid, high-grade
debt obligations in an aggregate amount equal to the amount of its commitments
in connection with such delayed delivery and purchase transactions.
Standby Commitment Agreements. The High Current Income, Global Utility
Focus and Developing Capital Markets Focus Funds may from time to time enter
into standby commitment agreements. Such agreements commit the respective Fund,
for a stated period of time, to purchase a stated amount of a fixed income
security which may be issued and sold to the Fund at the option of the issuer.
The price and coupon of the security is fixed at the time of the commitment. At
the time of entering into the agreement the Fund is paid a commitment fee which
is typically approximately 0.5% of the aggregate purchase price of the security
which the Fund has committed to purchase. The Fund will at all times maintain a
segregated account with its custodian of cash or liquid equity or debt
securities in an amount equal to the purchase price of the securities underlying
the commitment. There can be no assurance that the securities subject to a
standby commitment will be issued, and the value of the security, if issued, on
the delivery date may be more or less than its purchase price.
<PAGE>
Portfolio Strategies Involving Options, Futures, Swaps and Foreign Exchange
Transactions. The Quality Equity, Natural Resources Focus, American Balanced,
Global Strategy Focus, Basic Value Focus, Global Bond Focus, Global Utility
Focus, International Equity Focus, Index 500, Equity Growth and Developing
Capital Markets Focus Funds may use certain derivative instruments, including
options, futures contracts and swaps, and may purchase and sell foreign
exchange. Transactions involving such instruments expose a Fund to certain
risks. Each Fund's use of these instruments and the associated risks are
described in detail in Appendix A attached to this Prospectus.
RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund, International Equity Focus Fund and
Developing Capital Markets Focus Fund may invest a substantial portion of their
assets in high yield, high risk securities or junk bonds, which are regarded as
being predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial risk.
Issuers of junk bonds may be highly leveraged and may not have available to them
more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During recessionary periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the High Current Income Fund, International Equity Focus Fund or
Developing Capital Markets Focus Fund may invest normally do not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after a Fund purchases a particular security, in which case a Fund may
experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund each will diversify its holdings among many issuers. However,
there can be no assurance that diversification will protect a Fund from
widespread defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated
fixed-income securities, so that adverse economic events may have a greater
impact on their prices and yields than on higher-rated fixed-income securities.
Zero coupon bonds and bonds which pay interest and/or principal in additional
bonds rather than in cash are especially volatile. Like higher-rated
fixed-income securities, junk bonds are generally purchased and sold through
dealers who make a market in such securities for their own accounts. However,
there are fewer dealers in this market, which may be less liquid than the market
for higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions (whether
or not based on economic fundamentals) may impair the liquidity of this market,
and may cause the prices the High Current Income Fund, International Equity
Focus Fund and Developing Capital Markets Focus Fund receive for their junk
bonds to be reduced, or a Fund may experience difficulty in liquidating a
portion of its portfolio when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Under such conditions, judgement may play a
greater role in valuing certain of each Fund's portfolio securities than in the
case of securities trading in a more liquid market.
<PAGE>
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund, International Equity Focus Fund and Developing
Capital Markets Focus Fund. In addition, each Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the High Current Income Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be dependent
on expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities may
default on their sovereign debt.
Holders of sovereign debt, including the High Current Income Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund, may
be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. In the event of a default by a
governmental entity, there may be few or no effective legal remedies available
to a Fund and there can be no assurance a Fund will be able to collect on
defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an 'ordinarily prudent person.' In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that compliance
with these standards will not have any negative impact on the performance of any
of the Funds.
<PAGE>
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not 'interested persons' of the Company as defined in the Investment Company Act
of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as follows:
ARTHUR ZEIKEL*--President of the Investment Adviser and its affiliate,
Fund Asset Management, L.P. ('FAM'); President and Director of Princeton
Services, Inc. ('Princeton Services'); Executive Vice President of ML&Co.;
and Director of the Merrill Lynch Funds Distributor, Inc. (the
'Distributor').
WALTER MINTZ--Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN--Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Chairman of Fernwood Associates (financial
consultants).
JOE GRILLS--Member of the Committee on Investment of Employee Benefit
Assets of the Financial Executives Institute ('CIEBA'); Member of CIEBA's
Executive Committee; and Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund.
ROBERT S. SALOMON, JR.--Principal of STI Management (investment
adviser).
- ------------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The general
partner of the Investment Adviser is Princeton Services, Inc., a wholly owned
subsidiary of Merrill Lynch & Co., Inc. The principal address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing
address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or
its affiliate, Fund Asset Management, L.P., 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 October 31, 1996, MLAM and FAM had a total
of approximately $217.6 billion in investment company and other portfolio assets
under management including accounts of certain affiliates of FAM.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the Funds,
who consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the
Company (certain of which it may delegate to third parties) and is obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Agreements. The Investment Adviser has access to
the full range of the securities and economic research facilities of Merrill
Lynch.
During the Company's fiscal year ended December 31, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742, of which $144,618 related
to the Reserve Assets Fund (representing .50% of its average net assets),
$1,964,869 related to the Prime Bond Fund (representing .45% of its average net
assets), $1,551,098 related to the High Current Income Fund (representing .50%
of its average net assets), $2,505,030 related to the Quality Equity Fund
(representing .46% of its average net assets), $1,852,641 related to the Equity
Growth Fund (representing .75% of its average net assets), $1,941,598 related to
the Flexible Strategy Fund, now part of the Global Strategy Focus Fund
(representing .65% of its average net assets), $277,494 related to the Natural
Resources Focus Fund (representing .65% of its average net assets), $1,045,146
related to the American Balanced Fund (representing .55% of its average net
assets), $1,598,551 related to the Domestic Money Market Fund (representing .50%
of its average net assets), $3,348,535 related to the Global Strategy Focus Fund
(representing .65% of its average net assets), $1,414,380 related to the Basic
Value Focus Fund (representing .60% of its average net assets), $464,049 related
to the Global Bond Focus Fund (representing .60% of its average net assets),
$803,260 related to the Global Utility Focus Fund (representing .60% of its
average net assets), $70,573 related to the International Bond Fund, now part
of the Global Bond Focus Fund (representing .60% of its average net assets),
$1,817,721 related to the International Equity Focus Fund (representing .75% of
its average net assets), $434,062 related to the Developing Capital Markets
Focus Fund (representing 1.00% of its average net assets), and $143,117 related
to the Government Bond Fund (representing .50% of its average net assets).
Although the .75% and the 1.00% investment advisory fees are higher than that
of many other mutual funds, the Funds believe they are justified by the high
degree of care that must be given to the initial selection and continuous
supervision of the types of portfolio securities in which the Funds invest. The
Index 500 Fund, which is expected to commence operations on December 13, 1996,
will pay the Investment Adviser a fee at the annual rate of .30% of its average
net assets.
During the Company's fiscal year ended December 31, 1995, the total
operating expenses of the Company's Funds (including the advisory fees paid to
the Investment Adviser), before reimbursement of a portion of such
<PAGE>
expenses, were as follows: $176,421 by the Reserve Assets Fund (representing
.61% of its average net assets), $2,187,989 by the Prime Bond Fund (representing
.50% of its average net assets), $1,727,859 by the High Current Income Fund
(representing .55% of its average net assets), $2,787,884 by the Quality Equity
Fund (representing .51% of its average net assets), $2,007,667 by the Equity
Growth Fund (representing .81% of its average net assets), $2,128,925 by the
Flexible Strategy Fund, now part of the Global Strategy Focus Fund (representing
.71% of its average net assets), $335,073 by the Natural Resources Focus Fund
(representing .78% of its average net assets), $1,150,888 by the American
Balanced Fund (representing .61% of its average net assets), $1,768,774 by the
Domestic Money Market Fund (representing .55% of its average net assets),
$3,719,425 by the Global Strategy Focus Fund (representing .72% of its average
net assets), $1,565,649 related to the Basic Value Focus Fund (representing .66%
of its average net assets), $527,752 related to the Global Bond Focus Fund
(representing .68% of its average net assets), $890,100 related to the Global
Utility Focus Fund (representing .66% of its average net assets), $2,163,036
related to the International Equity Focus Fund (representing .89% of its average
net assets), $592,329 related to the Developing Capital Markets Focus Fund
(representing 1.36% of its average net assets), $112,261 related to the
International Bond Fund, now part of the Global Bond Focus Fund (representing
.95% of its average net assets), and $190,005 related to the Government Bond
Fund (representing .66% of its average net assets).
The Investment Advisory Agreements require the Investment Adviser to
reimburse the Company's Funds if and to the extent that in any fiscal year the
operating expenses of each Fund exceed the most restrictive expense limitations
then in effect under any state securities laws or published regulations
thereunder. Prior to the enactment of the National Securities Market Improvement
Act of 1996 on October 11, 1996 (the "Improvement Act"), the most restrictive
expense limitation required 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. As a result of the Improvement Act, the Investment Adviser will
no longer be subject to the foregoing expense limitation.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have
entered into two agreements which limit the operating expenses paid by each Fund
in a given year to 1.25% of its average daily net assets (the 'Reimbursement
Agreements'), which is less than the expense limitations imposed by state
securities laws or published regulations thereunder. The reimbursement
agreements, dated April 30, 1985 and February 11, 1992, provide that any
expenses in excess of 1.25% of average daily net assets will be reimbursed to
the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA.
During the Company's fiscal year ended December 31, 1995, the Developing Capital
Markets Focus Fund, International Bond Fund (now part of the Global Bond Focus
Fund) and Government Bond Fund were reimbursed for operating expenses. Such
reimbursements amounted to $49,477, $112,261 and $190,005, respectively. Except
to the extent required pursuant to the aforementioned agreements, the Investment
Adviser does not intend to reimburse the Global Bond Focus Fund for such Fund's
operating expenses. See 'Investment Advisory Arrangements' in the Statement of
Additional Information. MLLA sells the Contracts described in the Prospectus for
the Contracts.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
<PAGE>
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
Thomas R. Robinson has served as the Portfolio Manager of the American
Balanced Fund, Global Strategy Focus Fund and Quality Equity Fund since November
1995, and is primarily responsible for each such Fund's day-to-day management.
He has served as a Senior Portfolio Manager of MLAM since November 1995.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
Fredric Lutcher has served as the Equity Growth Fund's Portfolio Manager
since June 1990, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1989.
Walter Rogers has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and employee of
the Investment Adviser since 1986.
Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have served
as the International Equity Focus Fund's Portfolio Managers since July 1993, and
are primarily responsible for the Fund's day-to-day management. Andrew Bascand
has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global
Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P.
Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior
Research Officer of the Bank of England's International Department from 1986 to
1987. Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993;
Vice President
<PAGE>
from 1990 to 1993; and an employee since 1987. Grace Pineda and Steve Silverman
have served as Vice Presidents of MLAM since 1989 and 1983, respectively.
Peter Lehman has served as the Natural Resources Focus Fund's Portfolio
Manager since January 1994, and is primarily responsible for the Fund's
day-to-day management. He has served as Vice President of MLAM since 1994;
Senior Fund Analyst for an international fund managed by the Investment Adviser
from 1992 to 1994; Director and Senior Portfolio Manager for Prudential
Insurance Company of America from 1989 to 1991.
Jay Harbeck has served as the Prime Bond Fund's Portfolio Manager since
July 1992, and is primarily responsible for the Fund's day-to-day management. He
has served as Vice President of MLAM since 1986.
Jacqueline Rogers has served as the Portfolio Manager of the Domestic Money
Market Fund and the Reserve Assets Fund since October 1996, and is primarily
responsible for each such Fund's day-to-day management. She has served as Vice
President of MLAM since January 1986.
Robert Parish has served as the Portfolio Manager of Global Bond Focus Fund
(formerly, the World Income Focus Fund) since July 1993 and is primarily
responsible for the Fund's day-to-day management. He has served as Vice
President of MLAM since 1991 and was the Vice President and Senior Portfolio
Manager for Templeton International from 1987 to 1991.
Grace Pineda has served as the Developing Capital Markets Focus Fund's
Portfolio Manager since May 1994, and is primarily responsible for the Fund's
day-to-day management. She has served as Vice President of MLAM since 1989.
Jay Harbeck has served as the Government Bond Fund's Portfolio Manager
since May 1994 and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1986.
Eric Mitofsky will serve as the Index 500 Fund's Portfolio Manager upon the
Fund's commencement of operations. He has served as a Vice President of MLAM
since 1992, and was an employee of Merrill Lynch's Equity Trading Group from
1983 to 1992.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis. The Securities and
Exchange Commission has issued an order permitting the Company to conduct
certain principal transactions with respect to the Domestic Money Market and
Reserve Assets Funds with Merrill Lynch Government Securities Inc. and Merrill
Lynch Money Markets Inc. in U.S. Government and government agency
<PAGE>
securities, and certain other money market securities, subject to certain terms
and conditions. During the year ended December 31, 1995, the Company engaged in
22 transactions pursuant to such order involving $82.1 million of securities.
For the year ended December 31, 1995, the Company paid brokerage commissions of
$5,789,335, of which $264,999 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company continuously offers shares in each of its Funds to the
Insurance Companies at prices equal to the respective per share net asset value
of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary
of the Investment Adviser, acts as the distributor of the shares. Net asset
value is determined in the manner set forth below under 'Additional
Information--Determination of Net Asset Value.'
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market and Reserve Assets
Funds, will consist of all payments of dividends or interest received by such
Fund less the estimated expenses of such Fund (including fees payable to the
Investment Adviser). Net investment income of the Domestic Money Market and
Reserve Assets Funds (from the time of the immediate preceding determination
thereof) consists of (i) interest accrued and/or discount earned (including both
original issue and market discount), (ii) plus or minus all realized and
unrealized gains (other than realized long-term capital gains) and losses on its
portfolio securities, (iii) less the estimated expenses of the respective Fund
(including the fees payable to the Investment Adviser) applicable to that
dividend period.
Dividends on the Domestic Money Market and Reserve Assets Funds are
declared daily and reinvested monthly in additional full and fractional shares
of such Fund. Dividends from net investment income of the Prime Bond, High
Current Income, Global Bond Focus and Government Bond Funds are declared and
reinvested monthly in additional full and fractional shares of the respective
Funds at net asset value. Dividends from net investment income of the Global
Utility Focus Fund are declared and reinvested quarterly in additional full and
fractional shares of the Fund. Dividends from net investment income of the
Quality Equity, Equity Growth, Index 500, National Resources Focus, American
Balanced, Global Strategy Focus, International Equity Focus, Basic Value Focus
and Developing Capital Markets Focus Funds are declared and reinvested at least
annually in additional full and fractional shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, other than short-term capital gains of the Domestic Money Market and
Reserve Assets Funds, are declared and distributed annually after the close of
the Company's fiscal year to the shareholders of the Fund or Funds to which such
gains are attributable. Short-term capital gains are taxable as ordinary income.
<PAGE>
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
'Code'). Under such provisions, a Fund will not be subject to federal income tax
on such part of its net ordinary income and net realized capital gains which it
distributes to shareholders. One of the requirements to qualify for treatment as
a regulated investment company under the Code is that a Fund, among other
things, derive less than 30% of its gross income in each taxable year from gains
(without deduction of losses) from the sale or other disposition of stocks,
securities and certain options, futures or forward contracts held for less than
three months. This requirement may limit the ability of certain Funds to dispose
of certain securities at times when management of the Company might otherwise
deem such disposition appropriate or desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make distributions
in amounts necessary to satisfy its distribution requirements under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send to
the Insurance Companies a written notice required by the Code designating the
amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the Securities and Exchange Commission.
In connection with its reorganization on December 6, 1996, the Global Bond Focus
Fund (i) acquired substantially all of the assets and assumed substantially all
the liabilities of the International Bond Fund, a separate Fund of the Company,
(ii) implemented a change in its investment objective and policies from seeking
high current income from a global portfolio of fixed income securities,
including non-investment grade securities, to seeking a high total investment
return by investing in a global portfolio of investment grade fixed income
securities and (iii) changed its name from the World Income Focus Fund to its
current name. For the period from the commencement of the World Income Focus
Fund's operations through its reorganization on December 6, 1996, the portfolio
of the Fund included debt securities rated below investment grade (i.e., junk
bonds). On December 6, 1996, the
<PAGE>
Government Bond Fund (i) implemented a change in its investment objective so
that the Fund may invest in any debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities without regard to remaining
maturity and (ii) changed its name from the Intermediate Government Bond Fund to
its current name. For the period from the commencement of the Fund's operations
through December 6, 1996, the portfolio of the Intermediate Government Bond Fund
consisted primarily of 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. As a result of the foregoing changes in the
investment objective of each of the Global Bond Focus Fund and the Government
Bond Fund, the performance information set forth herein and in the Statement of
Additional Information for the period prior to December 6, 1996 may not be
indicative of such Fund's performance following December 6, 1996.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the offering price per
share on the last day of the period. The yield for the 30-day period ending
December 31, 1995 was 5.92% for the Prime Bond Fund, 10.05% for the High Current
Income Fund, 8.50% for the Global Bond Focus Fund and 5.56% for the Government
Bond Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost. The yield and
total return quotations may be of limited use for comparative purposes because
they do not reflect charges imposed at the Separate Account level which, if
included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the S&P 500 Index, the Value Line Composite Index, the Dow Jones
Industrial Average, or performance data published by Lipper Analytical Services,
Inc., or Variable Annuity Research Data Service or contained in publications
such as Morningstar Publications, Inc., Chase Investment Performance Digest,
Money Magazine, U.S. News & World Report, Business Week, Financial Services
Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes
Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic
Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with
other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.
<PAGE>
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market and Reserve Assets
Funds is computed by dividing the sum of the value of the securities held by
that Fund plus any cash or other assets (including interest and dividends
accrued) minus all liabilities (including accrued expenses) by the total number
of shares outstanding of that Fund at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees payable to the Investment
Adviser, are accrued daily. Since the net investment income of the Domestic
Money Market and Reserve Assets Funds (including realized and unrealized gains
and losses on their portfolio securities) are declared as a dividend each time
the net income of the Funds are determined (see 'Dividends, Distributions and
Taxes'), the net asset value per share of the Funds normally remains at $1.00
per share immediately after each such determination and dividend declaration.
Except with respect to securities held by the Domestic Money Market and
Reserve Assets Funds having a remaining maturity of 60 days or less, securities
held by each Fund will be valued as follows: Portfolio securities which are
traded on stock exchanges are valued at the last sale price (regular way) as of
the close of business on the day the securities are being valued, or, lacking
any sales, at the last available bid price. Securities traded in the
over-the-counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. Portfolio securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. When a Portfolio writes a call option, the amount of the premium
received is recorded on the books as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options being traded in the
over-the-counter market, the last asked price. Options purchased are valued at
their last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Futures
contracts are valued at settlement price at the close of the applicable
exchange. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. Securities held by the Domestic Money Market
and Reserve Assets Funds with a remaining maturity of 60 days or less are valued
on an amortized cost basis, unless particular circumstances dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
Pricing(Trademark) Service ('MLSPS'), to value securities held by the High
Current Income and Prime Bond Funds and to value bonds held by other of the
Company's Funds. The Board of Directors of the Company has examined the methods
used by the pricing services in estimating the value of securities held by the
Funds and believes that such methods will reasonably and fairly approximate the
price at which those securities may be sold and result in a good faith
determination of the fair value of such securities; however, there is no
assurance that securities can be sold at the prices at which they are valued.
During the year ended December 31, 1995, American Balance Fund, Flexible
Strategy Fund (now part of Global Strategy Focus Fund), Global Utility Focus
Fund, High Current Income Fund, Government
<PAGE>
Bond Fund, Prime Bond Fund and Global Bond Focus Fund paid MLSPS $473, $368,
$38, $10,932, $439, $7,041 and $4,613, respectively.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981, and operations of its
Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime
Bond, High Current Income, Quality Equity and Equity Growth Funds commenced on
April 20, 1982. The Natural Resources Focus Fund and the American Balanced Fund
commenced operations on June 1, 1988 and June 1, 1988, respectively. The
Domestic Money Market Fund and the Global Strategy Focus Fund commenced
operations on February 20 and February 28, 1992, respectively. The Basic Value
Focus, Global Bond Focus, Global Utility Focus and International Equity Focus
Funds commenced operations on July 1, 1993. The Developing Capital Markets Focus
Fund and Government Bond Fund commenced operations on May 2, 1994. The Index 500
Fund is expected to commence operations on December 13, 1996. The authorized
capital stock of the Company consists of 3,400,000,000 shares of Common Stock,
par value $0.10 per share. The shares of Common Stock are divided into sixteen
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 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
Global Bond 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
Government Bond Fund Common Stock and Merrill Lynch Index 500 Common Stock,
respectively. The Company may, from time to time, at the sole discretion of its
Board of Directors and without the need to obtain the approval of its
shareholders or of Contract Owners, offer and sell shares of one or more of such
classes. Each class consists of 100,000,000 shares except for Domestic Money
Market Fund Common Stock which consists of 1,300,000,000 shares, Reserve Assets
Fund Common Stock which consists of 500,000,000 shares and Global Bond Focus
Fund Common Stock and Global Strategy Focus Fund Common Stock, each of which
consists of 200,000,000 shares. All shares of Common Stock have equal voting
rights, except that only shares of the respective classes are entitled to vote
on matters concerning only that class. Pursuant to the Investment Company Act of
1940 and the rules and regulations thereunder, certain matters approved by a
vote of all shareholders of the Company may not be binding on a class whose
shareholders have not approved such matter. Each issued and outstanding share of
a class is entitled to one vote and to participate equally in dividends and
distributions declared with respect to such class and in net assets of such
class upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of each class, when issued, will be fully
paid and nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable. Holders of shares of any class
are entitled to redeem their shares as set forth under 'Redemption of Shares.'
Shares do not have cumulative voting rights and the holders of more than 50% of
the shares of the Company voting for the election of directors can elect all of
the directors of the Company if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any directors. The
Company does not intend to hold meetings of shareholders unless under the
Investment Company Act of 1940 shareholders are required to act on any of the
following matters: (i) election of directors; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of the selection of independent accountants.
Family Life purchased $1,000 worth of shares of each of the Natural
Resources Focus Fund and the American Balanced Fund on April 29, 1988 and
$1,999,000 worth of shares of each such Fund on May 27, 1988.
<PAGE>
Family Life also provided the initial capitalization for each of the Company's
other Funds other than the Domestic Money Market, Global Strategy Focus, Basic
Value Focus, Global Bond Focus, Global Utility Focus and International Equity
Focus Funds. MLLIC purchased $100 worth of shares of each of the Domestic Money
Market and Global Strategy Focus Funds on February 6, 1992, $2,000,000 worth of
shares of the Domestic Money Market Fund on February 20, 1992, $2,000,000 worth
of shares of the Global Strategy Focus Fund on February 28, 1992 and $100 worth
of shares of each of the Basic Value Focus, Global Bond Focus, Global Utility
Focus and International Equity Focus Funds on June 28, 1993. MLLIC purchased, on
July 1, 1993, $8,000,000 worth of shares of each of the Global Bond Focus Fund
and International Equity Focus Fund and $2,000,000 worth of shares of each of
the Basic Value Focus Fund and the Global Utility Focus Fund. MLLIC purchased,
on May 2, 1994, $8,000,000 worth of shares of the Developing Capital Markets
Focus Fund and, on May 16, 1994, $2,000,000 worth of shares of the Government
Bond Fund. On December 13, 1996, the Company anticipates that MLLIC will
purchase $1,000,000 worth of shares of the Index 500 Fund. The organizational
expenses of each of the Company's Funds are paid by the Investment Adviser. The
Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year
period.
In connection with a reorganization on December 6, 1996 conducted by the
Company with respect to certain of its Funds, the Company, with the approval of
the affected shareholders of the Funds, caused (i) Global Bond Focus Fund (a) to
acquire substantially all of the assets and assume substantially all the
liabilities of the International Bond Fund, a separate Fund of the Company, (b)
to implement a change in its investment objective and policies from seeking high
current income from a global portfolio of fixed income securities, including
non-investment grade securities, to seeking a high total investment return by
investing in a global portfolio of investment grade fixed income securities and
(c) to change its name from the World Income Focus Fund to its current name;
(ii) the Government Bond Fund (x) to implement a change in its investment
objective so that the Fund may invest in any debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities without
regard to remaining maturity and (y) to change its name from the Intermediate
Government Bond Fund to its current name; and (iii) the Global Strategy Focus
Fund to acquire substantially all of the assets and assume substantially all the
liabilities of the Flexible Strategy Fund, a separate Fund of the Company.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of the Company's assets, except that Chase Manhattan
Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245, acts as custodian
for assets of the Company's Developing Capital Markets Focus Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), which is a wholly
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's transfer
agent and is responsible for the issuance, transfer and redemption of shares and
the opening and maintenance of shareholder accounts. MLFDS will receive an
annual fee of $5,000 per Fund and will be entitled to reimbursement of
out-of-pocket expenses. Prior to June 1, 1990, BONY was the Company's transfer
agent.
<PAGE>
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated December 6, 1996, which
forms a part of the Registration Statement, is incorporated by reference into
this Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
<PAGE>
APPENDIX A
U.S. GOVERNMENT SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in the various types of
marketable securities issued by or guaranteed as to principal and interest by
the U.S. Government and supported by the full faith and credit of the U.S.
Treasury. U.S. Treasury obligations differ mainly in the length of their
maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in government agency
securities, which are debt securities issued by government sponsored
enterprises, federal agencies and international institutions. Such securities
are not direct obligations of the Treasury but involve government sponsorship or
guarantees by government agencies or enterprises. The Funds may invest in all
types of government agency securities currently outstanding or to be issued in
the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in depositary institutions
money instruments, such as certificates of deposit, including variable rate
certificates of deposit, bankers' acceptances, time deposits and bank notes.
Certificates of deposit are generally short-term, interest-bearing negotiable
certificates issued by commercial banks, savings banks or savings and loan
associations against funds deposited in the issuing institution. Variable rate
certificates of deposit are certificates of deposit on which the interest rate
is periodically adjusted prior to their stated maturity, usually at 30, 90 or
180 day intervals ('coupon dates'), based upon a specified market rate. As a
result of these adjustments, the interest rate on these obligations may be
increased or decreased periodically. Often, dealers selling variable rate
certificates of deposit to the Funds agree to repurchase such instruments, at
the Funds' option, at par on the coupon dates. The dealers' obligations to
repurchase these instruments are subject to conditions imposed by the various
dealers; such conditions typically are the continued credit standing of the
issuer and the existence of reasonably orderly market conditions. The Funds are
also able to sell variable rate certificates of deposit in the secondary market.
Variable rate certificates of deposit normally carry a higher interest rate than
comparable fixed rate certificates of deposit because variable rate certificates
of deposit generally have a longer stated maturity than comparable fixed rate
certificates of deposit. As a matter of policy, the Domestic Money Market Fund
will invest only in these types of instruments issued by U.S. issuers.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund, and Developing
Capital Markets Focus Fund) may invest in certificates of deposit and bankers'
acceptances issued by foreign branches or subsidiaries of U.S. banks
('Eurodollar' obligations) or U.S. branches or subsidiaries of foreign banks
('Yankeedollar' obligations). The Fund may invest only in Eurodollar obligations
which by their terms are general obligations of the U.S. parent bank and meet
the other criteria
<PAGE>
discussed below. Yankeedollar obligations in which the Fund may invest must be
issued by U.S. branches or subsidiaries of foreign banks which are subject to
state or federal banking regulations in the U.S. and by their terms must be
general obligations of the foreign parent. In addition, the Fund will limit its
investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing
Capital Markets Focus Fund) may also invest in U.S. dollar-denominated
obligations of foreign depository institutions and their foreign branches and
subsidiaries, such as certificates of deposit, bankers' acceptances, time
deposits and deposit notes. The obligations of such foreign branches and
subsidiaries may be the general obligation of the parent bank or may be limited
to the issuing branch or subsidiary by the terms of the specific obligation or
by government regulation. Such investments will only be made if determined to be
of comparable quality to other investments permissible for the Reserve Assets
Fund. The Reserve Assets Fund will not invest more than 25% of its total assets
(taken at market value at the time of each investment) in these obligations.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United States,
has total assets of at least $1 billion and its deposits are insured by the
Federal Deposit Insurance Corporation (the 'FDIC'); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets of
a Fund (taken at market value at the time of each investment) in certificates of
deposit issued by banks and savings and loan associations with assets of less
than $1 billion if the principal amount of each such certificate of deposit is
fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in commercial paper
(including variable amount master demand notes and insurance company funding
agreements), which refers to short-term, unsecured promissory notes issued by
corporations, partnerships, trusts and other entities to finance short-term
credit needs and by trusts issuing asset-backed commercial paper. Commercial
paper is usually sold on a discount basis and has a maturity at the time of
issuance not exceeding nine months. Variable amount master demand notes are
demand obligations that permit the investment of fluctuating amounts at varying
market rates of interest pursuant to arrangements between the issuer and a
commercial bank acting as agent for the payees of such notes, whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes. Because variable amount master notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender may not
sell or otherwise transfer the note without the borrower's consent. Such notes
provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis, in accordance with a stated short-term
interest rate benchmark. Because the interest rate of a variable amount master
note is adjusted no less often than every 60 days and since repayment of the
note may be demanded at any time, the Investment Adviser values such a note in
accordance with the amortized cost basis described under 'Determination of Net
Asset Value' in the Statement of Additional Information.
The Domestic Money Market Fund and Reserve Assets Fund may also invest in
nonconvertible debt securities issued by entities or asset-backed nonconvertible
debt securities issued by trusts (e.g., bonds and debentures) with no more than
397 days (13 months) remaining to maturity at date of settlement. Short-term
debt
<PAGE>
securities with a remaining maturity of less than one year tend to become
extremely liquid and are traded as money market securities. For a discussion of
the ratings requirements of the Funds' portfolio securities, see 'Investment
Objectives and Policies of the Funds--Money Market Fund Portfolio Restrictions'
and 'Investment Objectives and Policies of the Funds--Domestic Money Market
Fund' in the Prospectus.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing
Capital Markets Focus Fund) may also invest in U.S. dollar-denominated
commercial paper and other short-term obligations issued by foreign entities.
Such investments are subject to quality standards similar to those applicable to
investments in comparable obligations of domestic issuers. Investments in
foreign entities in general involve the same risks as those described in the
Statement of Additional Information in connection with investments in
Eurodollar, Yankeedollar and foreign bank obligations.
REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered 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. If the seller
were to default on its obligation to repurchase a security under a repurchase
agreement or purchase and sale contract and the market value of the underlying
security at such time was less than the Fund had paid to the seller, the Fund
would realize a loss. Repurchase agreements maturing in more than seven days
will be considered 'illiquid securities.' The Domestic Money Markets and Reserve
Assets Funds will not enter into repurchase agreements maturing in more than 30
days.
Reverse Repurchase Agreements. The Domestic Money Market and Reserve
Assets Funds may enter into reverse repurchase agreements, which involve the
sale of money market securities held by the Funds, with an agreement to
repurchase the securities at an agreed upon price, date, and interest payment.
The Funds will use the proceeds of the reverse repurchase agreements to purchase
other money market securities either maturing, or under an agreement to resell,
at a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Funds will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the proceeds of the
transaction is greater than the interest expense of the reverse repurchase
transaction. A separate account of the applicable Fund will be established with
the Custodian consisting of cash or U.S. Government securities having a market
value at all times at least equal in value to the proceeds received on any sale
subject to repurchase plus accrued interest.
<PAGE>
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.
<PAGE>
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.
PORTFOLIO STRATEGIES INVOLVING OPTIONS, FUTURES, SWAPS AND FOREIGN EXCHANGE
TRANSACTIONS
Options on Portfolio Securities. Each of the Quality Equity, Natural
Resources Focus, American Balanced, Global Strategy Focus, Basic Value Focus,
Global Bond Focus, Global Utility Focus, International Equity Focus, Equity
Growth, Index 500 and Developing Capital Markets Focus Funds may from time to
time sell ('write') covered call options on its portfolio securities in which it
may invest and may engage in closing purchase transactions with respect to such
options. A covered call option is an option where the Fund, in return for a
premium, gives another party a right to buy particular securities held by the
Fund at a specified future date and at a price set at the time of the contract.
The principal reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater return than would be realized on the
securities alone. By writing covered call options, a Fund gives up the
opportunity, while the option is in effect, to profit from any price increase in
the underlying security above the option exercise price. In addition, the Fund's
ability to sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a partial
hedge against the price of the underlying security declining. The Quality Equity
Fund and the Basic Value Focus Fund may not write covered call options on
underlying securities exceeding 15% of the value of their total assets.
Each of the Natural Resources Focus, Global Strategy Focus, Global Bond
Focus, Global Utility Focus, International Equity Focus, Index 500 and
Developing Capital Markets Focus Funds also may write put options, which give
the holder of the option the right to sell the underlying security to the Fund
at the stated exercise price. The Fund will receive a premium for writing a put
option which increases the Fund's return. A Fund will write only covered put
options which means that so long as the Fund is obligated as the writer of the
option, it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. A Fund may engage in closing transactions in order to terminate put
options that it has written.
<PAGE>
The Natural Resources Focus, Global Strategy Focus, Global Bond Focus,
Global Utility Focus, International Equity Focus, Index 500 and Developing
Capital Markets Focus Funds may purchase put options on portfolio securities. In
return for payment of a premium, the purchase of a put option gives the holder
thereof the right to sell the security underlying the option to another party at
a specified price until the put option is closed out, expires or is exercised.
Each Fund will only purchase put options to seek to reduce the risk of a decline
in value of the underlying security. The total return on the security may be
reduced by the amount of the premium paid for the option by the Fund. Prior to
its expiration, a put option may be sold in a closing sale transaction and
profit or loss from the sale will depend on whether the amount received is more
or less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Each of the Funds may engage in options transactions on exchanges and in
the over-the-counter ('OTC') markets. In general, exchange traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See 'Over-the-Counter Options'
below for information as to restrictions on the use of OTC options.
Options on Stock Indices. The Natural Resources Focus, Global Strategy
Focus, Global Bond Focus, International Equity Focus and Developing Capital
Markets Focus Funds may purchase and write call options and put options on stock
indices traded on a national securities exchange to seek to reduce the general
market risk of their securities or specific industry sectors which the Fund
invests in. In addition, the Index 500 Fund may purchase and write call options
and put options on stock indices in order to gain market exposure efficiently in
the event of subscriptions, to maintain liquidity in the event of redemptions
and to minimize trading costs. Options on indices are similar to options on
securities except that, on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Funds may invest in index options based on a broad market index,
e.g., the S&P 500, or on a narrow index representing an industry or market
segment, e.g., the Amex Oil & Gas Index. The effectiveness of a hedge employing
stock index options will depend primarily on the degree of correlation between
movements in the value of the index underlying the option and in the portion of
the portfolio being hedged. For further discussion concerning such options, see
'Risk Factors in Options, Futures and Currency Transactions' below and the
Company's Statement of Additional Information.
Stock Index and Financial Futures Contracts. The Natural Resources Focus,
Global Strategy Focus, Global Bond Focus, International Equity Focus and
Developing Capital Markets Focus Funds may purchase and sell stock index futures
contracts and financial futures contracts to hedge their portfolios. The Funds
may sell stock index futures contracts and financial futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Funds' securities portfolios that might otherwise result.
When the Funds are not fully invested in the securities market and anticipate a
significant market advance, they may purchase stock index or financial futures
in order to gain rapid market exposure that may in part or entirely offset
increases in the cost of securities that the Funds intend to purchase. A stock
index or financial futures contract is a bilateral agreement pursuant to which
the Funds will agree to buy or deliver at settlement an amount of cash equal to
a dollar multiplied by the difference between the value of a stock index or
financial instrument at
<PAGE>
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 depends 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. Subject to
the limitations imposed by the Commodity Futures Trading Commission (the
'CFTC'), the Index 500 Fund may invest a portion of its assets in stock index
and financial futures contracts in order to gain market exposure efficiently in
the event of subscription, to maintain liquidity in the event of redemptions and
to minimize trading costs. See 'Risk Factors in Options, Futures and Currency
Transactions' below.
Swaps. The Index 500 Fund is authorized to enter into equity swap
agreements, which are OTC contracts in which one party agrees to make periodic
payments based on the change in market value of a specific equity security,
basket of equity securities or equity index in return for periodic payments
based on a fixed or variable interest rate or the change in market value of a
different equity security, basket of equity securities or equity index. Swap
agreements may be used to obtain exposure to an equity or market without owning
or taking physical custody of securities in circumstances in which direct
investment is restricted by local law or is otherwise impractical.
The Index 500 Fund will enter into a swap transaction only if, immediately
following the time the Fund enters into the transaction, the aggregate notional
principal amount of swap transactions to which the Fund is a party would not
exceed 5% of the Fund's assets.
Hedging Foreign Currency Risks. The Natural Resources Focus, Global
Strategy Focus, Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets Focus Funds are authorized to deal in
forward foreign exchange contracts between currencies of the different countries
in which they will invest, including multi-national currency units, as a hedge
against possible variations in the foreign exchange rate between these
currencies and the United States dollar. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price at the time of the contract. The dealings
of the Funds in forward foreign exchange will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Funds accruing in connection with the purchase
and sale of their portfolio securities, the sale and redemption of shares of the
Funds or the payment of dividends and distributions by the Funds. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Funds
will not speculate in forward foreign exchange. Hedging against a decline in the
value of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value of the hedged
currency should rise. Moreover, it may not be possible for the Funds to hedge
against a devaluation that is so generally anticipated that the Funds are not
able to contract to sell the currency at a price above the devaluation level
they anticipate.
The Funds are also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency options provide
the holder thereof the right to buy or to sell a currency at a fixed price on or
before a future date. A 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
<PAGE>
the Funds, sold by the Funds but not yet delivered, or committed or anticipated
to be purchased by the Funds. As an illustration, the Funds may use such
techniques to hedge the stated value in United States dollars of an investment
in a Japanese yen-denominated security. In such circumstances, for example, the
Funds may purchase a foreign currency put option enabling them to sell a
specified amount of yen for dollars at a specified price by a future date. To
the extent the hedge is successful, a loss in the value of the yen relative to
the dollar will tend to be offset by an increase in the value of the put option.
To offset, in whole or in part, the cost of acquiring such a put option, the
Funds may also sell a call option which, if exercised, requires it to sell a
specified amount of yen for dollars at a specified price by a future date (a
technique called a 'straddle'). By selling such call option in this
illustration, the Funds give up the opportunity to profit without limit from
increases in the relative value of the yen to the dollar.
The Funds will not speculate in foreign currency options or futures.
Accordingly, the Funds will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which they own, the
expected acquisition price of securities which they have committed or anticipate
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Funds but not yet delivered, the proceeds
thereof in its denominated currency. Further, if a security with respect to
which a currency hedging transaction has been executed should subsequently
decrease in value, the Funds will direct their custodian to segregate liquid,
high-grade debt securities having a market value equal to such decrease in
value, less any initial or variation margin held in the account of their broker.
As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
Options on Futures Contracts. The Natural Resources Focus, Global Strategy
Focus, Global Bond Focus, Global Utility Focus, Index 500 and International
Equity Focus Funds may also purchase and write call and put options on futures
contracts in connection with their hedging activities. Generally, these
strategies are utilized under the same market conditions (i.e., conditions
relating to specific types of investments) in which the Funds enter into futures
transactions. The Funds may purchase put options or write call options on
futures contracts rather than selling the underlying futures contract in
anticipation of a decline in the equities markets or in the value of a foreign
currency. Similarly, the Funds may purchase call options, or write put options
on futures contracts, as a substitute for the purchase of such futures to hedge
against the increased cost resulting from appreciation of equity securities or
in the currency in which securities which the Funds intend to purchase are
denominated. Limitations on transactions in options on futures contracts are
described below.
Over-the-Counter Options. The Natural Resources Focus, Global Strategy
Focus, Global Bond Focus, Global Utility Focus, International Equity Focus,
Index 500 and Developing Capital Markets Focus Funds may engage in options
transactions in the over-the-counter markets. In general, over-the-counter
('OTC') options are two-party contracts with price and terms negotiated by the
buyer and seller, whereas exchange-traded options are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options include put and call options on individual securities, cash settlement
options on groups of securities, and options on currency. The Funds may engage
in an OTC options transaction only if they are permitted to enter into
transactions in exchange-traded options of the same general type. The Funds will
engage in OTC options only with financial institutions which have capital of at
least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Company require that each of the
Natural Resources Focus, Global Strategy Focus, Global Bond
<PAGE>
Focus, Global Utility Focus, International Equity Focus, Index 500 and
Developing Capital Markets Focus Funds' futures transactions constitute bona
fide hedging transactions or, with respect to non-hedging transactions, that the
Fund not enter into such transactions, if, immediately thereafter, the sum of
the amount of initial margin deposits on the respective Fund's existing
non-hedging futures positions and premiums paid for related options would exceed
5% of the market value of the Fund's total assets.
When a Fund purchases a futures contract, a call option thereon or writes a
put option, an amount of cash and cash equivalents will be deposited in a
segregated account with the Company's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby ensuring
that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission
which exempts the Company from certain provisions of the Investment Company Act
of 1940 in connection with transactions involving futures contracts and options
thereon.
Risk Factors in Options, Futures and Currency Transactions. A Fund's
ability to effectively hedge all or a portion of its portfolio of securities
through transactions in options on stock indices, 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 judgement will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entails 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.
The Index 500 Fund may utilize options on stock indices, stock index
futures and financial futures in order to gain market exposure efficiently in
the event of subscriptions, to maintain liquidity in the event of redemptions
and to minimize trading costs.
<PAGE>
PROSPECTUS
DECEMBER 9, 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o 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 sixteen separate funds. Shares of six of the funds are offered hereby
(hereinafter referred to as the 'Funds' or individually as a 'Fund'). A separate
class of common stock ('Common Stock') is issued for each Fund.
The shares of the Funds are sold to Merrill Lynch Life Insurance Company
('MLLIC') and ML Life Insurance Company of New York ('ML of New York') for
certain separate accounts ('Separate Accounts') to fund benefits under variable
life insurance contracts ('Variable Life Contracts') issued by MLLIC and ML of
New York. Shares of the Funds also are sold to Separate Accounts of insurance
companies other than MLLIC or ML of New York (together with MLLIC and ML of New
York, 'Insurance Companies') to fund Variable Life Contracts and/or variable
annuity contracts, (together with the Variable Life Contracts, the 'Contracts')
issued by them. The Insurance Companies will redeem shares to the extent
necessary to provide benefits under the respective Contracts or for such other
purposes as may be consistent with the respective Contracts. MLLIC and ML of New
York are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the
Company's investment adviser, Merrill Lynch Asset Management, L.P. (the
'Investment Adviser'). The investment objectives of the Funds, each of whose
name is preceded by 'Merrill Lynch,' are as follows:
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income
by investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND). High
total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational
currency units.
GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation through
investment in securities, principally equities, of issuers in countries
other than the United States.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation
by investing in securities, principally equities, of issuers in countries
having smaller capital markets.
EQUITY GROWTH FUND. Long-term capital growth by investing primarily in
common shares of small companies and emerging growth companies regardless of
size.
For more information on the Funds' investment objectives and policies,
please see 'Investment Objectives and Policies of the Funds,' page 8.
THE DEVELOPING CAPITAL MARKETS FOCUS FUND INVESTS OR MAY INVEST IN HIGH
YIELD BONDS (COMMONLY KNOWN AS 'JUNK BONDS'), WHICH INVOLVE SPECIAL RISKS. SEE
'INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD
SECURITIES.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus sets forth in concise form the information about the Company
that a prospective investor should know before investing in the Company.
Investors should read and retain this Prospectus for future reference. A
Statement containing Additional Information about the Company has been filed
with the Securities and Exchange Commission in a Statement of Additional
Information, dated December 9, 1996, and is available on request and without
charge by calling or writing the Company at the address and telephone number set
forth above. The Statement of Additional Information is hereby Incorporated by
reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................................................... 3
The Insurance Companies.................................................................................... 8
Investment Objectives and Policies of the Funds............................................................ 8
Directors.................................................................................................. 26
Investment Adviser......................................................................................... 27
Portfolio Transactions and Brokerage....................................................................... 29
Purchase of Shares......................................................................................... 29
Redemption of Shares....................................................................................... 29
Dividends, Distributions and Taxes......................................................................... 29
Performance Data........................................................................................... 30
Additional Information..................................................................................... 31
Appendix A................................................................................................. A-1
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Company's Funds. With the exception of the six month
period ending June 30, 1996, the information in the table has been audited by
Deloitte & Touche LLP, independent auditors, in connection with their annual
audits of the Company's financial statements. Financial statements for the year
ended December 31, 1995 and the independent auditors' report thereon appear in
the Statement of Additional Information. The information in the following table
should be read in conjunction with the financial statements.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
DEVELOPING
CAPITAL
MARKETS
BASIC VALUE FOCUS FUND FOCUS FUND
--------------------------------------------------------------------------- ----------
FOR THE FOR THE YEAR ENDED FOR THE PERIOD FOR THE
SIX MONTHS DECEMBER 31, JULY 1, 1993+ SIX MONTHS
ENDED JUNE ---------------------- TO DECEMBER ENDED JUNE
30, 1996 1995 1994 31, 1993 30, 1996
---------- ------------------ ------------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32
-------- -------- -------- ------- --------
Investment income--net....... .08 .18 .17 .04 .11
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net........... 1.28 2.49 .08 .91 .95
-------- -------- -------- ------- --------
Total from investment
operations.................. 1.36 2.67 .25 .95 1.06
-------- -------- -------- ------- --------
Less dividends and
distributions:
Investment income--net...... (.10) (.19) (.10) -- (.23)
Realized gain on
investments--net.......... (.72) (.48) -- -- --
-------- -------- -------- ------- --------
Total dividends and
distributions............... (.82) (.67) (.10) -- (.23)
-------- -------- -------- ------- --------
Net asset value, end of
period...................... $ 13.64 $ 13.10 $ 11.10 $ 10.95 $ 10.15
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share....................... 11.03%# 25.49% 2.36% 9.50%# 11.69%#
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............... .64%* .66% .72% .86%* 1.20%*
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Expenses..................... .64%* .66% .72% .86%* 1.20%*
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Investment income--net....... 1.33%* 1.68% 2.08% 1.69%* 2.37%*
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................. $397,189 $306,463 $164,307 $ 47,207 $ 76,849
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Portfolio turnover........... 37.28% 74.10% 60.55% 30.86% 53.29%
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Average commission rate
paid##...................... $ .0552 -- -- -- $ .0005
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
<CAPTION>
DEVELOPING CAPITAL
MARKETS FOCUS FUND
------------------------------
FOR THE
FOR THE YEAR PERIOD 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...................... $ 9.51 $ 10.00
-------- -------
Investment income--net....... .20 .09
Realized and unrealized gain
(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 period (in
thousands).................. $ 55,209 $36,676
-------- -------
-------- -------
Portfolio turnover........... 62.53% 29.79%
-------- -------
-------- -------
Average commission rate
paid##...................... -- --
-------- -------
-------- -------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
----------------------------------------------------------
FOR THE FOR THE YEAR ENDED FOR THE PERIOD
SIX MONTHS DECEMBER 31, JULY 1,
ENDED -------------------- 1993+ TO
JUNE 30, 1996 1995 1994 DECEMBER 31, 1993
------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................... $ 11.30 $ 9.45 $ 10.66 $ 10.00
--------- -------- -------- ---------
Investment income--net........................................ .24 .45 .35 .04
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................. .46 1.79 (1.25) .64
--------- -------- -------- ---------
Total from investment operations.............................. .70 2.24 (.90) .68
--------- -------- -------- ---------
Less dividends and distributions:
Investment income--net...................................... (.27) (.39) (.29) (.02)
Realized gain on investments--net........................... -- -- -- --
In excess of realized gain on investments--net................ -- -- (.02) --
--------- -------- -------- ---------
Total dividends and distributions............................. (.27) (.39) (.31) (.02)
--------- -------- -------- ---------
Net asset value, end of period................................ $ 11.73 $ 11.30 $ 9.45 $ 10.66
--------- -------- -------- ---------
--------- -------- -------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................ 6.34%# 24.33% (8.51)% 6.85%#
--------- -------- -------- ---------
--------- -------- -------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................ .66%* .66% .73% .89%*
--------- -------- -------- ---------
--------- -------- -------- ---------
Expenses...................................................... .66%* .66% .73% .89%*
--------- -------- -------- ---------
--------- -------- -------- ---------
Investment income--net........................................ 4.14%* 4.44% 3.68% 2.84%*
--------- -------- -------- ---------
--------- -------- -------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...................... $ 150,275 $148,225 $126,243 $ 104,517
--------- -------- -------- ---------
--------- -------- -------- ---------
Portfolio turnover............................................ 7.73% 11.05% 9.52% 1.72%
--------- -------- -------- ---------
--------- -------- -------- ---------
Average commission rate paid##................................ $ .0596 -- -- --
--------- -------- -------- ---------
--------- -------- -------- ---------
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities. The average commission rate paid with
respect to a fiscal year is calculated by dividing (i) the total dollar amount of commissions paid by the Fund
during such fiscal year, by (ii) the total number of equity securities purchased and sold during such fiscal
year for which commissions were paid by the Fund.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
---------------------------------------------------
FOR THE
FOR THE PERIOD
SIX MONTHS FOR THE YEAR ENDED JULY 1,
ENDED DECEMBER 31, 1993+ TO
JUNE 30, --------------------- DECEMBER 31,
1996 1995 1994 1993
---------- -------- -------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 11.06 $ 10.90 $ 11.03 $ 10.00
-------- -------- -------- --------
Investment income--net......................................... .11 .20 .19 .01
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net................................... .71 .37 (.13) 1.02
-------- -------- -------- --------
Total from investment operations............................... .82 .57 .06 1.03
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net....................................... (.15) (.01) (.18) --
Realized gain on investments--net............................ -- (.17) (.01) --
In excess of realized gain on investments--net............... -- (.23) -- --
-------- -------- -------- --------
Total dividends and distributions.............................. (.15) (.41) (.19) --
-------- -------- -------- --------
Net asset value, end of period................................. $ 11.73 $ 11.06 $ 10.90 $ 11.03
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................. 7.53%# 5.48% .55% 10.30%#
-------- -------- -------- --------
-------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................................. .87%* .89% .97% 1.14%*
-------- -------- -------- --------
-------- -------- -------- --------
Expenses....................................................... .87%* .89% .97% 1.14%*
-------- -------- -------- --------
-------- -------- -------- --------
Investment income net.......................................... 2.23%* 1.95% 1.09% .30%*
-------- -------- -------- --------
-------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................... $317,966 $265,602 $247,884 $ 76,906
-------- -------- -------- --------
-------- -------- -------- --------
Portfolio turnover............................................. 27.43% 100.02% 58.84% 17.39%
-------- -------- -------- --------
-------- -------- -------- --------
Average commission rate paid##................................. $ .0004 -- -- --
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities. The average commission rate paid with
respect to a fiscal year is calculated by dividing (i) the total dollar amount of commissions paid by the Fund
during such fiscal year, by (ii) the total number of equity securities purchased and sold during such fiscal
year for which commissions were paid by the Fund.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
GLOBAL BOND FOCUS FUND#
-------------------------------------------------------
FOR THE
FOR THE PERIOD
SIX MONTHS FOR THE YEAR ENDED JULY 1,
ENDED DECEMBER 31, 1993+ TO
JUNE 30, -------------------- DECEMBER 31,
1996++ 1995++ 1994 1993
----------- ------- ------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 9.79 $ 9.17 $ 10.38 $ 10.00
------- ------- ------- --------
Investment income--net.......................................... .39 .85 .76 .25
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net.................................... (.15) .61 (1.19) .33
------- ------- ------- --------
Total from investment operations................................ .24 1.46 (.43) .58
------- ------- ------- --------
Less dividends and distributions:
Investment income--net........................................ (.40) (.84) (.76) (.20)
Realized gain on investments--net............................. -- -- -- --
In excess of realized gain on investments--net................ -- -- (.02) --
------- ------- ------- --------
Total dividends and distributions............................... (.40) (.84) (.78) (.20)
------- ------- ------- --------
Net asset value, end of period.................................. $ 9.63 $ 9.79 $ 9.17 $ 10.38
------- ------- ------- --------
------- ------- ------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............................. 2.56%## 16.69% (4.21)% 5.90%##
------- ------- ------- --------
------- ------- ------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................................ .68%* .68% .75% .94%*
------- ------- ------- --------
------- ------- ------- --------
Investment income--net.......................................... 8.13%* 8.99% 8.01% 6.20%*
------- ------- ------- --------
------- ------- ------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................ $85,732 $81,845 $75,150 $ 50,737
------- ------- ------- --------
------- ------- ------- --------
Portfolio turnover.............................................. 106.40% 132.57% 117.58% 54.80%
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# In connection with its reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired
substantially all of the assets and assumed substantially all the liabilities of the International Bond Fund,
a separate Fund of the Company, (ii) implemented a change in its investment objective and policies from
seeking high current income from a global portfolio of fixed income securities, including non-investment grade
securities, to seeking a high total investment return by investing in a global portfolio of investment grade
fixed income securities and (iii) changed its name from the World Income Focus Fund to its current name. For
the period from the commencement of the Fund's operations through its reorganization on December 6, 1996, the
portfolio of the Fund included debt securities rated below investment grade (i.e., junk bonds). As a result,
the financial information in the financial highlights table for operations of the Fund prior to its
reorganization may not be indicative of its performance following its reorganization.
## Aggregate total investment return.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
-----------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------------------------------
1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988
----------- -------- -------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $13.70 $11.75 $11.47
--------- -------- -------- ------- ------- ------- ------ ------ ------
Investment income--net.............. .05 .17 .05 (.01) .01 .09 .05 (.07) (.10)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net.................. 1.28 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60
--------- -------- -------- ------- ------- ------- ------ ------ ------
Total from investment operations.... 1.33 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50
--------- -------- -------- ------- ------- ------- ------ ------ ------
Less dividends and distributions:
Investment income--net............. (.10) (.09) -- --++ (.07) (.02) -- -- --
Realized gain on investments--net... (3.59) -- (.19) -- -- -- -- -- (.22)
--------- -------- -------- ------- ------- ------- ------ ------ ------
Total dividends and distributions... (3.69) (.09) (.19) -- (.07) (.02) -- -- (.22)
--------- -------- -------- ------- ------- ------- ------ ------ ------
Net asset value, end of period...... $ 25.62 $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $11.98 $13.70 $11.75
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.............................. 5.48%# 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)% 16.60% 4.25%
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... .79%* .81% .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25%
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
Expenses............................ .79%* .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25%
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
Investment income (loss)--net....... .37%* .72% .27% (.05)% .04% .51% .14% (.68)% (.56)%
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)......................... $ 408,358 $339,921 $170,044 $98,976 $23,167 $11,318 $6,851 $6,811 $5,521
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
Portfolio turnover.................. 43.26% 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73%
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
Average commission rate paid##...... $ .0590 -- -- -- -- -- -- -- --
--------- -------- -------- ------- ------- ------- ------ ------ ------
--------- -------- -------- ------- ------- ------- ------ ------ ------
<CAPTION>
EQUITY
GROWTH FUND
---------------
FOR THE YEAR
ENDED
DECEMBER 31,
---------------
1987 1986
------ ------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $18.42 $15.56
------ ------
Investment income--net.............. (.09) .04
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net.................. (4.01) 2.86
------ ------
Total from investment operations.... (4.10) 2.90
------ ------
Less dividends and distributions:
Investment income--net............. (.03) (.04)
Realized gain on investments--net... (2.82) --
------ ------
Total dividends and distributions... (2.85) (.04)
------ ------
Net asset value, end of period...... $11.47 $18.42
------ ------
------ ------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share.............................. (22.29)% 18.68%
------ ------
------ ------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... 1.24% 1.25%
------ ------
------ ------
Expenses............................ 1.24% 1.44%
------ ------
------ ------
Investment income (loss)--net....... (.60)% .24%
------ ------
------ ------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)......................... $6,707 $4,955
------ ------
------ ------
Portfolio turnover.................. 94.91% 80.52%
------ ------
------ ------
Average commission rate paid##...... -- --
------ ------
------ ------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average number of shares outstanding during the period.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in six Funds to certain separate
accounts (the 'Separate Accounts') of MLLIC and ML of New York to fund benefits
under Variable Life Contracts. Those six Funds are: the Basic Value Focus Fund,
Global Bond Focus Fund, Global Utility Focus Fund, International Equity Focus
Fund, Developing Capital Markets Focus Fund and the Equity Growth Fund. Through
a separate Prospectus, the Company offers shares in all of its funds to certain
other separate accounts of the Insurance Companies to fund benefits under
variable annuity contracts issued by them.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only in
the Contract. The Contract is described in the Prospectus for each Contract.
That Prospectus describes the relationship between increases or decreases in the
net asset value of shares of a Fund, and any distributions on such shares, and
the benefits provided under a Contract. The Prospectus for the Contracts also
describes various fees payable to the Insurance Companies and charges to the
Separate Accounts made by the Insurance Companies with respect to the Contracts.
Since shares of the Funds will be sold only to the Insurance Companies for the
Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus
refer to the Insurance Companies. MLLIC and ML of New York are wholly owned
subsidiaries of ML&Co., as is the Investment Adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described below. The differences
in objectives and policies among the Funds can be expected to affect the return
of each Fund and the degree of market and financial risk to which each Fund is
subject. Each Fund is classified as 'diversified,' as defined in the Investment
Company Act of 1940, except for the Global Bond Focus Fund and the Developing
Capital Markets Focus Fund, each of which is classified as 'non-diversified.'
The investment objectives and classification of each Fund may not be changed
without the approval of the holders of a majority of the outstanding shares of
each Fund affected. The investment objectives and policies of each Fund are
discussed below.
Fixed Income Security Ratings. No Fund other than the International Equity
Focus Fund and Developing Capital Markets Focus Fund invests in fixed-income
securities which are rated below investment grade (i.e., securities rated Ba or
below by Moody's Investors Service, Inc. ('Moody's') or BB or below by Standard
& Poor's Rating Group ('Standard & Poor's'). However, securities purchased by a
Fund may subsequently be downgraded. Such securities may continue to be held and
will be sold only if, in the judgement of the Investment Adviser, it is
advantageous to do so. Securities in the lowest category of investment grade
debt securities may have speculative characteristics which may lead to weakened
capacity to pay interest and principal during periods of adverse economic
conditions. See Appendix A for a fuller description of corporate bond ratings.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a
<PAGE>
discount, either from book value or historical price-earnings ratios, or seem
capable of recovering from temporarily out of favor considerations. Particular
emphasis is placed on securities which provide an above average dividend return
and sell at a below-average price-earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates and
depress prices of securities in unfavorable climates. Based on this premise,
management believes that favorable changes in market prices are more likely to
begin when securities are out of favor, earnings are depressed, price-earnings
ratios are relatively low, investment expectations are limited, and there is no
real general interest in the particular security or industry involved. On the
other hand, management believes that negative developments are more likely to
occur when investment expectations are generally high, stock prices are
advancing or have advanced rapidly, price-earnings ratios have been inflated,
and the industry or issue continues to gain new investment acceptance on an
accelerated basis. In other words, management believes that market prices of
securities with relatively high price-earnings ratios are more susceptible to
unexpected adverse developments while securities with relatively low
price-earnings ratios are more favorably positioned to benefit from favorable,
but generally unanticipated, events. This investment policy departs from
traditional philosophy. Management of the Fund believes that the market risk
involved in this policy is moderated somewhat by an emphasis on securities with
above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation of
the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities rated
investment grade and utilize covered call options with respect to portfolio
securities as described below and in the Statement of Additional Information. It
reserves the right as a defensive measure to hold other types of securities,
including U.S. Government and Government agency securities, money market
securities or other fixed-income securities deemed by the Investment Adviser to
be consistent with a defensive posture, or cash, in such proportions as, in the
opinion of management, prevailing market or economic conditions warrant. The
Fund may invest up to 10% of its total assets, taken at market value at the time
of acquisition, in the securities of foreign issuers.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND)
The investment objective of the Global Bond Focus Fund is to seek to
provide shareholders a high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units. 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 'Other Portfolio
Strategies-- Foreign Securities.' The Fund should be considered as a long-term
investment and a vehicle for diversification and not as a balanced investment
program.
The Fund may invest in United States and foreign government and corporate
fixed income securities which have a credit rating of A or better by Standard &
Poor's or by Moody's or commercial paper rated A-1 by
<PAGE>
Standard & Poor's or Prime-1 by Moody's or obligations that the Advisor has
determined to be of similar creditworthiness. 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 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 Global Bond
<PAGE>
Focus Fund. As a general matter, in evaluating investments for the Fund, the
Investment Advisor 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 evaluation of 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 Global Bond 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.
GLOBAL UTILITY FOCUS FUND
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of the Investment Adviser, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk, as described below under 'Other Portfolio
Strategies--Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions.' Investing on an international basis involves special
considerations. See 'Other Portfolio Strategies--Foreign Securities.'
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a temporary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash in
such proportions as, in the opinion of the Investment Adviser, prevailing market
or economic conditions warrant. Except during temporary defensive periods, such
securities or cash will not exceed 20% of its total assets. Under normal
circumstances, the Fund will invest at least 65% of its total assets in issuers
domiciled in at least three countries, one of which may be the United States,
although the Investment Adviser expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
<PAGE>
preferred stocks will vary from time to time based upon the Investment Adviser's
judgement of the extent to which investments in each category will contribute to
meeting the Fund's investment objective. Fixed income securities in which the
Fund will invest generally will be limited to those rated investment grade, that
is, rated in one of the four highest rating categories by Standard & Poor's or
Moody's (i.e., securities rated at least BBB by Standard & Poor's or Baa by
Moody's), or deemed to be of equivalent quality in the judgement of the
Investment Adviser. Securities rated Baa by Moody's are described by it as
having speculative characteristics and, according to Standard & Poor's, fixed
income securities rated BBB normally exhibit adequate protection parameters,
although adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay interest and repay principal. The Fund's
commercial paper investments at the time of purchase will be rated 'A-1 ' or
'A-2' by Standard & Poor's or 'Prime-1 ' or 'Prime-2' by Moody's or, if not
rated, will be of comparable quality as determined by the Investment Adviser.
The Fund may also invest up to 5% of its total assets at the time of purchase in
fixed income securities having a minimum rating no lower than Caa by Moody's or
CCC by Standard & Poor's. The Fund may, but need not, dispose of any security if
it is subsequently downgraded. For a description of ratings of debt securities,
see Appendix A to this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ('ADRs'), European Depository Receipts ('EDRs') or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. Generally, ADRs, which are
issued in registered form, are designated for use in the United States
securities markets, and EDRs, which are issued in bearer form, are designed for
use in European securities markets. The Fund may invest in ADRs and EDRs through
both sponsored and unsponsored arrangements. In a sponsored ADR or EDR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depository's transaction fees, whereas in an unsponsored arrangement the foreign
issuer assumes no obligations and the depository's transaction fees are paid by
the ADR or EDR holders. Foreign issuers in respect of whose securities
unsponsored ADRs or EDRs have been issued are not necessarily obligated to
disclose material information in the markets in which the unsponsored ADRs or
EDRs are traded and, therefore, there may not be a correlation between such
information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of common
stocks issued by domestic utility companies historically have significantly
exceeded those of industrial companies' common stocks, while the prices of
domestic utility stocks have tended to be less volatile than stocks of
industrial companies. Total returns on domestic utility stocks have also
generally exceeded those on stocks of industrial companies. Debt securities of
domestic utility companies historically also have yielded slightly more than
similar debt securities of industrial companies, and have had higher total
returns. For certain periods, the total return of utility companies' securities
has underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in the
future. The Investment Adviser believes that the average dividend yields of
common stocks issued by foreign utility companies have also
<PAGE>
historically exceeded those of foreign industrial companies' common stocks. To
meet its objective of capital appreciation, the Fund may invest in foreign
utility companies which pay lower than average dividends, but have a greater
potential for capital appreciation.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availability of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are
substantial differences between the regulatory practices and policies of various
jurisdictions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for these
utilities to obtain adequate relief. Certain of the issuers of securities of the
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies, and impose
additional requirements governing the licensing, construction and operation of
nuclear power plants.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. In some instances, utility companies
are operating on an unregulated basis. Because of trends toward deregulation and
the evolution of independent power producers as well as new entrants to the
field of telecommunications, non-regulated providers of utility services have
become a significant part of their respective industries. The Investment Adviser
believes that the emergence of competition and deregulation will result in
certain utility companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
businesses from increased competition and may be less profitable. The Investment
Adviser seeks to take advantage of favorable investment opportunities that are
expected to arise from these structural changes. Of course, there can be no
assurance that favorable developments will occur in the future.
<PAGE>
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The Global Utility Focus Fund's investment policies are designed to enable
it to capitalize on evolving investment opportunities throughout the world. For
example, the rapid growth of certain foreign economies will necessitate
expansion of capacity in the utility industries in those countries. Although
many foreign utility companies currently are government-owned, thereby limiting
current investment opportunities for the Fund, the Investment Adviser believes
that, in order to attract significant capital for growth, foreign governments
are likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership
of assets rather than government ownership, is expected to occur in newer,
faster-growing economies and in mature economies. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. The Investment Adviser will take into account anticipated economic
growth rates and other economic developments when selecting securities of
utility companies. The principal sectors of the global utility industries are
discussed below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates have
declined, many utilities have refinanced high cost debt and in doing so have
improved their fixed charges coverage. Regulators, however, have lowered allowed
rates of return as interest rates have declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of, the
Nuclear Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for decommissioning of such plants.
In October 1993, Standard & Poor's stiffened its debt-ratings formula for
the electric utility industry, stating that the industry is in long-term
decline. In addition, Moody's stated that it expected a drop in the next three
years
<PAGE>
in its average credit ratings for the industry. Reasons set forth for these
outlooks included slowing demand and increasing cost pressures as a result of
competition from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access to
the telephone networks comprise the greatest portion of this segment. Telephone
companies in the United States are still experiencing the effects of the breakup
of American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone communication services have expanded their
non-regulated activities into other businesses, including cellular telephone
services, data processing, equipment retailing, computer software and hardware
services, and financial services. This expansion has provided significant
opportunities for certain telephone companies to increase their earnings and
dividends at faster rates than had been allowed in traditional regulated
businesses. Increasing competition, technological innovations and other
structural changes, however, could adversely affect the profitability of such
utilities. Technological breakthroughs and the merger of telecommunications with
video and entertainment is now associated with the expansion of the role of
cable companies as providers of utility services in the telecommunications
industry and the competitive response of traditional telephone companies. Given
mergers and certain marketing tests currently underway, it is likely that both
traditional telephone companies and cable companies will soon provide a greatly
expanded range of utility services, including two-way video and informational
services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decades, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Investment
Adviser, however, environmental considerations could improve the gas industry
outlook in the future. For example, natural gas is the cleanest of the
hydrocarbon fuels, and this may result in incremental shifts in fuel consumption
toward natural gas and away from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic companies.
The Investment Adviser believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Investment Outside the Utility Industries. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that are
outside the utility industries. Such investments may include common stocks, debt
securities or preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies. Some of these
issuers may be in industries related to utility industries and, therefore, may
be subject to similar risks. Securities that are issued by foreign companies or
are denominated in foreign currencies are subject to the risks outlined above.
<PAGE>
The Global Utility Focus Fund is also permitted to invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
('U.S. Government Securities'). Such investments may be backed by the 'full
faith and credit' of the United States, including U.S. Treasury bills, notes and
bonds as well as certain agency securities and mortgage-backed securities issued
by the Government National Mortgage Association (GNMA). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the 'full faith and credit' of the United States, such as
certain securities issued by the Federal National Mortgage Association (FNMA),
the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.
The Global Utility Focus Fund may invest in securities issued or guaranteed
by foreign governments. Such securities are typically denominated in foreign
currencies and are subject to the currency fluctuation and other risks of
foreign securities investments. The foreign government securities in which the
Fund intends to invest generally will consist of obligations supported by
national, state or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank.
Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities including quasi-governmental agencies. Foreign
government securities will not be considered government securities for purposes
of determining the Fund's compliance with diversification and concentration
policies.
INTERNATIONAL EQUITY FOCUS FUND
The investment objective of the International Equity Focus Fund is to seek
capital appreciation and, secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal conditions, at least 65% of the Fund's net assets
will be invested in such equity securities. The investment objective of the Fund
is a fundamental policy and may not be changed without approval of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. Investing
on an international basis involves special considerations. Investing in smaller
capital markets entails the risk of significant volatility in the Fund's
security prices. See 'Other Portfolio Strategies--Foreign Securities.' The Fund
is designed for investors seeking to complement their U.S. holdings through
foreign investments. The Fund should be considered as a long-term investment and
a vehicle for diversification and not as a balanced investment program.
The International Equity Focus Fund will invest in an international
portfolio of securities of foreign companies located throughout the world. While
there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in
<PAGE>
the developed countries of Europe and the Far East. However, for the reasons
stated below, management of the Fund will give special attention to investment
opportunities in the developing countries of the world, including, but not
limited to Latin America, the Far East and Eastern Europe. It is anticipated
that a significant portion of the Fund's assets may be invested in such
developing countries.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser based primarily on its
assessment of the relative condition and growth potential of the various
economies and securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. Within such
allocations, the Investment Adviser will seek to identify equity investments in
each market which are expected to provide a total return which equals or exceeds
the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called 'emerging' countries (such as
Malaysia, Mexico and Thailand), which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Fund will primarily emphasize investments in common stock, the
Fund may also invest in preferred stocks, convertible debt securities and other
instruments the return on which is linked to the performance of a common stock
or a basket or index of common stocks (collectively, 'equity securities'). The
Fund may also invest in non-equity securities, including debt securities, cash
or cash equivalents denominated in U.S. dollars or foreign currencies and
short-term securities, including money market instruments. Under certain adverse
investment conditions, for defensive purposes, the Fund may restrict the markets
in which its assets will be invested and may increase the proportion of assets
invested in short-term obligations of U.S. issuers. Under normal conditions, at
least 65% of the Fund's total assets will be invested in the securities of
issuers from at least three different foreign countries. Investments made for
defensive purposes will be maintained only during periods in which the
Investment Adviser determines that economic or financial conditions are adverse
for holding or being fully invested in equity securities of foreign issuers.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world.
<PAGE>
The Fund also may invest up to 35% of its net assets in longer-term,
non-convertible debt securities emphasizing debt securities which offer the
opportunity for capital appreciation. Capital appreciation in debt securities
may arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels, or in the creditworthiness of issuers. In
accordance with its investment objective, the Fund will not seek to benefit from
anticipated short-term fluctuations in currency exchange rates. The Fund may,
from time to time, invest in debt securities with relatively high yields (as
compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. Such income can be used, however,
to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ('supranational entities'), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or 'stockholders,' usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgement, analysis and experience
in evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default or which the Investment Adviser believes will be in default. See 'Other
Portfolio Strategies--Foreign Securities' and 'Risk of High Yield Securities'
below.
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental policy
and may not be changed without approval of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. Investing on an international basis involves
special considerations. Investing in smaller capital markets entails the risk of
significant volatility in the Fund's security prices. See 'Other Portfolio
Strategies--Foreign Securities.' The Fund is designed for investors seeking to
complement their U.S. holdings through foreign investments. The Fund should be
considered as a long-term investment and a vehicle for diversification and not
as a balanced investment program.
<PAGE>
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four
countries having the largest equity market capitalizations. Currently,
these four countries are Japan, the United Kingdom, the United States
and Germany. At September 30, 1996, 1996, those countries' equity
market capitalizations totalled approximately 71% of the world's
equity market capitalization according to data provided by Morgan
Stanley Capital International. The Fund will at all times, except during
defensive periods, maintain investments in at least three countries
having smaller capital markets.
The Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called 'emerging' countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries (such as France, the Netherlands and Spain), although
having relatively mature smaller capital markets, may also be in a position to
benefit from local or international developments encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in countries having smaller capital markets. It also
may not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Investment Adviser will emphasize
the allocation of assets among certain countries' capital markets, rather than
the selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. See 'Risks of High Yield Securities' below.
Such income can be used, however, to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ('governmental entities'), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ('supranational entities'), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related
<PAGE>
government agencies. Examples include the World Bank, the European Steel and
Coal Community, the Asian Development Bank and the Inter-American Development
Bank. The governmental members, or 'stockholders,' usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgement, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Investment
Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign
Securities' and 'Risks of High Yield Securities' below.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market of
its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues or profits in any one
of the two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such countries. The Fund also may
consider closed-end investment companies to be located in the country or
countries in which they primarily make their portfolio investments.
Foreign investments in smaller capital markets involve risks not involved
in domestic investment, including fluctuations in foreign exchange rates, future
political and economic developments, different legal systems and the existence
or possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. These risks
are often heightened for investments in small capital markets. With respect to
certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries. In
addition, certain foreign investments may be subject to foreign withholding
taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
<PAGE>
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Company believes have special investment value, and of emerging growth companies
regardless of size. Companies are selected by management on the basis of their
long-term potential for expanding their size and profitability or for gaining
increased market recognition for their securities. Current income is not a
factor in the selection of securities. The Fund is intended to provide an
opportunity for Contract Owners who are not ordinarily in a position to perform
the specialized type of research or analysis of small and emerging growth
companies.
Management seeks to identify those small emerging growth companies which
can show significant and sustained increases in earnings over an extended period
of time and are in sound financial condition. Management believes that, while
these companies present above-average risks, properly selected companies of this
type also have the potential to increase their earnings at a rate substantially
in excess of the general growth of the economy. The Fund attempts to achieve its
objective by focusing on the long-range view of a company's prospects through a
fundamental analysis of its management, financial structure, product
development, marketing ability and other relevant factors. Full development of
these companies frequently takes time and, for this reason, the Fund should be
considered as a long-term investment and not as a vehicle for seeking short-term
profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalizations in the $50-$300 million range and generally are
little known to most individual investors, although some may be dominant in
their respective industries. Underlying this strategy is management's belief
that relatively small companies will continue to have the opportunity to develop
into significant business enterprises. Some such companies may be in a
relatively early stage of development; others may manufacture a new product or
perform a new service. Such companies may not be counted upon to develop into
major industrial companies, but management believes that eventual recognition of
their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Emerging growth companies. In selecting investments for the Equity Growth
Fund, management also seeks emerging growth companies that either occupy a
dominant position in an emerging industry or subindustry or have a significant
and growing market share in a large, fragmented industry. Management believes
that capable and flexible management is one of the most important criteria of
emerging growth companies and that such companies should employ sound financial
and accounting policies and also demonstrate effective research, successful
product development and marketing, efficient service and pricing flexibility.
Emphasis is given to companies with rapid historical growth rates, above-average
returns on equity and strong current balance sheets, all of which should enable
the company to finance its continued growth. Management of the Company also
analyzes and weighs relevant factors beyond the company itself, such as the
level of competition in the industry, the extent of governmental regulation, the
nature of labor conditions and other related matters.
The Equity Growth Fund emphasizes investments in companies that do most of
their business in the United States and therefore are free of the currency
exchange problems, foreign tax considerations and potential political and
economic upheavals that many multinational corporations face. Moreover, the size
and kinds of markets that they serve make these companies less susceptible than
larger companies to intervention from the federal government by means of price
controls, regulations or litigation.
<PAGE>
While the process of selection and continuous supervision by management
does not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
It should be apparent that an investment in a fund such as the Equity
Growth Fund involves greater risk than is customarily associated with more
established companies. The securities of smaller or emerging growth companies
may be subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may have
limited product lines, markets or financial resources, or they may be dependent
upon a limited management group. Because of these factors, management of the
Company believes that shares in the Equity Growth Fund are suitable for Contract
Owners who are in a financial position to assume above-average investment risk
in search of above-average long-term reward. As indicated, the Fund is designed
for Contract Owners whose investment objective is growth rather than income. It
is definitely not intended for exclusive funding of Contracts but is designed
for Contract Owners who are prepared to experience above-average fluctuations in
net asset value.
The securities in which the Equity Growth Fund invests will often be traded
only in the over-the-counter market or on a regional securities exchange and may
not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Fund or portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when in
management's judgement such disposition is not desirable or to make many small
sales over a lengthy period of time.
The investment emphasis of the Equity Growth Fund is on equities, primarily
common stock and, to a lesser extent, securities convertible into common stocks
and rights to subscribe for common stock, and the Fund will maintain at least
80% of its net assets invested in equity securities of small or emerging growth
companies except during defensive periods. The Fund reserves the right as a
defensive measure and to provide for redemptions to hold other types of
securities, including non-convertible preferred stocks and debt securities, U.S.
Government and Government agency securities, money market securities or other
fixed-income securities deemed by the Investment Adviser to be consistent with a
defensive posture, or cash, in such proportions as, in the opinion of
management, prevailing market or economic conditions warrant.
NON-DIVERSIFIED FUNDS
The Global Bond Focus and Developing Capital Markets Focus Funds are
classified as non-diversified investment companies under the Investment Company
Act of 1940. However, each Fund will have to limit its investments to the extent
required by the diversification requirements applicable to regulated investment
companies under the Internal Revenue Code. To qualify as a regulated investment
company, a Fund, at the close of each fiscal quarter, may not have more than 25%
of its total assets invested in the securities (except obligations of the U.S.
Government, its agencies or instrumentalities) of any one issuer and with
respect to 50% of its assets, (i) may not have more than 5% of its total assets
invested in the securities of any one issuer and (ii) may not own more than 10%
of the outstanding voting securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
<PAGE>
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, as amended (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 the value of a securities
index or a basket of securities, or based on the relative changes of two
indices. In addition, certain of the Funds may invest in securities the
potential return of which is based inversely on the change in an index. For
example, a Fund may invest in securities that pay a higher rate of interest when
a particular index decreases and pay a lower rate of interest (or do not fully
return principal) when the value of the index increases. If a Fund invests in
such securities, it may be subject to reduced or eliminated interest payments or
loss of principal in the event of an adverse movement in the relevant index or
indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Company believes that indexed and inverse securities may provide portfolio
management flexibility that permits a Fund to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Foreign Securities. The Basic Value Focus, Global Bond Focus, Global
Utility Focus, International Equity Focus, Developing Capital Markets Focus and
Equity Growth 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
<PAGE>
company investing exclusively in United States securities because the expenses
of the Fund, such as custodial costs, are higher. In addition, net investment
income earned by a Fund on a foreign security may be subject to withholding and
other taxes imposed by foreign governments which will reduce a Fund's net
investment income. The Investment Adviser will consider these and other factors
before investing in foreign securities, and will not make such investments
unless, in its opinion, such investments will meet the standards and objectives
of a particular Fund. No Fund which may invest in foreign securities will
concentrate its investments in any particular country. The Global Bond Focus,
Global Utility Focus, International Equity Focus and Developing Capital Markets
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.
Each of the International Equity Focus Fund and Developing Capital Markets
Focus Fund may invest a significant portion of its assets in securities of
foreign issuers in smaller capital markets, while each of the other Funds which
is permitted to invest in foreign securities may from time to time invest in
securities of such foreign issuers. Foreign investments in smaller capital
markets involve risks not involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems and the existence or possible imposition
of exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. These risks are often heightened
for investments in small capital markets. Because a Fund which invests in
foreign securities will invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of securities in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Foreign currency exchange rates are determined by forces of
supply and demand in the foreign exchange markets. These forces are, in turn,
affected by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With respect
to certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries. In
addition, certain foreign investments may be subject to foreign withholding
taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
a Fund which invests in these markets incurring additional costs and delays in
transporting and custodying such securities outside such countries. Delays in
settlement could result in temporary periods when assets of such a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement
<PAGE>
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience. Due to its emphasis on securities
of issuers located in smaller capital markets, the Developing Capital Markets
Focus Fund and the International Equity Focus Fund should be considered as a
vehicle for diversification and not as a balanced investment program.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government debtor,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole and the political constraints to which a
government debtor may be subject. Government debtors may default on their debt
and may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. Holders of government debt, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing and
emerging market countries are among the world's largest debtors to commercial
banks, other governments, international financial organizations and other
financial institutions. The issuers of the government debt securities in which a
Fund may invest have in the past experienced substantial difficulties in
servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements.
The Developing Capital Markets Focus and International Equity Focus Funds
intend to invest in securities of foreign issuers in smaller capital markets.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries require governmental approval prior to investments by foreign persons,
or limit the amount of investment by foreign persons in a particular company, or
limit the investment by foreign persons to only a specific class of securities
of a company which may have less advantageous terms than securities of the
company available for purchase by nationals.
<PAGE>
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the 'Investment Company Act' or 'the
Act'), the Developing Capital Markets Focus and International Equity Focus Funds
each may invest up to 10% of its total assets in securities of such closed-end
investment companies. This restriction on investments in securities of
closed-end investment companies may limit opportunities for the Fund to invest
indirectly in certain smaller capital markets. Shares of certain closed-end
investment companies may at times be acquired only at market prices representing
premiums to their net asset values. If a Fund acquires shares in closed-end
investment companies, shareholders would bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of such closed-end investment companies. A Fund also may seek, at
its own cost, to create its own investment entities under the laws of certain
countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a Fund's
investments in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from 'securities related
activities,' as defined by the rules thereunder. These provisions may also
restrict a Fund's investments in certain foreign banks and other financial
institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash or securities issued or guaranteed by the U.S. Government which, while
the loan is outstanding, will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities plus accrued
interest. Such cash collateral will be invested in short-term securities, the
income from which will increase the return to the Fund.
Forward Commitments. Each of the Funds may purchase securities on a
when-issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be more
or less than its purchase price. A Fund entering into such transactions will
maintain a segregated account with its custodian of cash or liquid, high-grade
debt obligations in an aggregate amount equal to the amount of its commitments
in connection with such delayed delivery and purchase transactions.
Standby Commitment Agreements. The Global Utility Focus and Developing
Capital Markets Focus Funds may from time to time enter into standby commitment
agreements. Such agreements commit the respective Fund, for a stated period of
time, to purchase a stated amount of a fixed income security which may be issued
and sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement the Fund is paid a commitment fee which is typically approximately
0.5% of the aggregate purchase price of the security which the Fund has
committed to purchase. The Fund will at all times maintain a segregated account
with its custodian of cash or liquid equity or debt securities 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.
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Basic Value Focus, Global Bond Focus, Global Utility Focus,
International Equity Focus, Developing Capital Markets Focus and Equity Growth
Funds may use certain derivative instruments, including options and futures
contracts, and may purchase and sell foreign exchange. Transactions involving
such instruments expose a Fund to certain risks.
<PAGE>
Each Fund's use of these instruments and the associated risks are described in
detail in Appendix A attached to this Prospectus.
RISKS OF HIGH YIELD SECURITIES
The International Equity Focus Fund and Developing Capital Markets Focus
Fund may invest a substantial portion of their assets in high yield, high risk
securities or junk bonds, which are regarded as being predominantly speculative
as to the issuer's ability to make payments of principal and interest.
Investment in such securities involves substantial risk. Issuers of junk bonds
may be highly leveraged and may not have available to them more traditional
methods of financing. Therefore, the risks associated with acquiring the
securities of such issuers generally are greater than is the case with
higher-rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, issuers of high yield securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During recessionary periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of junk bonds
because such securities may be unsecured and may be subordinated to other
creditors of the issuer. While the high yield securities in which the
International Equity Focus Fund or Developing Capital Markets Focus Fund may
invest normally do not include securities which, at the time of investment, are
in default or the issuers of which are in bankruptcy, there can be no assurance
that such events will not occur after a Fund purchases a particular security, in
which case a Fund may experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the
International Equity Focus Fund and Developing Capital Markets Focus Fund each
will diversify its holdings among many issuers. However, there can be no
assurance that diversification will protect a Fund from widespread defaults
brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated
fixed-income securities, so that adverse economic events may have a greater
impact on their prices and yields than on higher-rated fixed-income securities.
Zero coupon bonds and bonds which pay interest and/or principal in additional
bonds rather than in cash are especially volatile. Like higher-rated
fixed-income securities, junk bonds are generally purchased and sold through
dealers who make a market in such securities for their own accounts. However,
there are fewer dealers in this market, which may be less liquid than the market
for higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions (whether
or not based on economic fundamentals) may impair the liquidity of this market,
and may cause the prices the International Equity Focus Fund and Developing
Capital Markets Focus Fund receive for their junk bonds to be reduced, or a Fund
may experience difficulty in liquidating a portion of its portfolio when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Under such conditions, judgement may play a greater role in valuing certain of
each Fund's portfolio securities than in the case of securities trading in a
more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the International Equity Focus Fund and Developing Capital Markets Focus Fund.
In addition, each Fund may incur additional expenses
<PAGE>
to the extent that it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the International Equity Focus
Fund and Developing Capital Markets Focus Fund may invest include junk bonds
issued by sovereign entities. Investment in such sovereign debt involves a high
degree of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest when due
in accordance with the terms of such debt. A governmental entity's willingness
or ability to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International Monetary Fund
and the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt, including the International Equity Focus Fund
and Developing Capital Markets Focus Fund, may be requested to participate in
the rescheduling of such debt and to extend further loans to governmental
entities. In the event of a default by a governmental entity, there may be few
or no effective legal remedies available to a Fund and there can be no assurance
a Fund will be able to collect on defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an 'ordinarily prudent person.' In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that compliance
with these standards will not have any negative impact on the performance of any
of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
<PAGE>
DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not 'interested persons' of the Company as defined in the Investment Company Act
of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as follows:
ARTHUR ZEIKEL*--President of the Investment Adviser and its affiliate,
Fund Asset Management, L.P. ('FAM'); President and Director of Princeton
Services, Inc. ('Princeton Services'); Executive Vice President of ML&Co.;
and Director of Merrill Lynch Funds Distributor, Inc. (the 'Distributor');
Director of the Distributor.
WALTER MINTZ--Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN--Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Chairman of Fernwood Associates (financial
consultants).
JOE GRILLS--Member of the Committee on Investment of Employee Benefit
Assets of the Financial Executives Institute ('CIEBA'); member of CIEBA's
Executive Committee; and member of the Investment Advisory Committee of the
State of New York Retirement Fund.
ROBERT SALOMON, JR.--Principal of STI Management (investment adviser).
- ------------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. (the 'Investment Adviser'), an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser
for the Fund. The general partner of the Investment Adviser is Princeton
Services, Inc., a wholly owned subsidiary of Merrill Lynch & Co., Inc. The
principal address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey
08543-9011). The Investment Adviser or its affiliate, Fund Asset Management,
L.P., 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
October 31, 1996, the Investment Adviser and FAM had a total of approximately
$217.6 billion in investment company and other portfolio assets under management
including accounts of certain affiliates of FAM.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the Funds,
who consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the
Company (certain of which it may delegate to third parties) and is obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Agreements. The Investment Adviser has access to
the full range of the securities and economic research facilities of Merrill
Lynch.
During the Company's fiscal year ended December 31, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742 of which $1,414,380 related
to the Basic Value Focus Fund (representing .60% of its average net assets),
$464,049 related to the Global Bond Focus Fund (representing .60% of its average
net assets), $803,260 related to the Global Utility Focus Fund (representing
.60% of its average net assets), $1,817,721 related to the International Equity
Focus Fund (representing .75% of its average net assets), $70,573 related to the
International Bond Fund, now part of the Global Bond Focus Fund (representing
60% of its average net assets), $434,062 related to the Developing Capital
Markets Focus Fund (representing 1.00% of its average net assets) and $1,852,641
related to the Equity Growth Fund (representing .75% of its average net assets).
Although the 1.00% investment advisory fee of the Developing Capital Markets
Focus Fund is higher than that of many other mutual funds, the Fund believes it
is justified by the high degree of care that must be given to the initial
selection and continuous supervision of the types of portfolio securities in
which the Fund invests.
During the Company's fiscal year ended December 31, 1995, the total
operating expenses of the Company's Funds (including the advisory fees paid to
the Investment Adviser), before reimbursement of a portion of such expenses,
were as follows: $1,565,649 related to the Basic Value Focus Fund (representing
.66% of its average net assets), $527,752 related to the Global Bond Focus Fund
(representing .68% of its average net assets), $890,100 related to the Global
Utility Focus Fund (representing .66% of its average net assets), $2,163,036
related to the International Equity Focus Fund (representing .89% of its average
net assets), $592,329 related to the Developing Capital Markets Focus Fund
(representing 1.36% of its average net assets), $112,261 related to the
International Bond Fund, now part of the Global Bond Focus Fund (representing
.95% of its average net assets) and $2,007,667 by the Equity Growth Fund
(representing .81% 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 exceed the most restrictive expense limitations
then in effect under any state securities laws or published regulations
thereunder. Prior to the enactment of the National Securities Market Improvement
<PAGE>
Act of 1996 on October 11, 1996 (the "Improvement Act"), the most restrictive
expense limitation required 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. As a result of the Improvement Act, the Investment Adviser will
no longer be subject to the foregoing expense limitation.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have
entered into two agreements which limit the operating expenses paid by each Fund
in a given year to 1.25% of its average daily net assets (the 'Reimbursement
Agreements'), which is less than the expense limitations imposed by state
securities laws or published regulations thereunder. The reimbursement
agreements, dated April 30, 1985 and February 11, 1992, provide that any
expenses in excess of 1.25% of average daily net assets will be reimbursed to
the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA.
During the Company's fiscal year ended December 31, 1995, the Developing Capital
Markets Focus Fund and International Bond Fund (now part of the Global Bond
Focus Fund) were reimbursed for operating expenses. Such reimbursements amounted
to $49,477 and $112,261, respectively. Except to the extent required pursuant to
the aforementioned agreements, the Investment Adviser does not intend to
reimburse the Global Bond Focus Fund for such Fund's operating expenses. See
'Investment Advisory Arrangements' in the Statement of Additional Information.
MLLA sells the Contracts described in the Prospectus for the Contracts.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
<PAGE>
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
KEVIN RENDINO has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
WALTER ROGERS has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
ANDREW BASCAND, ADRIAN HOLMES, GRACE PINEDA and STEVE SILVERMAN have served
as the International Equity Focus Fund's Portfolio Managers since July 1993, and
are primarily responsible for the Fund's day-to-day management. Andrew Bascand
has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global
Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P.
Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior
Research Officer of the Bank of England's International Department from 1986 to
1987. Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993;
Vice President from 1990 to 1993; and an employee since 1987. Grace Pineda and
Steve Silverman have served as Vice Presidents of MLAM since 1989 and 1983,
respectively.
GRACE PINEDA has served as the Developing Capital Markets Focus Fund's
Portfolio Manager since May 1994, and is primarily responsible for the Fund's
day-to-day management. She has served as Vice President of MLAM since 1989.
ROBERT PARISH has served as the Portfolio Manager of Global Bond Focus Fund
(formerly, the World Income Focus Fund) since July 1993 and is primarily
responsible for the Fund's day-to-day management. He served as Vice President of
MLAM since 1991, and was Vice President and Senior Portfolio Manager for
Templeton International from 1987 to 1991.
FREDRIC LUTCHER has served as the Equity Growth Fund's Portfolio Manager
since June 1990, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1989.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis.
<PAGE>
During the year ended December 31, 1995, the Company engaged in 22 transactions
pursuant to such order involving $82.1 million of securities. For the year ended
December 31, 1995, the Company paid brokerage commissions of $5,789,335, of
which $264,999 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company continuously offers shares in each of its Funds to the
Insurance Companies at prices equal to the respective per share net asset value
of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned subsidiary
of the Investment Adviser, acts as the distributor of the shares. Net asset
value is determined in the manner set forth below under 'Additional
Information--Determination of Net Asset Value.'
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market and Reserve Assets
Funds, will consist of all payments of dividends or interest received by such
Fund less the estimated expenses of such Fund (including fees payable to the
Investment Adviser).
Dividends from net investment income of the Global Bond Focus Fund are
declared and reinvested monthly in additional full and fractional shares of the
respective Funds at net asset value. Dividends from net investment income of the
Global Utility Focus Fund are declared and reinvested quarterly in additional
full and fractional shares of the Fund. Dividends from net investment income of
the International Equity Focus, Basic Value Focus, Developing Capital Markets
Focus and Equity Growth Funds are declared and reinvested at least annually in
additional full and fractional shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
'Code'). Under such provisions, a Fund will not be subject to federal income tax
on such part of its net ordinary income and net realized capital gains which it
distributes to shareholders. One of the requirements to qualify for treatment as
a regulated investment company under the Code is that a Fund, among other
things, derive less than 30% of its gross income in each taxable year from gains
(without deduction of losses) from the sale or other disposition of stocks,
securities and certain options, futures or forward contracts held for less than
three months. This requirement may limit the ability of certain Funds to dispose
of certain securities at times when management of the Company might otherwise
deem such disposition appropriate or desirable.
<PAGE>
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make distributions
in amounts necessary to satisfy its distribution requirements under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send to
the Insurance Companies a written notice required by the Code designating the
amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the Securities and Exchange Commission.
In connection with its reorganization on December 6, 1996, the Global Bond Focus
Fund (i) acquired substantially all of the assets and assumed substantially all
the liabilities of the International Bond Fund, a separate fund of the Company,
(ii) implemented a change in its investment objective and policies from seeking
high current income from a global portfolio of fixed income securities,
including non-investment grade securities, to seeking a high total investment
return by investing in a global portfolio of investment grade fixed income
securities and (iii) changed its name from the World Income Focus Fund to its
current name. For the period from the commencement of the World Income Focus
Fund's operations through its reorganization on December 6, 1996, the portfolio
of the Fund included debt securities rated below investment grade (i.e., junk
bonds).
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the offering price per
share on the last day
<PAGE>
of the period. The yield for the 30-day period ending December 31, 1995 was
8.50% for the Global Bond Focus Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost. The yield and
total return quotations may be of limited use for comparative purposes because
they do not reflect charges imposed at the Separate Account level, which, if
included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line
Composite Index, the Dow Jones Industrial Average, or performance data published
by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service
or contained in publications such as Morningstar Publications, Inc., Chase
Investment Performance Digest, Money Magazine, U.S. News & World Report,
Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Ibbotson Associates. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market Fund is computed by
dividing the sum of the value of the securities held by that Fund plus any cash
or other assets (including interest and dividends accrued) minus all liabilities
(including accrued expenses) by the total number of shares outstanding of that
Fund at such time, rounded to the nearest cent. Expenses, including the
investment advisory fees payable to the Investment Adviser, are accrued daily.
Securities held by each Fund will be valued as follows: Portfolio
securities which are traded on stock exchanges are valued at the last sale price
(regular way) as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
in the over-the-counter market prior to the time of valuation. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market,
and it is expected that for debt securities this ordinarily will be the
over-the-counter market. When a Portfolio writes a call option, the amount of
the premium received is recorded on the books as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options being traded in
the over-the-counter market, the last asked price. Options purchased are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the over-the-counter market, the last bid price. Futures
contracts are valued at settlement price at the
<PAGE>
close of the applicable exchange. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Company.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation.
The Company has used pricing services, including Merrill Lynch Securities
PricingSM Service ('MLSPS'), to value bonds held by certain of the Company's
Funds. The Board of Directors of the Company has examined the methods used by
the pricing services in estimating the value of securities held by the Funds and
believes that such methods will reasonably and fairly approximate the price at
which those securities may be sold and result in a good faith determination of
the fair value of such securities; however, there is no assurance that
securities can be sold at the prices at which they are valued. During the year
ended December 31, 1995, Global Utility Focus Fund and Global Bond Focus Fund
paid MLSPS $38 and $4,613, respectively.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. The Equity Growth Fund
commenced operations on April 20, 1982. The Basic Value Focus, Global Bond
Focus, Global Utility Focus and International Equity Focus Funds commenced
operations on July 1, 1993. The Developing Capital Markets Focus Fund commenced
operations on May 2, 1994. The authorized capital stock of the Company consists
of 3,400,000,000 shares of Common Stock, par value $0.10 per share. The shares
of Common Stock are divided into sixteen 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 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 Global Bond Focus Fund, 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 Government Bond Fund Common Stock and Merrill Lynch Index
500 Common Stock, respectively. The Company may, from time to time, at the sole
discretion of its Board of Directors and without the need to obtain the approval
of its shareholders or of Contract Owners, offer and sell shares of one or more
of such classes. Each class consists of 100,000,000 shares except for Domestic
Money Market Fund Common Stock which consists of 1,300,000,000 shares, Reserve
Assets Fund Common Stock which consists of 500,000,000 shares and Global Bond
Focus Fund Common Stock and Global Strategy Focus Fund Common Stock, each of
which consists of 200,000,000 shares. All shares of Common Stock have equal
voting rights, except that only shares of the respective classes are entitled to
vote on matters concerning only that class. Pursuant to the Investment Company
Act of 1940 and the rules and regulations thereunder, certain matters approved
by a vote of all shareholders of the Company may not be binding on a class whose
shareholders have not approved such matter. Each issued and outstanding share of
a class is entitled to one vote and to participate equally in dividends and
distributions declared with respect to such class and in net assets of such
class upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of each class, when issued, will be fully
paid and nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable. Holders of shares of any class
are entitled to redeem their shares as set forth under 'Redemption of Shares.'
Shares do not have cumulative voting rights and the holders of more than 50% of
the shares of the Company voting for the election of directors can elect all of
the directors of the Company if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any directors. The
Company does not intend to hold meetings of shareholders unless under the
Investment Company Act of 1940 shareholders are required to act on any of the
following matters: (i) election of directors;
<PAGE>
(ii) approval of an investment advisory agreement; (iii) approval of a
distribution agreement; and (iv) ratification of the selection of independent
accountants.
MLLIC purchased $100 worth of shares of each of the Basic Value Focus,
Global Bond Focus, Global Utility Focus and International Equity Focus Funds on
June 28, 1993. MLLIC purchased, on July 1, 1993, $8,000,000 worth of shares of
each of the Global Bond Focus Fund and International Equity Focus Fund and
$2,000,000 worth of shares of each of the Basic Value Focus Fund and the Global
Utility Focus Fund. MLLIC purchased, on May 2, 1994 and $8,000,000 worth of
shares of the Developing Capital Markets Focus Fund. The organizational expenses
of each of the Company's Funds are paid by the Investment Adviser. The
Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year
period.
In connection with a reorganization on December 6, 1996 conducted by the
Company with respect to certain of its Funds, the Company, with the approval of
the affected shareholders of the Funds, caused (i) Global Bond Focus Fund (a) to
acquire substantially all of the assets and assume substantially all the
liabilities of the International Bond Fund, a separate fund of the Company, (b)
to implement a change in its investment objective and policies from seeking high
current income from a global portfolio of fixed income securities, including
non-investment grade securities, to seeking a high total investment return by
investing in a global portfolio of investment grade fixed income securities and
(c) to change its name from the World Income Focus Fund to its current name.
INDEPENDENT AUDITORS
Deloitte & Touche, LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of the Company's assets, except that Chase Manhattan
Bank, N.A., Chase Metro Tech Center, Brooklyn,
New York 11245, acts as custodian for assets of the Company's Developing Capital
Markets Focus Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), which is a wholly
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's transfer
agent and is responsible for the issuance, transfer and redemption of shares and
the opening and maintenance of shareholder accounts. MLFDS will receive an
annual fee of $5,000 per Fund and will be entitled to reimbursement of
out-of-pocket expenses. Prior to June 1, 1990, BONY was the Company's transfer
agent.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
<PAGE>
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated December 9, 1996, which
forms a part of the Registration Statement, is incorporated by reference into
this Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
38
<PAGE>
APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, each of the Funds may invest in the
various types of marketable securities issued by or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each of the Funds may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or to
be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
depositary institutions money instruments, such as certificates of deposit,
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ('coupon dates'), based upon a
specified market rate. As a result of these adjustments, the interest rate on
these obligations may be increased or decreased periodically. Often, dealers
selling variable rate certificates of deposit to the Funds agree to repurchase
such instruments, at the Funds' option, at par on the coupon dates. The dealers'
obligations to repurchase these instruments are subject to conditions imposed by
the various dealers; such conditions typically are the continued credit standing
of the issuer and the existence of reasonably orderly market conditions. The
Funds are also able to sell variable rate certificates of deposit in the
secondary market. Variable rate certificates of deposit normally carry a higher
interest rate than comparable fixed rate certificates of deposit because
variable rate certificates of deposit generally have a longer stated maturity
than comparable fixed rate certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
For temporary or defensive purposes, the Global Bond Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may invest in certificates of deposit and bankers'
acceptances issued by foreign branches or subsidiaries of U.S. banks
('Eurodollar' obligations) or U.S. branches or subsidiaries of foreign banks
('Yankeedollar' obligations). The Fund may invest only in Eurodollar obligations
which by their terms are general obligations of the U.S. parent bank and meet
the other criteria discussed below. Yankeedollar obligations in which the Fund
may invest must be issued by U.S. branches or
<PAGE>
subsidiaries of foreign banks which are subject to state or federal banking
regulations in the U.S. and by their terms must be general obligations of the
foreign parent. In addition, the Fund will limit its investments in Yankeedollar
obligations to obligations issued by banking institutions with more than $1
billion in assets.
For temporary or defensive purposes, the Global Bond Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may also invest in U.S. dollar-denominated obligations of
foreign depository institutions and their foreign branches and subsidiaries,
such as certificates of deposit, bankers' acceptances, time deposits and deposit
notes. The obligations of such foreign branches and subsidiaries may be the
general obligation of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government regulation.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United States,
has total assets of at least $1 billion and its deposits are insured by the
Federal Deposit Insurance Corporation (the 'FDIC'); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets of
a Fund (taken at market value at the time of each investment) in certificates of
deposit issued by banks and savings and loan associations with assets of less
than $1 billion if the principal amount of each such certificate of deposit is
fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
commercial paper (including variable amount master demand notes and insurance
company funding agreements), which refers to short-term, unsecured promissory
notes issued by corporations, partnerships, trusts and other entities to finance
short-term credit needs and by trusts issuing asset-backed commercial paper.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. Variable amount master demand notes
are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer and
a commercial bank acting as agent for the payees of such notes, whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes. Because variable amount master notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender may not
sell or otherwise transfer the note without the borrower's consent. Such notes
provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis, in accordance with a stated short-term
interest rate benchmark. Because the interest rate of a variable amount master
note is adjusted no less often than every 60 days and since repayment of the
note may be demanded at any time, the Investment Adviser values such a note in
accordance with the amortized cost basis described under 'Determination of Net
Asset Value' in the Statement of Additional Information.
For temporary or defensive purposes, the Global Bond Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may also invest in U.S. dollar-denominated commercial paper
and other short-term obligations issued by foreign entities. Such investments
are subject to quality standards similar to those applicable to investments in
comparable obligations of domestic issuers. Investments in foreign entities in
general involve the same risks as those described in the Statement of Additional
Information in connection with investments in Eurodollar, Yankeedollar and
foreign bank obligations.
<PAGE>
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. If the seller were to
default on its obligation to repurchase a security under a repurchase agreement
or purchase and sale contract and the market value of the underlying security at
such time was less than the Fund had paid to the seller, the Fund would realize
a loss. Repurchase agreements 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.
<PAGE>
B--Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any period of time may be
small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other market shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PORTFOLIO STRATEGIES INVOLVING OPTIONS, FUTURES AND FOREIGN EXCHANGE
TRANSACTIONS
Options on Portfolio Securities. Each of the Basic Value Focus, Global
Bond Focus, Global Utility Focus, International Equity Focus, Equity Growth and
Developing Capital Markets Focus Funds may from time to time sell ('write')
covered call options on its portfolio securities in which it may invest and may
engage in closing purchase transactions with respect to such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy particular securities held by the Fund at a specified
future date
<PAGE>
and at a price set at the time of the contract. The principal reason for writing
call options is to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the securities alone. By writing
covered call options, a Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining. The Basic Value Focus Fund may not write covered
call options on underlying securities exceeding 15% of the value of its total
assets.
Each of the Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets Focus Funds also may write put options,
which give the holder of the option the right to sell the underlying security to
the Fund at the stated exercise price. The Fund will receive a premium for
writing a put option which increases the Fund's return. A Fund will write only
covered put options which means that so long as the Fund is obligated as the
writer of the option, it will, through its custodian, have deposited and
maintained cash, cash equivalents, U.S. Government securities or other high
grade liquid debt or equity securities denominated in U.S. dollars or non-U.S.
currencies with a securities depository with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise for as long as
the option is outstanding. A Fund may engage in closing transactions in order to
terminate put options that it has written.
The Global Bond Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds may purchase put options on portfolio
securities. In return for payment of a premium, the purchase of a put option
gives the holder thereof the right to sell the security underlying the option to
another party at a specified price until the put option is closed out, expires
or is exercised. Each Fund will only purchase put options to seek to reduce the
risk of a decline in value of the underlying security. The total return on the
security may be reduced by the amount of the premium paid for the option by the
Fund. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Each of the Funds may engage in options transactions on exchanges and in
the over-the-counter ('OTC') markets. In general, exchange traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See 'Over-the-Counter Options'
below for information as to restrictions on the use of OTC options.
Options on Stock Indices. The Global Bond Focus, International Equity
Focus and Developing Capital Markets Focus Funds may purchase and write call
options and put options on stock indices traded on a national securities
exchange to seek to reduce the general market risk of their securities or
specific industry sectors which the Fund invests in. Options on indices are
similar to options on securities except that, on exercise or assignment,
<PAGE>
the parties to the contract pay or receive an amount of cash equal to the
difference between the closing value of the index and the exercise price of the
option times a specified multiple. The Funds may invest in index options based
on a broad market index, e.g., the S&P 500, or on a narrow index representing an
industry or market segment, e.g., the Amex Oil & Gas Index. The effectiveness of
a hedge employing stock index options will depend primarily on the degree of
correlation between movements in the value of the index underlying the option
and in the portion of the portfolio being hedged. For further discussion
concerning such options, see 'Risk Factors in Options, Futures and Currency
Transactions' below and the Company's Statement of Additional Information.
Stock Index and Financial Futures Contracts. The Global Bond Focus,
International Equity Focus and Developing Capital Markets Focus Funds may
purchase and sell stock index futures contracts and financial futures contracts
to hedge their portfolios. The Funds may sell stock index futures contracts and
financial futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of the Funds' securities
portfolios that might otherwise result. When the Funds are not fully invested in
the securities market and anticipate a significant market advance, they may
purchase stock index or financial futures in order to gain rapid market exposure
that may in part or entirely offset increases in the cost of securities that the
Funds intend to purchase. A stock index or financial futures contract is a
bilateral agreement pursuant to which the Funds will agree to buy or deliver at
settlement an amount of cash equal to a dollar multiplied by the difference
between the value of a stock index or financial instrument at the close of the
last trading day of the contract and the price at which the futures contract is
originally entered into. The Funds may engage in transactions in stock index
futures contracts based on broad market indexes or on indexes on industry or
market segments. A Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests. As
with stock index options, the effectiveness of the Funds' hedging strategies
depends 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 Bond Focus, Global Utility
Focus, International Equity Focus and Developing Capital Markets Focus Funds are
authorized to deal in forward foreign exchange contracts between currencies of
the different countries in which they will invest, including multinational
currency units, as a hedge against possible variations in the foreign exchange
rate between these currencies and the United States dollar. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price at the time of the contract.
The dealings of the Funds in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Funds accruing in connection with the
purchase and sale of their portfolio securities, the sale and redemption of
shares of the Funds or the payment of dividends and distributions by the Funds.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Funds will not speculate in forward foreign exchange. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Funds to
hedge against a devaluation that is so generally anticipated that the Funds are
not able to contract to sell the currency at a price above the devaluation level
they anticipate.
The Funds are also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency
<PAGE>
options provide the holder thereof the right to buy or to sell a currency at a
fixed price on or before a future date. A futures contract on a foreign currency
is an agreement between two parties to buy and sell a specified amount of a
currency for a set price on a future date. Such transactions may be effected
with respect to hedges on non-U.S. dollar-denominated securities (including
securities denominated in multi-national currency units) owned by the Funds,
sold by the Funds but not yet delivered, or committed or anticipated to be
purchased by the Funds. As an illustration, the Funds may use such techniques to
hedge the stated value in United States dollars of an investment in a Japanese
yen-denominated security. In such circumstances, for example, the Funds may
purchase a foreign currency put option enabling them to sell a specified amount
of yen for dollars at a specified price by a future date. To the extent the
hedge is successful, a loss in the value of the yen relative to the dollar will
tend to be offset by an increase in the value of the put option. To offset, in
whole or in part, the cost of acquiring such a put option, the Funds may also
sell a call option which, if exercised, requires it to sell a specified amount
of yen for dollars at a specified price by a future date (a technique called a
'straddle'). By selling such call option in this illustration, the Funds give up
the opportunity to profit without limit from increases in the relative value of
the yen to the dollar.
The Funds will not speculate in foreign currency options or futures.
Accordingly, the Funds will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which they own, the
expected acquisition price of securities which they have committed or anticipate
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Funds but not yet delivered, the proceeds
thereof in its denominated currency. Further, if a security with respect to
which a currency hedging transaction has been executed should subsequently
decrease in value, the Funds will direct their custodian to segregate liquid,
high-grade debt securities having a market value equal to such decrease in
value, less any initial or variation margin held in the account of their broker.
As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
Options on Futures Contracts. The Global Bond Focus, Global Utility Focus
and International Equity Focus Funds may also purchase and write call and put
options on futures contracts in connection with their hedging activities.
Generally, these strategies are utilized under the same market conditions (i.e.,
conditions relating to specific types of investments) in which the Funds enter
into futures transactions. The Funds may purchase put options or write call
options on futures contracts rather than selling the underlying futures contract
in anticipation of a decline in the equities markets or in the value of a
foreign currency. Similarly, the Funds may purchase call options, or write put
options on futures contracts, as a substitute for the purchase of such futures
to hedge against the increased cost resulting from appreciation of equity
securities or in the currency in which securities which the Funds intend to
purchase are denominated. Limitations on transactions in options on futures
contracts are described below.
Over-the-Counter Options. The Global Bond Focus, Global Utility Focus,
International Equity Focus and Developing Capital Markets Focus Funds may engage
in options transactions in the over-the-counter markets. In general,
over-the-counter ('OTC') options are two-party contracts with price and terms
negotiated by the buyer and seller, whereas exchange-traded options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options include put and call options on
individual securities, cash settlement options on groups of securities, and
options on currency. The Funds may engage in an OTC options transaction only if
they are permitted to enter into transactions in exchange-traded options of the
same general type. The Funds will engage in OTC options only
<PAGE>
with financial institutions which have a capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Company require that each of the
Global Bond Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds' futures transactions constitute bona
fide hedging transactions or, with respect to non-hedging transactions, that the
Fund not enter into such transactions, if, immediately thereafter, the sum of
the amount of initial margin deposits on the respective Fund's existing non-
hedging futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
When a Fund purchases a futures contract, a call option thereon or writes a
put option, an amount of cash and cash equivalents will be deposited in a
segregated account with the Company's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby ensuring
that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission
which exempts the Company from certain provisions of the Investment Company Act
of 1940 in connection with transactions involving futures contracts and options
thereon.
Risk Factors in Options, Futures and Currency Transactions. A Fund's
ability to effectively hedge all or a portion of its portfolio of securities
through transactions in options on stock indices, 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 judgement 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.
<PAGE>
PROSPECTUS
DECEMBER 9, 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o 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 sixteen separate funds. Shares of four of the funds are offered hereby
(hereinafter referred to as the 'Funds' or individually as a 'Fund'). A separate
class of common stock ('Common Stock') is issued for each Fund. The Company's
investment adviser is Merrill Lynch Asset Management, L.P. (the 'Investment
Adviser').
The shares of the Funds are sold to certain insurance companies ('Insurance
Companies'), including Insurance Companies owned by Merrill Lynch & Co., Inc.,
for certain separate accounts ('Separate Accounts') to fund benefits under
variable life insurance contracts and/or variable annuities contracts
('Contracts') issued by the Insurance Companies. The Insurance Companies will
redeem shares to the extent necessary to provide benefits under the respective
Contracts or for such other purposes as may be consistent with the respective
Contracts. The investment objectives of the Funds, each of whose name is
preceded by 'Merrill Lynch,' are as follows:
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income
by investing in securities, primarily equities that management of the Fund
believes are undervalued and therefore represent basic investment value.
DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the
highest possible current income consistent with the foregoing objectives by
investing in short-term domestic money market securities.
GLOBAL STRATEGY FOCUS FUND. High total investment return by investing
primarily in a portfolio of equity and fixed-income securities of U.S. and
foreign issuers.
HIGH CURRENT INCOME FUND. As high a level of current income as is
consistent with its investment policies and prudent investment management,
and capital appreciation to the extent consistent with the foregoing
objective. The Fund invests principally in fixed-income securities that are
rated, in the lower rating categories of the established rating services or
in unrated securities of comparable quality. For more information on the
Funds' investment objectives and policies, please see 'Investment Objectives
and Policies of the Funds,' page 7.
THE DOMESTIC MONEY MARKET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
AN INVESTMENT IN THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND INVESTS OR MAY
INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS 'JUNK BONDS'), WHICH INVOLVE
SPECIAL RISKS. SEE 'INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF
HIGH YIELD SECURITIES.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY
THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED DECEMBER 9, 1996, AND AVAILABLE ON REQUEST AND WITHOUT CHARGE
BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH
ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................................................... 3
The Insurance Companies.................................................................................... 7
Domestic Money Market Fund Yield Information............................................................... 7
Investment Objectives and Policies of the Funds............................................................ 7
Directors.................................................................................................. 17
Investment Adviser......................................................................................... 18
Portfolio Transactions and Brokerage....................................................................... 19
Purchase of Shares......................................................................................... 20
Redemption of Shares....................................................................................... 20
Dividends, Distributions and Taxes......................................................................... 20
Performance Data........................................................................................... 21
Additional Information..................................................................................... 22
Appendix A................................................................................................. A-1
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Company's Funds. With the exception of the six month
period ending June 30, 1996, the information in the table has been audited by
Deloitte & Touche LLP, independent auditors, in connection with their annual
audits of the Company's financial statements. Financial statements for the year
ended December 31, 1995 and the independent auditors' report thereon appear in
the Statement of Additional Information. The information in the following table
should be read in conjunction with the financial statements.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
-------------------------------------------------------------------------
FOR THE FOR THE
SIX MONTHS FOR THE YEAR ENDED PERIOD JULY
ENDED JUNE DECEMBER 31, 1, 1993+ TO
30, ----------------------------------------- DECEMBER 31,
1996 1995 1994 1993
---------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 13.10 $ 11.10 $ 10.95 $ 10.00
-------- -------- -------- --------
Investment income--net............. .08 .18 .17 .04
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net....... 1.28 2.49 .08 .91
-------- -------- -------- --------
Total from investment operations... 1.36 2.67 .25 .95
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net........... (.10) (.19) (.10) --
Realized gain on
investments--net............... (.72) (.48) -- --
-------- -------- -------- --------
Total dividends and
distributions.................... (.82) (.67) (.10) --
-------- -------- -------- --------
Net asset value, end of period..... $ 13.64 $ 13.10 $ 11.10 $ 10.95
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................ 11.03%# 25.49% 2.36% 9.50%#
-------- -------- -------- --------
-------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... .64%* .66% .72% .86%*
-------- -------- -------- --------
-------- -------- -------- --------
Investment income--net............. 1.33%* 1.68% 2.08% 1.69%*
-------- -------- -------- --------
-------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)....................... $397,189 $306,463 $164,307 $ 47,207
-------- -------- -------- --------
-------- -------- -------- --------
Portfolio turnover................. 37.28% 74.10% 60.55% 30.86%
-------- -------- -------- --------
-------- -------- -------- --------
Average commission rate paid##..... $ .0552 -- -- --
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
SIX MONTHS FOR THE YEAR ENDED DECEMBER 31, FEBRUARY 20, 1992+
ENDED -------------------------------- TO DECEMBER 31,
JUNE 30, 1996 1995 1994 1993 1992
------------- -------- -------- -------- -------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- -------- -------- -------- -------
Investment income--net....................... .0248 .0547 .0386 .0302 .0302
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net.......................... (.0010) .0012 (.0007) .0005 .0013
--------- -------- -------- -------- -------
Total from investment operations............. .0238 .0559 .0379 .0307 .0315
--------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net..................... (.0248) (.0547) (.0386) (.0302) (.0302)
Realized gain on investments--net.......... --# (.0002) -- (.0005) (.0010)
--------- -------- -------- -------- -------
Total dividends and distributions............ (.0248) (.0549) (.0386) (.0307) (.0312)
--------- -------- -------- -------- -------
Net asset value, end of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 4.95%* 5.65% 3.94% 3.10% 3.65%*
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............... .54%* .55% .50% .36% .32%*
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
Expenses..................................... .54%* .55% .57% .63% .88%*
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
Investment income--net, and realized gain
(loss) on investments--net................. 4.97%* 5.50% 4.02% 3.03% 3.48%*
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 275,604 $303,912 $363,199 $170,531 $41,128
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Amount is less than $.0001 per share.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<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
FOR THE PERIOD
SIX MONTHS FOR THE YEAR ENDED FEBRUARY 28,
ENDED DECEMBER 31, 1992+ TO
JUNE 30, ---------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
---------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00
--------- -------- -------- -------- --------
Investment income--net...................... .18 .39 .30 .16 .13
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net......................... .31 .82 (.48) 1.96 .13
--------- -------- -------- -------- --------
Total from investment operations............ .49 1.21 (.18) 2.12 .26
--------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................... (.29) (.39) (.21) (.17) (.04)
Realized gain on investments--net......... -- -- (.04) -- --
In excess of realized gain on
investments--net.......................... -- --++ (.01) -- --
--------- -------- -------- -------- --------
Total dividends and distributions........... (.29) (.39) (.26) (.17) (.04)
--------- -------- -------- -------- --------
Net asset value, end of period.............. $ 12.75 $ 12.55 $ 11.73 $ 12.17 $ 10.22
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 4.03%## 10.60% (1.46)% 21.03% 2.62%##
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............. .71%* .72% .77% .88% 1.25%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Expenses.................................... .71%* .72% .77% .88% 1.35%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Investment income--net...................... 2.87%* 3.33% 2.85% 2.41% 2.66%*
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $ 550,528 $540,242 $515,407 $269,627 $ 15,527
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Portfolio turnover.......................... 80.64% 27.23% 21.03% 17.07% 14.47%
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Average commission rate paid###............. $ .0290 -- -- -- --
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
</TABLE>
- ------------------
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# On December 6, 1996, the Global Strategy Focus Fund acquired substantially
all of the assets and assumed substantially all the liabilities of the
Flexible Strategy Fund, a separate Fund of the Company.
## Aggregate total investment return.
### For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The average commission rate paid with respect to
a fiscal year is calculated by dividing (i) the total dollar amount of
commissions paid by the Fund during such fiscal year, by (ii) the total
number of equity securities purchased and sold during such fiscal year for
which commissions were paid by the Fund.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
----------------------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------- -------- -------- -------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55
--------- -------- -------- -------- ------- ------ ------ ------- -------
Investment income--net........ .52 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.11) .65 (1.47) .95 .90 2.10 (2.08) (.64) .20
--------- -------- -------- -------- ------- ------ ------ ------- -------
Total from investment
operations................... .41 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41
--------- -------- -------- -------- ------- ------ ------ ------- -------
Less dividends and
distributions:
Investment income--net....... (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11)
Realized gain on
investments--net........... -- -- -- -- -- -- -- -- --
--------- -------- -------- -------- ------- ------ ------ ------- -------
Total dividends and
distributions................ (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11)
--------- -------- -------- -------- ------- ------ ------ ------- -------
Net asset value, end of
period....................... $ 11.13 $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85
--------- -------- -------- -------- ------- ------ ------ ------- -------
--------- -------- -------- -------- ------- ------ ------ ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 3.73%# 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87%
--------- -------- -------- -------- ------- ------ ------ ------- -------
--------- -------- -------- -------- ------- ------ ------ ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... .53%* .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07%
--------- -------- -------- -------- ------- ------ ------ ------- -------
--------- -------- -------- -------- ------- ------ ------ ------- -------
Investment income--net........ 9.40%* 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22%
--------- -------- -------- -------- ------- ------ ------ ------- -------
--------- -------- -------- -------- ------- ------ ------ ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $ 383,818 $356,352 $255,719 $163,428 $26,343 $9,649 $8,106 $12,942 $13,960
--------- -------- -------- -------- ------- ------ ------ ------- -------
--------- -------- -------- -------- ------- ------ ------ ------- -------
Portfolio turnover............ 28.32% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91%
--------- -------- -------- -------- ------- ------ ------ ------- -------
--------- -------- -------- -------- ------- ------ ------ ------- -------
<CAPTION>
HIGH CURRENT
INCOME FUND
-----------------
FOR THE YEAR
ENDED
DECEMBER 31,
----------------
1987 1986
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 11.42 $ 11.39
------- -------
Investment income--net........ 1.23 1.25
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............ (.79) .03
------- -------
Total from investment
operations................... .44 1.28
------- -------
Less dividends and
distributions:
Investment income--net....... (1.23) (1.25)
Realized gain on
investments--net........... (.08) --
------- -------
Total dividends and
distributions................ (1.31) (1.25)
------- -------
Net asset value, end of
period....................... $ 10.55 $ 11.42
------- -------
------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................ 3.82% 11.74%
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... 1.01% 1.12%
------- -------
------- -------
Investment income--net........ 10.88% 10.65%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $13,075 $12,577
------- -------
------- -------
Portfolio turnover............ 56.07% 22.44%
------- -------
------- -------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# Aggregate total investment return.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in four Funds to certain separate
accounts (the 'Separate Accounts') of certain Insurance Companies to fund
benefits under the Contracts. Those four Funds are: the Basic Value Focus Fund,
Domestic Money Market Fund, Global Strategy Focus Fund, and High Current Income
Fund. Through separate Prospectuses, the Company offers shares in some or all of
its funds to certain other Separate Accounts of other Insurance Companies to
fund benefits under variable life and variable annuity Contracts issued by them.
The right of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only in
the Contract. The Contract is described in the Prospectus for each Contract.
That Prospectus describes the relationship between increases or decreases in the
net asset value of shares of a Fund, and any distributions on such shares, and
the benefits provided under a Contract. The Prospectus for the Contracts also
describes various fees payable to the Insurance Companies and charges to the
Separate Accounts made by the Insurance Companies with respect to the Contracts.
Because shares of the Funds will be sold only to the Insurance Companies for the
Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus
refer to the Insurance Companies.
DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Domestic Money Market Fund for
the seven-day period ended December 31, 1995, computed to include and exclude
realized and unrealized gains and losses, and information as to the compounded
annualized yield, excluding gains and losses, for the same periods. The yield
quotations may be of limited use for comparative purposes because they do not
reflect charges imposed at the Separate Account level which, if included, would
decrease the yield.
<TABLE>
<CAPTION>
DOMESTIC MONEY
MARKET FUND
--------------
<S> <C>
Annualized Yield:
Including gains and losses................................................. 5.28%
Excluding gains and losses................................................. 5.28%
Compounded Annualized Yield.................................................. 5.42%
Average maturity of portfolio at end of period............................... 79 days
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective which it
pursues through separate investment policies as described below. The differences
in objectives and policies among the Funds can be expected to affect the return
of each Fund and the degree of market and financial risk to which each Fund is
subject. Each Fund is classified as 'diversified,' as defined in the Investment
Company Act of 1940 (the 'Investment Company Act'), except for the Global
Strategy Focus Fund, which is classified as 'nondiversified.' The investment
objectives and classification of each Fund may not be changed without the
<PAGE>
approval of the holders of a majority of the outstanding shares of each Fund
affected. The investment objectives and policies of each Fund are discussed
below.
Fixed Income Security Ratings. No Fund other than the High Current Income
Fund invests in fixed-income securities which are rated below investment grade
(i.e., securities rated Ba or below by Moody's Investors Service, Inc.
('Moody's') or BB or below by Standard & Poor's Rating Group ('Standard &
Poor's')). However, securities purchased by a Fund may subsequently be
downgraded. Such securities may continue to be held and will be sold only if, in
the judgement of the Investment Adviser, it is advantageous to do so. Securities
in the lowest category of investment grade debt securities may have speculative
characteristics which may lead to weakened capacity to pay interest and
principal during periods of adverse economic conditions. See Appendix A for a
fuller description of corporate bond ratings.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a discount, either from book value or historical
price-earnings ratios, or seem capable of recovering from temporarily out of
favor considerations. Particular emphasis is placed on securities which provide
an above average dividend return and sell at a below-average price-earnings
ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates and
depress prices of securities in unfavorable climates. Based on this premise,
management believes that favorable changes in market prices are more likely to
begin when securities are out of favor, earnings are depressed, price-earnings
ratios are relatively low, investment expectations are limited, and there is no
real general interest in the particular security or industry involved. On the
other hand, management believes that negative developments are more likely to
occur when investment expectations are generally high, stock prices are
advancing or have advanced rapidly, price-earnings ratios have been inflated,
and the industry or issue continues to gain new investment acceptance on an
accelerated basis. In other words, management believes that market prices of
securities with relatively high price-earnings ratios are more susceptible to
unexpected adverse developments while securities with relatively low
price-earnings ratios are more favorably positioned to benefit from favorable,
but generally unanticipated, events. This investment policy departs from
traditional philosophy. Management of the Fund believes that the market risk
involved in this policy is moderated somewhat by an emphasis on securities with
above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation of
the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities rated
investment grade and utilize covered call options with respect to portfolio
securities as described below and in the Statement of Additional Information. It
reserves the right as a defensive measure to hold other types of securities,
including U.S. Government and Government agency securities, money market
securities or other fixed-income securities deemed by the Investment Adviser to
be consistent with a defensive posture, or
<PAGE>
cash, in such proportions as, in the opinion of management, prevailing market or
economic conditions warrant. The Fund may invest up to 10% of its total assets,
taken at market value at the time of acquisition, in the securities of foreign
issuers.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in
short-term domestic money market securities. The Fund will invest in short-term
U.S. Government securities, U.S. Government agency securities, domestic
depository institution money instruments (including certificates of deposit,
bankers' acceptances, time deposits and bank notes), short-term debt securities
(such as commercial paper and insurance company funding agreements), variable
amount master demand notes, repurchase and reverse repurchase agreements of U.S.
issuers and other money market instruments. As a matter of fundamental policy,
which may be changed only with the approval of a majority of the Domestic Money
Market Fund's outstanding voting securities, as defined in the Investment
Company Act, the Fund may not purchase securities of foreign issuers (including
Eurodollar or Yankeedollar bank obligations). U.S. Government securities may be
purchased on a forward commitment basis. The types of money market securities in
which the Domestic Money Market Fund may invest are described more fully in
Appendix A to this Prospectus. The Domestic Money Market Fund will be subject to
portfolio maturity, quality and diversification restrictions discussed below
under 'Money Market Fund Portfolio Restrictions.'
GLOBAL STRATEGY FOCUS FUND
The investment objective of the Global Strategy Focus Fund is to seek high
total investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of U.S. and foreign
issuers. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of
non-dollar-denominated securities and other assets and liabilities resulting
from currency fluctuations. Investing on an international basis involves special
considerations. See 'Other Portfolio Strategies--Foreign Securities.'
The Global Strategy Focus Fund seeks to achieve its objective by investing
primarily in the securities of issuers located in the United States, Canada,
Western Europe and the Far East. There are no prescribed limits on the
geographical allocation of the Fund among these regions. Such allocation will be
made primarily on the basis of the anticipated total return from investments in
the securities of issuers wherever located, considering such factors as the
condition and growth potential of the various economies and securities markets
and the issuers domiciled therein, anticipated movements in interest rates in
the various capital markets and in the value of foreign currencies relative to
the U.S. dollar, tax considerations and economic, social, financial, national
and political factors which may affect the climate for investing within such
securities markets. When, in the judgement of the Investment Adviser, economic
or market conditions warrant, the Fund reserves the right to concentrate its
investments in one or more capital markets, including the United States. For
additional information, concerning the risks of investing in foreign securities,
see 'Other Portfolio Strategies--Foreign Securities.'
The equity and convertible preferred securities in which the Global
Strategy Focus Fund may invest are primarily securities issued by quality
companies. Generally, the characteristics of such companies include a strong
balance sheet, good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management.
<PAGE>
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be primarily those rated BBB or better by
Standard and Poor's or Baa or better by Moody's or of comparable quality. The
Fund may also invest in debt obligations issued or guaranteed by sovereign
governments, political subdivisions thereof (including states, provinces and
municipalities) or their agencies or instrumentalities or issued or guaranteed
by international organizations designated or supported by governmental entities
to promote economic reconstruction or development ('supranational entities')
such as the International Bank for Reconstruction (the 'World Bank') and the
European Coal and Steel Community. Investments in securities of supranational
entities are subject to the risk that member governments will fail to make
required capital contributions and that a supranational entity will thus be
unable to meet its obligations.
When market or financial considerations warrant, the Global Strategy Focus
Fund may invest as a temporary defensive measure up to 100% of its assets in
U.S. Government or Government agency securities issued or guaranteed by the
United States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Investment Adviser to
be consistent with a defensive posture, or may hold its assets in cash.
The Global 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 'Other Portfolio Strategies--Portfolio Strategies
Involving Options, Futures and Foreign Exchange Transactions.'
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund is to
obtain the highest level of current income that is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its primary objective.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard and Poor's), or in unrated securities of comparable
quality. Securities rated below Baa by Moody's and below BBB by Standard and
Poor's are commonly known as 'junk bonds.' Additional information regarding
various bond ratings is set forth in Appendix A to the Prospectus. The market
price of fixed-income securities such as those purchased by the Fund is affected
by changes in interest rates generally. As interest rates rise, the market value
of fixed-income securities will fall, adversely affecting the net asset value of
the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater market
fluctuations and risks of loss of income and principal than lower-yielding,
higher-rated fixed-income securities. Such securities are generally issued by
corporations which are not as financially secure or as creditworthy as issuers
of higher-rated securities. There is, accordingly, a greater risk that the
issuers of higher-yielding securities will not be able to pay principal and
interest on such securities, especially during periods of adverse economic
conditions. Because investment in such high-yield securities entails relatively
greater risk of loss of income or principal, an investment in the High Current
Income Fund may not be appropriate as the exclusive investment to fund the
Contracts for all Contract Owners. See 'Risks of High Yield Securities.'
<PAGE>
Selection and supervision by the management of the Company of investments
in lower-rated fixed-income securities involves continuous analysis of
individual issuers, general business conditions and other factors which may be
too time consuming or too costly for the average investor. The furnishing of
these services does not, of course, guarantee successful results. The analysis
of issuers may include, among other things, historic and current financial
condition, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management, responsiveness
to business conditions, credit standing, and current and anticipated results of
operations. Analysis of general business conditions and other factors may
include anticipated changes in economic activity and interest rates, the
availability of new investment opportunities, and the economic outlook for
specific industries. While the Investment Adviser considers as one factor in its
credit analysis the ratings assigned by the rating services, the Investment
Adviser performs its own independent credit analysis of issuers and
consequently, the Fund may invest, without limit, in unrated securities if such
securities offer, in the opinion of the Investment Adviser, a relatively high
yield without undue risk. As a result, the High Current Income Fund's ability to
achieve its investment objective may depend to a greater extent on the
Investment Adviser's own credit analysis than the Funds which invest in
higher-rated securities. Although the High Current Income Fund will invest
primarily in lower-rated securities, it will not invest in securities rated Ca
or lower by Moody's and CC or lower by Standard and Poor's unless the Investment
Adviser believes that the financial condition of the issuer or the protection
afforded to the particular securities is stronger than would otherwise be
indicated by such low ratings. However, securities purchased by the Fund may
subsequently be downgraded. Such securities may continue to be held and will be
sold only if, in the judgement of the Investment Adviser, it is advantageous to
do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that the
risk of loss of income and principal may be substantially reduced with only a
relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending upon
the judgement of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. It is anticipated that under normal
circumstances more than 90% of the Fund's assets will be invested in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. Although it is expected that, in general, the
Fund will not invest in common stocks, rights or other equity securities, it
will acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in connection with an actual or proposed conversion or exchange of
fixed-income securities. In addition, under unusual market or economic
conditions, the High Current Income Fund for defensive purposes may invest up to
100% of its assets in U.S. Government or Government agency securities, money
market securities or other fixed income securities deemed by the Investment
Adviser to be consistent with a defensive posture, or may hold its assets in
cash. The yield on such securities may be lower than the yield on lower-rated
fixed-income securities.
<PAGE>
The table below shows the average monthly dollar-weighted market value, by
Standard and Poor's rating category, of the securities held by the Fund during
the year ended December 31, 1995.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
- -------------------------------------------------------------------------- ----- --------
<S> <C> <C>
BBB....................................................................... 2.5% 2.6%
BB........................................................................ 32.1 34.0
B......................................................................... 50.0 53.0
CCC....................................................................... 2.1 2.4
NR**...................................................................... 7.2 8.0
--------
100.0%
</TABLE>
- ------------------
* A description of corporate bond ratings of Standard & Poor's is set forth in
Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any other organizations.
NON-DIVERSIFIED FUNDS
The Global Strategy Focus Fund is classified as a non-diversified
investment company under the Investment Company Act. However, the Fund will have
to limit its investments to the extent required by the diversification
requirements applicable to regulated investment companies under the Internal
Revenue Code. To qualify as a regulated investment company, a Fund, at the close
of each fiscal quarter, may not have more than 25% of its total assets invested
in the securities (except obligations of the U.S. Government, its agencies or
instrumentalities) of any one issuer and with respect to 50% of its assets, (i)
may not have more than 5% of its total assets invested in the securities of any
one issuer and (ii) may not own more than 10% of the outstanding voting
securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
MONEY MARKET FUND PORTFOLIO RESTRICTIONS
For purposes of the investment policies of the Domestic Money Market Fund,
the Company defines short-term money market securities as securities having a
maturity of no more than 762 days (25 months) in the case of U.S. Government and
agency securities and no more than 397 days (13 months) in the case of all other
securities. Management of the Company expects that substantially all the assets
of the Domestic Money Market Fund will be invested in securities maturing in
less than one year, but at times some portion may have maturities of up to 25
months. For these purposes, the maturity of a variable rate security is deemed
to be the next coupon date on which the interest rate is adjusted. The
dollar-weighted average maturity of the Fund's portfolio assets will not exceed
90 days.
<PAGE>
The Domestic Money Market Fund's investments in short-term debt and
depository institution money instruments will be rated, or will be issued by
issuers who have been rated, in one of the two highest rating categories for
short-term debt obligations by a nationally recognized statistical rating
organization (an 'NRSRO') or, if not rated, will be of comparable quality as
determined by the Directors of the Company. The Fund's investments in corporate
bonds and debentures (which must have maturities at the date of purchase of 397
days (13 months) or less) will be in issuers which have received from an NRSRO a
rating, with respect to a class of short-term debt obligations that is
comparable in priority and security with the investment, in one of the two
highest rating categories for short-term obligations or, if not rated, are of
comparable quality as determined by the Directors of the Company. Currently,
there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services, Inc., IBCA
Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and Thomson
BankWatch.
A regulation of the Securities and Exchange Commission (the 'SEC') limits
investments by the Domestic Money Market Fund in securities issued by any one
issuer (other than the U.S. Government, its agencies or instrumentalities)
ordinarily to not more than 5% of its total assets, or in the event that such
securities do not have the highest rating, not more than 1% of its total assets.
In addition, this regulation requires that not more than 5% of the Fund's total
assets be invested in securities that have a rating lower than the highest
rating.
OTHER PORTFOLIO STRATEGIES
Restricted Securities. Each of the Funds is subject to limitations on the
amount of illiquid securities they may purchase; however, each Fund may purchase
without regard to that limitation certain securities that are not registered
under the Securities Act of 1933, as amended (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 the value of a securities
index or a basket of securities, or based on the relative changes of two
indices. In addition, certain of the Funds may invest in securities the
potential return of which is based inversely on the change in an index. For
example, a Fund may invest in securities that pay a higher rate of interest when
a particular index decreases and pay a lower rate of interest (or do not fully
return principal) when the value of the index increases. If a Fund invests in
such securities, it may be subject to reduced or eliminated interest payments or
loss of principal in the event of an adverse movement in the relevant index or
indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
<PAGE>
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Company believes that indexed and inverse securities may provide portfolio
management flexibility that permits a Fund to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Foreign Securities. The Basic Value Focus, Global Strategy Focus and High
Current Income Funds may invest in securities of foreign issuers. Investments in
foreign securities, particularly those of non-governmental issuers, involve
considerations and risks which are not ordinarily associated with investing in
domestic issuers. These considerations and risks include changes in currency
rates, currency exchange control regulations, the possibility of expropriation,
the unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. If it should become necessary, a Fund
could encounter greater difficulties in invoking legal processes abroad than
would be the case in the United States. Transaction costs in foreign securities
may be higher. The operating expense ratio of a Fund investing in foreign
securities can be expected to be higher than that of an investment company
investing exclusively in United States securities because the expenses of the
Fund, such as custodial costs, are higher. In addition, net investment income
earned by a Fund on a foreign security may be subject to withholding and other
taxes imposed by foreign governments which will reduce a Fund's net investment
income. The Investment Adviser will consider these and other factors before
investing in foreign securities, and will not make such investments unless, in
its opinion, such investments will meet the standards and objectives of a
particular Fund. No Fund which may invest in foreign securities will concentrate
its investments in any particular country. The Global Strategy Focus Fund may
from time to time be substantially invested in non-dollar-denominated securities
of foreign issuers. A Fund's return on investments in non-dollar-denominated
securities may be reduced or enhanced as a result of changes in foreign currency
rates during the period in which the Fund holds such investments. Each Fund
other than the Basic Value Focus and Global Strategy Focus Funds will purchase
only securities issued in dollar denominations.
Each of the Funds which is permitted to invest in foreign securities may
from time to time invest in securities of foreign issuers in smaller capital
markets. Foreign investments in smaller capital markets involve risks not
involved in domestic investment, including fluctuations in foreign exchange
rates, future political and economic developments, different legal systems and
the existence or possible imposition of exchange controls or other foreign or
United States governmental laws or restrictions applicable to such investments.
These risks are often heightened for investments in small capital markets.
Because a Fund which invests in foreign securities will invest in securities
denominated or quoted in currencies other than the United States dollar, changes
in foreign currency exchange rates may affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments insofar
as United States investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets. These
forces are, in turn, affected by international balance of payments and other
economic and financial conditions, government intervention, speculation and
other factors. With respect to certain countries, there may be the possibility
of expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments which could affect
investment in those countries. In addition, certain foreign investments may be
subject to foreign withholding taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional
<PAGE>
investment measurements, such as price/earnings ratios, as used in the United
States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
a Fund which invests in these markets incurring additional costs and delays in
transporting and custodying such securities outside such countries. Delays in
settlement could result in temporary periods when assets of such a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. There is generally less government supervision and
regulation of exchanges, brokers and issuers in countries having smaller capital
markets than there is in the United States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government debtor,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole and the political constraints to which a
government debtor may be subject. Government debtors may default on their debt
and may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. Holders of government debt, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing and
emerging market countries are among the world's largest debtors to commercial
banks, other governments, international financial organizations and other
financial institutions. The issuers of the government debt securities in which a
Fund may invest have in the past experienced substantial difficulties in
servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain
<PAGE>
indebtedness. Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by negotiating new or
amended credit agreements.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries require governmental approval prior to investments by foreign persons,
or limit the amount of investment by foreign persons in a particular company, or
limit the investment by foreign persons to only a specific class of securities
of a company which may have less advantageous terms than securities of the
company available for purchase by nationals.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a Fund's
investments in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from 'securities related
activities,' as defined by the rules thereunder. These provisions may also
restrict a Fund's investments in certain foreign banks and other financial
institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash or securities issued or guaranteed by the U.S. Government which, while
the loan is outstanding, will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities plus accrued
interest. Such cash collateral will be invested in short-term securities, the
income from which will increase the return to the Fund.
Forward Commitments. Each of the Funds may purchase securities on a
when-issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be more
or less than its purchase price. A Fund entering into such transactions will
maintain a segregated account with its custodian of cash or liquid, high-grade
debt obligations in an aggregate amount equal to the amount of its commitments
in connection with such delayed delivery and purchase transactions.
Standby Commitment Agreements. The High Current Income Fund may from time
to time enter into standby commitment agreements. Such agreements commit the
Fund, for a stated period of time, to purchase a stated amount of a fixed income
security which may be issued and sold to the Fund at the option of the issuer.
The price and coupon of the security is fixed at the time of the commitment. At
the time of entering into the agreement the Fund is paid a commitment fee which
is typically approximately 0.5% of the aggregate purchase price of the security
which the Fund has committed to purchase. The Fund will at all times maintain a
segregated account with its custodian of cash or liquid equity or debt
securities in an amount equal to the purchase price of the securities underlying
the commitment. There can be no assurance that the securities subject to a
standby commitment will be issued, and the value of the security, if issued, on
the delivery date may be more or less than its purchase price.
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Basic Value Focus and Global Strategy Focus Funds may use
certain derivative instruments, including options and futures contracts, and may
purchase and sell foreign exchange. Transactions involving such instruments
expose a Fund to certain risks. Each Fund's use of these instruments and the
associated risks are described in detail in Appendix A attached to this
Prospectus.
<PAGE>
RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund may invest a substantial portion of its assets
in high yield, high risk securities or junk bonds, which are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial risk.
Issuers of junk bonds may be highly leveraged and may not have available to them
more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During recessionary periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the High Current Income Fund may invest normally do not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after the Fund purchases a particular security, in which case the Fund may
experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund will diversify its holdings among many issuers. However,
there can be no assurance that diversification will protect the Fund from
widespread defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated
fixed-income securities, so that adverse economic events may have a greater
impact on their prices and yields than on higher-rated fixed-income securities.
Zero coupon bonds and bonds which pay interest and/or principal in additional
bonds rather than in cash are especially volatile. Like higher-rated
fixed-income securities, junk bonds are generally purchased and sold through
dealers who make a market in such securities for their own accounts. However,
there are fewer dealers in this market, which may be less liquid than the market
for higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions (whether
or not based on economic fundamentals) may impair the liquidity of this market,
and may cause the prices the High Current Income Fund receives for its junk
bonds to be reduced, or the Fund may experience difficulty in liquidating a
portion of its portfolio when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Under such conditions, judgement may play a
greater role in valuing certain of the Fund's portfolio securities than in the
case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund. In addition, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on a
portfolio holding or to participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the High Current Income Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
<PAGE>
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be dependent
on expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities may
default on their sovereign debt.
Holders of sovereign debt, including the High Current Income Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to governmental entities. In the event of a default by a governmental
entity, there may be few or no effective legal remedies available to the Fund
and there can be no assurance the Fund will be able to collect on defaulted
sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an 'ordinarily prudent person.' In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that compliance
with these standards will not have any negative impact on the performance of any
of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
<PAGE>
DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not 'interested persons' of the Company as defined in the Investment Company
Act. The Directors of the Company are responsible for the overall supervision of
the operations of the Company and perform the various duties imposed on the
directors of investment companies by the Investment Company Act. The Board of
Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as follows:
ARTHUR ZEIKEL*--President of the Investment Adviser and its affiliate,
Fund Asset Management, L.P. ('FAM'); President and Director of Princeton
Services, Inc. ('Princeton Services'); Executive Vice President of Merrill
Lynch & Co., Inc. ('ML&Co.'); and Director of Merrill Lynch Funds
Distributor, Inc. (the 'Distributor').
WALTER MINTZ--Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN--Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Chairman of Fernwood Associates (financial
consultants).
JOE GRILLS--Member of the Committee on Investment of Employee Benefit
Assets of the Financial Executives Institute ('CIEBA'); Member of CIEBA's
Executive Committee; and Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund.
ROBERT S. SALOMON, JR.--Principal of STI Management (investment
adviser).
- ------------------
* Interested person, as defined in the Investment Company Act, of the Company.
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The general
partner of the Investment Adviser is Princeton Services, Inc., a wholly owned
subsidiary of Merrill Lynch & Co., Inc. The principal address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing
address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or
its affiliate, Fund Asset Management, L.P. ('FAM'), acts as the investment
adviser for over 130 other registered investment companies. The Investment
Adviser also offers portfolio management and portfolio analysis services to
individuals and institutions. In the aggregate, as of October 31, 1996, MLAM and
FAM had a total of approximately $217.6 billion in investment company and other
portfolio assets under management including accounts of certain affiliates of
FAM.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the Funds,
who consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the
Company (certain of which it may delegate to third parties) and is obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Agreements. The Investment Adviser has access to
the full range of the securities and economic research facilities of Merrill
Lynch.
During the Company's fiscal year ended December 31, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742, of which $1,414,380
related to the Basic Value Focus Fund (representing .60% of its average net
assets), $1,598,551 related to the Domestic Money Market Fund (representing .50%
of its average net assets), $3,348,535 related to the Global Strategy Focus Fund
(representing .65% of its average net assets), and $1,551,098 related to the
High Current Income Fund (representing .50% of its average net assets).
During the Company's fiscal year ended December 31, 1995, the total
operating expenses of the Company's Funds (including the advisory fees paid to
the Investment Adviser), before reimbursement of a portion of such expenses,
were as follows: $1,565,649 related to the Basic Value Focus Fund (representing
.66% of its average net assets), $1,768,774 related to the Domestic Money Market
Fund (representing .55% of its average net assets), $3,719,425 related to the
Global Strategy Focus Fund (representing .72% of its average net assets), and
$1,727,859 related to the High Current Income Fund (representing .55% of its
average net assets).
The Investment Advisory Agreements require the Investment Adviser to
reimburse the Company's Funds if and to the extent that in any fiscal year the
operating expenses of each Fund exceed the most restrictive expense limitations
then in effect under any state securities laws or published regulations
thereunder. Prior to the enactment of the National Securities Market Improvement
Act of 1996 on October 11, 1996 (the "Improvement Act"), the most restrictive
expense limitation required 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. As a result of the Improvement Act, the Investment Adviser will
no longer be subject to the foregoing expense limitation.
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
<PAGE>
'Reimbursement Agreements'), which is less than the expense limitations imposed
by state securities laws or published regulations thereunder. The reimbursement
agreements, dated April 30, 1985 and February 11, 1992, provide that any
expenses in excess of 1.25% of average daily net assets will be reimbursed to
the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA.
See 'Investment Advisory Arrangements' in the Statement of Additional
Information. MLLA sells certain Contracts described in the Prospectus for such
Contracts.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including Insurance Companies owned by ML&Co.,
pursuant to which the Investment Adviser compensates such companies for
administrative responsibilities relating to the Company which are performed by
such Insurance Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
Jacqueline Rogers has served as the Domestic Money Market Fund's Portfolio
Manager since October 1996, and is primarily responsible for the Fund's
day-to-day management. She has served as Vice President of MLAM since January
1986.
Thomas R. Robinson has served as the Global Strategy Focus Fund's Portfolio
Manager since November 1995, and is primarily responsible for the Fund's
day-to-day management. He has served as a Senior Portfolio Manager of MLAM since
November 1995.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and an employee
of the Investment Adviser since 1986.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act, persons affiliated with the Company are
prohibited from dealing with the Company as a principal in the purchase and sale
of the Company's portfolio securities unless an exemptive order allowing such
transactions is obtained from the SEC. Affiliated persons of the Company may
serve as its broker in over-the-counter transactions conducted on an agency
basis. The SEC has issued an order permitting the Company to conduct certain
principal transactions with respect to the Domestic Money Market Fund with
Merrill Lynch Government Securities Inc. and Merrill Lynch Money Markets Inc. in
U.S. Government and government agency securities, and certain other money market
securities, subject to certain terms and conditions. During the year ended
December 31, 1995, the Company engaged in 22 transactions pursuant to such order
involving $82.1 million of securities. For the year ended December 31, 1995, the
Company paid brokerage commissions of $5,789,335, of which $264,999 was paid to
Merrill Lynch.
PURCHASE OF SHARES
The Company will offer shares in the Funds, without sales charge, only for
purchase by the Insurance Companies for the Separate Accounts to fund benefits
under the Contracts. The Company continuously offers shares in each of its Funds
to the Insurance Companies at prices equal to the respective per share net asset
value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly owned
subsidiary of the Investment Adviser, acts as the distributor of the shares. Net
asset value is determined in the manner set forth below under 'Additional
Information--Determination of Net Asset Value.'
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to the conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market Fund, will consist of
all payments of dividends or interest received by such Fund less the estimated
expenses of such Fund (including fees payable to the Investment Adviser).
Dividends on the Domestic Money Market Fund are declared and reinvested
daily (as of June 1, 1996, declared daily and reinvested monthly) in additional
full and fractional shares of such Fund. Dividends from net
<PAGE>
investment income of the High Current Income Fund are declared and reinvested
monthly in additional full and fractional shares of the respective Funds at net
asset value. Dividends from net investment income of the Basic Value Focus and
Global Strategy Focus Funds are declared and reinvested at least annually in
additional full and fractional shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
'Code'). Under such provisions, a Fund will not be subject to federal income tax
on such part of its net ordinary income and net realized capital gains which it
distributes to shareholders. One of the requirements to qualify for treatment as
a regulated investment company under the Code is that a Fund, among other
things, derive less than 30% of its gross income in each taxable year from gains
(without deduction of losses) from the sale or other disposition of stocks,
securities and certain options, futures or forward contracts held for less than
three months. This requirement may limit the ability of certain Funds to dispose
of certain securities at times when management of the Company might otherwise
deem such disposition appropriate or desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make distributions
in amounts necessary to satisfy its distribution requirements under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send to
the Insurance Companies a written notice required by the Code designating the
amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the SEC.
<PAGE>
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the offering price per
share on the last day of the period. The yield for the 30-day period ending
December 31, 1995 was 10.05% for the High Current Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost. The yield and
total return quotations may be of limited use for comparative purposes because
they do not reflect charges imposed at the Separate Account level which, if
included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line
Composite Index, the Dow Jones Industrial Average, or performance data published
by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service
or contained in publications such as Morningstar Publications, Inc., Chase
Investment Performance Digest, Money Magazine, U.S. News & World Report,
Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Ibbotson Associates. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market Fund is computed by
dividing the sum of the value of the securities held by that Fund plus any cash
or other assets (including interest and dividends accrued) minus all liabilities
(including accrued expenses) by the total number of shares outstanding of that
Fund at such time, rounded to the nearest cent. Expenses, including the
investment advisory fees payable to the Investment Adviser, are accrued daily.
Because the net investment income of the Domestic Money Market Fund (including
realized and unrealized gains and losses on its portfolio securities) are
declared as a dividend each time the net income of the Fund is determined (see
'Dividends, Distributions and
<PAGE>
Taxes'), the net asset value per share of the Fund normally remains at $1.00 per
share immediately after each such determination and dividend declaration.
Securities held by each Fund will be valued as follows: Portfolio
securities which are traded on stock exchanges are valued at the last sale price
(regular way) as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
in the over-the-counter market prior to the time of valuation. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market,
and it is expected that for debt securities this ordinarily will be the
over-the-counter market. When a Portfolio writes a call option, the amount of
the premium received is recorded on the books as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options being traded in
the over-the-counter market, the last asked price. Options purchased are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the over-the-counter market, the last bid price. Futures
contracts are valued at settlement price at the close of the applicable
exchange. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. Securities held by the Domestic Money Market
Fund with a remaining maturity of 60 days or less are valued on an amortized
cost basis, unless particular circumstances dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
PricingSM Service ('MLSPS'), to value securities held by the High Current Income
Fund and to value bonds held by other of the Company's Funds. The Board of
Directors of the Company has examined the methods used by the pricing services
in estimating the value of securities held by the Funds and believes that such
methods will reasonably and fairly approximate the price at which those
securities may be sold and result in a good faith determination of the fair
value of such securities; however, there is no assurance that securities can be
sold at the prices at which they are valued. During the year ended December 31,
1995, High Current Income Fund paid MLSPS $10,932.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. Operations of the High
Current Income Fund commenced on April 20, 1982. The Domestic Money Market and
Global Strategy Focus Funds commenced operations on February 20 and February 28,
1992, respectively. The Basic Value Focus Fund commenced operations on July 1,
1993. The authorized capital stock of the Company consists of 3,400,000,000
shares of Common Stock, par value $0.10 per share. The shares of Common Stock
are divided into sixteen 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 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 Global Bond 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 Government Bond Fund Common Stock and Merrill Lynch Index
500 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
<PAGE>
Contract Owners, offer and sell shares of one or more of such classes. Each
class consists of 100,000,000 shares except for Domestic Money Market Fund
Common Stock which consists of 1,300,000,000 shares, Reserve Assets Fund Common
Stock which consists of 500,000,000 shares and Global Bond Focus Fund Common
Stock and Global Strategy Focus Fund Common Stock, each of which consists of
200,000,000 shares. All shares of Common Stock have equal voting rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class. Pursuant to the Investment Company Act and the rules
and regulations thereunder, certain matters approved by a vote of all
shareholders of the Company may not be binding on a class whose shareholders
have not approved such matter. Each issued and outstanding share of a class is
entitled to one vote and to participate equally in dividends and distributions
declared with respect to such class and in net assets of such class upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities. The shares of each class, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or similar
rights, and will be freely transferable. Holders of shares of any class are
entitled to redeem their shares as set forth under 'Redemption of Shares.'
Shares do not have cumulative voting rights and the holders of more than 50% of
the shares of the Company voting for the election of directors can elect all of
the directors of the Company if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any directors. The
Company does not intend to hold meetings of shareholders unless under the
Investment Company Act shareholders are required to act on any of the following
matters: (i) election of directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
the selection of independent accountants.
The organizational expenses of each of the Company's Funds are paid by the
Investment Adviser. The Investment Adviser is reimbursed by its affiliate,
Merrill Lynch Life Insurance Company, for all such expenses over a five-year
period.
In connection with the reorganization on December 6, 1996, the Global
Strategy Focus Fund acquired substantially all of the assets and assumed
substantially all the liabilities of the Flexible Strategy Fund, a separate Fund
of the Company.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of each of the Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ('MLFDS'), which is a wholly
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's transfer
agent and is responsible for the issuance, transfer and redemption of shares and
the opening and maintenance of shareholder accounts. MLFDS will receive an
annual fee of $5,000 per Fund and will be entitled to reimbursement of
out-of-pocket expenses. Prior to June 1, 1990, BONY was the Company's transfer
agent.
<PAGE>
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated December 9, 1996, which
forms a part of the Registration Statement, is incorporated by reference into
this Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
<PAGE>
APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, each of the Funds may invest in the
various types of marketable securities issued by or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each of the Funds may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or to
be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
depositary institutions money instruments, such as certificates of deposit,
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ('coupon dates'), based upon a
specified market rate. As a result of these adjustments, the interest rate on
these obligations may be increased or decreased periodically. Often, dealers
selling variable rate certificates of deposit to the Funds agree to repurchase
such instruments, at the Funds' option, at par on the coupon dates. The dealers'
obligations to repurchase these instruments are subject to conditions imposed by
the various dealers; such conditions typically are the continued credit standing
of the issuer and the existence of reasonably orderly market conditions. The
Funds are also able to sell variable rate certificates of deposit in the
secondary market. Variable rate certificates of deposit normally carry a higher
interest rate than comparable fixed rate certificates of deposit because
variable rate certificates of deposit generally have a longer stated maturity
than comparable fixed rate certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
For temporary or defensive purposes, the Global Strategy Focus Fund may
invest in certificates of deposit and bankers' acceptances issued by foreign
branches or subsidiaries of U.S. banks ('Eurodollar' obligations) or U.S.
branches or subsidiaries of foreign banks ('Yankeedollar' obligations). The Fund
may invest only in Eurodollar obligations which by their terms are general
obligations of the U.S. parent bank and meet the other criteria discussed below.
Yankeedollar obligations in which the Fund may invest must be issued by U.S.
branches or subsidiaries of foreign banks which are subject to state or federal
banking regulations in the U.S. and by their
<PAGE>
terms must be general obligations of the foreign parent. In addition, the Fund
will limit its investments in Yankeedollar obligations to obligations issued by
banking institutions with more than $1 billion in assets.
For temporary or defensive purposes, the Global Strategy Focus Fund may
also invest in U.S. dollar-denominated obligations of foreign depository
institutions and their foreign branches and subsidiaries, such as certificates
of deposit, bankers' acceptances, time deposits and deposit notes. The
obligations of such foreign branches and subsidiaries may be the general
obligation of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government regulation.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United States,
has total assets of at least $1 billion and its deposits are insured by the
Federal Deposit Insurance Corporation (the 'FDIC'); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets of
a Fund (taken at market value at the time of each investment) in certificates of
deposit issued by banks and savings and loan associations with assets of less
than $1 billion if the principal amount of each such certificate of deposit is
fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
For temporary or defensive purposes (and the Domestic Money Market Fund for
other than temporary or defensive purposes), each of the Funds may invest in
commercial paper (including variable amount master demand notes and insurance
company funding agreements), which refers to short-term, unsecured promissory
notes issued by corporations, partnerships, trusts and other entities to finance
short-term credit needs and by trusts issuing asset-backed commercial paper.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. Variable amount master demand notes
are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer and
a commercial bank acting as agent for the payees of such notes, whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes. Because variable amount master notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender may not
sell or otherwise transfer the note without the borrower's consent. Such notes
provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis, in accordance with a stated short-term
interest rate benchmark. Because the interest rate of a variable amount master
note is adjusted no less often than every 60 days and since repayment of the
note may be demanded at any time, the Investment Adviser values such a note in
accordance with the amortized cost basis described under 'Determination of Net
Asset Value' in the Statement of Additional Information.
The Domestic Money Fund may also invest in nonconvertible debt securities
issued by entities or asset-backed nonconvertible debt securities issued by
trusts (e.g., bonds and debentures) with no more than 397 days (13 months)
remaining to maturity at date of settlement. Short-term debt securities with a
remaining maturity of less than one year tend to become extremely liquid and are
traded as money market securities. For a discussion of the ratings requirements
of the Funds' portfolio securities, see 'Investment Objectives and Policies of
the Funds' Money Market Fund Portfolio Restrictions' and 'Investment Objectives
and Policies of the Funds--Domestic Money Market Fund' in the Prospectus.
For temporary or defensive purposes, the Global Strategy Focus Fund may
also invest in U.S. dollar-denominated commercial paper and other short-term
obligations issued by foreign entities. Such investments are
<PAGE>
subject to quality standards similar to those applicable to investments in
comparable obligations of domestic issuers. Investments in foreign entities in
general involve the same risks as those described in the Statement of Additional
Information in connection with investments in Eurodollar, Yankeedollar and
foreign bank obligations.
REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements or purchase and sale contracts. If the seller were to
default on its obligation to repurchase a security under a repurchase agreement
or purchase and sale contract and the market value of the underlying security at
such time was less than the Fund had paid to the seller, the Fund would realize
a loss. Repurchase agreements 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.
<PAGE>
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded both during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any period of time may be
small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other market shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC--Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
PORTFOLIO STRATEGIES INVOLVING OPTIONS, FUTURES AND FOREIGN EXCHANGE
TRANSACTIONS
Options on Portfolio Securities. Each of the Basic Value Focus and Global
Strategy Focus Funds may from time to time sell ('write') covered call options
on its portfolio securities in which it may invest and may engage in closing
purchase transactions with respect to such options. A covered call option is an
option where the Fund, in return for a premium, gives another party a right to
buy particular securities held by the Fund at a specified future date and at a
price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, a Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining. The Basic Value Focus Fund may not write covered call
options on underlying securities exceeding 15% of the value of its total assets.
The Global Strategy Focus Fund also may write put options, which give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. The Fund will receive a premium for writing a put
option which increases the Fund's return. The Fund will write only covered put
options which means that so long as the Fund is obligated as the writer of the
option, it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. The Fund may engage in closing transactions in order to terminate
put options that it has written.
The Global Strategy Focus Fund may purchase put options on portfolio
securities. In return for payment of a premium, the purchase of a put option
gives the holder thereof the right to sell the security underlying the option to
another party at a specified price until the put option is closed out, expires
or is exercised. The Fund will only purchase put options to seek to reduce the
risk of a decline in value of the underlying security. The total return on the
security may be reduced by the amount of the premium paid for the option by the
Fund. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Each of the Funds may engage in options transactions on exchanges and in
the over-the-counter ('OTC') markets. In general, exchange traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See 'Over-the-Counter Options'
below for information as to restrictions on the use of OTC options.
<PAGE>
Options on Stock Indices. The Global Strategy Focus Fund may purchase and
write call options and put options on stock indices traded on a national
securities exchange to seek to reduce the general market risk of their
securities or specific industry sectors which the Fund invests in. Options on
indices are similar to options on securities except that, on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in index options
based on a broad market index, e.g., the S&P 500, or on a narrow index
representing an industry or market segment, e.g., the Amex Oil & Gas Index. The
effectiveness of a hedge employing stock index options will depend primarily on
the degree of correlation between movements in the value of the index underlying
the option and in the portion of the portfolio being hedged. For further
discussion concerning such options, see 'Risk Factors in Options, Futures and
Currency Transactions' below and the Company's Statement of Additional
Information.
Stock Index and Financial Futures Contracts. The Global Strategy Focus
Fund may purchase and sell stock index futures contracts and financial futures
contracts to hedge its portfolio. The Fund may sell stock index futures
contracts and financial futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index or financial futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of securities
that the Fund intends to purchase. A stock index or financial futures contract
is a bilateral agreement pursuant to which the Fund will agree to buy or deliver
at settlement an amount of cash equal to a dollar multiplied by the difference
between the value of a stock index or financial instrument at the close of the
last trading day of the contract and the price at which the futures contract is
originally entered into. The Fund may engage in transactions in stock index
futures contracts based on broad market indexes or on indexes on industry or
market segments. The Fund may effect transactions in stock index futures
contracts in connection with the equity securities in which it invests and in
financial futures contracts in connection with the debt securities in which it
invests. As with stock index options, the effectiveness of the Fund's hedging
strategies depends primarily upon the degree of correlation between movements in
the value of the securities subject to the hedge and the index or securities
underlying the futures contract. See 'Risk Factors in Options, Futures and
Currency Transactions' below.
Hedging Foreign Currency Risks. The Global Strategy Focus Fund is
authorized to deal in forward foreign exchange contracts between currencies of
the different countries in which they will invest, including multinational
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 Fund in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of their portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Funds will not speculate in forward foreign exchange. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Fund to
hedge against a devaluation that is so generally anticipated that the Fund is
not able to contract to sell the currency at a price above the devaluation level
they anticipate.
<PAGE>
The Fund is also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency options provide
the holder thereof the right to buy or to sell a currency at a fixed price on or
before a future date. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Such transactions may be effected with respect to hedges
on non-U.S. dollar-denominated securities (including securities denominated in
multi-national currency units) owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese yen-denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency put
option enabling them to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which,
if exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a 'straddle'). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar.
The Fund will not speculate in foreign currency options or futures.
Accordingly, the Fund will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which they own, the
expected acquisition price of securities which they have committed or anticipate
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Fund but not yet delivered, the proceeds
thereof in its denominated currency. Further, if a security with respect to
which a currency hedging transaction has been executed should subsequently
decrease in value, the Fund will direct its custodian to segregate liquid,
high-grade debt securities having a market value equal to such decrease in
value, less any initial or variation margin held in the account of their broker.
As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
Options on Futures Contracts. The Global Strategy Focus Fund may also
purchase and write call and put options on futures contracts in connection with
its hedging activities. Generally, these strategies are utilized under the same
market conditions (i.e., conditions relating to specific types of investments)
in which the Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts rather than selling the
underlying futures contract in anticipation of a decline in the equities markets
or in the value of a foreign currency. Similarly, the Fund may purchase call
options, or write put options on futures contracts, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from
appreciation of equity securities or in the currency in which securities which
the Fund intends to purchase are denominated. Limitations on transactions in
options on futures contracts are described below.
Over-the-Counter Options. The Global Strategy Focus Fund may engage in
options transactions in the over-the-counter markets. In general,
over-the-counter ('OTC') options are two-party contracts with price and terms
negotiated by the buyer and seller, whereas exchange-traded options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options include put and call options on
individual securities, cash settlement options on groups of securities, and
options on currency. The Fund may engage in an OTC options transaction only if
it is permitted to enter into transactions in exchange-traded options of the
same general type.
<PAGE>
The Fund will engage in OTC options only with financial institutions which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Company require that the Global
Strategy Focus Fund's futures transactions constitute bona fide hedging
transactions or, with respect to non-hedging transactions, that the Fund not
enter into such transactions, if, immediately thereafter, the sum of the amount
of initial margin deposits on the Fund's existing non-hedging futures positions
and premiums paid for related options would exceed 5% of the market value of the
Fund's total assets.
When the Fund purchases a futures contract, a call option thereon or writes
a put option, an amount of cash and cash equivalents will be deposited in a
segregated account with the Company's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby ensuring
that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission
which exempts the Company from certain provisions of the Investment Company Act
of 1940 in connection with transactions involving futures contracts and options
thereon.
Risk Factors in Options, Futures and Currency Transactions. A Fund's
ability to effectively hedge all or a portion of its portfolio of securities
through transactions in options on stock indices, 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 judgement will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entails 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.
<PAGE>
DECEMBER 9, 1996
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o 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 sixteen 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 Natural Resources Focus Fund, Merrill Lynch American
Balanced Fund, Merrill Lynch Global Strategy Focus Fund, Merrill Lynch Basic
Value Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill Lynch Global
Utility Focus Fund, Merrill Lynch International Equity Focus Fund, Merrill Lynch
Developing Capital Markets Focus Fund, Merrill Lynch Government Bond Fund and
Merrill Lynch Index 500 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 DECEMBER 9, 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.................................................................................... 3
Management of the Company.................................................................................. 15
Investment Advisory Arrangements........................................................................... 18
Determination of Net Asset Value........................................................................... 20
Portfolio Transactions and Brokerage....................................................................... 21
Redemption of Shares....................................................................................... 23
Dividends, Distributions and Taxes......................................................................... 23
Distribution Arrangements.................................................................................. 24
Performance Data........................................................................................... 24
Additional Information..................................................................................... 26
Independent Auditors' Report............................................................................... 27
Audited Financial Statements............................................................................... 29
Unaudited Financial Statements............................................................................. 79
</TABLE>
<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 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 Global Bond Focus Fund seeks to attain
high total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational currency
units. 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 Government Bond Fund seeks the highest possible
current income consistent with the protection of capital afforded by investing
in debt securities issued or guaranteed by the United States Government, its
agencies or instrumentalities. The Index 500 Fund seeks to provide investment
results that, before expenses, correspond to the aggregate price and yield
performance of Standard & Poor's 500 Composite Stock Price Index (the 'S&P 500
Index').
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.
<PAGE>
INVESTMENT RESTRICTIONS
The Company has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of the assets of the Funds
and their activities. The fundamental policies set forth below 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 of the
affected Fund are represented or (ii) more than 50% of the outstanding shares of
the affected Fund).
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
<PAGE>
excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except
as provided in (8) above), as security for indebtedness, any securities
owned or held by the Fund except as may be necessary in connection with
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 25% of the Fund's total assets, taken at
market value at the time thereof. Although the Fund has the authority to
mortgage, pledge or hypothecate more than 10% of its total assets under
this investment restriction (10), as a matter of operating policy, the Fund
will not mortgage, pledge or hypothecate in excess of 10% of total net
assets.
(11) act as an underwriter of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(12) purchase, either alone or together with any other Fund or Funds,
more than 10% of the outstanding securities of an issuer except that such
restriction does not apply to U.S. Government or government agency
securities, bank money instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or
variable amount master notes) with legal or contractual restrictions on
resale or for which no readily available market exists or in securities of
issuers (other than issuers of government agency securities) having a
record, together with predecessors, of less than three years of continuous
operation if, regarding all such securities, more than 10% of its total
assets (taken at market value) would be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more
than 10% of the Fund's total assets (taken at market value at the time of
each investment) would be subject to repurchase agreements maturing in more
than seven days.
(15) enter into reverse repurchase agreements if, as a result
thereof, the Fund's obligations with respect to reverse repurchase
agreements would exceed one-third of the Fund's net assets (defined to be
total assets, taken at market value, less liabilities other than reverse
repurchase agreements).
(16) invest more than 25% of its total assets (taken at market value
at the time of each investment) in the securities of issuers in any
particular industry (other than U.S. Government securities, government
agency securities or bank money instruments).
RESTRICTIONS APPLICABLE TO THE RESERVE ASSETS 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.
<PAGE>
(3) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(4) purchase or sell interests in oil, gas or other mineral
exploration or development programs, commodities, commodity contracts or
real estate, except that the Fund may invest in securities secured by real
estate or interests therein or securities issued by companies which invest
in real estate or interest therein.
(5) purchase any securities on margin except that the Company may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
(6) make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
(7) make loans to other persons; provided that the Fund may purchase
money market securities or enter into repurchase agreements; lend
securities owned or held by it pursuant to (8) below; and provided further
that for purposes of this restriction the acquisition of a portion of an
issue of publicly-distributed bonds, debentures or other corporate debt
securities or of government obligations, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed the
making of a loan.
(8) lend its portfolio securities in excess of 20% of its total
assets, taken at market value at the time of the loan, provided that such
loans are made according to the guidelines set forth below and the
guidelines of the Securities and Exchange Commission and the Company's
Board of Directors, including maintaining collateral from the borrower
equal at all times to the current market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at
market value and then only from banks as a temporary measure for
extraordinary or emergency purposes. The borrowing provisions shall not
apply to reverse repurchase agreements. Usually only 'leveraged' investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only to meet redemption requests
which might otherwise require untimely dispositions of portfolio
securities. The Fund will not purchase securities while borrowings are
outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except
as provided in (8) above), as security for indebtedness, any securities
owned or held by the Fund except as may be necessary in connection with
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 25% of the Fund's total assets, taken at
market value at the time thereof. As a matter of operating policy, the Fund
will not mortgage, pledge or hypothecate in excess of 10% of total net
assets.
(11) act as an underwriter of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(12) purchase, either alone or together with any other Fund or Funds,
more than 10% of the outstanding securities of an issuer except that such
restriction does not apply to U.S. Government or government agency
securities, bank money instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or
variable amount master notes) with legal or contractual restrictions on
resale or for which no readily available market exists or in securities of
issuers (other 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.
<PAGE>
(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 EACH OF THE FUNDS (EXCEPT THE DOMESTIC MONEY MARKET
FUND AND THE RESERVE ASSETS FUND)
Under the fundamental investment restrictions, each of the Funds (unless
noted otherwise below) may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.(1)
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)
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that the 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.
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.
6. Issue senior securities to the extent such issuance would violate
applicable law.
- ------------------
(1) The Developing Capital Markets Focus, Global Bond Focus, Global Strategy
Focus, Index 500 and Natural Resource Focus Funds are classified as
non-diversified investment companies under the Investment Company Act, and
therefore this restriction is not applicable to those Funds.
(2) For purposes of this restriction, states, municipalities and their political
subdivisions are not considered to be part of any industry, and utilities
will be divided according to their services; for example, gas, gas
transmission, electricity, telecommunications and water each will be
considered a separate industry for purposes of this restriction. In
addition, this restriction will not restrict (i) the Global Utility Focus
Fund, under normal circumstances, from investing 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 (ii) the Natural Resources Focus Fund
from investing greater than 25% of its assets in gold- related companies.
<PAGE>
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.
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.
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.
Under the non-fundamental investment restrictions, each of the Funds
(unless noted otherwise below) may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Engage in short sales of securities or maintain a short position
except to the extent permitted by applicable law. The Fund does not
currently intend to engage in short sales or maintain a short position,
except for short sales 'against the box.'(3)
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. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be
liquid by the Board of Directors of the Company are not subject to the
limitations set forth in this investment 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.
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.
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(3) The Global Bond Focus, Global Strategy Focus, International Equity Focus
and Natural Resources Focus Funds may maintain short positions in
forward currency contracts, options, futures contracts and options on
futures contracts.
<PAGE>
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.
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.
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.
i. Notwithstanding fundamental investment restriction number 7 above,
borrow amounts in excess of 5% (20% in the case of the Developing Capital
Markets Focus and Global Bond Focus Funds and 10% in the case of the Global
Strategy Focus, Government Bond, International Equity Focus and Natural
Resources Focus Funds) of the total assets of the Fund, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares.(4)
j. Pledge greater than 10% (20% in the case of the Developing Capital
Markets Focus Fund) of its total assets, taken at market value at the time
of the pledge. For the purpose of this restriction, collateral arrangements
with respect to (i) transactions in options, foreign currency contracts,
futures contracts and options on futures contracts and (ii) initial and
variation margin are not deemed to be a pledge of assets.
k. Lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided however that the
Quality Equity Fund may only make loans to New York Stock Exchange Member
firms, other brokerage firms having net capital of at least $10 million and
financial institutions, such as registered investment companies, banks and
insurance companies, having at least $10 million in capital and surplus.
l. In the case of the Global Utility Focus Fund only, 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.
m. In the case of each of the American Balanced Fund, the Basic Value
Focus Fund, the Equity Growth Fund, the High Current Income Fund, the Prime
Bond Fund and the Quality Equity Fund, invest in the securities of foreign
issuers except that each such Fund (except the American Balanced Fund) may
invest in securities of foreign issuers if at the time of acquisition no
more than 10% (25% in the case of the Quality Equity Fund) 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
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(4) In addition, the American Balanced, Basic Value Focus, Developing
Capital Markets Focus, Equity Growth, Global Strategy Focus, High
Current Income, Natural Resources Focus, Prime Bond and Quality
Equity Funds will not purchase securities while borrowings are
outstanding, except, in the case of the Developing Capital Markets
Focus Fund, (a) to honor prior commitments or (b) to exercise
subscription rights where outstanding borrowings have been obtained
exclusively for settlements of other securities transactions. The
Global Bond Focus, Global Utility Focus and International Equity
Focus Funds will not purchase securities while borrowings in excess
of 5% of its total assets are outstanding.
<PAGE>
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. See 'Other Portfolio Strategies--Foreign Securities'
in the Prospectus.(5)
OVER-THE-COUNTER OPTIONS
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by a Fund, the market value of the underlying securities covered
by OTC call options currently outstanding which were sold by the Fund and margin
deposits on the Fund's existing OTC options on futures contracts exceeds 15% of
the total assets of the Fund, taken at market value, together with all other
assets of the Fund which are illiquid or are otherwise not readily marketable.
However, if an OTC option is sold by a Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities equal to the repurchase price less the
amount by which the option is 'in-the-money' (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is 'in-the-money.' This policy as to OTC options is not a fundamental
policy of any Fund and may be amended by the Directors of the Company without
the approval of the Company's shareholders. However, the Company will not change
or modify this policy prior to the change or modification by the Commission
staff of its position.
RESTRICTED SECURITIES
From time to time a Fund may invest in securities the disposition of which
is subject to legal restrictions, such as restrictions imposed by the Securities
Act of 1933 (the 'Securities Act') on the resale of securities acquired in
private placements. If registration of such securities under the Securities Act
is required, such registration may not be readily accomplished and if such
securities may be sold without registration, such resale may be permissible only
in limited quantities. In either event, a Fund may not be able to sell its
restricted securities at a time which, in the judgement 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
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(5) Notwithstanding this restriction, each of the Prime Bond Fund and the High
Current Income Fund may invest up to 25% of its total assets 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.
<PAGE>
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 Fund may not invest more than
15% of its net assets in securities for which market disposition is not readily
available. Market disposition may not be readily available for repurchase
agreements maturing in more than seven days and for securities having
restrictions on resale.
Lending of Portfolio Securities. Subject to any applicable investment
restriction above, each Fund may from time to time loan securities from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash, securities issued or guaranteed by the U.S. Government or, in the case
of the Domestic Money Market and Reserve Assets Fund, cash equivalents which
while the loan is outstanding will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. Such cash
collateral will be invested in short-term securities, the income from which will
increase the return to the Fund. The Fund will retain all rights of beneficial
ownership as to the loaned portfolio securities, including voting rights and
rights to interest or other distributions, and will have the right to regain
record ownership of loaned securities to exercise such beneficial rights. Such
loans will be terminable at any time. The Fund may pay reasonable finders',
administrative and custodial fees to persons unaffiliated with the Fund in
connection with the arranging of such loans. The dividends, interest and other
distributions received by the Company on loaned securities may, for tax
purposes, be treated as income other than qualified income for the 90% test
discussed under 'Dividends, Distributions and Taxes--Federal Income Taxes.' The
Company intends to lend portfolio securities only to the extent that such
activity does not jeopardize the Company's qualification as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
Forward Commitments. Securities may be purchased or sold on a delayed
delivery basis or may be purchased on a forward commitment basis by each of the
Company's Funds at fixed purchase terms with periods of up to 180 days between
the commitment and settlement dates. The purchase will be recorded on the date
the purchasing Fund enters into the commitment and the value of security will
thereafter be reflected in the calculation of the Fund's net asset value. The
value of the security on the delivery date may be more or less than its purchase
price. A separate account of the Fund will be established with The Bank of New
York or Chase Manhattan Bank N.A. (for Developing Capital Markets Focus Fund)
(the 'Custodian') consisting of cash or liquid, high-grade debt obligations
having a market value at all times until the delivery date at least equal to the
amount of its commitments in connection with such delayed delivery and purchase
transactions. Although a Fund will generally enter into forward commitments with
the intention of acquiring securities for its portfolio, it may dispose of a
commitment prior to settlement if the Investment Adviser deems it appropriate to
do so. There can, of course, be no assurance that the judgement 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
<PAGE>
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 (and, for
temporary or defensive purposes, the Natural Resources Focus, Global Strategy
Focus, Global Bond Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds) may invest in obligations issued by
foreign branches or subsidiaries of U.S. banks ('Eurodollar' obligations), by
U.S. branches or subsidiaries of foreign banks ('Yankeedollar' obligations), or
by foreign depository institutions and their foreign branches and subsidiaries
('foreign bank obligations'). Investment in such obligations may involve
different risks from the risks of investing in obligations of U.S. banks. Such
risks include adverse political and economic developments, the possible
imposition of withholding taxes on interest income payable on such obligations,
the possible seizure or nationalization of foreign deposits and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might adversely affect the payment of principal and interest.
Generally the issuers of such obligations are subject to fewer U.S. regulatory
requirements than are applicable to U.S. banks. Foreign depository institutions
and their foreign branches and subsidiaries, and foreign branches or
subsidiaries of U.S. banks, may be subject to less stringent reserve
requirements than U.S. banks. U.S. branches or subsidiaries of foreign banks are
subject to the reserve requirements of the state in which they are located.
There may be less publicly available information about a foreign depository
institution, branch or subsidiary, or a U.S. branch or subsidiary of a foreign
bank, than about a U.S. bank, and such institutions may not be subject to the
same accounting, auditing and financial record keeping standards and
requirements as U.S. banks. Evidence of ownership of Eurodollar and foreign bank
obligations may be held outside of the United States, and a Fund may be subject
to the risks associated with the holding of such property overseas. Eurodollar
and foreign bank obligations of the Fund held overseas will be held by foreign
branches of the Custodian for the Fund or by other U.S. or foreign banks under
subcustodian arrangements complying with the requirements of the Investment
Company Act of 1940.
The Investment Adviser will consider the above factors in making
investments in Eurodollar, Yankeedollar and foreign bank obligations and will
not knowingly purchase obligations which, at the time of purchase, are subject
to exchange controls or withholding taxes. Generally, the Reserve Assets Fund
will limit its Yankeedollar investments to obligations of banks organized in
Canada, France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom
and other western industrialized nations.
Standby Commitment Agreements. The High Current Income Fund, Global Utility
Focus Fund, International Equity Focus Fund and Developing Capital Markets Focus
Fund may from time to time enter into standby commitment agreements. Such
agreements commit a Fund, for a stated period of time, to purchase a stated
amount of a fixed income security which may be issued and sold to the Fund at
the option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement the Fund is
paid a commitment fee, regardless of whether or not the security is ultimately
issued, which is typically approximately 0.5% of the aggregate purchase price of
the security which the Fund has committed to purchase. A Fund will enter into
such agreements only for the purpose of investing in the security underlying the
commitment at a yield and price which is considered advantageous to the Fund. A
Fund will not enter into a standby commitment with a remaining term in excess of
45 days and will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with the
value of portfolio securities subject to legal restrictions on resale, will not
exceed 10% of its assets taken at the time of acquisition of such commitment or
security. A Fund will at all times maintain a segregated account with its
custodian of cash or liquid, high-grade debt obligations in an amount equal to
the purchase price of the securities underlying the commitment.
<PAGE>
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, Natural Resources
Focus Fund, American Balanced Fund, Global Strategy Focus Fund, Basic Value
Focus Fund, Global Bond Focus Fund, Global Utility Focus Fund, International
Equity Focus Fund, Index 500 Fund, Equity Growth and Developing Capital Markets
Focus 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, Global Bond
Focus, Global Utility Focus, International Equity Focus, Index 500 and
Developing Capital Markets Focus Funds also may write put options, which give
the holder of the option the right to sell the underlying security to the Fund
at the stated exercise price. The Fund will receive a premium for writing a put
option which increases the Fund's return. A Fund will write only covered put
options which means that so long as the Fund is obligated as the writer of the
option, it
<PAGE>
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,
Global Bond Focus, Global Utility Focus, International Equity Focus, Index 500
and Developing Capital Markets Focus 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,
Global Bond 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 indices for the purpose of hedging the
Funds' investment
<PAGE>
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. The Index 500 Fund may purchase and write
exchange-traded call options and put options on stock indices in order to gain
market exposure efficiently in the event of subscriptions, to maintain liquidity
in the event of redemptions and to minimize trading costs. 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 indices will be subject to the Investment Adviser's
ability to correctly predict movements in the direction of the stock market
generally or of a particular industry or market segment. This requires different
skills and techniques than predicting changes in the price of individual stocks.
Stock Index and Financial Futures. The Natural Resources Focus, Global
Strategy Focus, Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets Focus 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. The Index 500 Fund may engage in
transactions in stock index or financial futures in order to gain market
exposure efficiently in the event of subscriptions, to maintain liquidity in the
event of redemptions and to minimize trading costs. 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, Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets Focus 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
<PAGE>
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, Global Bond Focus, Global
Utility Focus, International Equity Focus and Developing Capital Markets Focus
Funds will purchase a call option on a futures contract to hedge against the
appreciation of securities resulting from a market advance or appreciation of
securities denominated in foreign currencies resulting from strengthening of the
currency which the Fund intends to purchase.
The writing of a call option on a futures contract may constitute a partial
hedge against a decline in the equities market or drop in the value of a foreign
currency, if the futures price at expiration is below the exercise price of the
option. In such event, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's security investments or investments denominated in
foreign currencies. Conversely, if the futures price is above the exercise price
at any point prior to expiration, the option may be exercised and the Fund would
be required to enter into the underlying futures contract at an unfavorable
price. The Index 500 Fund may purchase or write call options on futures
contracts in order to gain market exposure efficiently in the event of
subscriptions, to maintain liquidity in the event of redemptions and to minimize
trading costs.
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, Global Bond Focus,
Global Utility Focus, International Equity Focus and Developing Capital Markets
Focus 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.
The Index 500 Fund may purchase or write put options on futures contracts in
order to gain market exposure efficiently in the event of subscriptions, to
maintain liquidity in the event of redemptions and to minimize trading costs.
Risk Factors in Transactions in Futures and Options Thereon. The Natural
Resources Focus, Global Strategy Focus, Global Bond Focus, Global Utility Focus,
International Equity Focus and Developing Capital
<PAGE>
Markets Focus 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 Funds 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. However, the Index 500 Fund may engage in futures
and options thereon in order to gain market exposure efficiently in the event of
subscriptions, to maintain liquidity in the event of redemptions and to minimize
trading costs.
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 a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transactions costs. In
order to profit from an option purchased, however, it may be necessary to
exercise the option and to liquidate the underlying futures contract, subject to
the risks of the availability of a liquid offset market. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased. The writer of an option on
a futures contract is subject to the risks of commodity futures trading,
including the requirement of variation margin payments, as well as the
additional risk that movements in the price of the option may not correlate with
movements in the price of the underlying security or futures contract.
The trading of futures contracts and options thereon also is subject to
certain market risks, such as trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of a brokerage
firm or clearing corporation or other disruptions of normal trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
MANAGEMENT OF THE COMPANY
The Directors and executive officers of the Company and their 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 Merrill Lynch Funds Distributor, Inc. (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.
<PAGE>
MELVIN R. SEIDEN (65)--Director--780 Third Avenue, Suite 2502, New York,
New York 10017. Director of Silbanc Properties, Ltd. (real estate, consulting
and investments) since 1996 and President thereof 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. Chairman of Fernwood Associates (financial consultants)
since 1996 and Principal thereof since 1975.
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 since 1993; Director, LaSalle Street Fund since 1995.
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; 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.
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.
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.
THOMAS R. ROBINSON (52)--Vice President(1)(2)--Senior Portfolio Manager of
the Investment Adviser since November 1995; Manager of International Equity
Strategy of ML&Co.'s Global Securities Research and Economics Group from 1989 to
1995.
<PAGE>
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.
JACQUELINE ROGERS (38)--Vice President(1)(2)--Vice President of the
Investment Adviser since January 1986.
ALDONA A. SCHWARTZ (47)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1991 and an employee of the Investment Adviser since
1986.
GERALD M. RICHARD (46)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Treasurer of the
Distributor since 1984 and Vice President since 1981; and Senior Vice President
and Treasurer of Princeton Administrators, Inc. since 1988.
IRA P. SHAPIRO (33)--Secretary(1)(2)--Attorney associated with the
Investment Adviser and FAM since 1993. Prior to 1993 Mr. Shapiro was an attorney
in private practice.
- ------------------
(1) Interested person, as defined in the Investment Company Act of 1940, of the
Company.
(2) The Officers of the Company are officers of certain other investment
companies for which the Investment Adviser or FAM acts as investment
adviser.
The following table sets forth for the fiscal year ended December 31, 1995,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1995, the aggregate compensation
<PAGE>
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>
PENSION OR RETIREMENT TOTAL COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED COMPANY AND
COMPENSATION AS PART OF MLAM/FAM ADVISED
NAME OF DIRECTOR FROM COMPANY COMPANY EXPENSE FUNDS PAID TO DIRECTORS(1)
- -------------------------------------- ------------ --------------------- ---------------------------
<S> <C> <C> <C>
Walter Mintz(1)....................... $ 15,500 NONE $ 153,883
Melvin R. Seiden(1)................... 15,500 NONE 153,883
Stephen B. Swensrud(1)................ 15,500 NONE 161,883
Joe Grills(1)......................... 15,500 NONE 153,883
Robert S. Salomon, Jr.*(1)............ 0 NONE 0
Harry Woolf**(1)...................... 15,500 NONE 153,883
</TABLE>
- ------------------
* Mr. Salomon was elected as a Director of the Company on January 17, 1996 and,
accordingly, received no compensation from the Company for the year ended
December 31, 1995.
** Mr. Woolf retired as a Director of the Company on December 31, 1995.
(1) The Directors serve on the boards of other MLAM/FAM Advised Funds as
follows: Mr. Grills (18 registered investment companies consisting of 38
portfolios); Mr. Mintz (18 registered investment companies consisting of 28
portfolios); Mr. Salomon (18 registered investment companies consisting of
38 portfolios); Mr. Seiden (18 registered investment companies consisting of
38 portfolios); Mr. Swensrud (20 registered investment companies consisting
of 49 portfolios); and Mr. Woolf, prior to his retirement (18 registered
investment companies consisting of 38 portfolios).
Mr. Zeikel and the officers of the Company owned on November 30, 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; Michael J. Hennewinkel, Senior Vice
President; N. John
<PAGE>
Hewitt, Senior Vice President; Philip L. Kirstein, Senior Vice President,
General Counsel, Director and Secretary; Ronald M. Kloss, Senior Vice President
and Controller; Richard L. Reller, Senior Vice President; Stephen M. M. Miller,
Senior Vice President; Joseph T. Monagle, Senior Vice President; Michael L.
Quinn, 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 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 Government
Bond Fund, 0.60% of the average daily net assets of the Basic Value Focus Fund,
Global Bond Focus Fund and Global Utility Focus Fund, 1.00% of the average daily
net assets of the Developing Capital Markets Focus Fund, 0.30% of the average
daily net assets of the Index 500 Fund and at the following annual rates with
respect to the other Funds:
RESERVE ASSETS FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<CAPTION>
ADVISORY
FEE
--------
<S> <C>
Not exceeding $500 million.......................................................... 0.500%
In excess of $500 million but not exceeding $750 million............................ 0.425%
In excess of $750 million but not exceeding $1 billion.............................. 0.375%
In excess of $1 billion but not exceeding $1.5 billion.............................. 0.350%
In excess of $1.5 billion but not exceeding $2 billion.............................. 0.325%
In excess of $2 billion but not exceeding $2.5 billion.............................. 0.300%
In excess of $2.5 billion........................................................... 0.275%
</TABLE>
QUALITY EQUITY FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<S> <C>
Not exceeding $250 million.......................................................... 0.500%
In excess of $250 million but not exceeding $300 million............................ 0.450%
In excess of $300 million but not exceeding $400 million............................ 0.425%
In excess of $400 million........................................................... 0.400%
</TABLE>
<PAGE>
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 BOND
INCOME 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. Prior to the enactment of the National
Securities Market Improvement Act of 1996 on October 11, 1996 (the 'Improvement
Act'), the most restrictive expense limitation required 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. In
addition, as a result of the Improvement Act, the Investment Adviser will no
longer be subject to the foregoing expense limitation.
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 (now part of the Global Bond Focus Fund)
and $50,942 for the 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,
<PAGE>
$190,005 for the Government Bond Fund, and $112,261 for the International Bond
Fund (now part of the Global Bond Focus Fund). Except to the extent required
pursuant to the aforementioned agreements, the Investment Adviser does not
intend to reimburse the Global Bond Focus Fund for such Fund's operating
expenses.
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 Index 500
Fund, at a meeting held on April 10, 1996. The Board of Directors of the Company
approved the Investment Advisory Agreement relating to the Index 500 Fund at a
meeting held on October 16, 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.
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
<PAGE>
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,
Global Bond Focus Fund and Developing Capital Markets Focus 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.
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
<PAGE>
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 judgement 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
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
<PAGE>
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> <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%
Global Bond Focus Fund**............................................................. 132.57% 117.58%
Global Strategy Focus Fund**......................................................... 27.23% 21.03%
Global Utility Focus Fund............................................................ 11.05% 9.52%
High Current Income Fund............................................................. 41.60% 51.88%
Government Bond Fund**............................................................... 45.39% 103.03%*
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%
</TABLE>
- ------------------
* For the period from May 2, 1994 (commencement of operations) to December 31,
1994.
** In connection with a reorganization on December 6, 1996 conducted by the
Company with respect to certain of its Funds, the Company, with the approval
of the affected shareholders of the Funds, caused (i) Global Bond Focus Fund
(a) to acquire substantially all of the assets and assume substantially all
the liabilities of the International Bond Fund, a separate Fund of the
Company, (b) to implement a change in its investment objective and policies
from seeking high current income from a global portfolio of fixed income
securities, including non-investment grade securities, to seeking a high
total investment return by investing in a global portfolio of investment
grade fixed income securities and (c) to change its name from the World
Income Focus Fund to its current name; (ii) the Government Bond Fund (x) to
implement a change in its investment objective so that the Fund may invest in
any debt securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities without regard to remaining maturity and (y) to change
its name from the Intermediate Government Bond Fund to its current name; and
(iii) the Global Strategy Focus Fund to acquire substantially all of the
assets and assume substantially all the liabilities of the Flexible Strategy
Fund, a separate Fund of the Company. As a result, the portfolio turnover
rates for the fiscal years set forth in the table for the Global Bond Focus
Fund, the Global Strategy Focus Fund and the Government Bond Fund may not be
indicative of the portfolio turnover rates of such Funds following December
6, 1996. In addition, the portfolio turnover rate for the Global Bond Focus
Fund is likely to be significantly higher in the short-term because the Fund
will be disposing of those securities in which it may no longer invest due to
the change in its investment objective.
<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.
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Regulations
are subject to change by legislative or administrative action, and such change
may apply retroactively.
DISTRIBUTION ARRANGEMENTS
The Company has entered into a distribution agreement (the 'Distribution
Agreement') with Merrill Lynch Funds Distributor, Inc. 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. In connection with its reorganization on
December 6, 1996, the Global Bond Focus Fund (i) acquired substantially all of
the assets and assumed substantially all the liabilities of the International
Bond Fund, a separate Fund of the Company, (ii) implemented a change in its
investment objective and policies from seeking high current income from a global
portfolio of fixed income securities, including non-investment grade securities,
to seeking a high total investment return by investing in a global portfolio of
investment grade fixed income securities and (iii) changed its name from the
World Income Focus Fund to its current name. For the period from the
commencement of the World Income Focus Fund's operations through its
reorganization on December 6, 1996, the portfolio of the Fund included debt
securities rated below investment grade (i.e., junk bonds). On December 6, 1996,
the Government Bond Fund (i) implemented a change in its investment objective so
that the Fund may invest in any debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities without regard to remaining
maturity and (ii) changed its name from the Intermediate Government Bond Fund to
its current name. For the period from the commencement of the Fund's operations
through December 6, 1996, the portfolio of the Intermediate Government Bond Fund
consisted primarily of 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. As a result of the foregoing changes in the
investment objective of each of the Global Bond Focus Fund and the Government
Bond Fund, the performance information set forth herein and in the Prospectus
for the period prior to December 6, 1996 may not be indicative of such Fund's
performance following December 6, 1996.
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.
<PAGE>
The Reserve Assets Fund normally computes its annualized yield by
determining the net change for a seven-day base period, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, dividing the net change in account
value by the value of the account at the beginning of the base period to obtain
the base period return, and multiplying the base period return by 365 and then
dividing by seven. Under this calculation, the yield does not reflect realized
and unrealized gains and losses on portfolio securities. The Fund may also
include its yield in advertisements, calculated in the same manner as set forth
above but including realized and unrealized gains and losses. The Securities and
Exchange Commission also permits the calculation of a standardized effective or
compounded yield. This is computed by compounding the unannualized base period
return by dividing the base period by seven, adding one to the quotient, raising
the sum to the 365th power, and subtracting one from the result. This compounded
yield calculation also excludes realized or unrealized gains or losses on
portfolio securities.
Set forth below is average annual total return information for the shares
of each of the Company's Funds, other than the Reserve Assets Fund and Domestic
Money Market Fund. The total return quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the Separate
Account level which, if included, would decrease total return.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
REDEEMABLE VALUE
OF A
EXPRESSED AS A $1,000 HYPOTHETICAL
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
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE
OF A
EXPRESSED AS A $1,000 HYPOTHETICAL
PERCENTAGE BASED INVESTMENT
ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD
--------------------- ----------------
AMERICAN BALANCED FUND:
<S> <C> <C>
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
GLOBAL BOND FOCUS FUND:
One Year Ended December 31, 1995......................................... 16.69 1,166.90
Inception* Through December 31, 1995..................................... 6.98 1,183.70
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
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 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; Global Bond 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 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.
<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
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
BASIC DEVELOPING DOMESTIC
AMERICAN VALUE CAPITAL MONEY
BALANCED FOCUS MARKETS MARKET
FUND FUND FOCUS FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . $ 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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF 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>
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
HIGH INTERMEDIATE
CURRENT GOVERNMENT INTERNATIONAL
INCOME BOND BOND
FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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>
INTERNATIONAL
EQUITY FOCUS
FUND
- --------------------------------------------------------------------------------------
<S> <C>
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
NATURAL
RESOURCES PRIME QUALITY
FOCUS BOND EQUITY
- -------------------------------------------------------------- FUND FUND FUND
----------------------------------------------
<S> <C> <C> <C>
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.
<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.
<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.
<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>
See Notes to Financial Statements.
<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.
<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.
<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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
---------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
<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>
See Notes to Financial Statements.
<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
------------ -----------------
------------ -----------------
- ------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
<PAGE>
+ Commencement of Operations.
<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.
</TABLE>
<TABLE>
<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
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
<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
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------------
<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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
-----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
-------------------- --------------------
-------------------- --------------------
- ----------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
<CAPTION>
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 -----------
- -------------------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
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>
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
- ---------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C>
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>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
FOCUS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
---------------------------------- --------------
---------------------------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NATURAL RESOURCES
FOCUS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
PRIME BOND FUND
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
---------------------------------- --------------
---------------------------------- --------------
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RESERVE ASSETS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
WORLD INCOME FOCUS FUND
-----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN DERIVED AMERICAN BALANCED FUND
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:
$ 13.08 $ 14.08 $ 12.85 $ 12.82 $ 11.26
Net asset value, beginning ------------ ------------ ------------ ----------- -----------
of year. . . . . . . . . .
Investment income--net. . .
.59 .48 .32 .31 .47
Realized and unrealized gain
(loss) on investments and 2.06 (1.06 ) 1.37 .37 1.76
foreign currency ------------ ------------ ------------ ----------- -----------
transactions--net. . . . .
Total from investment 2.65 (.58 ) 1.69 .68 2.23
operations. . . . . . . . ------------ ------------ ------------ ----------- -----------
Less dividends and
distributions: (.56 ) (.37 ) (.34 ) (.37 ) (.49 )
Investment income--net. . -- -- ) (.12 ) (.28 ) (.18 )
Realized gain on -- (.05 -- -- --
investments--net ------------ ------------ ------------ ----------- -----------
In excess of realized gain
on investments--net. . . .
Total dividends and (.56 ) (.42 ) (.46 ) (.65 ) (.67 )
distributions. . . . . . . ------------ ------------ ------------ ----------- -----------
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 20.81% (4.19% ) 13.49% 5.72% 20.65%
share. . . . . . . . . . . --- ------- --- ------- --- ------- --- ------ --- ------
------------ ------------ ------------ ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 212,912 $ 158,951 $ 115,420 $ 24,918 $ 7,937
thousands). . . . . . . . --- ------- --- ------- --- ------- --- ------ --- ------
------------ ------------ ------------ ----------- -----------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
------------------------------------------------------------------
-----------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE FOR THE YEAR ENDED
BEEN DERIVED FROM INFORMATION PROVIDED IN THE DECEMBER 31,
FINANCIAL STATEMENTS. ---------------------------------------------------- FOR THE PERIOD
JULY 1, 1993+ TO
DECEMBER 31,
1993
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
$ 11.10 $ 10.95 $ 10.00
Net asset value, beginning of period. . . . . ------------ ------------ -----------
-----------------------------------------------------------------------------------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
DEVELOPING CAPITAL
MARKETS FOCUS FUND
---------------------------------------------------
-------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE FOR THE PERIOD
YEAR ENDED MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DEC. 31, 1995 DEC. 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
$ 9.51 $ 10.00
Net asset value, beginning of period. . . . . . . . . . . . . . . . . . ------------ -----------
-------------------------------------------------------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
------------------------------------------------------------------
- --------------------------------
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED
FROM INFORMATION PROVIDED IN DECEMBER 31,
THE FINANCIAL STATEMENTS. ------------------------------------------------------------------
FOR THE PERIOD
INCREASE (DECREASE) IN NET FEB. 20, 1992+
ASSET VALUE: TO DEC. 31,
1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of $ 1.00 $ 1.00 $ 1.00 $ 1.00
period. . . . . . . . . . . . -------------------- ------------ ------------ -----------
Investment income--net. . . . .0547 .0386 .0302 .0302
Realized and unrealized gain
(loss) on investments and .0012 (.0007 ) .0005 .0013
foreign currency -------------------- ------------ ------------ -----------
transactions--net. . . . . .
Total from investment .0559 .0379 .0307 .0315
operations. . . . . . . . . . -------------------- ------------ ------------ -----------
Less dividends and
distributions: (.0547) (.0386 ) (.0302 ) (.0302 )
Investment income--net. . . . (.0002) -- (.0005 ) (.0010 )
Realized gain on -------------------- ------------ ------------ -----------
investments--net
Total dividends and (.0549) (.0386 ) (.0307 ) (.0312 )
distributions. . . . . . . . -------------------- ------------ ------------ -----------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ----------- --- ------- --- ------- --- ------
-------------------- ------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per 5.64% 3.94% 3.10% 3.65% *
share. . . . . . . . . . . . ------- ----------- --- ------- --- ------- --- ------
-------------------- ------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .55% .50% .36% .32% *
------- ----------- --- ------- --- ------- --- ------
-------------------- ------------ ------------ -----------
Expenses. . . . . . . . . . . .55% .57% .63% .88% *
------- ----------- --- ------- --- ------- --- ------
-------------------- ------------ ------------ -----------
Investment income--net, and 5.50% 4.02% 3.03% 3.48% *
realized gain on ------- ----------- --- ------- --- ------- --- ------
investments--net. . . . . . . -------------------- ------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in $ 303,912 $ 363,199 $ 170,531 $ 41,128
thousands). . . . . . . . . . ------- ----------- --- ------- --- ------- --- ------
-------------------- ------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------------------------
*Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND
RATIOS HAVE BEEN DERIVED FROM EQUITY GROWTH FUND
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. . . . . . . . . . . . $ 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 45.90% (7.27% ) 17.78% (.53% ) 50.10%
share. . . . . . . . . . . ------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN DERIVED FLEXIBLE STRATEGY FUND
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. . . . . . . . . . $ 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 period
(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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS
HAVE BEEN DERIVED
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%
--- ------- --- ------- --- ------- --- ------
------------ ------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN --------------------------------------------------------------------------------
DERIVED
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:
<S> <C> <C> <C>
$ 9.45 $ 10.66 $ 10.00
Net asset value, beginning of period. . . . . ------------ ------------ ------------
------------------------------------------------------------------------------------
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% *
--- ------- --- ------- --- -------
------------ ------------ ------------
4.44% 3.68% 2.84% *
Investment income--net. . . . . . . . . . . . --- ------- --- ------- --- -------
------------ ------------ ------------
- -----------------------------------------------------------------------------------------------------------------------------------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA HIGH CURRENT INCOME FUND
AND RATIOS HAVE BEEN DERIVED ------------------------------------------------------------------
FROM INFORMATION PROVIDED IN
THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSET VALUE: 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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT
BOND FUND
---------------------------------------------------
-------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE FOR THE PERIOD
YEAR ENDED MAY 2, 1994+
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1995 TO DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
$ 9.97 $ 10.00
Net asset value, beginning of period. . . . . . . . . . . . . . . . . . ------------- ------------
-------------------------------------------------------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
$ 9.70 $ 10.00
Net asset value, beginning of period. . . . . . . . . . . . . . . . . . ------------- ------------
-------------------------------------------------------
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN ---------------------------------------------------------------------------
DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS.
FOR THE YEAR 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:
<S> <C> <C> <C>
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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND
RATIOS HAVE BEEN DERIVED NATURAL RESOURCES FOCUS FUND
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. . . . . . . . . . . . . $ 10.82 $ 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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN DERIVED PRIME BOND FUND
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. . . . . . . . . . $ 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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN DERIVED QUALITY EQUITY FUND
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. . . . . . . . . . $ 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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN DERIVED RESERVE ASSETS FUND
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. . . . . . . . . . . . . $ 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.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
------------------------------------------------------------------
---------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN
DERIVED FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS.
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------------- FOR THE PERIOD
JULY 1, 1993+ TO
DECEMBER 31,
1993
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . . $ 9.17 $ 10.38 $ 10.00
----------- ----------- -----------
---------------------------------------------------------------------------------
Investment income--net. . . . . . . . . . . . . .85 .76 .25
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net. . . . . . . . . . . . . . . .61 (1.19 ) .33
----------- ----------- -----------
---------------------------------------------------------------------------------
Total from investment operations. . . . . . . . 1.46 (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%
---------- ---------- --- ------
----------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
See Notes to Financial Statements.
<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-
<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>
RESERVE ASSETS FUND
--------------------------
Portion of average daily value of net assets of the Fund:
- ---------------------------------------------------------------------
ADVISORY
FEE
- ---------------------------------------------------------------------
<S> <C> <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%
- ---------------------------------------------------------------------
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%
- ---------------------------------------------------------------------
<PAGE>
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
- ---------------------------------------------------------------------
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.
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>
PURCHASES SALES
- ---------------------------------------------------------------------
<S> <C> <C>
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>
<PAGE>
Transactions in options written for the year ended December 31, 1995, were as
follows:
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
- ----------------------------------------------------------------------------------
SHARES
COVERED BY
WRITTEN PREMIUMS
CALL OPTIONS WRITTEN OPTIONS RECEIVED
- ----------------------------------------------------------------------------------
<S> <C> <C>
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)
Options closed. . . . . . . . . . . . . . . . . . . (5) (468,647)
---------- ------------
Outstanding call options written, end of year. . . 1 $ 54,253
---------- ------------
--------- -- --------
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- -------------------------------------------------------------------------------
NUMBER OF PREMIUMS
PUT OPTIONS WRITTEN CONTRACTS RECEIVED
- -------------------------------------------------------------------------------
<S> <C> <C>
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>
DEVELOPING
BASIC CAPITAL DOMESTIC
AMERICAN VALUE MARKETS MONEY
BALANCED FOCUS FOCUS MARKET
FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
<PAGE>
At December 31, 1995, net realized and unrealized gains (losses) were as
follows:
<TABLE>
<CAPTION>
AMERICAN BASIC VALUE
BALANCED FUND FOCUS FUND
------------------------------------ -------------------------------
Realized Unrealized Realized Unrealized
Losses Gains Gains Gains
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
--------------------- ------------- ----------------- -------------
--------------------- ------------- ----------------- -------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEVELOPING CAPITAL DOMESTIC MONEY
MARKETS FOCUS FUND MARKET FUND
------------------------------------ -------------------------------
Realized Unrealized
Gains Gains Realized Unrealized
(Losses) (Losses) Gains Gains
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
EQUITY GROWTH FLEXIBLE STRATEGY
FUND FUND
----------------------------------- ---------------------------------------
Realized Realized Unrealized
Gains Unrealized Gains Gains
(Losses) Gains (Losses) (Losses)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
<PAGE>
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
- ----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------
<S> <C> <C>
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
--------- --------------
-------- -- ----------
- ----------------------------------------------------------------------------
<CAPTION>
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . 4,208,232 $ 56,940,222
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . 308,791 4,107,209
--------- --------------
Total issued. . . . . . . . . . . . . . . . . . 4,517,023 61,047,431
Shares redeemed. . . . . . . . . . . . . . . . (565,599) (7,507,172)
--------- --------------
Net increase. . . . . . . . . . . . . . . . . . 3,951,424 $ 53,540,259
--------- --------------
-------- -- ----------
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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
---------- --------------
--------- -- ----------
<CAPTION>
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . . 10,501,448 $ 115,102,779
Shares issued to shareholders in reinvestment of dividends 87,071 928,253
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 10,588,519 116,031,032
Shares redeemed. . . . . . . . . . . . . . . . . . . . . . (99,204) (1,078,972)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 10,489,315 $ 114,952,060
---------- --------------
--------- -- ----------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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
---------- --------------
--------- -- ----------
<CAPTION>
- ----------------------------------------------------------------------------------------
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . . 3,089,579 $ 31,702,122
Shares redeemed. . . . . . . . . . . . . . . . . . . . . . (33,668) (339,498)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 3,055,911 $ 31,362,624
---------- --------------
--------- -- ----------
- ----------------------------------------------------------------------------------------
</TABLE>
+Prior to May 2, 1994 (commencement of operations), the Fund issued 800,000
shares to MLAM for $8,000,000.
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Sharess 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)
------------ ----------------
------------ ----------------
<CAPTION>
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 458,988,915 $ 458,988,915
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . . . . . 11,425,228 11,425,228
------------ ----------------
Total issued . . . . . . . . . . . . . . . . . . . . . . 470,414,143 470,414,143
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (277,547,347) (277,547,347)
------------ ----------------
Net increase . . . . . . . . . . . . . . . . . . . . . . 192,866,796 $ 192,866,796
------------ ----------------
------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
----------- ----------------
----------- ----------------
<CAPTION>
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 4,244,767 $ 84,908,525
Shares issued to shareholders in reinvestment of
distributions. . . . . . . . . . . . . . . . . . . . . . 43,323 895,916
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 4,288,090 85,804,441
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (178,315) (3,486,970)
----------- ----------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 4,109,775 $ 82,317,471
----------- ----------------
----------- ----------------
</TABLE>
FLEXIBLE STRATEGY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
----------- ----------------
----------- ----------------
<CAPTION>
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 6,842,583 $ 103,469,524
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . . . . . 708,891 10,747,143
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 7,551,474 114,216,667
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (904,823) (13,574,190)
----------- ----------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 6,646,651 $ 100,642,477
----------- ----------------
----------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
INTERNATIONAL BOND FUND
- -------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C>
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
--------- -------------
-------- -- ---------
- -------------------------------------------------------------------------------
<CAPTION>
For the Period May 2, 1994+ to Dollar
December 31, 1994 Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 532,215 $ 5,218,763
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 27,759 271,353
--------- -------------
Total issued. . . . . . . . . . . . . . . . . . 559,974 5,490,116
Shares redeemed. . . . . . . . . . . . . . . . . (35,652) (348,847)
--------- -------------
Net increase. . . . . . . . . . . . . . . . . . 524,322 $ 5,141,269
--------- -------------
-------- -- ---------
- -------------------------------------------------------------------------------
</TABLE>
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 500,000
shares to MLAM for $5,000,000.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- ---------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C>
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>
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- --------------------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1994 Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 15,762,751 $ 177,512,550
Shares issued to shareholders in reinvestment of dividends
and distributions. . . . . . . . . . . . . . . . . . . . 155,170 1,705,946
----------- ----------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 15,917,921 179,218,496
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (149,766 ) (1,678,473 )
----------- ----------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 15,768,155 $ 177,540,023
----------- ----------------
---------- --- -----------
- --------------------------------------------------------------------------------------------------
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>
For the Year Ended Dollar
December 31, 1994 Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . . . . . 2,431,502 $ 26,836,585
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . . . . . 7,751 83,948
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . . . . . . 2,439,253 26,920,533
Shares redeemed. . . . . . . . . . . . . . . . . . . . . (134,053) (1,481,555)
----------- --------------
Net increase. . . . . . . . . . . . . . . . . . . . . . . 2,305,200 $ 25,438,978
----------- --------------
---------- -- ----------
- ----------------------------------------------------------------------------------------
<CAPTION>
PRIME BOND FUND
- ----------------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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>
<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.
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>
FUND PURCHASE SELL
- ------------------------------------------------------
<S> <C> <C>
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>
LONG-TERM
ORDINARY CAPITAL
FUND INCOME-NET GAINS
- -----------------------------------------------------------------
<S> <C> <C>
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>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTHS
ENDED JUNE 30, 1996
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
BASIC DEVELOPING DOMESTIC
AMERICAN VALUE CAPITAL MONEY
BALANCED FOCUS MARKETS MARKET
FUND FUND FOCUS FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . $ 212,871,001 $ 403,877,071 $ 74,106,393 $ 275,219,739
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768 804 100,908 588
Receivable for securities sold. . . . . . . . . . . . . . . . . 3,500,972 615,729 2,177,185 --
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . 1,392,250 -- 30,349 1,327,486
Receivable for capital shares sold. . . . . . . . . . . . . . . 129,622 846,876 282,360 --
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . 148,397 599,355 376,848 --
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 29,070
-------------- -------------- ------------- ----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . 218,061,339 405,962,995 77,082,690 276,578,223
-------------- -------------- ------------- -----------------
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased. . . . . . . . . . . . . . . . 2,447,668 8,489,549 168,617 --
Payable for capital shares redeemed. . . . . . . . . . . . . . . 23,683 552 1,888 791,660
Payable to investment adviser (Note 2). . . . . . . . . . . . . 91,486 182,432 56,414 104,769
Accrued expenses and other liabilities. . . . . . . . . . . . . 61,449 101,787 6,337 78,083
-------------- -------------- ------------- -----------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 2,624,286 8,774,320 233,256 974,512
-------------- -------------- ------------- ----------------
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,437,053 $ 397,188,675 $ 76,849,434 $ 275,603,711
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . $ 1,415,797 $ 2,911,583 $ 756,984 $ 27,575,749
Paid-in capital in excess of par. . . . . . . . . . . . . . . . 188,688,535 332,949,347 73,630,225 248,181,746
Undistributed investment income--net. . . . . . . . . . . . . . 3,735,464 2,308,627 583,022 --
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . 9,382,632 25,904,462 (5,562,311) --
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . 12,214,625 33,114,656 7,441,514 (153,784)
-------------- -------------- ------------- ----------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,437,053 $ 397,188,675 $ 76,849,434 $ 275,603,711
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . 14,157,967 29,115,828 7,569,835 275,757,494
-------------- -------------- ------------- ----------------
-------------- -------------- ------------- ----------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . $ 15.22 $ 13.64 $ 10.15 $ 1.00
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
- --------------------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . $ 200,656,376 $ 370,762,415 $ 66,662,200 $ 275,373,523
-------------- -------------- ------------- -----------------
-------------- -------------- ------------- -----------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000 1,300,000,000
-------------- -------------- ------------- ----------------
-------------- -------------- ------------- ----------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996 (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . $ 403,142,688 $ 321,053,682 $ 545,168,737 $ 149,656,200
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 525 955,041 410
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . -- 84,869 534,323 311
Receivable for securities sold. . . . . . . . . . . . . . . . 9,320,922 7,190,066 11,192,114 --
Interest receivable. . . . . . . . . . . . . . . . . . . . . 53,696 1,345,497 3,099,994 32,374
Dividends receivable. . . . . . . . . . . . . . . . . . . . . 199,751 344,291 745,597 492,934
Receivable for capital shares sold. . . . . . . . . . . . . . 850,173 11,223 -- 205,074
Receivable for forward foreign exchange contracts (Note 1b). -- 146,121 483,431 --
Deferred organization expenses (Note 1f). . . . . . . . . . . -- -- -- 3,277
Prepaid registration fees and other assets (Note 1f). . . . . 23,118 28,002 41,934 11,488
-------------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 413,590,348 330,204,276 562,221,171 150,402,068
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased. . . . . . . . . . . . . . . 4,853,273 6,515,668 9,854,033 --
Payable for forward foreign exchange contracts (Note 1b). . . -- 93,168 865,072 --
Payable to investment adviser (Note 2). . . . . . . . . . . . 238,470 161,914 266,665 65,113
Payable for capital shares redeemed. . . . . . . . . . . . . 1,642 58,546 504,504 1,628
Accrued expenses and other liabilities. . . . . . . . . . . . 138,771 94,140 202,480 59,936
-------------- -------------- -------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 5,232,156 6,923,436 11,692,754 126,677
-------------- -------------- -------------- --------------
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,358,192 $ 323,280,840 $ 550,528,417 $ 150,275,391
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . $ 1,594,158 $ 2,089,979 $ 4,316,675 $ 1,281,135
Paid-in capital in excess of par. . . . . . . . . . . . . . . 341,070,957 295,398,545 506,440,444 130,805,555
Undistributed investment income--net. . . . . . . . . . . . . 702,715 3,462,821 2,705,491 1,679,397
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). 26,450,108 3,981,013 (4,326,801) (3,343,839)
Unrealized appreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . 38,540,254 18,348,482 41,392,608 19,853,143
-------------- -------------- -------------- --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,358,192 $ 323,280,840 $ 550,528,417 $ 150,275,391
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . 15,941,579 20,899,788 43,166,754 12,811,346
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . $ 25.62 $ 15.47 $ 12.75 $ 11.73
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . $ 364,602,434 $ 302,704,127 $ 503,773,647 $ 129,802,210
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000 100,000,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996 (CONTINUED)
<TABLE>
<CAPTION>
HIGH INTERMEDIATE
CURRENT GOVERNMENT INTERNATIONAL
INCOME BOND BOND
FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . $ 376,933,106 $ 53,561,490 $ 17,595,390
Options purchased, at value (cost--$576,079)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,829 283 394
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . . -- -- 2,897
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . 7,009,503 626,471 437,997
Receivable for securities sold. . . . . . . . . . . . . . . . . 2,313,750 -- --
Receivable for capital shares sold. . . . . . . . . . . . . . . 198,101 148,788 334
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . 21,875 -- --
Receivable from investment adviser (Note 2). . . . . . . . . . . -- 10,116 8,592
Receivable for forward foreign exchange contracts (Note 1b). . . -- -- --
Receivable for variation margin on stock index futures contracts
(Note 1b). . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Receivable for loaned securities (Note 6). . . . . . . . . . . . -- 233 --
Deferred organization expenses (Note 1f). . . . . . . . . . . . -- -- 2,667
Prepaid registration fees and other assets (Note 1f). . . . . . 30,383 3,078 3,008
-------------- --------------- ---------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . 386,512,547 54,350,459 18,051,279
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$308,269)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Unrealized depreciation on forward foreign exchange
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . -- -- --
Payable for securities purchased. . . . . . . . . . . . . . . . 2,413,825 -- --
Payable to investment adviser (Note 2). . . . . . . . . . . . . 142,882 -- --
Payable for forward foreign exchange contracts (Note 1b). . . . -- -- --
Payable for capital shares redeemed. . . . . . . . . . . . . . . 28,782 -- 50,123
Accrued expenses and other liabilities. . . . . . . . . . . . . 109,385 22,239 17,640
-------------- --------------- ---------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 2,694,874 22,239 67,763
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,817,673 $ 54,328,220 $ 17,983,516
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . $ 3,449,188 $ 530,068 $ 181,063
Paid-in capital in excess of par. . . . . . . . . . . . . . . . 391,084,202 53,658,500 18,097,261
Undistributed investment income--net. . . . . . . . . . . . . . 2,746,405 254,355 90,589
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . 842,686 (66,540) (367,085)
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . (14,304,808) (48,163) (18,312)
-------------- --------------- ---------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,817,673 $ 54,328,220 $ 17,983,516
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . 34,491,875 5,300,683 1,810,634
-------------- --------------- ---------------
-------------- --------------- ---------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . $ 11.13 $ 10.25 $ 9.93
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . $ 391,237,914 $ 53,609,653 $ 17,611,983
-------------- --------------- ---------------
-------------- --------------- ---------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000
-------------- --------------- ---------------
-------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FOCUS
FUND
- ------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . $ 316,094,452
Options purchased, at value (cost--$576,079)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . 602,358
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . .
11,823
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . 19,586
Receivable for securities sold. . . . . . . . . . . . . . . . . 1,932,305
Receivable for capital shares sold. . . . . . . . . . . . . . . 644,357
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . 659,725
Receivable from investment adviser (Note 2). . . . . . . . . . . --
Receivable for forward foreign exchange contracts (Note 1b). . . 6,301
Receivable for variation margin on stock index futures contracts
(Note 1b). . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,259
--
Receivable for loaned securities (Note 6). . . . . . . . . . . .
Deferred organization expenses (Note 1f). . . . . . . . . . . . --
Prepaid registration fees and other assets (Note 1f). . . . . . 41,671
----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . 320,014,837
------------------
----------------
- ------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$308,269)
(Notes 1a & 1b). . . . . . . . . . . . . . . . . . . . . . . . . 526,479
Unrealized depreciation on forward foreign exchange
contracts (Note 1b). . . . . . . . . . . . . . . . . . . . . . . 28,873
Payable for securities purchased. . . . . . . . . . . . . . . . 885,534
Payable to investment adviser (Note 2). . . . . . . . . . . . . 178,082
Payable for forward foreign exchange contracts (Note 1b). . . . 183,142
Payable for capital shares redeemed. . . . . . . . . . . . . . . --
Accrued expenses and other liabilities. . . . . . . . . . . . . 246,596
----------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 2,048,706
----------------
- ----------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,966,131
------------------
------------------
- ------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . $ 2,711,085
Paid-in capital in excess of par. . . . . . . . . . . . . . . . 296,345,662
Undistributed investment income--net. . . . . . . . . . . . . . 4,576,376
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . (3,746,046)
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . 18,079,054
----------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,966,131
------------------
------------------
- ------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . 27,110,851
----------------
----------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . $ 11.73
------------------
------------------
- ------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . $ 297,976,496
------------------
------------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . 100,000,000
----------------
----------------
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996 (CONTINUED)
<TABLE>
<CAPTION>
NATURAL
RESOURCES PRIME QUALITY
FOCUS BOND EQUITY
FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . $ 45,667,088 $ 476,145,056 $ 687,327,523
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 577 190
Foreign cash (Note 1c). . . . . . . . . . . . . . . . . . . . . 20,647 -- --
Receivable for securities sold. . . . . . . . . . . . . . . . . -- 9,141,457 26,244,657
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . -- 7,594,926 --
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . 136,477 -- 677,692
Receivable for capital shares sold. . . . . . . . . . . . . . . -- 323,077 218,866
Receivable for loaned securities (Note 6). . . . . . . . . . . . -- 1,257 --
Prepaid registration fees and other assets (Note 1f). . . . . . 3,285 41,602 47,821
------------- --------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . .. . . . . . . 45,827,749 493,247,952 714,516,749
------------- --------------- --------------
- --------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased. . . . . . . . . . . . . . . . - 13,117,445 14,565,657
Payable to investment adviser (Note 2). . . . . . . . . . . . . 23,341 157,101 237,293
Payable for capital shares redeemed. . . . . . . . . . . . . . . 61,943 8,859 63,933
Accrued expenses and other liabilities. . . . . . . . . . . . . 20,721 129,035 178,296
------------- --------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 106,005 13,412,440 15,045,179
------------- --------------- --------------
- --------------------------------------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,721,744 $ 479,835,512 $ 699,471,570
------------- --------------- --------------
------------- --------------- --------------
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . .. . . . . . . $ 365,173 $ 4,086,510 $ 2,342,157
Paid-in capital in excess of par. . . . . . . . . .. . . . . . . 39,582,597 492,116,585 627,633,959
Undistributed investment income--net. . . . . . . . . . . . . . 483,425 2,444,731 8,197,116
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note 5). . . 1,222,269 (16,459,536) 15,040,698
Unrealized appreciation (depreciation) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . 4,068,280 (2,352,778) 46,257,640
------------- --------------- --------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,721,744 $ 479,835,512 $ 699,471,570
------------- --------------- --------------
------------- --------------- --------------
- ---------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . .. . . . . . . 3,651,734 40,865,099 23,421,567
------------- --------------- --------------
------------- --------------- --------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . $ 12.52 $ 11.74 $ 29.86
------------- --------------- --------------
------------- --------------- --------------
- ---------------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . $ 41,598,783 $ 478,497,834 $ 641,069,883
------------- --------------- --------------
------------- --------------- --------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 100,000,000
------------- --------------- --------------
------------- --------------- --------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996 (CONCLUDED)
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value* (Note 1a). . . . . . . . . . . . . . . . . . . . $ 23,496,017 $ 84,020,934
Unrealized appreciation on forward foreign exchange contracts (Note 1b) -- 7,823
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,131 4,374
Receivable for securities sold. . . . . . . . . . . . . . . . . . . . . -- 5,425,856
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 88,204 1,615,147
Receivable for forward foreign exchange contracts (Note 1b). . . . . . -- 95,225
Dividends receivable. . . . . . . . . . . . . . . . . . . . . . . . . . -- 11,550
Receivable for options written. . . . . . . . . . . . . . . . . . . . . -- 1,641
Receivable for capital shares sold. . . . . . . . . . . . . . . . . . . 623 --
Deferred organization expenses (Note 1f). . . . . . . . . . . . . . . . -- 3,944
Prepaid registration fees and other assets (Note 1f). . . . . . . . . . 6,663 6,032
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,592,638 91,192,526
------------- ---------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES:
Options written, at value (premiums received--$21,476) (Notes 1a & 1b). -- 12,197
Payable for securities purchased. . . . . . . . . . . . . . . . . . . . -- 5,320,421
Payable for capital shares redeemed. . . . . . . . . . . . . . . . . . 63,055 53,810
Payable to investment adviser (Note 2). . . . . . . . . . . . . . . . . 9,041 39,499
Payable for variation margin on financial futures contracts (Note 1b). -- 6,357
Payable for forward foreign exchange contracts (Note 1b). . . . . . . . -- 100
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . 17,409 28,391
------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 89,505 5,460,775
------------- -------------
- -----------------------------------------------------------------------------------------------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,503,133 $ 85,731,751
------------- ---------------
------------- ---------------
- -------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+. . . . . . . . . . . . . . . . . . . . . $ 2,351,145 $ 890,560
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . . . . 21,160,306 88,672,442
Undistributed investment income--net. . . . . . . . . . . . . . . . . . -- 681,420
Accumulated realized capital losses on
investments and foreign currency transactions--net (Note 5). . . . . . -- (1,896,662)
Unrealized depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . . . (8,318) (2,616,009)
---------- ----------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,503,133 $ 85,731,751
------------- ---------------
------------- ---------------
- -------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . . . . . 23,511,452 8,905,602
------------- -------------
------------- -------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE. . . . . . . . $ 1.00 $ 9.63
------------- ---------------
------------- ---------------
- -------------------------------------------------------------------------------------------------------
* Identified cost. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,504,335 $ 86,633,248
------------- ---------------
------------- ---------------
+ Authorized shares. . . . . . . . . . . . . . . . . . . . . . . . . . 500,000,000 100,000,000
------------- -------------
------------- -------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
<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. . . . . . . . . . . . . . . . . . . . $ 3,423,725 $ 791,151 $ 210,557 $ 7,736,277
Dividends*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959,007 2,631,357 969,888 --
----------- ------------- ------------- ------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,382,732 3,422,508 1,180,445 7,736,277
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 591,689 1,040,764 330,366 700,732
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,849 15,645 50,657 11,218
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . . 14,119 29,135 4,034 17,348
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 14,645 13,457 3,397 15,988
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . . 3,317 3,294 484 3,641
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . . 3,261 2,271 2,064 2,713
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 8 6,981 1,666 9
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . . 522 108 2,256 --
Amortization of organization expenses (Note 1f). . . . . . . . . . -- 329 1,102 724
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,847 1,881 697 5,771
----------- ------------- ------------- ------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 647,257 1,113,865 396,723 758,144
----------- ------------- ------------- ------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . .
3,735,475 2,308,643 783,722 6,978,133
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . . 10,657,106 29,409,646 (1,700,652) 8,460
Realized loss on foreign currency transactions--net. . . . . . . . -- -- (59,761) --
Change in unrealized appreciation/depreciation on investments--net. (9,191,391) 3,761,125 7,986,349 (292,067)
Change in unrealized appreciation/depreciation on foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . -- -- (2,992) --
----------- ------------- ------------- ------------
Total realized and unrealized gain (loss) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . 1,465,715 33,170,771 6,222,944 (283,607)
----------- ------------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,201,190 $35,479,414 $ 7,006,666 $6,694,526
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
*Net of foreign withholding tax on dividends. . . . . . . . . . . . $ 873 $ 56,721 $ 71,062 --
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (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*. . . . . . . . . . . . . . . . . . . $ 1,079,453 $ 4,346,459 $ 6,896,154 $ 428,120
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,109,991 1,771,577 2,984,885 3,153,827
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 23,338 -- --
----------- ------------- ------------- ------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,189,444 6,141,374 9,881,039 3,581,947
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 1,405,270 1,047,399 1,790,004 446,115
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 19,179 28,270 74,753 15,613
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 32,621 30,564 55,047 15,209
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 14,046 16,344 27,493 9,364
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 3,540 3,894 6,457 2,057
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 2,167 2,574 2,579 2,887
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 7,153 10 -- 5
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . -- 1,861 1,833 1,392
Amortization of organization expenses (Note 1f). . . . . . . . . . -- -- -- 498
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,742 4,482 7,470 2,240
----------- ------------- ------------- ------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 1,486,718 1,135,398 1,965,636 495,380
----------- ------------- ------------- ------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . .
702,726 5,005,976 7,915,403 3,086,567
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain on investments--net. . . . . . . . . . . . . . . . . 26,607,899 2,610,731 10,381,340 557,142
Realized gain (loss) on foreign currency transactions--net. . . . -- (168,982) 9,041,091 (39,403)
Change in unrealized appreciation/depreciation on investments--net (9,045,390) 5,768,190 4,593,426 5,456,830
Change in unrealized appreciation/depreciation on foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . -- (694) (9,685,172) (11,305)
----------- ------------- ------------- ------------
Total realized and unrealized gain on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . 17,562,509 8,209,245 14,330,685 5,963,264
----------- ------------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,265,235 $13,215,221 $22,246,088 $9,049,831
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
*Net of foreign withholding tax on interest. . . . . . . . . . . . -- $ 21,146 $ 40,360 --
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
**Net of foreign withholding tax on dividends. . . . . . . . . . . $ 1,202 $ 65,310 $ 214,322 $ 217,002
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (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*. . . . . . . . . . . . . . . . . . . $18,240,140 $ 1,447,957 $ 591,574
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,136 5,415 --
----------- --------------- ---------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,458,276 1,453,372 591,574
----------- --------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 905,732 111,990 55,321
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 26,411 12,054 7,549
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . . 26,317 1,598 2,157
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 23,878 4,731 3,188
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . . 4,947 663 --
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . . 3,451 3,499 2,561
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . . -- 671 220
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . -- 302 29
Amortization of organization expenses (Note 1f). . . . . . . . . . -- -- 410
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 915 466
----------- --------------- ---------------
Total expenses before reimbursement. . . . . . . . . . . . . . . . 990,736 136,423 71,901
Reimbursement of expenses (Note 2). . . . . . . . . . . . . . . . . -- (136,423) (71,901)
----------- --------------- ---------------
Expenses after reimbursement. . . . . . . . . . . . . . . . . . . . 990,736 -- --
----------- --------------- ---------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . 17,467,540 1,453,372 591,574
----------- --------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . . 2,358,133 (66,539) (30,078)
Realized gain (loss) on foreign currency transactions--net. . . . . -- -- (268,633)
Change in unrealized appreciation/depreciation on investments--net. (6,295,162) (2,012,002) (587,984)
Change in unrealized appreciation/depreciation on foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . -- -- (1,865)
----------- --------------- ---------------
Total realized and unrealized gain (loss) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . (3,937,029) (2,078,541) (828,404)
----------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,530,511 $ (625,169) $ (236,830)
----------- --------------- ---------------
----------- --------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
*Net of foreign withholding tax on interest. . . . . . . . . . . . -- -- $ 5,803
----------- --------------- ---------------
----------- --------------- ---------------
**Net of foreign withholding tax on dividends. . . . . . . . . . . -- -- --
----------- --------------- ---------------
----------- --------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY
FOCUS
FUND
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $ 1,612,058
Dividends**. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,928,708
---------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,540,766
---------------
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 1,096,395
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 118,870
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . . 23,346
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 11,522
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . . 8,334
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . . 1,972
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . . 2,745
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 2,964
Amortization of organization expenses (Note 1f). . . . . . . . . . 594
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,158
---------------
Total expenses before reimbursement. . . . . . . . . . . . . . . . 1,269,900
Reimbursement of expenses (Note 2). . . . . . . . . . . . . . . . . --
---------------
Expenses after reimbursement. . . . . . . . . . . . . . . . . . . . 1,269,900
---------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . 3,270,866
---------------
- --------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . . 8,664,045
Realized gain (loss) on foreign currency transactions--net. . . . . 299,017
Change in unrealized appreciation/depreciation on investments--net. 9,668,988
Change in unrealized appreciation/depreciation on foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . (880,270)
---------------
Total realized and unrealized gain (loss) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . 17,751,780
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,022,646
---------------
---------------
- --------------------------------------------------------------------------------------
*Net of foreign withholding tax on interest. . . . . . . . . . . . --
---------------
---------------
**Net of foreign withholding tax on dividends. . . . . . . . . . .
$ 385,550
---------------
---------------
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (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. . . . . . . . . . . . . . . . . . . . $ 47,988 $ 16,797,756 $ 4,858,801
Dividends*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602,092 -- 4,989,084
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 49,189 3,074
------------ -------------- -------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 650,080 16,846,945 9,850,959
------------ -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 147,928 1,034,341 1,488,622
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . . 4,768 28,059 59,533
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,340 32,670 28,131
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 5,450 29,475 28,216
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . . 526 7,137 8,160
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . . 2,587 3,274 2,415
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . . 1,535 5,727 115
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . 113 -- 2,334
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698 5,878 6,498
------------ -------------- -------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 179,945 1,146,561 1,624,024
------------ -------------- -------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . . .
470,135 15,700,384 8,226,935
------------ -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) on investments--net. . . . . . . . . . . . . . 1,244,960 (513,078) 15,040,763
Realized loss on foreign currency transactions--net. . . . . . . . (7,988) -- (66)
Change in unrealized appreciation/depreciation on investments--net. 1,435,417 (27,084,561) 15,420,315
Change in unrealized appreciation/depreciation on foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . (57) -- --
------------ -------------- -------------
Total realized and unrealized gain (loss) on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . 2,672,332 (27,597,639) 30,461,012
------------ -------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS. . $ 3,142,467 $(11,897,255) $38,687,947
------------ -------------- -------------
------------ -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------
*Net of foreign withholding tax on dividends. . . . . . . . . . . . $ 54,810 -- $ 165,559
------------ -------------- -------------
------------ -------------- -------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (CONCLUDED)
<TABLE>
<CAPTION>
WORLD
RESERVE INCOME
ASSETS FOCUS
FUND FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*. . . . . . . . . . . . . . . . . . . $ 675,090 $ 3,795,425
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 26,768
---------- -------------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . .
675,090 3,822,193
---------- -------------
- --------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2). . . . . . . . . . . . . . . . . 60,674 259,604
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . 5,438 16,026
Accounting services (Note 2). . . . . . . . . . . . . . . . . . . 2,377 7,726
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . 3,258 5,311
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . . . . 2,668 2,419
Pricing services. . . . . . . . . . . . . . . . . . . . . . . . . -- 2,572
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . -- 925
Amortization of organization expenses (Note 1f). . . . . . . . . . -- 762
Registration fees (Note 1f). . . . . . . . . . . . . . . . . . . . -- 618
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 973
---------- -------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 74,415 296,936
---------- -------------
Investment income--net. . . . . . . . . . . . . . . . . . . . . .
600,675 3,525,257
---------- -------------
- --------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3):
Realized gain on investments--net. . . . . . . . . . . . . . . . . 2,562 996,847
Realized loss on foreign currency transactions--net. . . . . . . . -- (116,486)
Change in unrealized appreciation/depreciation on investments--net (22,267) (2,286,088)
Change in unrealized appreciation/depreciation on foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . 123
---------- -------------
Total realized and unrealized loss on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . (19,705) (1,405,604)
---------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 580,970 $ 2,119,653
---------- -------------
---------- -------------
- --------------------------------------------------------------------------------------------------
*Net of foreign withholding tax on interest. . . . . . . . . . . . -- $ 18,867
---------- -------------
---------- -------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statemeents.
<PAGE>
This page left intentionally blank.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
---------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . $ 3,735,475 $ 8,022,508
Realized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 10,657,106 (311,392)
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . (9,191,391) 27,587,655
------------ ------------
Net increase in net assets resulting from operations. . . . . . 5,201,190 35,298,771
------------ ------------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . (4,146,625) (7,173,644)
Realized gain on investments--net. . . . . . . . . . . . . . . . (328,715) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . (4,475,340) (7,173,644)
------------ ------------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share 1,798,989 25,836,347
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . ------------ ------------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . 2,524,839 53,961,474
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . 212,912,214 158,950,740
------------ ------------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . $215,437,053 $212,912,214
------------ ------------
------------ ------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . $ 3,735,464 $ 4,146,614
------------ ------------
------------ ------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
---------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . $ 2,308,643 $ 3,967,636
Realized gain (loss) on investments and foreign currency 29,409,646 13,595,994
transactions--net. . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . 3,761,125 34,077,480
------- --------------- --- -----------
Net increase in net assets resulting from operations. . . . . . 35,479,414 51,641,110
------- --------------- --- -----------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . (2,262,442) (3,296,595)
Realized gain on investments--net. . . . . . . . . . . . . . . . (16,947,347) (7,106,929)
------- --------------- --- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . (19,209,789) (10,403,524)
------- --------------- --- -----------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share 74,456,157 100,918,588
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . ------- --------------- --- -----------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . 90,725,782 142,156,174
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . 306,462,893 164,306,719
------- --------------- --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . $ 397,188,675 $ 306,462,893
------------------------ ----------------
------------------------ ----------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . $ 2,308,627 $ 2,262,426
------------------------ ----------------
------------------------ ----------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DEVELOPING CAPITAL
MARKETS FOCUS FUND
------------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 DEC. 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 783,722 $ 1,186,414
Realized gain (loss) on investments and foreign currency (1,760,413) (3,129,641)
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 7,983,357 1,803,333
------ ------------- -- ------------
Net increase (decrease) in net assets resulting from operations. . 7,006,666 (139,894)
------ ------------- -- ------------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (1,385,673) (332,002)
Realized gain on investments--net. . . . . . . . . . . . . . . . . -- --
------ ------------- -- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . . (1,385,673) (332,002)
------ ------------- -- ------------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 16,019,811 19,004,774
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ ------------- -- ------------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . 21,640,804 18,532,878
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 55,208,630 36,675,752
------ ------------- -- ------------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,849,434 $ 55,208,630
--------------------- ----------------
--------------------- ----------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . $ 583,022 $ 1,184,973
--------------------- ----------------
--------------------- ----------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
DOMESTIC MONEY
MARKET FUND
------------------------------------
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 6,978,133 $ 17,526,423
Realized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . 8,460 44,778
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . (292,067) 334,598
--- ----------- --- -----------
Net increase (decrease) in net assets resulting from operations. . 6,694,526 17,905,799
--- ----------- --- -----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (6,978,133) (17,526,423)
Realized gain on investments--net. . . . . . . . . . . . . . . . . (8,460) (44,778)
--- ----------- --- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . . (6,986,593) (17,571,201)
--- ----------- --- -----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (28,016,051) (59,621,869)
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . --- ----------- --- -----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . (28,308,118) (59,287,271)
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 303,911,829 363,199,100
--- ----------- --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 275,603,711 $ 303,911,829
---------------- ----------------
---------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . $ -- $ --
---------------- ----------------
---------------- ----------------
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
EQUITY GROWTH FUND
----------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 702,726 $ 1,785,602
Realized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . 26,607,899 45,385,878
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . (9,045,390) 44,941,516
----- ------------- --- -----------
Net increase (decrease) in net assets resulting from operations. . 18,265,235 92,112,996
----- ------------- --- -----------
- ---------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (1,279,878) (889,063)
Realized gain on investments--net. . . . . . . . . . . . . . . . . (43,561,906) --
----- ------------- --- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders. . . . . . . . . . . . . . . . . . . (44,841,784) (889,063)
----- ------------- --- -----------
- ---------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 95,013,587 78,653,598
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . ----- ------------- --- -----------
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . 68,437,038 169,877,531
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 339,921,154 170,043,623
----- ------------- --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,358,192 $ 339,921,154
-------------------- ----------------
-------------------- ----------------
- ---------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . $ 702,715 $ 1,279,867
-------------------- ----------------
-------------------- ----------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
-------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 DEC. 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,005,976 $ 9,166,703
Realized gain (loss) on investments and foreign currency transactions--net 2,441,749 27,052,018
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 5,767,496 11,822,579
------- --------------- -- ----------
Net increase in net assets resulting from operations. . . . . . . . . . . 13,215,221 48,041,300
------- --------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (6,146,563) (8,045,358)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . (25,432,100) (5,055,924)
In excess of realized gain on investments--net. . . . . . . . . . . . . . -- --
------- --------------- -- ----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,578,663) (13,101,282)
------- --------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 21,410,619 10,795,379
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------- --------------- -- ----------
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 3,047,177 45,735,397
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 320,233,663 274,498,266
------- --------------- -- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323,280,840 $ 320,233,663
------------------------ --------------
------------------------ --------------
- -----------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . . . $ 3,462,821 $ 4,603,408
------------------------ --------------
------------------------ --------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
------------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,915,403 $ 17,146,054
Realized gain (loss) on investments and foreign currency transactions--net 19,422,431 (23,380,052)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . (5,091,746) 58,162,628
--------- ----------------- --- -----------
Net increase in net assets resulting from operations. . . . . . . . . . . 22,246,088 51,928,630
--------- ----------------- --- -----------
- -------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (12,699,527) (16,913,134)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . . . . . -- (199,509)
--------- ----------------- --- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,699,527) (17,112,643)
--------- ----------------- --- -----------
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share 740,243 (9,981,690)
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------- ----------------- --- -----------
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 10,286,804 24,834,297
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 540,241,613 515,407,316
--------- ----------------- --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 550,528,417 $ 540,241,613
---------------------------- ----------------
---------------------------- ----------------
- -------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . . . $ 2,705,491 $ 7,489,615
---------------------------- ----------------
---------------------------- ----------------
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL UTILITY FOCUS FUND
------------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,086,567 $ 5,942,408
Realized gain (loss) on investments and foreign currency transactions--net 517,739 (2,380,178)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . 5,445,525 26,090,740
--------- ----------------- --- -----------
Net increase in net assets resulting from operations. . . . . . . . . . . 9,049,831 29,652,970
--------- ----------------- --- -----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (3,566,704) (5,144,108)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . . . . . -- --
--------- ----------------- --- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,566,704) (5,144,108)
--------- ----------------- --- -----------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share (3,433,013) (2,526,392)
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------- ----------------- --- -----------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets. . . . . . . . . . . . . . . . . . . . . . . 2,050,114 21,982,470
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 148,225,277 126,242,807
--------- ----------------- --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,275,391 $ 148,225,277
---------------------------- ----------------
---------------------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . . . $ 1,679,397 $ 2,159,534
---------------------------- ----------------
---------------------------- ----------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
-------------------------------
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,467,540 $ 30,889,361
Realized gain (loss) on investments and foreign currency transactions--net 2,358,133 589,358
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . (6,295,162) 16,336,511
-- ---------- --- -----------
Net increase (decrease) in net assets resulting from operations. . . . . . 13,530,511 47,815,230
-- ---------- --- -----------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (17,543,433) (30,645,264)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . . -- --
-- ---------- --- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,543,433) (30,645,264)
-- ---------- --- -----------
- ---------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions. . . . 31,478,655 83,463,234
-- ---------- --- -----------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . . . . 27,465,733 100,633,200
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 356,351,940 255,718,740
-- ---------- --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,817,673 $ 356,351,940
-------------- ----------------
-------------- ----------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . . . . $ 2,746,405 $ 2,822,298
-------------- ----------------
-------------- ----------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE
GOVERNMENT BOND FUND
------------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,453,372 $ 1,796,464
Realized gain (loss) on investments and foreign currency transactions--net (66,539) 192,982
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . (2,012,002) 2,024,581
------- -------------- --- ----------
Net increase (decrease) in net assets resulting from operations. . . . . . (625,169) 4,014,027
------- -------------- --- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (1,398,070) (1,670,786)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . . (137,667) --
------- -------------- --- ----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,535,737) (1,670,786)
------- -------------- --- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions. . . . 15,492,699 20,842,535
------- -------------- --- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . . . . 13,331,793 23,185,776
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,996,427 17,810,651
------- -------------- --- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,328,220 $ 40,996,427
----------------------- ---------------
----------------------- ---------------
- ----------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . . . . $ 254,355 $ 199,053
----------------------- ---------------
----------------------- ---------------
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL BOND FUND
--------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . $ 591,574 $ 829,012
Realized gain (loss) on investments and foreign currency transactions--net (238,555) 201,199
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net. . . . . . . . . . . . . . . . . . . . . . . . (589,849) 735,220
-------- --------------- --- ----------
Net increase (decrease) in net assets resulting from operations. . . . . . (236,830) 1,765,431
-------- --------------- --- ----------
- --------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . . . . (589,177) (795,220)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . . . . (231,037) --
-------- --------------- --- ----------
Net decrease in net assets resulting from dividends and distributions to
shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (820,214) (795,220)
-------- --------------- --- ----------
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions. . . . 920,016 7,217,039
-------- --------------- --- ----------
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . . . . (137,028) 8,187,250
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,120,544 9,933,294
-------- --------------- --- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,983,516 $ 18,120,544
------------------------- ---------------
------------------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . . . . $ 90,589 $ 88,192
------------------------- ---------------
------------------------- ---------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
FOCUS FUND
-----------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 DEC. 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 3,270,866 $ 4,728,612
Realized gain (loss) on investments and foreign currency )
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . . 8,963,062 (7,417,463
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 8,788,718 15,585,541
------ -------------- -- ----------
Net increase (decrease) in net assets resulting from operations. . . 21,022,646 12,896,690
------ -------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (3,669,329) (151,930)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- (3,904,078)
In excess of realized gain on investments--net. . . . . . . . . . . -- (5,275,618)
------ -------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (3,669,329) (9,331,626)
------ -------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,010,573 14,153,402
------ -------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 52,363,890 17,718,466
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 265,602,241 247,883,775
------ -------------- -- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,966,131 $ 265,602,241
---------------------- --------------
---------------------- --------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . $ 4,576,376 $ 4,974,839
---------------------- --------------
---------------------- --------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
NATURAL RESOURCES
FOCUS FUND
--------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 470,135 $ 745,572
Realized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . . 1,236,972 789,560
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 1,435,360 3,506,951
----- ------------ --- ----------
Net increase (decrease) in net assets resulting from operations. . . 3,142,467 5,042,083
----- ------------ --- ----------
- -----------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (302,424) (719,125)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (740,711) (116,046)
In excess of realized gain on investments--net. . . . . . . . . . . -- --
----- ------------ --- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,043,135) (835,171)
----- ------------ --- ----------
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,061 (819,422)
----- ------------ --- ----------
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 2,619,393 3,387,490
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 43,102,351 39,714,861
----- ------------ --- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,721,744 $ 43,102,351
------------------- ---------------
------------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . $ 483,425 $ 315,714
------------------- ---------------
------------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRIME BOND FUND
--------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 15,700,384 $ 30,681,580
Realized gain (loss) on investments and foreign currency
transactions--net. . . . . . . . . . . . . . . . . . . . . . . . . . (513,078) 2,850,926
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . (27,084,561) 46,631,310
---- ------------ --- -----------
Net increase (decrease) in net assets resulting from operations. . . (11,897,255) 80,163,816
---- ------------ --- -----------
- --------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (15,751,538) (30,585,478)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- --
In excess of realized gain on investments--net. . . . . . . . . . . -- --
---- ------------ --- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (15,751,538) (30,585,478)
---- ------------ --- -----------
- --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,646,337 49,025,455
---- ------------ --- -----------
- --------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . (10,002,456) 98,603,793
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 489,837,968 391,234,175
---- ------------ --- -----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 479,835,512 $ 489,837,968
------------------ ----------------
------------------ ----------------
- --------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i). . . . . . . . . . . $ 2,444,731 $ 2,495,885
------------------ ----------------
------------------ ----------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
-----------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 DEC. 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 8,226,935 $ 10,721,106
Realized gain on investments and foreign currency transactions--net. 15,040,697 84,589,225
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . 15,420,315 17,627,851
------ -------------- -- ----------
Net increase in net assets resulting from operations. . . . . . . . 38,687,947 112,938,182
------ -------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (6,037,948) (8,042,730)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (84,325,411) (9,959,874)
------ -------------- -- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (90,363,359) (18,002,604)
------ -------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,596,381 85,255,141
------ -------------- -- ----------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 54,920,969 180,190,719
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 644,550,601 464,359,882
------ -------------- -- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 699,471,570 $ 644,550,601
---------------------- --------------
---------------------- --------------
- ----------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ 8,197,116 $ 6,008,129
---------------------- --------------
---------------------- --------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
----------------------------------------
FOR THE SIX MONTHS FOR THE
ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 600,675 $ 1,572,494
Realized gain on investments and foreign currency transactions--net. 2,562 10,309
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . (22,267) 41,873
------ ------------- --- ----------
Net increase in net assets resulting from operations. . . . . . . . 580,970 1,624,676
------ ------------- --- ----------
- -------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (600,675) (1,572,494)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . (2,562) (10,309)
------ ------------- --- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (603,237) (1,582,803)
------ ------------- --- ----------
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,024,469) (6,688,035)
------ ------------- --- ----------
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . (2,046,736) (6,646,162)
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 25,549,869 32,196,031
------ ------------- --- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,503,133 $ 25,549,869
--------------------- ---------------
--------------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . -- --
--------------------- ---------------
--------------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WORLD INCOME FOCUS FUND
--------------------------------------------
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED DEC.
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 1996 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . $ 3,525,257 $ 6,952,991
Realized gain on investments and foreign currency transactions--net. 880,361 510,287
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net. . . . . . . . . . . . . . . . . (2,285,965) 4,502,738
-------- --------------- --- ----------
Net increase in net assets resulting from operations. . . . . . . . 2,119,653 11,966,016
-------- --------------- --- ----------
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G):
Investment income--net. . . . . . . . . . . . . . . . . . . . . . . (3,609,145) (6,851,555)
Realized gain on investments--net. . . . . . . . . . . . . . . . . . -- --
-------- --------------- --- ----------
Net decrease in net assets resulting from dividends and distributions
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . (3,609,145) (6,851,555)
-------- --------------- --- ----------
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,376,611 1,580,255
-------- --------------- --- ----------
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets. . . . . . . . . . . . . . . 3,887,119 6,694,716
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 81,844,632 75,149,916
-------- --------------- --- ----------
End of period*. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,731,751 $ 81,844,632
------------------------- ---------------
------------------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net. . . . . . . . . . . . . . . . $ 681,420 $ 765,308
------------------------- ---------------
------------------------- ---------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS
HAVE BEEN DERIVED AMERICAN BALANCED FUND
FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: FOR THE SIX MONTHS ENDED
JUNE 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82
---------------- ------------ ------------ ------------ -----------
Investment income--net. . . . . . . . . .26 .59 .48 .32 .31
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net . . . . . . . . . . . .11 2.06 (1.06) 1.37 .37
---------------- ------------ ------------ ------------ -----------
Total from investment operations. . . . .37 2.65 (.58) 1.69 .68
---------------- ------------ ------------ ------------ -----------
Less dividends and distributions:
Investment income--net. . . . . . . . . (.30) (.56) (.37) (.34) (.37)
Realized gain on investments--net (.02) -- -- (.12) (.28)
In excess of realized gain on
investments--net. . . . . . . . . . . . -- -- (.05) -- --
---------------- ------------ ------------ ------------ -----------
Total dividends and distributions. . . . (.32) (.56) (.42) (.46) (.65)
---------------- ------------ ------------ ------------ -----------
Net asset value, end of period. . . . . $ 15.22 $ 15.17 $ 13.08 $ 14.08 $ 12.85
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . 2.48%+++ 20.81% (4.19%) 13.49% 5.72%
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses. . . . . . . . . . . . . . . . .60%* .61% .63% .70% .97%
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
Investment income--net. . . . . . . . . 3.46%* 4.22% 3.95% 3.20% 3.71%
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 215,437 $ 212,912 $ 158,951 $ 115,420 $ 24,918
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
Portfolio turnover. . . . . . . . . . . 111.96% 38.40% 35.36% 12.55% 36.34%
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
Average commission rate paid ++++. . . . $ .0613 -- -- -- --
---- ---------- --- ------- --- ------- --- ------- --- ------
---- ---------- --- ------- --- ------- --- ------- --- ------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
---------------------------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA FOR THE YEAR ENDED
AND RATIOS HAVE BEEN DERIVED DECEMBER 31,
FROM INFORMATION PROVIDED IN
THE FINANCIAL STATEMENTS. -----------------------------------------
FOR THE PERIOD
JULY 1, 1993+ TO
FOR THE SIX DECEMBER 31,
INCREASE (DECREASE) IN NET MONTHS ENDED 1993
ASSET VALUE: JUNE 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 13.10 $ 11.10 $ 10.95 $ 10.00
---------------- ------------------ ------------ -----------
Investment income--net. . . . .08 .18 .17 .04
Realized and unrealized gain on 1.28 2.49 .08 .91
investments --net. . . . . . ---------------- ------------------ ------------ -----------
Total from investment 1.36 2.67 .25 .95
operations. . . . . . . . . . ---------------- ------------------ ------------ -----------
Less dividends and
distributions:
Investment income--net. . . . (.10) (.19) (.10) --
Realized gain on
investments--net. . . . . . . (.72) (.48) -- --
---------------- ------------------ ------------ -----------
Total dividends and (.82) (.67) (.10) --
distributions. . . . . . . . ---------------- ------------------ ------------ -----------
Net asset value, end of period $ 13.64 $ 13.10 $ 11.10 $ 10.95
---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per 11.03+++ 25.49% 2.36% 9.50%+++
share. . . . . . . . . . . . ---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses. . . . . . . . . . . .64%* .66% .72% .86%*
---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
Investment income--net. . . . 1.33%* 1.68% 2.08% 1.69%*
---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in $ 397,189 $ 306,463 $ 164,307 $ 47,207
thousands). . . . . . . . . . ---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
Portfolio turnover. . . . . . 37.28% 74.10% 60.55% 30.86%
---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
Average commission rate paid $ .0552 -- -- --
++++. . . . . . . . . . . . . ---- ---------- ----- ----------- --- ------- -- -------
---- ---------- ----- ----------- --- ------- -- -------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
+++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DEVELOPING CAPITAL MARKETS FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE -----------------------------------------------------------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN
THE FINANCIAL STATEMENTS.
FOR THE SIX FOR THE FOR THE PERIOD
MONTHS ENDED YEAR ENDED MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . $ 9.32 $ 9.51 $ 10.00
--------------------- ------------ ---------
Investment income--net. . . . . . . . . . . . .11 .20 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net. . . . . . . . . . . . . . .95 (.30) (.58)
--------------------- ------------ ---------
Total from investment operations. . . . . .. . 1.06 (.10) (.49)
--------------------- ------------ ---------
Less dividends from investment income--net.. . (.23) (.09) --
--------------------- ------------ ---------
Net asset value, end of period. . . . . . .. . $ 10.15 $ 9.32 $ 9.51
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . . .. . 11.69%+++ (1.08%) (4.90%)+++
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement. . . . . . .. . 1.20%* 1.25% 1.29%*
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
Expenses. . . . . . . . . . . . . . . . . .. . 1.20%* 1.36% 1.35%*
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
Investment income--net. . . . . . . . . . .. . 2.37%* 2.73% 2.18%*
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands). .. . $ 76,849 $ 55,209 $ 36,676
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
Portfolio turnover. . . . . . . . . . . . .. . 53.29% 62.53% 29.79%
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
Average commission rate paid++. . . . . . .. . $ 0.0005 -- --
------- ------------ -- -------- - ------
------- ------------ -- -------- - ------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities.
+++ Aggregate total investment returns.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
FOR THE YEAR ENDED
DECEMBER 31,
THE FOLLOWING PER SHARE DATA AND RATIOS ----------------------------------------
HAVE BEEN DERIVED FROM INFORMATION FOR THE SIX FOR THE PERIOD
PROVIDED IN THE FINANCIAL STATEMENTS. MONTHS ENDED FEB. 20, 1992+
JUNE 30, TO DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------- ---------------- ---------- ---------- ---------
Investment income--net .0248 .0547 .0386 .0302 .0302
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (.0010) .0012 (.0007) .0005 .0013
---------------- ---------------- ---------- ---------- ---------
Total from investment operations .0238 .0559 .0379 .0307 .0315
---------------- ---------------- ---------- ---------- ---------
Less dividends and distributions:
Investment income--net (.0248) (.0547) (.0386) (.0302) (.0302)
Realized gain on investments--net --+++ (.0002) -- (.0005) (.0010)
---------------- ---------------- ---------- ---------- ---------
Total dividends and distributions (.0248) (.0549) (.0386) (.0307) (.0312)
---------------- ---------------- ---------- ---------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---------- ----- --------- -- ------ -- ------ - ------
---- ---------- ----- --------- -- ------ -- ------ - ------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 4.95%* 5.65% 3.94% 3.10% 3.65%*
---- ---------- ----- --------- -- ------ -- ------ - ------
---- ---------- ----- --------- -- ------ -- ------ - ------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .54%* .55% .50% .36% .32%*
---- ---------- ----- --------- -- ------ -- ------ - ------
---- ---------- ----- --------- -- ------ -- ------ - ------
Expenses .54%* .55% .57% .63% .88%*
---- ---------- ----- --------- -- ------ -- ------ - ------
---- ---------- ----- --------- -- ------ -- ------ - ------
Investment income--net, and realized
gain on investments--net 4.97%* 5.50% 4.02% 3.03% 3.48%*
---- ---------- ----- --------- -- ------ -- ------ - ------
---- ---------- ----- --------- -- ------ -- ------ - ------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in $ 275,604 $ 303,912 $363,199 $170,531 $ 41,128
thousands) ---- ---------- ----- --------- -- ------ -- ------ - ------
---- ---------- ----- --------- -- ------ -- ------ - ------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
+++ Amount is less than $.0001 per share.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. EQUITY GROWTH FUND+
------------------------------------------------------------------ -
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
FOR THE SIX
INCREASE (DECREASE) IN NET ASSET VALUE: MONTHS ENDED 1995 1994 1993 1992
JUNE 30, 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96
------------ ---------- ---------- --------- ---------
Investment income (loss)--net .05 .17 .05 (.01) .01
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.28 8.64 (1.56) 3.17 (.10)
------------ ---------- ---------- --------- ---------
Total from investment operations 1.33 8.81 (1.51) 3.16 (.09)
------------ ---------- ---------- --------- ---------
Less dividends and distributions:
Investment income--net (.10) (.09) -- --++ (.07)
Realized gain on investments--net (3.59) -- (.19) -- --
------------ ---------- ---------- --------- ---------
Total dividends and distributions (3.69) (.09) (.19) -- (.07)
------------ ---------- ---------- --------- ---------
Net asset value, end of period $ 25.62 $ 27.98 $ 19.26 $ 20.96 $ 17.80
-- -------- -- ------ -- ------ -- ----- -- -----
-- -------- -- ------ -- ------ -- ----- -- -----
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 5.48%+++ 45.90% (7.27%) 17.78% (.53%)
-- -------- -- ------ -- ------ -- ----- -- -----
-- -------- -- ------ -- ------ -- ----- -- -----
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .79%* .81% .83% .96% 1.18%
-- -------- -- ------ -- ------ -- ----- -- -----
-- -------- -- ------ -- ------ -- ----- -- -----
Investment income--net .37%* .72% .27% (.05%) .04%
-- -------- -- ------ -- ------ -- ----- -- -----
-- -------- -- ------ -- ------ -- ----- -- -----
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 408,358 $339,921 $170,044 $98,976 $23,167
-- -------- -- ------ -- ------ -- ----- -- -----
-- -------- -- ------ -- ------ -- ----- -- -----
Portfolio turnover 43.26% 96.79% 88.48% 131.75% 98.64%
-- -------- -- ------ --------- -------- --------
-- -------- -- ------ --------- -------- --------
Average commission rate paid ++++ $ .0590 -- -- -- --
-- -------- -- ------ -- ------ -- ----- -- -----
-- -------- -- ------ -- ------ -- ----- -- -----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
++ Amount is less than $.01 per share.
+++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND
RATIOS HAVE BEEN DERIVED FLEXIBLE STRATEGY FUND
FROM INFORMATION PROVIDED IN THE -----------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET FOR THE SIX --------------------------------------------
VALUE: MONTHS ENDED 1995+ 1994+ 1993 1992
JUNE 30, 1996+
- ---------------------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of $ 16.47 $ 14.70 $ 16.19 $ 14.15 $ 14.79
period -------------- -------- ---------- ---------- ---------
Investment income--net .24 .47 .37 .28 .33
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net .39 1.99 (1.02) 1.94 .25
-------------- -------- ---------- ---------- ---------
Total from investment operations .63 2.46 (.65) 2.22 .58
-------------- -------- ---------- ---------- ---------
Less dividends and distributions:
Investment income--net (.32) (.42) (.30) (.15) (.54)
Realized gain on investments--net (1.31) (.27) (.54) (.03) (.68)
-------------- -------- ---------- ---------- ---------
Total dividends and distributions (1.63) (.69) (.84) (.18) (1.22)
-------------- -------- ---------- ---------- ---------
Net asset value, end of period $ 15.47 $ 16.47 $ 14.70 $ 16.19 $ 14.15
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share 4.17%+++ 17.40% (4.20%) 15.80% 4.25%
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .70%* .71% .73% .80% .90%
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
Investment income--net 3.04%* 3.07% 2.52% 2.26% 2.62%
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $ 323,281 $320,234 $274,498 $194,777 $82,549
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
Portfolio turnover 54.86% 135.83% 65.54% 56.42% 55.25%
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
Average commission rate paid++++ $ .0375 -- -- -- --
-------------- -------- ---------- ---------- ---------
-------------- -------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
-----------------------------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE BEEN FOR THE YEAR ENDED
DERIVED FROM INFORMATION DECEMBER 31,
PROVIDED IN THE FINANCIAL ---------------------------------------------
STATEMENTS. FOR THE PERIOD
FEB. 28, 1992+
INCREASE (DECREASE) IN NET FOR THE SIX MONTHS ENDED JUNE 30, TO DEC. 31,
ASSET VALUE: 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00
------------------ ------------ ------------ ------------ -----------
Investment income--net .18 .39 .30 .16 .13
Realized and unrealized gain
(loss) on investments
and foreign currency
transactions--net .31 .82 (.48) 1.96 .13
------------------ ------------ ------------ ------------ -----------
Total from investment .49 1.21 (.18) 2.12 .26
operations ------------------ ------------ ------------ ------------ -----------
Less dividends and
distributions:
Investment income--net (.29) (.39) (.21) (.17) (.04)
Realized gain on
investments--net -- -- (.04) -- --
In excess of realized gain
on investments--net -- --++ (.01) -- --
------------------ ------------ ------------ ------------ -----------
Total dividends and (.29) (.39) (.26) (.17) (.04)
distributions ------------------ ------------ ------------ ------------ -----------
Net asset value, end of $ 12.75 $ 12.55 $ 11.73 $ 12.17 $ 10.22
period ----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per 4.03%++++ 10.60% (1.46%) 21.03% 2.62%++++
share ----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of .71%* .72% .77% .88% 1.25%*
reimbursement ----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
Expenses .71%* .72% .77% .88% 1.35%*
----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
Investment income--net 2.87%* 3.33% 2.85% 2.41% 2.66%*
----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in $ 550,528 $ 540,242 $ 515,407 $ 269,627 $ 15,527
thousands) ----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
Portfolio turnover 80.64% 27.23% 21.03% 17.07% 14.47%
----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
Average commission rate $ .0290 -- -- -- --
paid+++ ----- ----------- --- ------- --- ------- --- ------- -- -------
----- ----------- --- ------- --- ------- --- ------- -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
++++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN ---------------------------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE YEAR ENDED FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED DECEMBER 31, JULY 1, 1993+
JUNE 30, ------------------------ TO DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.30 $ 9.45 $ 10.66 $ 10.00
---------------- ---------- ---------- ----------
Investment income--net .24 .45 .35 .04
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .46 1.79 (1.25) .64
---------------- ---------- ---------- ----------
Total from investment operations .70 2.24 (.90) .68
---------------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.27) (.39) (.29) (.02)
In excess of realized gain on investments--net -- -- (.02) --
---------------- ---------- ---------- ----------
Total dividends and distributions (.27) (.39) (.31) (.02)
---------------- ---------- ---------- ----------
Net asset value, end of period $ 11.73 $ 11.30 $ 9.45 $ 10.66
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 6.34%+++ 24.33% (8.51%) 6.85%+++
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .66%* .66% .73% .89%*
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
Investment income--net 4.14%* 4.44% 3.68% 2.84%*
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 150,275 $148,225 $126,243 $ 104,517
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
Portfolio turnover 7.73% 11.05% 9.52% 1.72%
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
Average commission rate paid ++++ $ .0596 -- -- --
---- ---------- -- ------ -- ------ - -------
---- ---------- -- ------ -- ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
+++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
</TABLE>
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
THE FOLLOWING PER SHARE DATA AND --------------------------------------------------------------------------------------
RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS. FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23
period
------------ ------------ ----------- ------------ -------------
Investment income--net .52 1.09 1.05 .95 1.07
Realized and unrealized gain
(loss) on investments
and foreign currency
transactions--net (.11) .65 (1.47) .95 .90
------------ ------------ ----------- ------------ -------------
Total from investment operations .41 1.74 (.42) 1.90 1.97
------------ ------------ ----------- ------------ -------------
Less dividends from investment (.53) (1.10) (1.03) (.97) (1.07)
income--net
------------ ------------ ----------- ------------ -------------
Net asset value, end of period $ 11.13 $ 11.25 $ 10.61 $ 12.06 $ 11.13
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 3.73%+++ 17.21% (3.59%) 17.84% 20.05%
------------ ------------ ----------- ------------ -------------
------------ ------------ ----------- ------------ -------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .53%* .55% .61% .72% .89%
------------ ------------ ----------- ------------ -------------
------------ ------------ ----------- ------------ -------------
Investment income--net 9.40%* 9.92% 9.73% 8.62% 10.06%
------------ ------------ ----------- ------------ -------------
------------ ------------ ----------- ------------ -------------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 383,818 $ 356,352 $ 255,719 $ 163,428 $ 26,343
------------ ------------ ----------- ------------ -------------
------------ ------------ ----------- ------------ -------------
Portfolio turnover 28.32% 41.60% 51.88% 35.67% 28.21%
------------ ------------ ----------- ------------ -------------
------------ ------------ ----------- ------------ -------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
** Total investment returns exclude insurance-related
fees and expenses.
+++ Aggregate total investment return.
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT BOND FUND
------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE FOR THE FOR THE PERIOD
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. SIX MONTHS ENDED YEAR ENDED MAY 2, 1994+ TO
JUNE 30, 1996 DEC. 31, 1995 DEC. 31, 1994
INCREASE (DECREASE) IN NET ASSET VALUE:
- ---------------------------------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . . . . . . $ 10.79 $ 9.97 $ 10.00
------------------- --------- ----------
Investment income--net. . . . . . . . . . . . . . . . . .33 .62 .25
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net. . . . . . . . . (.50) .81 (.07)
------------------- --------- ----------
Total from investment operations. . . . . . . . . . . . (.17) 1.43 .18
------------------- --------- ----------
Less dividends and distributions:
Investment income--net. . . . . . . . . . . . . . . . . (.33) (.61) (.21)
Realized gain on investments--net. . . . . . . . . . . .
(.04) -- --
------------------- --------- ----------
Total dividends and distributions. . . . . . . . . . . . (.37) (.61) (.21)
------------------- --------- ----------
Net asset value, end of period. . . . . . . . . . . . . $ 10.25 $ 10.79 $ 9.97
------ ----------- - ------ - -------
------ ----------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . . . . . . . . . (1.63%)+++ 14.83% 1.79%+++
------ ----------- - ------ - -------
------ ----------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement. . . . . . . . . . . . . .00%* .00% .00%*
------ ----------- - ------ - -------
------ ----------- - ------ - -------
Expenses. . . . . . . . . . . . . . . . . . . . . . . . .61%* .66% .80%*
------ ----------- - ------ - -------
------ ----------- - ------ - -------
Investment income--net. . . . . . . . . . . . . . . . . 6.47%* 6.28% 4.66%*
------ ----------- - ------ - -------
------ ----------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands). . . . . . . . $ 54,328 $ 40,996 $ 17,811
------ ----------- - ------ - -------
------ ----------- - ------ - -------
Portfolio turnover. . . . . . . . . . . . . . . . . . . 7.71% 45.39% 103.03%
------ ----------- - ------ - -------
------ ----------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**Total investment returns exclude insurance-related fees and expenses.
+Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND
------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE SIX FOR THE FOR THE PERIOD
MONTHS ENDED YEAR ENDED MAY 2, 1994+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1996 DEC. 31, 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. . . . . . . . . $ 10.52 $ 9.70 $ 10.00
------------------ --------- ----------
Investment income--net. . . . . . . . . . . . . . . . .32 .72 .38
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net. . . . . . . . (.46) .82 (.35)
------------------ --------- ----------
Total from investment operations. . . . . . . . . . . (.14) 1.54 .03
------------------ --------- ----------
Less dividends:
Investment income--net. . . . . . . . . . . . . . . .. . (.32) (.72) (.33)
Realized gain on investments--net. . . . . . . . . . (.13) -- --
------------------ --------- ----------
Total dividends and distributions. . . . . . . . . . (.45) (.72) (.33)
------------------ --------- ----------
Net asset value, end of period. . . . . . . . . . . $ 9.93 $ 10.52 $ 9.70
------ ---------- - ------ - -------
------ ---------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share. . . . . . . . . (1.25%)+++ 16.35% 0.37%+++
------ ---------- - ------ - -------
------ ---------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement. . . . . . . . . . . .00%* .00% .00%*
------ ---------- - ------ - -------
------ ---------- - ------ - -------
Expenses. . . . . . . . . . . . . . . . . . . . . . .78%* .95% 1.08%*
------ ---------- - ------ - -------
------ ---------- - ------ - -------
Investment income--net. . . . . . . . . . . . . . . 6.40%* 7.05% 6.34%*
------ ---------- - ------ - -------
------ ---------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands). . . . . . $ 17,984 $ 18,121 $ 9,933
------ ---------- - ------ - -------
------ ---------- - ------ - -------
Portfolio turnover. . . . . . . . . . . . . . . . . 123.88% 2.23% 152.20%
------ ---------- - ------ - -------
------ ---------- - ------ - -------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+Commencement of Operations.
+++Aggregate total investment return.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
THE FOLLOWING PER SHARE DATA AND ---------------------------------------------------------------------------------------------
RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS. FOR THE YEAR ENDED
FOR THE SIX DECEMBER 31, FOR THE PERIOD
MONTHS ENDED ------------------------------------ JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET JUNE 30, 1996 1995 1994 DEC. 31, 1993
VALUE: --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.06 $ 10.90 $ 11.03 $ 10.00
------------------ ---------------------- ---------- -----------
Investment income--net .11 .20 .19 .01
Realized and unrealized gain (loss)
on investments
and foreign currency
transactions--net .71 .37 (.13) 1.02
------------------ ---------------------- ---------- -----------
-----------------------------------------------------------------------------------------------
Total from investment operations .82 .57 .06 1.03
------------------ ---------------------- ---------- -----------
Less dividends and distributions:
Investment income--net (.15) (.01) (.18) --
Realized gain on investments--net -- (.17) (.01) --
In excess of realized gain on
investments--net -- (.23) -- --
------------------ ---------------------- ---------- -----------
-----------------------------------------------------------------------------------------------
Total dividends and distributions (.15) (.41) (.19) --
------------------ ---------------------- ---------- -----------
Net asset value, end of period $ 11.73 $ 11.06 $ 10.90 $ 11.03
----- ----------- -------- ------------ -- ------ -- -------
----- ----------- -------- ------------ -- ------ -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 7.53%+++ 5.48% .55% 10.30%+++
----- ----------- -------- ------------ -- ------ -- -------
----- ----------- -------- ------------ -- ------ -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .87%* .89% .97% 1.14%*
----- ----------- -------- ------------ -- ------ -- -------
----- ----------- -------- ------------ -- ------ -- -------
Investment income--net 2.23%* 1.95% 1.09% .30%*
----- ----------- -------- ------------ -- ------ -- -------
----- ----------- -------- ------------ -- ------ -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in $ 317,966 $ 265,602 $247,884 $ 76,906
thousands) ----- ----------- -------- ------------ -- ------ -- -------
----- ----------- -------- ------------ -- ------ -- -------
Portfolio turnover 27.43% 100.02% 58.84% 17.39%
----- ----------- --------------------- -- ------ -- -------
----- ----------- --------------------- -- ------ -- -------
Average commission rate paid ++ $ .0004 -- -- --
----- ----------- -------- ------------ -- ------ -- -------
----- ----------- -------- ------------ -- ------ -- -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
+++ Aggregate total investment return.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION NATURAL RESOURCES FOCUS FUND
PROVIDED IN THE FINANCIAL ------------------------------------------------------------------------------------------
STATEMENTS. FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE JUNE 30, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 11.95 $ 10.82 $ 10.82 $ 9.84 $ 10.06
------------- ------------- ----------- ------------ ---------------
Investment income--net .12 .20 .17 .11 .18
Realized and unrealized gain
(loss) on investments
and foreign currency
transactions--net .74 1.15 (.02) .92 (.05)
------------- ------------- ----------- ------------ ---------------
Total from investment operations .86 1.35 .15 1.03 .13
------------- ------------- ----------- ------------ ---------------
Less dividends and
distributions:
Investment income--net (.08) (.19) (.15) (.05) (.29)
Realized gain on
investments--net (.21) (.03) -- -- (.06)
------------- ------------- ----------- ------------ ---------------
Total dividends and distributions (.29) (.22) (.15) (.05) (.35)
------------- ------------- ----------- ------------ ---------------
Net asset value, end of period $ 12.52 $ 11.95 $ 10.82 $ 10.82 $ 9.84
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 7.34%+++ 12.65% 1.44% 10.47% 1.36%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .79%* .78% .87% 1.13% 1.25%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Expenses .79%* .78% .87% 1.13% 1.27%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Investment income--net $ 2.06%* $ 1.75% $ 1.91% $ 1.34% $ 2.00%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $ 45,722 $ 43,102 $ 39,715 $ 14,778 $ 4,144
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Portfolio turnover 15.03% 30.15% 10.94% 58.44% 22.88%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Average commission rate paid++++ $ .0202 -- -- -- --
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+++ Aggregate total investment return.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND
RATIOS HAVE BEEN DERIVED PRIME BOND FUND
FROM INFORMATION PROVIDED IN THE --------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS. FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31,
ENDED JUNE 30, 1996 ------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02
------------- ------------- ----------- ------------ ---------------
Investment income--net .40 .82 .77 .70 .79
Realized and unrealized gain (loss)
on investments
and foreign currency
transactions--net (.71) 1.34 (1.36) .71 .04
------------- ------------- ----------- ------------ ---------------
Total from investment operations (.31) 2.16 (.59) 1.41 .83
------------- ------------- ----------- ------------ ---------------
Less dividends and distributions:
Investment income--net (.40) (.83) (.76) (.70) (.81)
Realized gain on investments--net -- -- -- (.11) --
In excess of realized gain on
investments--net -- -- (.17) -- --
------------- ------------- ----------- ------------ ---------------
Total dividends and distributions (.40) (.83) (.93) (.81) (.81)
------------- ------------- ----------- ------------ ---------------
Net asset value, end of period $ 11.74 $ 12.45 $ 11.12 $ 12.64 $ 12.04
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share (2.52%)+++ 20.14% (4.80%) 12.02% 7.27%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .49%* .50% .54% .63% .78%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Investment income--net 6.65%* 7.00% 6.74% 5.86% 6.76%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in $ 479,836 $ 489,838 $ 391,234 $ 314,091 $ 84,810
thousands)
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Portfolio turnover 48.14% 90.12% 139.89% 115.26% 82.74%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related
fees and expenses.
+++ Aggregate total investment return.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND
RATIOS HAVE BEEN DERIVED QUALITY EQUITY FUND
FROM INFORMATION PROVIDED IN THE --------------------------------------------------------------------------------------------
FNANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET FOR THE SIX MONTHS
VALUE: ENDED JUNE 30, 1996+ 1995+ 1994+ 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35
------------- ------------- ----------- ------------ ---------------
Investment income--net .36 .58 .38 .24 .34
Realized and unrealized gain (loss)
on investments
and foreign currency
transactions--net 1.34 5.48 (.74) 3.46 .32
------------- ------------- ----------- ------------ ---------------
Total from investment operations 1.70 6.06 (.36) 3.70 .66
------------- ------------- ----------- ------------ ---------------
Less dividends and distributions:
Investment income--net (.31) (.45) (.25) (.12) (.58)
Realized gain on investments--net (4.29) (.59) (.67) (.04) (.95)
------------- ------------- ----------- ------------ ---------------
Total dividends and distributions (4.60) (1.04) (.92) (.16) (1.53)
------------- ------------- ----------- ------------ ---------------
Net asset value, end of period $ 29.86 $ 32.76 $ 27.74 $ 29.02 $ 25.48
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 5.94%+++ 22.61% (1.20%) 14.57% 2.69%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .48%* .51% .54% .62% .74%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Investment income--net 2.45%* 1.94% 1.39% 1.07% 1.54%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period $ 699,472 $ 644,551 $ 464,360 $ 309,420 $ 87,977
(in thousands)
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Portfolio turnover 48.72% 140.32% 60.57% 88.25% 62.54%
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
Average commission rate paid++ $ .0619 -- -- -- --
------------- ------------- ----------- ------------ ---------------
------------- ------------- ----------- ------------ ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities.
+++ Aggregate total investment return.
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED RESERVE ASSETS FUND
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. -------------------------------------------------------------------
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- --------- --------- --------- ---------
Investment income--net .0246 .0543 .0371 .0268 .0320
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (.0008) .0018 (.0009) .0005 .0007
------------- --------- --------- --------- ---------
Total from investment operations .0238 .0561 .0362 .0273 .0327
------------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.0246) (.0543) (.0362) (.0268) (.0320)
Realized gain on investments--net (.0001) (.0004) -- (.0005) (.0005)
------------- --------- --------- --------- ---------
Total dividends and distributions (.0247) (.0547) (.0362) (.0273) (.0325)
------------- --------- --------- --------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 4.93%* 5.63% 3.80% 2.77% 3.28%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .61%* .61% .65% .70% .79%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Investment income--net, and realized gain
on investments--net 4.96% 5.47% 3.75% 2.73% 3.36%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 23,503 $25,550 $32,196 $30,168 $26,767
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**Total investment returns exclude insurance-related fees and expenses.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED WORLD INCOME FOCUS FUND
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. ---------------------------------------------------------------------
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, FOR THE PERIOD
MONTHS ENDED ------------------------------- JULY 1, 1993+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 1996++ 1995++ 1994 DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.79 $ 9.17 $ 10.38 $ 10.00
----------- ----------- ----------- ----------
Investment income--net .39 .85 .76 .25
Realized and unrealized gain (loss)
on investments
and foreign currency
transactions--net (.15) .61 (1.19) .33
----------- ----------- ----------- ----------
Total from investment operations .24 1.46 (.43) .58
----------- ----------- ----------- ----------
Less dividends and distributions:
Investment income--net (.40) (.84) (.76) (.20)
In excess of realized gain on
investments--net -- -- (.02) --
----------- ----------- ----------- ----------
Total dividends and distributions (.40) (.84) (.78) (.20)
----------- ----------- ----------- ----------
Net asset value, end of period $ 9.63 $ 9.79 $ 9.17 $ 10.38
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 2.56%+++ 16.69% (4.21%) 5.90%+++
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .68%* .68% .75% .94%*
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Investment income--net 8.13%* 8.99% 8.01% 6.20%*
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 85,732 $ 81,845 $ 75,150 $ 50,737
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Portfolio turnover 106.40% 132.57% 117.58% 54.80%
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* 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>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONCLUDED)
<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, Global Strategy Focus Fund,
International Bond Fund, Natural Resources Focus Fund and the World Income Focus
Fund, all of which are classified as "non-diversified". These unaudited
financial statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature. 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 last available bid price 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. 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. Premiums 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
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records
<PAGE>
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- counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(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.
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 for 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>
RESERVE ASSETS FUND
- ---------------------------------------------------------------------
ADVISORY
Portion of average daily value of net assets of the Fund: 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>
<PAGE>
QUALITY EQUITY FUND
- ------------------------------------------------------------------------
ADVISORY
Portion of average daily value of net assets of the Fund: 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%
- -----------------------------------------------------------------------
HIGH CURRENT INCOME FUND AND PRIME BOND FUND
- ------------------------------------------------------------------------
Portion of aggregate average daily value of
net assets of both Funds: ADVISORY FEE
- ------------------------------------------------------------------------
HIGH CURRENT PRIME
INCOME BOND
FUND FUND
- ------------------------------------------------------------------------
Not exceeding $250 million. . . . . . . . 0.55% 0.50%
In excess of $250 million but not more
than $500 million. . . . . . . . . . . . . 0.50% 0.45%
In excess of $500 million but not more
than $750 million. . . . . . . . . . . . . 0.45% 0.40%
In excess of $750 million. . . . . . . . . 0.40% 0.35%
- ------------------------------------------------------------------------
The 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 the Fund by MLAM which, in
turn, will be reimbursed by MLLA.
For the Intermediate Government Bond Fund for the six months ended June 30,
1996, MLAM earned fees of $111,990, all of which was voluntarily waived. MLAM
has also reimbursed the Fund $24,433 in additional expenses.
For the International Bond Fund for the six months ended June 30, 1996, MLAM
earned fees of $55,321, all of which was voluntarily waived. MLAM has also
reimbursed the Fund $16,580 in additional expenses.
For the six months ended June 30, 1996, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), an affiliate of MLAM, earned commissions on the execution of
portfolio security transactions aggregating $1,512 in the American Balanced
Fund, $7,080 in the Basic Value Focus Fund, $16,178 in the Developing Capital
Markets Focus Fund, $14,004 in the Flexible Strategy Fund, $27,762 in the Global
Strategy Focus Fund, $28,969 in the International Equity Focus Fund, $1,965 in
the Natural Resources Focus Fund, $40,668 in the Quality Equity Fund, and $625
in the World Income Focus Fund.
Accounting services are provided to the Company by MLAM at cost.
For the six months ended June 30, 1996, American Balanced Fund, Flexible
Strategy Fund, Global Strategy Focus 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, $153, $112, $26, $39, $2,983, $320, $3,175, and $1,290,
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
six months ended June 30, 1996 were as follows:
PURCHASES SALES
- ---------------------------------------------------------------------
American Balanced Fund. . . . . . . . $215,738,948 $ 199,185,856
- --------------------------------------- ------------ ------------
Basic Value Focus Fund. . . . . . . . 157,651,617 119,586,989
Developing Capital Markets Focus Fund 50,096,208 31,579,599
Domestic Money Market Fund. . . . . . -- --
Equity Growth Fund. . . . . . . . . . 208,355,230 146,607,557
Flexible Strategy Fund. . . . . . . . 262,078,296 128,347,540
Global Strategy Focus Fund. . . . . . 523,396,343 347,396,303
Global Utility Focus Fund. . . . . . 13,174,949 10,566,611
High Current Income Fund. . . . . . . 112,831,770 96,350,615
Intermediate Government Bond Fund. . 19,762,620 3,033,125
International Bond Focus Fund. . . . 22,380,614 20,855,699
International Equity Focus Fund. . . 103,205,109 63,299,412
Natural Resources Focus Fund. . . . . 8,774,165 6,584,265
Prime Bond Fund. . . . . . . . . . . 216,166,277 209,786,523
Quality Equity Fund. . . . . . . . . 497,269,445 241,905,404
Reserve Assets Fund. . . . . . . . . -- --
World Income Focus Fund. . . . . . . 86,003,631 84,501,659
- ---------------------------------------------------------------------
<PAGE>
Transactions in options written for the six months ended June 30, 1996, were as
follows:
INTERNATIONAL EQUITY FOCUS FUND
- --------------------------------------------------------------------------------
NOMINAL
VALUE
COVERED BY
WRITTEN PREMIUMS
CALL OPTIONS WRITTEN OPTIONS RECEIVED
- --------------------------------------------------------------------------------
Outstanding call options written, beginning of period 6,800 $ 54,253
Options written. . . . . . . . . . . . . . . . . . . 8,969 568,555
Options expired. . . . . . . . . . . . . . . . . . . (6,800) (54,253)
Options exercised. . . . . . . . . . . . . . . . . . (8,900) (281,723)
---------- --------
Outstanding call options written, end of period. . . 69 $ 286,832
---------- -----------
---------- -----------
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND
- --------------------------------------------------------------------------------
NOMINAL
VALUE
COVERED BY
WRITTEN PREMIUMS
PUT OPTIONS WRITTEN OPTIONS RECEIVED
- --------------------------------------------------------------------------------
Outstanding put options written, beginning of period. 914 $ 21,437
Options written. . . . . . . . . . . . . . . . . . . 1,240,000 8,866
Options expired. . . . . . . . . . . . . . . . . . . (1,240,000) (8,866)
----------- -----------
Outstanding put options written, end of period. . . . 914 $ 21,437
----------- -----------
----------- -----------
- --------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND
- --------------------------------------------------------------------------------
NOMINAL
VALUE
COVERED BY
WRITTEN PREMIUMS
CALL OPTIONS WRITTEN OPTIONS RECEIVED
- --------------------------------------------------------------------------------
Outstanding call options written, beginning of period -- $ --
Options written. . . . . . . . . . . . . . . . . . . 12,963,750 117,210
Options expired. . . . . . . . . . . . . . . . . . . (500,000) (781)
Options closed. . . . . . . . . . . . . . . . . . . . (11,168,750) (94,953)
----------- -----------
Outstanding call options written, end of period. . . 1,295,000 $ 21,476
----------- -----------
----------- -----------
- --------------------------------------------------------------------------------
At June 30, 1996, net unrealized appreciation/
depreciation and aggregate cost for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
DEVELOPING
BASIC CAPITAL DOMESTIC
AMERICAN VALUE MARKETS MONEY
BALANCED FOCUS FOCUS MARKET
FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Appreciated securities $ 13,752,802 $ 48,378,045 $10,422,953 $ 1,016
Depreciated securities (1,538,177) (15,263,389) (2,978,760) (154,800)
-------------- -------------- ------------- --------------
Net unrealized
appreciation
(depreciation). . . $ 12,214,625 $ 33,114,656 $ 7,444,193 $ (153,784)
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
Cost for Federal income
tax purposes*. . . . $200,656,376 $370,762,415 $66,662,200 $275,373,523
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL GLOBAL
EQUITY FLEXIBLE STRATEGY UTILITY
GROWTH STRATEGY FOCUS FOCUS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Appreciated securities. . . $ 64,888,365 $ 22,669,798 $ 47,712,621 $ 23,950,330
Depreciated securities. . . (26,348,111) (4,320,243) (6,317,531) (4,096,340)
-------------- -------------- -------------- ----------------
Net unrealized appreciation $ 38,540,254 $ 18,349,555 $ 41,395,090 19,853,990
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
Cost for Federal income
tax purposes*. . . . . . . $364,602,434 $302,704,127 $503,773,647 $ 129,802,210
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------
HIGH INTERMEDIATE INTERNATIONAL
CURRENT GOVERNMENT INTERNATIONAL EQUITY
INCOME BOND BOND FOCUS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . $ 7,647,408 $ 303,987 $ 296,436 $ 26,495,046
Depreciated securities. . . (21,952,216) (352,150) (313,029) (8,698,088)
-------------- -------------- -------------- ----------------
Net unrealized appreciation
(depreciation). . . . . . . $(14,304,808) $ (48,163) $ (16,593) $ 17,796,958
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
Cost for Federal income
tax purposes*. . . . . . . $391,237,914 $ 53,609,653 $ 17,611,983 $ 298,000,231
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------
NATURAL
RESOURCES PRIME QUALITY RESERVE
FOCUS BOND EQUITY ASSETS
FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . $ 5,817,648 $ 6,063,437 $ 56,978,860 $ 470
Depreciated securities. . . (1,749,343) (8,416,215) (10,721,220) (8,788)
-------------- -------------- -------------- ----------------
Net unrealized appreciation
(depreciation). . . . . . . $ 4,068,305 $ (2,352,778) $ 46,257,640 $ (8,318)
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
Cost for Federal income
tax purposes*. . . . . . . $ 41,598,783 $478,497,834 $641,069,883 $ 23,504,335
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
- -----------------------------------------------------------------------------------------------
WORLD
INCOME
FOCUS
FUND
- -----------------------------------------------------------------------------------------------
Appreciated securities. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,189,956
Depreciated securities. . . . . . . . . . . . . . . . . . . . . . . . . . (3,802,269)
----------------
Net unrealized depreciation. . . . . . . . . . . . . . . . . . . . . . . . $ (2,612,313)
----------------
----------------
Cost for Federal income tax purposes*. . . . . . . . . . . . . . . . . . . $ 86,631,607
----------------
----------------
- -----------------------------------------------------------------------------------------------
</TABLE>
* Net of premiums received on options written.
<PAGE>
At June 30, 1996, net realized and unrealized gains (losses) were as follows:
<TABLE>
<CAPTION>
AMERICAN BASIC VALUE
BALANCED FUND FOCUS FUND
------------------------------------ -------------------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Gains Gains
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments. $ 10,657,493 $12,214,625 $ 29,409,646 $ 33,114,656
Short-term investments (387) -- -- --
--------------------- ------------- ----------------- -------------
$ 10,657,106 $12,214,625 $ 29,409,646 $ 33,114,656
--------------------- ------------- ----------------- -------------
--------------------- ------------- ----------------- -------------
DEVELOPING CAPITAL DOMESTIC MONEY
MARKETS FOCUS FUND MARKET FUND
------------------------------------ -------------------------------
Unrealized
Realized Gains Realized Unrealized
Losses (Losses) Gains Losses
- -----------------------------------------------------------------------------------------------
Long-term investments. $ (1,700,566) $ 7,444,193 -- --
Short-term investments (86) -- $ 8,460 $ (153,784)
Foreign currency
transactions. . . . . (59,761) (2,679) -- --
--------------------- ------------- ----------------- -------------
$ (1,760,413) $ 7,441,514 $ 8,460 $ (153,784)
--------------------- ------------- ----------------- -------------
--------------------- ------------- ----------------- -------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY GROWTH FLEXIBLE STRATEGY
FUND FUND
--------------------------------- -----------------------------------------
Realized Unrealized
Realized Unrealized Gains Gains
Gains Gains (Losses) (Losses)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments. $ 26,607,899 $ 38,540,254 $ 2,611,624 $ 18,349,555
Short-term investments. -- -- (893) --
Foreign currency
transactions. . . . . . -- -- (168,982) (1,073)
----------------- -------------- -------------------------- -------------
$ 26,607,899 $ 38,540,254 $ 2,441,749 $ 18,348,482
----------------- -------------- -------------------------- -------------
----------------- -------------- -------------------------- -------------
- -------------------------------------------------------------------------------------------------------
GLOBAL STRATEGY GLOBAL UTILITY
FOCUS FUND FOCUS FUND
--------------------------------- -----------------------------------------
Realized Unrealized Realized Unrealized
Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses)
- -------------------------------------------------------------------------------------------------------
Long-term investments. $ 10,385,827 $ 41,395,090 $ 557,189 $ 19,853,990
Short-term investments. (4,487) -- (47) --
Forward foreign exchange
contracts. . . . . . . 10,575,079 -- -- --
Foreign currency
transactions. . . . . . (1,533,988) (2,482) (39,403) (847)
----------------- -------------- -------------------------- -------------
$ 19,422,431 $ 41,392,608 $ 517,739 $ 19,853,143
----------------- -------------- -------------------------- -------------
----------------- -------------- -------------------------- -------------
- -------------------------------------------------------------------------------------------------------
HIGH CURRENT INTERMEDIATE GOVERNMENT
INCOME FUND BOND FUND
--------------------------------- -----------------------------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Losses Losses Losses
- -------------------------------------------------------------------------------------------------------
Long-term investments. $ 2,358,151 $(14,304,808) $ (66,328) $ (48,163)
Short-term investments. (18) -- (211) --
----------------- -------------- -------------------------- -------------
$ 2,358,133 $(14,304,808) $ (66,539) $ (48,163)
----------------- -------------- -------------------------- -------------
----------------- -------------- -------------------------- -------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL BOND INTERNATIONAL EQUITY
FUND FOCUS FUND
------------------------------------ --------------------------------------
Realized Realized Unrealized
Gains Unrealized Gains Gains
(Losses) Losses (Losses) (Losses)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments. . $ 30,104 $ (16,593) $ 5,181,906 $18,078,143
Short-term investments. (26) -- (539,660) 39,813
Stock index futures
contracts. . . . . . . . -- -- 3,447,847 184,327
Options purchased. . . . -- -- 801,421 (102,788)
Options written. . . . . -- -- (227,469) (218,210)
Foreign currency
transactions. . . . . . (269,933) (1,720) (2,317,434) (2,425)
Forward foreign exchange
contracts. . . . . . . . 1,300 -- 1,525,111 (28,873)
Currency options written -- -- 8,866 --
Currency options
purchased. . . . . . . . -- -- 1,082,474 129,067
--------------------- ------------- ----------------------- -------------
$ (238,555) $ (18,313) $ 8,963,062 $18,079,054
--------------------- ------------- ----------------------- -------------
--------------------- ------------- ----------------------- -------------
- --------------------------------------------------------------------------------------------------------
NATURAL RESOURCES PRIME BOND
FOCUS FUND FUND
------------------------------------ --------------------------------------
Realized Unrealized
Gains Gains Realized Unrealized
(Losses) (Losses) Losses Losses
- --------------------------------------------------------------------------------------------------------
Long-term investments. . $ 1,244,929 $ 4,068,305 $ (513,078) $(2,352,778)
Short-term investments. 31 -- -- --
Foreign currency
transactions. . . . . . (7,988) (25) -- --
--------------------- ------------- ----------------------- -------------
$ 1,236,972 $ 4,068,280 $ (513,078) $(2,352,778)
--------------------- ------------- ----------------------- -------------
--------------------- ------------- ----------------------- -------------
- --------------------------------------------------------------------------------------------------------
QUALITY EQUITY RESERVE ASSETS
FUND FUND
------------------------------------ --------------------------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Gains Losses
- --------------------------------------------------------------------------------------------------------
Long-term investments. . $ 15,044,475 $46,257,640 -- --
Short-term investments. (3,712) -- $ 2,562 $ (8,318)
Foreign currency
transactions. . . . . . (66) -- -- --
--------------------- ------------- ----------------------- -------------
$ 15,040,697 $46,257,640 $ 2,562 $ (8,318)
--------------------- ------------- ----------------------- -------------
--------------------- ------------- ----------------------- -------------
- --------------------------------------------------------------------------------------------------------
WORLD INCOME
FOCUS FUND
--------------------------------------
Realized Unrealized
Gains Gains
(Losses) (Losses)
- --------------------------------------------------------------------------------------------------------
Long-term investments. . . . . . . . . . . . . . . . . . . . $ 940,764 $(2,612,322)
Short-term investments. . . . . . . . . . . . . . . . . . . 235 8
Financial futures contracts. . . . . . . . . . . . . . . . . 55,067 (18,332)
Options written. . . . . . . . . . . . . . . . . . . . . . . 781 1
Currency options written. . . . . . . . . . . . . . . . . . (87,496) 9,278
Currency options purchased. . . . . . . . . . . . . . . . . (62,095) --
Foreign currency transactions. . . . . . . . . . . . . . . . 335,318 (2,465)
Forward foreign exchange contracts. . . . . . . . . . . . . (302,213) 7,823
----------------------- -------------
$ 880,361 $(2,616,009)
----------------------- -------------
----------------------- -------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
- ----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ----------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . 443,913 $ 6,672,577
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . 300,762 4,475,340
--------- --------------
Total issued. . . . . . . . . . . . . . . . . . 744,675 11,147,917
Shares redeemed. . . . . . . . . . . . . . . . (618,140) (9,348,928)
--------- --------------
Net increase. . . . . . . . . . . . . . . . . . 126,535 $ 1,798,989
--------- --------------
--------- --------------
- ----------------------------------------------------------------------------
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
--------- --------------
--------- --------------
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
- -----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 4,281,723 $ 56,675,139
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 1,551,679 19,209,789
--------- --------------
Total issued. . . . . . . . . . . . . . . . . . 5,833,402 75,884,928
Shares redeemed. . . . . . . . . . . . . . . . . (109,003) (1,428,771)
--------- --------------
Net increase. . . . . . . . . . . . . . . . . . 5,724,399 $ 74,456,157
--------- --------------
--------- --------------
- -----------------------------------------------------------------------------
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
--------- --------------
--------- --------------
- -----------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND
- -----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- -----------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 2,206,879 $ 21,761,971
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 151,274 1,385,673
--------- --------------
Total issued. . . . . . . . . . . . . . . . . . 2,358,153 23,147,644
Shares redeemed. . . . . . . . . . . . . . . . . (710,327) (7,127,833)
--------- --------------
Net increase. . . . . . . . . . . . . . . . . . 1,647,826 $ 16,019,811
--------- --------------
--------- --------------
- -----------------------------------------------------------------------------
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
--------- --------------
--------- --------------
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
- ---------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 44,132,275 $ 44,132,275
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 6,987,225 6,987,225
------------ ---------------
Total issued. . . . . . . . . . . . . . . . . . 51,119,500 51,119,500
Shares redeemed. . . . . . . . . . . . . . . . . (79,135,551) (79,135,551)
------------ ---------------
Net decrease. . . . . . . . . . . . . . . . . . (28,016,051) $ (28,016,051)
------------ ---------------
------------ ---------------
- ---------------------------------------------------------------------------------
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)
------------ ---------------
------------ ---------------
- ---------------------------------------------------------------------------------
EQUITY GROWTH FUND
- ---------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ---------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 2,126,141 $ 54,634,330
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 1,846,101 44,841,784
------------ ---------------
Total issued. . . . . . . . . . . . . . . . . . 3,972,242 99,476,114
Shares redeemed. . . . . . . . . . . . . . . . . (177,401) (4,462,527)
------------ ---------------
Net increase. . . . . . . . . . . . . . . . . . 3,794,841 $ 95,013,587
------------ ---------------
------------ ---------------
- ---------------------------------------------------------------------------------
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
------------ ---------------
------------ ---------------
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
- ------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 322,632 $ 4,900,027
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 2,120,797 31,578,663
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . 2,443,429 36,478,690
Shares redeemed. . . . . . . . . . . . . . . . . (987,097) (15,068,071)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . 1,456,332 $ 21,410,619
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
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
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
- ------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 981,582 $ 12,165,816
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 1,034,163 12,699,527
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . 2,015,745 24,865,343
Shares redeemed. . . . . . . . . . . . . . . . . (1,913,271) (24,125,100)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . 102,474 $ 740,243
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
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)
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND
- ------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 525,876 $ 5,953,169
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 318,668 3,566,704
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . 844,544 9,519,873
Shares redeemed. . . . . . . . . . . . . . . . . (1,146,723) (12,952,886)
---------- --------------
Net decrease. . . . . . . . . . . . . . . . . . (302,179) $ (3,433,013)
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
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)
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
HIGH CURRENT INCOME FUND
- ------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 1,949,569 $ 21,919,295
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 1,564,745 17,543,433
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . 3,514,314 39,462,728
Shares redeemed. . . . . . . . . . . . . . . . . (709,604) (7,984,073)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . 2,804,710 $ 31,478,655
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
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
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT BOND FUND
- ----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ----------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 1,489,928 $ 15,382,724
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 147,175 1,535,737
--------- -------------
Total issued. . . . . . . . . . . . . . . . . . 1,637,103 16,918,461
Shares redeemed. . . . . . . . . . . . . . . . . (136,556) (1,425,762)
--------- -------------
Net increase. . . . . . . . . . . . . . . . . . 1,500,547 $ 15,492,699
--------- -------------
--------- -------------
- ----------------------------------------------------------------------------
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
--------- -------------
--------- -------------
- ----------------------------------------------------------------------------
INTERNATIONAL BOND FUND
- ----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ----------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 473,107 $ 4,758,679
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 81,153 820,214
--------- -------------
Total issued. . . . . . . . . . . . . . . . . . 554,260 5,578,893
Shares redeemed. . . . . . . . . . . . . . . . . (465,765) (4,658,877)
--------- -------------
Net increase. . . . . . . . . . . . . . . . . . 88,495 $ 920,016
--------- -------------
--------- -------------
- ----------------------------------------------------------------------------
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
--------- -------------
--------- -------------
- ----------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND
- ----------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ----------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 2,960,409 $ 33,642,988
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 334,488 3,669,329
--------- -------------
Total issued. . . . . . . . . . . . . . . . . . 3,294,897 37,312,317
Shares redeemed. . . . . . . . . . . . . . . . . (201,910) (2,301,744)
--------- -------------
Net increase. . . . . . . . . . . . . . . . . . 3,092,987 $ 35,010,573
--------- -------------
--------- -------------
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
- ------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
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
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND
- ------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 292,191 $ 3,668,481
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 88,476 1,043,135
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . 380,667 4,711,616
Shares redeemed. . . . . . . . . . . . . . . . . (337,250) (4,191,555)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . 43,417 $ 520,061
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended Dollar
December 31, 1995 Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
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)
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
PRIME BOND FUND
- ------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- ------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 1,738,225 $ 20,530,452
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 1,314,650 15,751,538
---------- --------------
Total issued. . . . . . . . . . . . . . . . . . 3,052,875 36,281,990
Shares redeemed. . . . . . . . . . . . . . . . . (1,538,839) (18,635,653)
---------- --------------
Net increase. . . . . . . . . . . . . . . . . . 1,514,036 $ 17,646,337
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
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
---------- --------------
---------- --------------
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
- -------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 954,616 $ 27,911,113
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 3,194,180 90,363,359
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . 4,148,796 118,274,472
Shares redeemed. . . . . . . . . . . . . . . . . (403,467) (11,678,091)
----------- --------------
Net increase. . . . . . . . . . . . . . . . . . 3,745,329 $ 106,596,381
----------- --------------
----------- --------------
- -------------------------------------------------------------------------------
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
----------- --------------
----------- --------------
- -------------------------------------------------------------------------------
RESERVE ASSETS FUND
- -------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- -------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 3,437,118 $ 3,437,118
Shares issued to shareholders in reinvestment of
dividends and distributions. . . . . . . . . . . 603,246 603,246
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . 4,040,364 4,040,364
Shares redeemed. . . . . . . . . . . . . . . . . (6,064,833) (6,064,833)
----------- --------------
Net decrease. . . . . . . . . . . . . . . . . . (2,024,469) $ (2,024,469)
----------- --------------
----------- --------------
- -------------------------------------------------------------------------------
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)
----------- --------------
----------- --------------
- -------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND
- -------------------------------------------------------------------------------
For the Six Months Ended Dollar
June 30, 1996 Shares Amount
- -------------------------------------------------------------------------------
Shares sold. . . . . . . . . . . . . . . . . . . 787,569 $ 7,687,323
Shares issued to shareholders in reinvestment of
dividends. . . . . . . . . . . . . . . . . . . . 374,021 3,609,145
----------- --------------
Total issued. . . . . . . . . . . . . . . . . . 1,161,590 11,296,468
Shares redeemed. . . . . . . . . . . . . . . . . (616,354) (5,919,857)
----------- --------------
Net increase. . . . . . . . . . . . . . . . . . 545,236 $ 5,376,611
----------- --------------
----------- --------------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
- -----------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C>
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>
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, $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 June 30, 1996, the Intermediate Government Bond Fund and Prime Bond Fund held
US Treasury bonds having an aggregate value of approximately $1,014,947 and
$9,814,000, respectively, as collateral for portfolio securities loaned having a
market value of approximately $1,011,090 and $9,510,000, respectively.
7. COMMITMENTS:
At June 30, 1996, the following Portfolios had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of Investments,
under which they agreed to purchase and sell various foreign currencies with
values of approximately:
<TABLE>
<CAPTION>
FUND PURCHASE SELL
- ------------------------------------------------------------------
<S> <C> <C>
Development Capital Markets Focus Fund -- $ 1,772,636
Flexible Strategy Fund. . . . . . . . $1,239,739 1,584,152
Global Strategy Focus Fund. . . . . . 3,859,627 5,937,404
International Equity Focus Fund. . . . 655,652 757,802
World Income Focus Fund. . . . . . . . 13,082 --
- ------------------------------------------------------------------
</TABLE>
8. SUBSEQUENT EVENT:
On July 9, 1996, the Board of Directors declared ordinary income dividends per
share payable on July 16, 1996 to shareholders of record as of July 8, 1996 as
follows:
<TABLE>
<CAPTION>
ORDINARY
FUND INCOME
- -----------------------------------------
<S> <C>
American Balanced Fund. . . $ .264270
Basic Value Focus Fund. . . .078764
Equity Growth Fund. . . . . .037634
Flexible Strategy Fund. . . .240460
Global Utility Focus Fund. . .132105
Natural Resources Focus Fund .115139
Quality Equity Fund. . . . . .349679
- -----------------------------------------
</TABLE>
On July 1, 1996, the Board of Directors declared ordinary income dividends per
share payable on July 1, 1996 to shareholders of record as of June 28, 1996 as
follows:
<TABLE>
<CAPTION>
ORDINARY
FUND INCOME
- -------------------------------------------------
<S> <C>
High Current Income Fund. . . . . $ .079624
Intermediate Government Bond Fund .047985
International Bond Fund. . . . . .050031
Prime Bond Fund. . . . . . . . . .059824
World Income Focus Fund. . . . . .060121
- -------------------------------------------------
</TABLE>
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights:
American Balanced Fund for the period January 1, 1996 to June 30,
1996 (unaudited), for each of the years in the seven-year period
ended December 31, 1995 and for the period June 1, 1988
(commencement of operations) to December 31, 1988 (audited).
Basic Value Focus Fund for the period January 1, 1996 to June 30,
1996 (unaudited), for each of the years in the two-year period
ended December 31, 1995 and for the period July 1, 1993
(commencement of operations) to December 31, 1993 (audited).
Developing Capital Markets Focus Fund for the period January 1,
1996 to June 30, 1996 (unaudited), for the year ended December 31,
1995 and for the period May 2, 1994 (commencement of operations) to
December 31, 1994 (audited).
Domestic Money Market Fund for the period January 1, 1996 to June
30, 1996 (unaudited), for each of the years in the three-year
period ended December 31, 1995 and for the period February 20, 1992
(commencement of operations) to December 31, 1992 (audited).
Equity Growth Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the ten-year period ended
December 31, 1995 (audited).
Global Strategy Focus Fund for the period January 1, 1996 to June
30, 1996 (unaudited), for each of the years in the three-year
period ended December 31, 1995 and for the period February 28, 1992
(commencement of operations) to December 31, 1992 (audited).
Global Utility Focus Fund for the period January 1, 1996 to June
30, 1996 (unaudited), for each of the years in the two-year period
ended December 31, 1995 and for the period July 1, 1993
(commencement of operations) to December 31, 1993 (audited).
High Current Income Fund for the period January 1, 1996 to June 30,
1996 (unaudited) and for each of the years in the ten-year period
ended December 31, 1995 (audited).
Government Bond Fund for the period January 1, 1996 to June 30,
1996 (unaudited), for the year ended December 31, 1995 and for the
period May 2, 1994 (commencement of operations) to December 31,
1994 (audited).
International Equity Focus Fund for the period January 1, 1996 to
June 30, 1996 (unaudited), for each of the years in the two-year
period ended December 31, 1995 and for the period July 1, 1993
(commencement of operations) to December 31, 1993 (audited).
Natural Resources Focus Fund for the period January 1, 1996 to June
30, 1996 (unaudited), for each of the years in the seven-year
period ended December 31, 1995 and for the period June 1, 1988
(commencement of operations) to December 31, 1988 (audited).
Prime Bond Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the ten-year period ended
December 31, 1995 (audited).
Quality Equity Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the ten-year period ended
December 31, 1995 (audited).
C-1
<PAGE>
Reserve Assets Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the ten-year period ended December
31, 1995 (audited).
Global Bond Focus Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for each of the years in the two-year period ended December
31, 1995 and for the period July 1, 1993 (commencement of operations) to
December 31, 1993 (audited).
Contained in Part B:
Schedules of Investments as of December 31, 1995 (audited) and as of June
30, 1996 (unaudited).
Statements of Assets and Liabilities as of December 31, 1995 (audited) and
as of June 30, 1996 (unaudited).
Statements of Operations for the year ended December 31, 1995 (audited) and
for the six-month period ended June 30, 1996 (unaudited).
Statements of Changes in Net Assets for each of the periods in the two-year
period ended December 31, 1995 (audited) and for the six-month period ended
June 30, 1996 (unaudited) and the year ended December 31, 1995 (unaudited).
Financial Highlights:
American Balanced Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the five-year period ended
December 31, 1995 (audited).
Basic Value Focus Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for each of the years in the two-year period ended December
31, 1995, and for the period July 1, 1993 (commencement of operations) to
December 31, 1993 (audited).
Developing Capital Markets Focus Fund for the period January 1, 1996 to
June 30, 1996 (unaudited), for the year ended December 31, 1995 and for the
period May 2, 1994 (commencement of operations) to December 31, 1994
(audited).
Domestic Money Market Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for each of the years in the three-year period ended December
31, 1995 and for the period February 20, 1992 (commencement of operations)
to December 31, 1992 (audited).
Equity Growth Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the five-year period ended
December 31, 1995 (audited).
Global Strategy Focus Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for each of the years in the three-year period ended December
31, 1995 and for the period February 28, 1992 (commencement of operations)
to December 31, 1992 (audited).
Global Utility Focus Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for each of the years in the two-year period ended December
31, 1995 and for the period July 1, 1993 (commencement of operations) to
December 31, 1993 (audited).
High Current Income Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the five-year period ended
December 31, 1995 (audited).
Government Bond Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for the year ended December 31, 1995 and for the period May 2,
1994 (commencement of operations) to December 31, 1994 (audited).
International Equity Focus Fund for the period January 1, 1996 to June 30,
1996 (unaudited), for each of the years in the two-year period ended
December 31, 1995 and for the period July 1, 1993 (commencement of
operations) to December 31, 1993 (audited).
C-2
<PAGE>
Natural Resources Focus Fund for the period January 1, 1996 to June 30,
1996 (unaudited) and for each of the years in the five-year period ended
December 31, 1995 (audited).
Prime Bond Fund for the period January 1, 1996 to June 30, 1996 (unaudited)
and for each of the years in the five-year period ended December 31, 1995
(audited).
Quality Equity Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the five-year period ended
December 31, 1995 (audited).
Reserve Assets Fund for the period January 1, 1996 to June 30, 1996
(unaudited) and for each of the years in the five-year period ended
December 31, 1995 (audited).
Global Bond Focus Fund for the period January 1, 1996 to June 30, 1996
(unaudited), for each of the years in the two-year period ended December
31, 1995 and for the period July 1, 1993 (commencement of operations) to
December 31, 1993 (audited).
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------
<S> <C>
1 (a) -- Articles of Incorporation of Registrant (a)
1 (b) -- Form of Articles Supplementary of Registrant (b)
1 (c) -- Form of Articles of Amendment of Registrant (c)
1 (d) -- Form of Articles Supplementary of Registrant (d)
1 (e) -- Form of Articles Supplementary of Registrant (e)
1 (f) -- Form of Articles Supplementary of Registrant (f)
1 (g) -- Articles Supplementary to Registrant's Articles of Incorporation
relating to the redesignation of shares of common stock as
Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch
World Income Focus Fund Common Stock, Merrill Lynch Global
Utility Focus Fund Common Stock and Merrill Lynch International
Equity Focus Fund Common Stock(s)
1 (h) -- Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of shares of common stock as Merrill
Lynch Developing Capital Markets Focus Fund Common Stock, Merrill
Lynch International Bond Fund Common Stock and Merrill Lynch
Intermediate Government Bond Fund Common Stock (u)
1 (i) -- Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of shares of common stock as Merrill
Lynch Index 500 Fund Common Stock.*
1 (j) -- Form of Articles of Amendment to Registrant's Articles of
Incorporation relating to the reclassification of the Merrill
Lynch Flexible Strategy Fund Common Stock as Merrill Lynch Global
Strategy Focus Fund Common Stock, the reclassification of the
Merrill Lynch International Bond Fund Common Stock as Merrill
Lynch World Income Focus Fund Common Stock, the change in name of
the class of shares of common stock designated as Merrill Lynch
Intermediate Government Bond Fund to Merrill Lynch Government
Bond Fund, and the change in the name of the class of shares of
common stock designated as Merrill Lynch World Income Focus Fund
to Merrill Lynch Global Bond Focus Fund.*
2 -- By-Laws of Registrant, as amended (g)
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------
<S> <C>
3 -- None
4 -- Specimen certificate for shares of common stock of Registrant (h)
5 (a) -- Investment Advisory Agreement for Merrill Lynch Reserve Assets
Fund (i)
5 (b) -- Investment Advisory Agreement for the Merrill Lynch Prime Bond
Fund, Merrill Lynch High Current Income Fund, Merrill Lynch
Quality Equity Fund and Merrill Lynch Equity Growth Fund (j)
5 (c) -- Form of Investment Advisory Agreement for Merrill Lynch Index 500
Fund*
5 (d) -- Form of Investment Advisory Agreement for Merrill Lynch Natural
Resources Focus Fund and Merrill Lynch American Balanced Fund (l)
5 (e) -- Form of Investment Advisory Agreement for Merrill Lynch Domestic
Money Market Fund and Merrill Lynch Global Strategy Focus Fund
(m)
5 (f) -- Form of Investment Advisory Agreement for Merrill Lynch Basic
Value Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill
Lynch Global Utility Focus Fund and Merrill Lynch International
Equity Focus Fund (t)
5 (g) -- Form of Investment Advisory Agreement for Merrill Lynch
Developing Capital Markets Focus Fund and Merrill Lynch
Government Bond Fund (u)
6 (a) -- Form of Distribution Agreement (n)
7 -- None
8 -- Form of Custodian Agreement (o)
9 (a) -- Form of Transfer Agency, and Dividend Disbursing Agreement (p)
9 (b) -- Form of Agreement relating to the use of the 'Merrill Lynch' name
(q)
9 (c) -- Form of Participation Agreement (k)
10 -- Opinion of Counsel (filed with Rule 24f-2 Notice on February 29,
1996)
11 -- Consent of Deloitte & Touche LLP*
12 -- None
13 -- None
14 -- None
15 -- None
16 -- Calculation of Performance Data (r)
24 -- Power of Attorney for Robert S. Salomon, Jr. (v)
27 -- Financial Data Schedules*
</TABLE>
- ---------------
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form N-1 (the 'Registration Statement').
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1
to the Registration Statement.
(Footnotes continued on next page)
C-4
<PAGE>
(Footnotes continued from previous page)
(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 9(c) to Post-Effective Amendment No. 24
to Registrant's Registration Statement ('Post-Effective Amendment No. 24').
(l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No.
11.
(m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No.
16.
(n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to Registrant's
Registration Statement ('Amendment No. 1').
(o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4.
(p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 4.
(q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1.
(r) Incorporated by reference to Exhibit 16 to Post-Effective Amendment No. 13
to the Registration Statement.
(s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No. 20
to the Registration Statement.
(t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment No.
20 to the Registration Statement.
(u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment No. 21
to the Registration Statement.
(v) Incorporated by reference to Exhibit 24 to Post-Effective Amendment No. 24.
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant does not control any other person. Except that substantially all
of Registrant's issued and outstanding shares are and will be held by Merrill
Lynch Life Insurance Company, ML Life Insurance Company of New York and Family
Life Insurance Company for their Separate Accounts, the Registrant is not under
common control with any other person.
C-5
<PAGE>
ITEM 26. NUMBERS OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AS OF
OCTOBER 31,
TITLE OF CLASS 1993 1996
- ------------------------------------------------------------ -------------
<S> <C>
Common stock, par value $0.10 per share, Merrill Lynch
Domestic Money Market Fund Class.......................... 3
Common stock, par value $0.10 per share, Merrill Lynch
Reserve Assets Fund Class................................. 8
Common stock, par value $0.10 per share, Merrill Lynch Prime
Bond Fund Class........................................... 4
Common stock, par value $0.10 per share, Merrill Lynch High
Current Income Fund Class................................. 10
Common stock, par value $0.10 per share, Merrill Lynch
Quality Equity Fund Class................................. 9
Common stock, par value $0.10 per share, Merrill Lynch
Equity Growth Fund Class.................................. 13
Common stock, par value $0.10 per share, Merrill Lynch
Natural Resources Focus Fund Class........................ 8
Common stock, par value $0.10 per share, Merrill Lynch
American Balanced Fund Class.............................. 9
Common stock, par value $0.10 per share, Merrill Lynch
Global Strategy Focus Fund Class*......................... 12
Common stock, par value $0.10 per share, Merrill Lynch Basic
Value Focus Fund Class.................................... 8
Common stock, par value $0.10 per share, Merrill Lynch
Global Bond Focus Fund Class**............................ 14
Common stock, par value $0.10 per share, Merrill Lynch
Global Utility Focus Fund Class........................... 7
Common stock, par value $0.10 per share, Merrill Lynch
International Equity Focus Fund Class..................... 7
Common stock, par value $0.10 per share, Merrill Lynch
Developing Capital Markets Focus Fund Class............... 7
Common stock, par value $0.10 per share, Merrill Lynch
Government Bond Fund Class................................ 3
Common stock, par value $0.10 per share, Merrill Lynch Index
500 Fund Class***......................................... 0
------
</TABLE>
- ---------------
* Includes holders of shares of the Merrill Lynch International Bond Fund on
October 31, 1996.
** Includes holders of shares of the Merrill Lynch Flexible Strategy Fund on
October 31, 1996.
*** Has not commenced operations.
The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner and Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a 'corporate representative') of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgements, fines and amounts paid in settlement actually and
C-6
<PAGE>
reasonably incurred by the corporate representative in connection with the
proceeding, if: (i) he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Registrant; and
(ii) with respect to any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful. The Registrant is also authorized under
Section 2-418 of the Maryland General Corporation Law to indemnify a corporate
representative under certain circumstances against expenses incurred in
connection with the defense of a suit or action by or in the right of the
Registrant. Under the Distribution Agreement, the Registrant has agreed to
indemnify the Distributor against any loss, liability, claim, damage or expense
arising out of any untrue statement of a material fact, or an omission to state
a material fact, in any registration statement, prospectus or report to
shareholders of the Registrant. Reference is made to Article VI of Registrant's
Certificate of Incorporation, Article VI of Registrant's By-Laws, Section 2-418
of the Maryland General Corporation Law and Section 9 of the Distribution
Agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the 'Manager' or 'MLAM'), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series
Funds, Inc.; and the following closed-end investment companies: Convertible
Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. Fund Asset Management, L.P. ('FAM'), an
affiliate of MLAM, acts as the investment adviser for the following open-end
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.
and The Municipal Fund Accumulation Program, Inc.; and the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield
C-7
<PAGE>
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holdings, Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager and FAM is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch Funds Distributor, Inc. ('MLFD') is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch') and Merrill Lynch & Co., Inc. ('ML&Co.') is
World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281.
The address of Merrill Lynch Financial Data Services, Inc. ('MLFDS') is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
February 1, 1993 for his own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is Executive
Vice President, and Mr. Richard is Treasurer of all or substantially all of the
investment companies described in the preceding paragraph. Messrs. Giordano,
Harvey, Hewitt, Kirstein and Monagle are directors or officers of one or more of
such companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------- ---------------------- ---------------------------------------------------
<S> <C> <C>
ML&Co. ............... Limited Partner Financial Services Holding Company; Limited Partner
of FAM.
Princeton Services.... General Partner General Partner of FAM.
Arthur Zeikel......... President President of FAM; President and Director of
Princeton Services; Director of Merrill Lynch
Funds Distributors, Inc. ('MLFD'); Executive Vice
President of ML&Co.
Terry K. Glenn........ Executive Vice Executive Vice President of FAM; President and
President Director of MLFD; Executive Vice President and
Director of Princeton Services; President of
Princeton Administrators, L.P.; Director of
MLFDS.
Vincent R. Giordano... Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services.
Elizabeth Griffin..... Senior Vice President Senior Vice President of FAM.
Norman R. Harvey...... Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services.
Michael J.
Hennewinkel......... Senior Vice President Senior Vice President of FAM.
N. John Hewitt........ Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services.
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------- ---------------------- ---------------------------------------------------
<S> <C> <C>
Philip L. Kirstein.... Senior Vice President, Senior Vice President, General Counsel and
General Counsel, Secretary of FAM; Senior Vice President, General
Director and Counsel, Director and Secretary of Princeton
Secretary Services; Director of MLFD.
Ronald M. Kloss....... Senior Vice President Senior Vice President and Controller of FAM; Senior
and Controller Vice President and Controller of Princeton
Services.
Richard L. Reller..... Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services.
Stephen M. M.
Miller.............. Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle..... Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services.
Michael L. Quinn Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services; Managing Director and
First Vice President of Merrill Lynch from 1989
to 1995.
Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of FAM; Senior
and Treasurer Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of MLFD.
Ronald Welburn........ Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services.
Anthony Wiseman....... Senior Vice President Senior Vice President of Princeton Services.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., MuniAssets Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest, Inc.
C-9
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081, Princeton,
New Jersey 08543-9081, except that the address of Officers Crook, Aldrich,
Brady, Breen, Fatseas and Wasel, is One Financial Center, Boston, Massachusetts
02111-2646.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
WITH POSITIONS AND OFFICES WITH
NAME UNDERWRITER REGISTRANT
- ------------------------- ----------------------- --------------------------
<S> <C> <C>
Terry K. Glenn........... President Executive Vice President
Arthur Zeikel............ Director President and Director
Philip L. Kirstein....... Director None
William E. Aldrich....... Senior Vice President None
Robert W. Crook.......... Senior Vice President None
Kevin Boman.............. Vice President None
Michael J. Brady......... Vice President None
William M. Breen......... Vice President None
Mark A. DeSario.......... Vice President None
James T. Fatseas......... Vice President None
Debra W. Landsman-Yaros.. Vice President None
Michelle T. Lau.......... Vice President None
Gerald M. Richard........ Vice President and Treasurer
Treasurer
Sal Venezia.............. Vice President None
William Wasel............ Vice President None
Robert Harris............ Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
will be maintained at the offices of the Registrant, its Investment Adviser and
its Custodian and Transfer Agent.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions 'Directors' and 'Investment
Adviser' in the Prospectus constituting Part A of the Registration Statement and
under the captions 'Management of the Company' and 'Investment Advisory
Arrangements' in the Statement of Additional Information constituting Part B of
the Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request, and without charge.
The Company hereby undertakes to file, within four to six months of the
effective date of post-effective amendment number 26 to the Company's
Registration Statement, a post-effective amendment to the Registration Statement
containing reasonably current, unaudited financial statements for the Merrill
Lynch Index 500 Fund.
The Company hereby undertakes to comply with the restrictions on
indemnification set forth in Investment Company Act Release No. IC-11330,
September 2, 1980.
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Plainsboro, and State
of New Jersey, on the 6th day of December, 1996.
MERRILL LYNCH VARIABLE SERIES FUNDS,
INC.
(Registrant)
By: /s/ ARTHUR ZEIKEL
----------------------------------
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ------------------------------------- -------------------
<S> <C> <C>
/s/ARTHUR ZEIKEL President and Director December 6, 1996
- ------------------------- (Principal Executive Officer)
(Arthur Zeikel)
* Treasurer (Principal Financial and
- ------------------------- Accounting Officer)
(Gerald M. Richard)
* Director
- -------------------------
(Walter Mintz)
* Director
- -------------------------
(Melvin R. Seiden)
* Director
- -------------------------
(Stephen B. Swensrud)
* Director
- -------------------------
(Joe Grills)
* Director
- -------------------------
(Robert S. Salomon, Jr.)
*By /s/ARTHUR ZEIKEL December 6, 1996
---------------------
(Arthur Zeikel)
Attorney-in-Fact
</TABLE>
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------
<S> <C>
1 (i) -- Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of shares of common stock as Merrill
Lynch Index 500 Fund Common Stock.*
1 (j) -- Form of Articles Supplementary to Registrant's Articles of
Incorporation relating to the reclassification of the Merrill
Lynch Flexible Strategy Fund Common Stock as Merrill Lynch Global
Strategy Focus Fund Common Stock, the reclassification of the
Merrill Lynch International Bond Fund Common Stock as Merrill
Lynch World Income Focus Fund Common Stock, the change in name of
the class of shares of common stock designated as Merrill Lynch
Intermediate Government Bond Fund to Merrill Lynch Government
Bond Fund, and the change in the name of the class of shares of
common stock designated as Merrill Lynch World Income Focus Fund
to Merrill Lynch Global Bond Focus Fund.*
5 (c) -- Form of Investment Advisory Agreement for Merrill Lynch Index 500
Fund*
11 -- Consent of Deloitte & Touche LLP*
27 -- Financial Data Schedules*
* Filed herewith.
</TABLE>
<PAGE>
Merrill Lynch Variable Series Funds, Inc.
Articles Supplementary
Merrill Lynch Variable Series Funds, Inc., a Maryland
corporation (the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation as follows:
First: The Corporation is an open-end company registered as such under the
Investment Company Act of 1940 with authority to issue capital stock as follows:
Number of
Authorized
Funds Shares
----- -------------
Merrill Lynch American Balanced Fund Common Stock 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000
Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000
Merrill Lynch Developing Capital Markets Focus
Fund Common Stock 100,000,000
Merrill Lynch Equity Growth Fund Common Stock 100,000,000
Merrill Lynch Flexible Strategy Focus Fund Common Stock 100,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock 100,000,000
Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000
Merrill Lynch High Current Income Fund Common Stock 100,000,000
Merrill Lynch Intermediate Government Bond Fund Common Stock 100,000,000
Merrill Lynch International Bond Fund Common Stock 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000
Merrill Lynch Prime Bond Fund Common Stock 100,000,000
Merrill Lynch Quality Equity Fund Common Stock 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock 500,000,000
Merrill Lynch World Income Focus Fund Common Stock 100,000,000
Second: All shares of the Corporation's capital stock have a par value of $0.10
per share. The aggregate par value of all the shares of all classes of the
Corporation's capital stock is currently Three Hundred Thirty Million Dollars
($330,000,000).
Third: The Board of Directors of the Corporation, acting in accordance with
Section 2-105(c) of the General Corporation Law of the State of Maryland, hereby
increases the number of
<PAGE>
authorized shares of capital stock of the Corporation by 100,000,000, all of
which shall be classified as Merrill Lynch Index 500 Fund Common Stock.
Fourth: All of the shares of the Corporation's Common Stock, as classified and
designated, continue to have preferences, conversions and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in Article V of the Articles of
Incorporation of the Corporation.
Fifth: After this increase in the number of authorized shares of capital stock
of the Corporation and classification of the shares, the Corporation will have
authority to issue capital stock as follows:
Number of
Authorized
Funds Shares
----- ----------
Merrill Lynch American Balanced Fund Common Stock 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000
Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000
Merrill Lynch Developing Capital Markets Focus
Fund Common Stock 100,000,000
Merrill Lynch Equity Growth Fund Common Stock 100,000,000
Merrill Lynch Flexible Strategy Focus Fund Common Stock 100,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock 100,000,000
Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000
Merrill Lynch High Current Income Fund Common Stock 100,000,000
Merrill Lynch Index 500 Fund Common Stock 100,000,000
Merrill Lynch Intermediate Government Bond Fund Common Stock 100,000,000
Merrill Lynch International Bond Fund Common Stock 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000
Merrill Lynch Prime Bond Fund Common Stock 100,000,000
Merrill Lynch Quality Equity Fund Common Stock 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock 500,000,000
Merrill Lynch World Income Focus Fund Common Stock 100,000,000
Sixth: All of the additional shares shall have a par value of $0.10 per share.
After this increase in the number of authorized shares of capital stock of the
Corporation and classification of those shares as Merrill Lynch Index 500 Fund
Common Stock, the aggregate par value of all the
2
<PAGE>
shares of all classes of the Corporation's capital stock will be Three Hundred
Forty Million Dollars ($340,000,000).
Seventh: No other change is intended or effected.
IN WITNESS WHEREOF, the Corporation has caused these Articles
Supplementary to be executed in its name and on its behalf by its President and
attested by its Secretary as of the 4th day of December, 1996.
MERRILL LYNCH VARIABLE SERIES
Attest: FUNDS, INC.
/s/ Ira Shapiro By: /s/ Arthur Zeikel
- --------------------------- -----------------------------
Secretary President
The undersigned, President of Merrill Lynch Variable Series
Funds, Inc., who executed on behalf of said Corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the foregoing Articles Supplementary
to be the corporate act of said Corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Arthur Zeikel
-----------------------------
President
3
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FORM OF 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 eighteen (18) classes as separate funds, including
classes of Common Stock, par value $0.10 per share, that are
designated as funds as follows:
Name of Fund and Number of Shares
Class of Common Stock of Common Stock
--------------------- ----------------
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
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
<PAGE>
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 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.
2
<PAGE>
(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.
<PAGE>
3
(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 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.
4
<PAGE>
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.
WITNESS MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- ----------------------------- -----------------------------------------
Name: Ira P. Shapiro Name: Arthur Zeikel
Title: Secretary Title: President
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
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this ____ day of _______, 1996 between Merrill Lynch
Variable Series Funds, Inc., a Maryland corporation (the "Company"), and Merrill
Lynch Asset Management, L.P., a Delaware limited partnership (the "Adviser");
W I T N E S S E T H:
WHEREAS, the Company is engaged in business as a diversified open-end
management investment company and is registered as such under the Investment
Company Act of 1940 (the "Investment Company Act"); and
WHEREAS, the Company is currently comprised of [sixteen] separate
Funds, each of which pursues its investment objective through separate
investment policies; and
WHEREAS, the Adviser is engaged in principally in rendering advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940; and
WHEREAS, the Adviser is currently serving as the Investment Adviser to
the Company's Reserve Assets Fund pursuant to an Investment Advisory Agreement
dated November 10, 1981 as amended on April 23, 1985; to the Company's Prime
Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund
pursuant to an Investment Advisory Agreement dated April 21, 1982 as amended on
April 23, 1985; to the Company's Natural Resources Focus Fund and American
Balanced Fund pursuant to an Investment Advisory Agreement dated April, 1988;
and to the Company's Domestic Money Market Fund and Global Strategy Focus Fund
pursuant to an Investment Advisory
<PAGE>
Agreement Dated October 16, 1991; to the Company's Basic Value Focus Fund,
Global Bond Focus Fund (formerly known as the World Income Focus Fund), Global
Utility Focus Fund and International Equity Focus Fund pursuant to an Investment
Advisory Agreement dated June, 1993; and to the Company's Developing Capital
Markets Focus Fund and Government Bond Fund (formerly known as the Intermediate
Government Bond Fund) pursuant to an Investment Advisory Agreement dated April,
1994;
WHEREAS, the Company desires to retain the Adviser to render
investment supervisory and corporate administrative services to the Company's
Index 500 Fund (the "Fund"), in the manner and on the terms hereinafter set
forth.
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Company and the Adviser hereby agree as follows:
ARTICLE 1.
Duties of the Adviser.
The Company hereby employs the Adviser to act as the investment
adviser to and manager of the Fund and to manage the investment and reinvestment
of the assets of the Fund, and to administer its affairs, subject to the
supervision of the Board of Directors of the Company, for the period and on the
terms and conditions set forth in this Agreement. The Adviser hereby accepts
such employment and agrees during such period, at its own expense, to render the
services and to assume the obligations herein set forth for the compensation
provided for herein. The Adviser shall
2
<PAGE>
for all purposes herein be deemed to be an independent contractor and shall,
unless otherwise expressly provided or authorized, have no authority to act for
or represent the Company in any way or otherwise be deemed an agent of the
Company.
(a) Investment Advisory Services. In acting as investment adviser to
the Fund, the Adviser shall regularly provide the Fund with such investment
research, advice and supervision as the latter may from time to time consider
necessary for the proper supervision of the Fund and shall furnish continuously
an investment program and shall determine from time to time what securities
shall be purchased, sold or exchanged and what portion of the assets of the
Fund's portfolio shall be held in the various securities in which it may invest,
subject always to the restrictions of the Company's Articles of Incorporation
and By-Laws, as amended from time to time, the provisions of the Investment
Company Act and the statements relating to the Fund's investment objectives,
investment policies and investment restrictions set forth in the currently
effective prospectus of the Company relating to the Fund under the Securities
Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at
any time, however, make any definitive determination as to the investment policy
of the Fund and notify the Adviser thereof, the Adviser shall be bound by such
determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked. The Adviser shall
take, on behalf of the Company, all actions which it deems necessary to
implement the investment policies determined as provided above, and in
3
<PAGE>
particular to place all orders for the purchase or sale of portfolio securities
for the Fund with brokers or dealers selected by it. In connection with the
selection of such brokers or dealers and the placing of such orders, the Adviser
is directed at all times to seek to obtain for the Fund the most favorable net
results for the Fund as determined by the Board of Directors and set forth in
the Prospectus. Subject to this requirement and the provisions of the Investment
Company Act, the Securities Exchange Act of 1934, and other applicable
provisions of law, nothing shall prohibit the Adviser from selecting brokers or
dealers with which it or the Company is affiliated.
(b) Administrative Services. In addition to the performance of
investment advisory services, the Adviser shall perform, or supervise the
performance of, administrative services in connection with the management of the
Company insofar as such services relate to and are required by the Fund. In this
connection, the Adviser agrees to (i) assist in supervising all aspects of the
Company's operations relating to the Fund, including the coordination of all
matters relating to the functions of the custodian, transfer agent, other
shareholder service agents, accountants, attorneys and other parties performing
services or operational functions for the Company relating to the Fund, (ii)
provide the Company, at the Adviser's expense, with services of persons
competent to perform such administrative and clerical functions as are necessary
in order to provide effective administration of the Company to the extent
required by the Fund, including duties in connection with shareholder relations,
reports,
4
<PAGE>
redemption requests and account adjustments and the maintenance of certain books
and records of the Company insofar as they relate to the Fund, and (iii) provide
the Company, at the Adviser's expense, with adequate office space and related
services necessary for its operations as contemplated in the Agreement.
ARTICLE 2.
Allocation of Charges and Expenses.
(a) The Adviser. The Adviser assumes and shall pay for
maintaining the staff and personnel, and shall at its own expense provide the
equipment, office space and facilities, necessary to perform its obligations
under this Agreement, and shall pay all compensation of officers of the Company
and the fees of all directors of the Company who are affiliated persons of
Merrill Lynch & Co., Inc. or its subsidiaries, and shall pay the organization
costs of the Fund.
(b) The Company. The Company assumes and shall pay all expenses of the
Fund, including, without limitation: insurance, taxes, expenses for legal and
auditing services, costs of printing proxies, stock certificates, shareholder
reports and prospectuses (except to the extent paid by the Distributor), charges
of the Custodian and Transfer Agent, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering the shares
under federal and state securities laws, fees and expenses of directors who are
not affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries,
accounting and pricing costs (including the daily calculation of net asset
value), interest,
5
<PAGE>
brokerage costs, litigation and other extraordinary or nonrecurring expenses,
and other expenses properly payable by the Company.
ARTICLE 3.
Compensation of the Adviser.
(a) Investment Advisory Fee. For the services rendered, the
facilities furnished and expenses assumed by the Adviser, the Company shall
pay to the Adviser at the end of each calendar month a fee at the annual rate
of 0.30% of the average daily net assets of the Fund, as determined and
computed in accordance with the description of the method of determination of
net asset value contained in the Prospectus.
(b) Expense Limitations. In the event the operating expenses of the
Fund, including the investment advisory fee applicable to the Fund payable to
the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a
date on which this Agreement is in effect, exceeds the expense limitations under
state securities laws or published regulations thereunder, as such limitations
may be raised or lowered from time to time, the Adviser shall reduce its
investment advisory fee by the extent of such excess and, if required under any
such laws or regulations, will reimburse the Fund in the amount of such excess;
provided, however, to the extent permitted under law, there shall be excluded
from such expenses the amount of any interest, taxes, brokerage commissions and
extraordinary expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related thereto) paid
or payable by the Company and
6
<PAGE>
allocated to the Fund. Whenever the expenses of the Fund exceed a pro rata
portion of the applicable annual expense limitations, the estimated amounts of
reimbursement under such limitations shall be applicable as an offset against
the monthly payment of the advisory fee due to the Adviser.
ARTICLE 4.
Limitation of Liability of the Adviser.
The Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company in connection with any
investment policy or the purchase, sale or redemption of any securities on the
recommendation of the Adviser. Nothing herein contained shall be construed to
protect the Adviser against any liability to the Company or its security
holders to which the Adviser shall otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence in the performance of its duties on
behalf of the Company, reckless disregard of the Adviser's obligations and
duties under this Agreement or the violation of any applicable law.
ARTICLE 5.
Activities of the Adviser.
The services of the Adviser under this Agreement are not to be
deemed exclusive, and the Adviser shall be free to render similar services to
others so long as its services hereunder are not impaired thereby. It is
understood that directors, officers, employees and shareholders of the Company
are or may become
7
<PAGE>
interested in the Adviser, as directors, officers, employees or shareholders or
otherwise and that directors, officers, employees or shareholders of the
Adviser are or may become similarly interested in the Company, and that the
Adviser is or may become interested in the Company as shareholder or otherwise.
ARTICLE 6.
Duration and Termination of this Agreement.
This Agreement shall become effective as of the effective date of
the Company's Post Effective Amendment No. 26 to its Registration Statement, and
shall remain in force until the second anniversary of such effectiveness and
thereafter, but only so long as such continuance after the second anniversary is
specifically approved at least annually by (i) the Board of Directors of the
Company, or by the vote of a majority of the outstanding shares of the Fund, and
(ii) a majority of those directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purposes of voting on such approval.
This Agreement may be terminated at any time, as to the Fund, without
the payment of any penalty, by the Board of Directors of the Company or by vote
of a majority of the outstanding shares of the Fund, or by the Adviser, on sixty
days' written notice to the other party. This Agreement shall automatically
terminate in the event of its assignment.
8
<PAGE>
ARTICLE 7.
Definitions.
The terms "assignment", "affiliated person" and "interested person",
when used in this Agreement, shall have the respective meanings specified in the
Investment Company Act. As used with respect to the Company or the Fund, the
term "majority of the outstanding shares" means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares.
ARTICLE 8.
Amendments of this Agreement.
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the Board of Directors of the Company,
or by the vote of the majority of outstanding shares of the Fund, and (ii) a
majority of those directors of the Company who are not parties to this Agreement
or interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
ARTICLE 9.
Governing Law.
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable laws of
9
<PAGE>
the State of New York, or any of the provisions herein, conflict with the
applicable provisions of the Investment Company Act, the latter shall control.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
ATTEST:
By:
-----------------------------
President
- -------------------------------
Secretary
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By Princeton Services, Inc., its
general partner
ATTEST:
- -------------------------------
Secretary
By:
-----------------------------
President
10
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Variable Series Funds, Inc.:
We consent to the use in Post-Effective Amendment No. 26 to Registration
Statement No. 2-74452 of our report dated February 20, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in each form of Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
December 6, 1996
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<NAME> AMERICAN BALANCED FUND
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<DISTRIBUTIONS-OF-INCOME> 7173644
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