<PAGE>
Rule 497(e)
Registration No. 2-74452
PROSPECTUS
MAY 13, 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PHONE NO. (609) 282-2800
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Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds. Shares of Merrill Lynch Equity Growth Fund
are offered hereby (hereinafter referred to as the 'Equity Growth Fund'). A
separate class of common stock ('Common Stock') is issued for each fund of the
Company (together with the Equity Growth Fund, the 'Funds'), including the
Equity Growth 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 Merrill Lynch Equity Growth
Fund, the only Fund offered pursuant to this Prospectus, is as follows: 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 Fund's investment objectives and policies,
please see 'Investment Objectives and Policies of the Fund,'page 4.
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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.
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THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY
THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 26, 1996, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET
FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
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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.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Financial Highlights........................................ 3
The Insurance Companies..................................... 4
Investment Objectives and Policies of the Fund.............. 4
Directors................................................... 9
Investment Adviser.......................................... 9
Portfolio Transactions and Brokerage........................ 11
Purchase of Shares.......................................... 11
Redemption of Shares........................................ 11
Dividends, Distributions and Taxes.......................... 11
Performance Data............................................ 12
Additional Information...................................... 13
Appendix A.................................................. A-1
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2
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FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to the Equity Growth Fund. The table has been audited by Deloitte &
Touche LLP, independent auditors, in connection with their annual audits of the
Company's financial statements. Financial statements for the year ended December
31, 1995 and the independent auditors' report thereon appear in the Statement of
Additional Information. The information in the following table should be read in
conjunction with the financial statements.
<TABLE>
<CAPTION>
The following per share
data and ratios have
been derived from
information provided in EQUITY GROWTH FUND
the financial --------------------------------------------------------------------------------------------
statements. FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN --------------------------------------------------------------------------------------------
NET ASSET VALUE: 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988
-------- -------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47
-------- -------- --------- ------- ------- ------- ------- -------
Investment income--net... .17 .05 (.01) .01 .09 .05 (.07) (.10)
Realized and unrealized
gain (loss) on
investments and foreign
curency
transactions--net....... 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60
-------- -------- --------- ------- ------- ------- ------- -------
Total from investment
operations.............. 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50
-------- -------- --------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment
income--net......... (.09) -- --++ (.07) (.02) -- -- --
Realized gain on
investments--net.... -- (.19) -- -- -- -- -- (.22)
-------- -------- --------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (.09) (.19) -- (.07) (.02) -- -- (.22)
-------- -------- --------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN*:
Based on net asset value
per share............... 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)% 16.60% 4.25%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .81% .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
Expenses................. .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
Investment income
(loss)--net............. .72% .27% (.05)% .04% .51% .14% (.68)% (.56)%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $339,921 $170,044 $ 98,976 $23,167 $11,318 $ 6,851 $ 6,811 $ 5,521
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
Portfolio turnover....... 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73%
-------- -------- --------- ------- ------- ------- ------- -------
-------- -------- --------- ------- ------- ------- ------- -------
<CAPTION>
The following per share
data and ratios have
been derived from EQUITY GROWTH FUND
information provided in -------------------
the financial FOR THE YEAR ENDED
statements. DECEMBER 31,
INCREASE (DECREASE) IN -------------------
NET ASSET VALUE: 1987 1986
------- -------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 18.42 $ 15.56
------- -------
Investment income--net... (.09) .04
Realized and unrealized
gain (loss) on
investments and foreign
curency
transactions--net....... (4.01) 2.86
------- -------
Total from investment
operations.............. (4.10) 2.90
------- -------
Less dividends and
distributions:
Investment
income--net......... (.03) (.04)
Realized gain on
investments--net.... (2.82) --
------- -------
Total dividends and
distributions........... (2.85) (.04)
------- -------
Net asset value, end of
year.................... $ 11.47 $ 18.42
------- -------
------- -------
TOTAL INVESTMENT RETURN*:
Based on net asset value
per share............... (22.29)% 18.68%
------- -------
------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... 1.24% 1.25%
------- -------
------- -------
Expenses................. 1.24% 1.44%
------- -------
------- -------
Investment income
(loss)--net............. (.60)% .24%
------- -------
------- -------
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $ 6,707 $ 4,955
------- -------
------- -------
Portfolio turnover....... 94.91% 80.52%
------- -------
------- -------
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* Total investment returns exclude insurance-related fees and expenses.
+ Based on average number of shares outstanding during the year.
++ Amount is less than $.01 per share.
Further information about the Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
3
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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 the Equity Growth Fund to certain
separate accounts (the 'Separate Accounts') of MLLIC and ML of New York to fund
benefits under Variable Life Contracts. 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 FUND
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies. 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. The
Equity Growth Fund is classified as 'diversified,' as defined in the Investment
Company Act of 1940. The investment objectives and classification of the Equity
Growth Fund may not be changed without the approval of the holders of a majority
of the outstanding shares of such Fund. The investment objectives and policies
of the Equity Growth Fund are discussed below.
Fixed Income Security Ratings. The Equity Growth Fund does not invest 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 the Equity Growth Fund may subsequently be downgraded. Such
securities may continue to be held and will be sold only if, in the judgment of
the Investment Adviser, it is advantageous to do so. Securities in the lowest
category of investment grade debt securities may have speculative
characteristics which may lead to weakened capacity to pay interest and
principal during periods of adverse economic conditions. See Appendix A for a
fuller description of corporate bond ratings.
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
4
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the economy. The Fund attempts to achieve its objective by focusing on the
long-range view of a company's prospects through a fundamental analysis of its
management, financial structure, product development, marketing ability and
other relevant factors. Full development of these companies frequently takes
time and, for this reason, the Fund should be considered as a long-term
investment and not as a vehicle for seeking short-term profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalizations in the $50-$300 million range and generally are
little known to most individual investors, although some may be dominant in
their respective industries. Underlying this strategy is management's belief
that relatively small companies will continue to have the opportunity to develop
into significant business enterprises. Some such companies may be in a
relatively early stage of development; others may manufacture a new product or
perform a new service. Such companies may not be counted upon to develop into
major industrial companies, but management believes that eventual recognition of
their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Emerging growth companies. In selecting investments for the Equity Growth
Fund, management also seeks emerging growth companies that either occupy a
dominant position in an emerging industry or subindustry or have a significant
and growing market share in a large, fragmented industry. Management believes
that capable and flexible management is one of the most important criteria of
emerging growth companies and that such companies should employ sound financial
and accounting policies and also demonstrate effective research, successful
product development and marketing, efficient service and pricing flexibility.
Emphasis is given to companies with rapid historical growth rates, above-average
returns on equity and strong current balance sheets, all of which should enable
the company to finance its continued growth. Management of the Company also
analyzes and weighs relevant factors beyond the company itself, such as the
level of competition in the industry, the extent of governmental regulation, the
nature of labor conditions and other related matters.
The Equity Growth Fund emphasizes investments in companies that do most of
their business in the United States and therefore are free of the currency
exchange problems, foreign tax considerations and potential political and
economic upheavals that many multinational corporations face. Moreover, the size
and kinds of markets that they serve make these companies less susceptible than
larger companies to intervention from the federal government by means of price
controls, regulations or litigation.
While the process of selection and continuous supervision by management
does not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
It should be apparent that an investment in a fund such as the Equity
Growth Fund involves greater risk than is customarily associated with more
established companies. The securities of smaller or emerging growth companies
may be subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may have
limited product lines, markets or financial resources, or they may be dependent
upon a limited management group. Because of these factors, management of the
Company believes that shares in the Equity Growth Fund are suitable for Contract
Owners who are in a financial position to assume above-average investment risk
in search of above-average long-term reward. As indicated, the Fund is designed
for Contract Owners whose investment objective is growth rather than income. It
is definitely not intended for exclusive funding of Contracts but is designed
for Contract Owners who are prepared to experience above-average fluctuations in
net asset value.
The securities in which the Equity Growth Fund invests will often be traded
only in the over-the-counter market or on a regional securities exchange and may
not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Fund or portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when in
management's judgment such disposition is not desirable or to make many small
sales over a lengthy period of time.
5
<PAGE>
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.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each Fund).
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
OTHER PORTFOLIO STRATEGIES
Restricted Securities. The Equity Growth Fund is subject to limitations on
the amount of illiquid securities it may purchase; however, the Equity Growth
Fund may purchase without regard to that limitation certain securities that are
not registered under the Securities Act of 1933 (the 'Securities Act'),
including (a) commercial paper exempt from registration under Section 4(2) of
the Securities Act, and (b) securities that can be offered and sold to
'qualified institutional buyers' under Rule 144A under the Securities Act,
provided that the Company's Board of Directors continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Board has determined that securities sold under Rule 144A which
are freely tradeable in their primary market offshore should be deemed liquid.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Equity Growth 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 the Equity Growth Fund to
the extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities.
Indexed and Inverse Securities. The Equity Growth 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, the Equity
Growth Fund may invest in a security that pays interest and returns principal
based on the change in an index of interest rates or an index of small company
stocks. Interest and principal payable on a security may also be based on
relative changes among particular indices. In addition, the Equity Growth Fund
may invest in securities whose potential investment return is inversely based on
the change in particular indices. For example, the Equity Growth Fund may invest
in securities that pay a higher rate of interest and principal when a particular
index decreases and pay a lower rate of interest and principal when the value of
the index increases. To the extent that the Equity Growth Fund invests in such
types of securities, it will be subject to the risks associated with changes in
the particular indices, which may include reduced or eliminated interest
payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Company believes that indexed securities, including inverse securities,
represent flexible portfolio management instruments that may allow the Equity
Growth Fund to seek potential investment rewards, hedge other portfolio
positions, or vary the degree of portfolio leverage relatively efficiently under
different market conditions.
6
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Foreign Securities. The Equity Growth Fund 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, the Equity Growth 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 the Equity Growth 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
Equity Growth Fund, such as custodial costs, are higher. In addition, net
investment income earned by the Equity Growth Fund on a foreign security may be
subject to withholding and other taxes imposed by foreign governments which will
reduce the Equity Growth Fund's net investment income. The Investment Adviser
will consider these and other factors before investing in foreign securities,
and will not make such investments unless, in its opinion, such investments will
meet the standards and objectives of the Equity Growth Fund. The Equity Growth
Fund will not concentrate its investments in any particular country. The Equity
Growth 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.
The Equity Growth Fund 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 the Equity Growth Fund may
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
the Equity Growth Fund incurring additional costs and delays in transporting and
custodying such securities outside such countries. Delays in settlement could
result in temporary periods when assets of the Equity Growth Fund are uninvested
and no return is earned thereon. The inability of the Equity Growth Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a
7
<PAGE>
portfolio security due to settlement problems could result either in losses to
the Equity Growth 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 the Equity Growth Fund may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Equity Growth
Fund may invest in countries in which foreign investors, including management of
the Fund, have had no or limited prior experience.
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. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Equity Growth Fund
acquires shares in closed-end investment companies, shareholders would bear both
their proportionate share of expenses in the Fund (including management and
advisory fees) and, indirectly, the expenses of such closed-end investment
companies. The Equity Growth 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. The Equity Growth Fund 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 Equity Growth Fund.
Forward Commitments. The Equity Growth Fund may purchase securities on a
when-issued basis, and it may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by the
Equity Growth 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. The Equity Growth 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.
INSURANCE LAW RESTRICTIONS
In order for shares of the Equity Growth Fund to remain eligible
investments for the Separate Accounts, it may be necessary, from time to time,
for the Equity Growth 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 the Equity Growth
Fund be made with the degree of care of an 'ordinarily prudent person.' In
addition, the Equity Growth 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 the Equity Growth Fund.
8
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OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that the Equity
Growth Fund 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
the Equity Growth 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 Merrill Lynch Funds Distributor, Inc. (the 'Distributor');
Director of the Distributor.
WALTER MINTZ--Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN--President of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial
consultants).
JOE GRILLS--Member of the Committee on Investment of Employee Benefit
Assets of the Financial Executives Institute ('CIEBA'); member of CIEBA's
Executive Committee; and member of the Investment Advisory Committee of the
State of New York Retirement Fund.
ROBERT SALOMON, JR.--Principal of STI Management (investment adviser).
- ---------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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 Company. The general partner of the Investment Adviser is
Princeton Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The principal address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey
08543-9011). The Investment Adviser or its affiliate, Fund Asset Management,
L.P. ('FAM'), acts as the investment adviser for over 130 other registered
investment companies. The Investment Adviser also offers portfolio management
and portfolio analysis services to individuals and institutions. In the
aggregate, as of March 31, 1996, the Investment Adviser and FAM had a total of
approximately $207.7 billion in investment company and other portfolio assets
under management including accounts of certain affiliates of FAM.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the Funds,
who consider information from various sources, make the necessary investment
decisions and effect transactions accordingly. The Investment Adviser is also
obligated to perform certain administrative and management services for the
Company (certain of which it may delegate to third parties) and is obligated to
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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 $1,852,641 related
to the Equity Growth Fund (representing .75% of its average net assets). During
the Company's fiscal year ended December 31, 1995, the total operating expenses
of the Equity Growth Fund (including the advisory fees paid to the Investment
Adviser), before reimbursement of a portion of such expenses, was $2,007,667
representing .81% of its average net assets).
The Investment Advisory Agreements require the Investment Adviser to
reimburse the Equity Growth Fund if and to the extent that in any fiscal year
the operating expenses of the Fund exceed the most restrictive expense
limitations then in effect under any state securities laws or published
regulations thereunder. At present the most restrictive expense limitation
requires the Investment Adviser to reimburse expenses which exceed 2.5% of the
Equity Growth Fund's first $30 million of average daily net assets, 2.0% of its
average daily net assets in excess of $30 million but less than $100 million,
and 1.5% of its average daily net assets in excess of $100 million. Expenses for
this purpose include the Investment Adviser's fee but exclude interest, taxes,
brokerage fees and commissions and extraordinary charges, such as litigation. No
fee payments will be made to the Investment Adviser with respect to the Equity
Growth Fund during any fiscal year which would cause the expenses of such Fund
to exceed the pro rata expense limitation applicable to such Fund at the time of
such payment.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have
entered into two agreements which limit the operating expenses paid by the
Equity Growth 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 Equity Growth Fund by the Investment Adviser which, in turn, will be
reimbursed by MLLA. See 'Investment Advisory Arrangements' in the Statement of
Additional Information. MLLA sells the Contracts described in the Prospectus for
the Contracts.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
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PORTFOLIO MANAGER
Frederick 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
The Equity Growth Fund does not have 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 the Equity Growth Fund to obtain the most favorable
net results, taking into account various factors, including price, dealer spread
or commission, if any, size of the transactions and difficulty of execution.
While the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in
over-the-counter transactions conducted on an agency basis. During the year
ended December 31, 1995, the Company engaged in 22 transactions pursuant to such
order involving $82.1 million of securities. For the year ended December 31,
1995, the Company paid brokerage commissions of $5,789,335, of which $264,999
was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company continuously offers shares in the Equity Growth Fund to the
Insurance Companies at prices equal to its per share net asset value. 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 the Equity Growth 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
Equity Growth Fund 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 the Equity Growth Fund. For dividend purposes, net
investment income of the Equity Growth Fund will consist of all payments of
dividends or interest received by such Fund less the estimated expenses of such
Fund (including fees payable to the Investment Adviser).
Dividends from net investment income of the Equity Growth Fund 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.
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TAX TREATMENT OF THE COMPANY
The Equity Growth 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, the Equity Growth 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 the Equity Growth 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 the Equity Growth Fund to dispose of
certain securities at times when management of the Company might otherwise deem
such disposition appropriate or desirable.
If the Equity Growth Fund earns original issue discount income in a taxable
year which is not represented by correlative cash income, or if the Equity
Growth 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 Equity Growth Fund may have to dispose of
securities and use the proceeds thereof to make distributions in amounts
necessary to satisfy its distribution requirements under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send to
the Insurance Companies a written notice required by the Code designating the
amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present or
prospective Contract owners. Average annual total return and yield are computed
in accordance with formulas specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the offering price per
share on the last day of the period.
Total return and yield figures are based on a Fund's historical performance
and are not intended to indicate future performance. A 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
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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 a Fund's relative performance
for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Equity Growth 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 the Equity Growth 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 the Equity Growth 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. 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.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. The Equity Growth Fund
commenced operations on April 20, 1982. The authorized capital stock of the
Company consists of 3,300,000,000 shares of Common Stock, par value $0.10 per
share. The shares of Common Stock are divided into seventeen classes designated
Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund
Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch
Quality Equity Fund Common Stock, Merrill Lynch
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Equity Growth Fund Common Stock, Merrill Lynch Flexible Strategy Fund Common
Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch
American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund
Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill
Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World Income Focus Fund
Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill
Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing
Capital Markets Focus Fund Common Stock, Merrill Lynch International Bond Fund
Common Stock and Merrill Lynch Intermediate Government Bond Fund Common Stock,
respectively. The Company may, from time to time, at the sole discretion of its
Board of Directors and without the need to obtain the approval of its
shareholders or of Contract Owners, offer and sell shares of one or more of such
classes. Each class consists of 100,000,000 shares except for Domestic Money
Market Fund Common Stock which consists of 1,300,000,000 shares Reserve Assets
Fund Common Stock which consists of 500,000,000 shares. All shares of Common
Stock have equal voting rights, except that only shares of the respective
classes are entitled to vote on matters concerning only that class. Pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder,
certain matters approved by a vote of all shareholders of the Company may not be
binding on a class whose shareholders have not approved such matter. Each issued
and outstanding share of a class is entitled to one vote and to participate
equally in dividends and distributions declared with respect to such class and
in net assets of such class upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities. The shares of each class, when issued,
will be fully paid and nonassessable, have no preference, preemptive,
conversion, exchange or similar rights, and will be freely transferable. Holders
of shares of any class are entitled to redeem their shares as set forth under
'Redemption of Shares.' Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Company voting for the election of
directors can elect all of the directors of the Company if they choose to do so
and in such event the holders of the remaining shares would not be able to elect
any directors. The Company does not intend to hold meetings of shareholders
unless under the Investment Company Act of 1940 shareholders are required to act
on any of the following matters: (i) election of directors; (ii) approval of an
investment advisory agreement; (iii) approval of a distribution agreement; and
(iv) ratification of the selection of independent accountants.
Family Life Insurance Company ('Family Life'), formerly a wholly owned
subsidiary of ML&Co., provided the initial capitalization of the Equity Growth
Fund. The organizational expenses of the Equity Growth Fund are paid by the
Investment Adviser. The Investment Adviser is reimbursed by MLLIC for all such
expenses over a five-year period.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ('BONY'), 110 Washington Street, New York, New York
10286, acts as custodian of the Company's assets, except that Chase Manhattan
Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245, acts as custodian
for assets of the Company's Developing Capital Markets Focus Fund.
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.
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LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Statement of Additional Information, dated April 26, 1996, which forms
a part of the Registration Statement, is incorporated by reference into this
Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, the Equity Growth 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
For temporary or defensive purposes, the Equity Growth 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 Equity
Growth Fund 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, the Equity Growth 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 Equity Growth Fund agree to
repurchase such instruments, at the Fund's 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 Equity Growth Fund is 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.
The Equity Growth Fund may not invest in any bank money instrument issued
by a commercial bank or a savings and loan association unless the bank or
association is organized and operating in the United States, has total assets of
at least $1 billion and its deposits are insured by the Federal Deposit
Insurance Corporation (the 'FDIC'); provided that this limitation shall not
prohibit the investment of up to 10% of the total assets of the 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, the Equity Growth 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
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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.
REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. The Equity Growth Fund
may invest in securities pursuant to repurchase agreements or purchase and sale
contracts. Under a repurchase agreement, the seller agrees, upon entering into
the contract with the Fund, to repurchase a security (typically a security
issued or guaranteed by the U.S. government) at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed yield for the Fund insulated from fluctuations in the market
value of the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. Repurchase agreements and purchase and sale
contracts maturing in more than seven days will be considered 'illiquid
securities.'
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