AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996.
FILE NO. 2-74452
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 <checked-box>
PRE-EFFECTIVE AMENDMENT NO. <square>
POST-EFFECTIVE AMENDMENT NO. 25 <checked-box>
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 <checked-box>
AMENDMENT NO. 26 <checked-box>
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Address of Principal Executive Offices) (Zip Code)
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:
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
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
<square> immediately upon filing pursuant to paragraph (b)
<square> on (date) pursuant to paragraph (b)
<square> 60 days after filing pursuant to paragraph (a)(1)
<square> on (date) pursuant to paragraph (a)(1) of Rule 485
<checked-box> 75 days after filing pursuant to paragraph (a)(2)
<square> on (date) pursuant to paragraph (a)(2) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
<square> 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>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A
<S> <C> <C>
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........................... *
STATEMENT OF
ADDITIONAL INFORMATION
CAPTION
----------------------
PART B
10. Cover Page ........................................ Cover Page
11. Table of Contents ................................. Table of Contents
12. General Information and History ................... Additional Information
13. Investment Objectives and Policies ................ Investment Objectives and Policies;
Investment Restrictions; Portfolio
Transactions and Brokerage
14. Management of the Registrant ...................... Management of the Company
15. Control Persons and Principal Holders of Securities Management of the Company; Additional
Information
16. Investment Advisory and Other Services ............. Management of the Company
17. Brokerage Allocation and Other Practices ........... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities ................. *
19. Purchase, Redemption and Pricing of Securities
Being Offered .............................. Determination of Net Asset Value;
Redemption of Shares
20. Tax Status ......................................... Dividends, Distributions and Taxes
21. Underwriters ....................................... Distribution Arrangements
22. Calculation of Performance Data .................... Performance Data
23. Financial Statements ............................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in
Part C of this Registration Statement.
- --------------------------
* Item inapplicable or answer negative.
</TABLE>
<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
[ ], 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011,
PRINCETON, NEW JERSEY 08543-9011
PHONE NO. (609) 282-2800
---------------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its 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. ("Moodys") 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 [ ], 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.
2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
TABLE OF CONTENTS
PAGE
----
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 ............................................................... 44
Investment Adviser ...................................................... 45
Portfolio Transactions and Brokerage .................................... 48
Purchase of Shares ...................................................... 48
Redemption of Shares .................................................... 49
Dividends, Distributions and Taxes ...................................... 49
Performance Data ........................................................ 50
Additional Information .................................................. 51
Appendix A .............................................................. A-1
3
<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
commenced operations in December 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.
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND
----------------------
FOR THE FOR THE
The following per share data and SIX PERIOD
ratios have been derived MONTHS JUNE 1,
from information provided in ENDED 1988+ TO
the financial statements. JUNE 30, FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET 1996 1995 1994 1993 1992 1991 1990 1989 1988
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 - - - - - - - -
====== ===== ====== ====== ===== ===== ===== ===== ====
- --------------------
* 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND DEVELOPING CAPITAL MARKETS FOCUS FUND
---------------------------------------- -------------------------------------
The following per share data and ratios have FOR THE FOR THE FOR THE FOR THE
been derived from information provided in SIX PERIOD SIX FOR THE PERIOD
the financial statements. MONTHS JULY 1, MONTHS YEAR MAY 2, 1994+
ENDED FOR THE YEAR ENDED 1993+ TO ENDED TO ENDED TO
JUNE 30, DECEMBER 31, DECEMBER JUNE 30, DECEMBER DECEMBER
------------------- 31, 31, 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1996 1995 1994
PER SHARE OPERATING PERFORMANCE: ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32 $ 9.51 $ 10.00
----- ----- ----- ----- ---- ---- -----
Investment income-net........................ .08 .18 .17 .04 .11 .20 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions-net............................. 1.28 2.49 .08 .91 .95 (.30) (.58)
----- ----- ----- ----- ---- ---- -----
Total from investment operations............. 1.36 2.67 .25 .95 1.06 (.10) (.49)
----- ----- ----- ----- ---- ---- -----
Less dividends and distributions:
Investment income-net...................... (.10) (.19) (.10) - (.23) (.09)
Realized gain on investments-net........... (.72) (.48) - - - - -
----- ----- ----- ----- ---- ---- -----
Total dividends and distributions............ (.82) (.67) (.10) - (.23) (.09) -
----- ----- ----- ----- ---- ---- -----
Net asset value, end of period............... $13.64 $13.10 $11.10 $ 10.95 $ 10.15 $ 9.32 $ 9.51
===== ===== ===== ===== ===== ==== ====
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 11.03%# 25.49% 2.36% 9.50%# 11.69%# (1.08)% (4.90)%#
===== ===== ==== ==== ===== ==== =====
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............... .64% .66% .72% .86%* 1.20%* 1.25% 1.29%*
==== ==== === === ==== ==== ====
Expenses..................................... .64%* .66% .72% .86%* 1.20%* 1.36% 1.35%*
==== ==== ==== ==== ===== ===== ====
Investment income-net........................ 1.33%* 1.68% 2.08% 1.69%* 2.37%* 2.73% 2.18%*
==== ==== ==== ==== ==== ==== ====
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 397,289 $ 306,463 $ 164,307 $ 47,207 $ 76,849 $ 55,209 $ 36,676
======= ======= ======= ====== ====== ====== ======
Portfolio turnover........................... $ 37.28% 74.10% 60.55% 30.86% 53.29% 62.53% 29.79%
======= ======= ======= ====== ====== ====== ======
Average commission rate paid##............... $ .0552 - - - $ 0.0005 - -
======= ======= ======= ====== ====== ====== ======
- --------------------
* 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
The following per share data and ratios have been FOR
derived from information provided in the financial FOR THE PERIOD
statements. SIX MONTHS FEBRUARY 20,
ENDED 1992+ TO
JUNE 30, FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1992
PER SHARE OPERATING PERFORMANCE: ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======
- ------------------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
FOR THE
The following per share data and SIX
ratios have been derived from MONTHS
information provided in the ENDED
financial statements JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
INCREASE (DECREASE) IN NET 1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990
ASSET VALUE: ---- ----- ----- ---- ----- ---- ------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period. $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $11.98 $ 13.70
------ ------ ------ ------ ----- ------ -----
Investment income-net ............. .05 .17 .05 (.01) .01 .09 .05
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)
------ ------ ------ ------ ----- ------ -----
Total from investment operations..... 1.33 8.81 (1.51) 3.16 (.09) 6.00 (1.72)
------ ------ ------ ------ ----- ------ -----
Less dividends and
distributions:
Investment income-net.............. (.10) (.09) - -++ (.07) (.02) -
Realized gain on investments-net... (3.59) - (.19) - - - -
------ ------ ------ ------ ----- ------ -----
Total dividends and distributions (3.69) (.09) (.19) - (.07) (.02) -
------ ------ ------ ------ ----- ------ -----
Net asset value, end of period....... $ 25.62 $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98
====== ====== ===== ====== ====== ====== =====
TOTAL INVESTMENT RETURN**:
Based on net asset value per share 5.48%# 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55)%
====== ====== ===== ====== ====== ====== =====
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... .79%* .81% .83% .96% 1.18% 1.25% 1.25%
====== ====== ===== ====== ====== ====== =====
Expenses ........................... .79%* .81% .83% .96% 1.18% 1.28% 1.47%
====== ====== ===== ====== ====== ====== =====
Investment income (loss)-net........ .37%* .72% .27% (.05)% .04% .51% .14%
====== ====== ===== ====== ====== ====== =====
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $408,358 $339,921 $170,044 $98,976 $23,167 $11,318 $6,851
======= ======= ======== ======= ====== ====== =====
Portfolio turnover.................. 43.26% 96.79% 88.48% 131.75% 98.64% 79.10% 135.24%
====== ====== ===== ======= ====== ====== ======
Average commission rate paid##...... $ .0590 - - - - - -
====== ====== ===== ======= ====== ====== ======
The following per share data and
ratios have been derived from
information provided in the
financial statements FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
INCREASE (DECREASE) IN NET 1989 1988 1987 1986
ASSET VALUE: ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 11.75 $ 11.47 $ 18.42 $ 15.56
------ ------ ------ -----
Investment income-net................ (.07) (.10) (.09) .04
Realized and unrealized gain
(loss) on investments and foreign
currency transactions- net........... 2.02 .60 (4.01) 2.86
------ ------ ------ -----
Total from investment operations....... 1.95 .50 (4.10) 2.90
Less dividends and distributions:
Investment income-net................ - - (.03) (.04)
Realized gain on investments-net..... - (.22) (2.82) -
------ ------ ------ -----
Total dividends and distributions...... - (.22) (2.85) (.04)
Net asset value, end of period......... $ 13.70 $ 11.75 $ 11.47 $ 18.42
====== ====== ===== ======
TOTAL INVESTMENT RETURN**:
Based on net asset value per share..... 16.60% 4.25% (22.29)% 18.68%
====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......... 1.25% 1.25% 1.24% 1.25%
====== ====== ===== ======
Expenses .............................. 1.53% 1.25% 1.24% 1.44%
====== ====== ===== ======
Investment income (loss)-net........... (.68)% (.56)% (.60)% .24%
====== ====== ===== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)$ 6,811 $ 5,521 $ 6,707 $ 4,955
======= ====== ====== ======
Portfolio turnover...................... 100.49% 68.73% 94.91% 80.52%
====== ====== ====== ======
Average commission rate paid##.......... - - - -
====== ====== ====== ======
- ------------------
* 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.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND# GLOBAL UTILITY FOCUS FUND
------------------------------------------------- -------------------------------------
FOR THE FOR THE FOR THE FOR THE
The following per share data and SIX PERIOD SIX PERIOD
ratios have been derived from MONTHS FEBRUARY MONTHS JULY 1,
from information provided in the ENDED FOR THE YEAR ENDED 28, ENDED FOR THE YEAR ENDED 1993+ to
financial statements. JUNE 30, DECEMBER 31, 1992+ TO JUNE 30, DECEMBER 31, DECEMBER
------------------------- DECEMBER 31, ---------------- 31,
INCREASE (DECREASE) IN NET ASSET
VALUE: 1996 1995 1994 1993 1992 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <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 $ 11.30 $ 9.45 $ 10.66 $ 10.00
------- ------- ------- ------- ------- ------- ------ ------- -------
Investment income-net............... .18 .39 .30 .16 .13 .24 .45 .35 .04
Realized and unrealized gain (loss)
on investments and foreign currency
transactions-net.................. .31 .82 (.48) 1.96 .13 .46 1.79 (1.25) .64
--- --- ----- ---- ---- ---- ---- ------ ----
Total from investment operations.... .49 1.21 (.18) 2.12 .26 .70 2.24 (.90) .68
Less dividends and distributions: --- --- ----- ---- ---- ---- ---- ------ ----
Investment income-net............. (.29) (.39) (.21) (.17) (.04) (.27) (.39) (.29) (.02)
Realized gain on investments-net - - (.04) - - - - - -
In excess of realized gain on
investments-net................... - -++ (.01) - - - - (.02) -
--- --- ----- ---- ---- ---- ---- ------ ----
Total dividends and distributions... (.29) (.39) (.26) (.17) (.04) (.27) (.39) (.31) (.02)
--- --- ----- ---- ---- ---- ---- ------ ----
Net asset value, end of period...... $ 12.75 $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 11.73 $ 11.30 $ 9.45 $ 10.66
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 4.03%## 10.60% (1.46)% 21.03% 2.62%## 6.34%## 24.33% (8.51)% 6.85%##
======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... .71%* .72% .77% .88% 1.25%* .66% .66% .73% .89%*
======= ======= ======= ======= ======= ======= ======= ======= =======
Expenses............................ .71%* .72% .77% .88% 1.35%* .66%* .66% .73% .89%*
======= ======= ======= ======= ======= ======= ======= ======= =======
Investment income-net............... 2.87%* 3.33% 2.85% 2.41% 2.66%* 4.14%* 4.44% 3.68% 2.84%*
======= ======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)....................... $550,528 $540,242 $515,407 $269,627 $15,527 $150,275 $148,225 $126,243 $ 104,517
======= ======= ======= ======= ======= ======= ======= ======= ========
Portfolio turnover................. 80.64% 27.23% 21.03% 17.07% 14.47% 7.73% 11.05% 9.52% 1.72%
======= ======= ======= ======= ======= ======= ======= ======= =======
Average commission rate paid###..... $.0290 - - - - $ .0596 - - -
======= ======= ======= ======= ======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# On [ ], 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.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
------------------------
FOR THE
The following per share SIX
data and ratios have MONTHS
been derived from ENDED
information provided JUNE 30,
in the financial FOR THE YEAR ENDED DECEMBER 31,
statements. ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
ASSET VALUE: ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 $ 11.42 $ 11.39
beginning of period ------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Investment income-net.... .52 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23 1.25
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions-net........ (.11) .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79) .03
------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Total from investment
operations.............. .41 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44 1.28
------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Less dividends and
distributions:
Investment income-net.... (.53) (1.10) (1.03) (.97 ) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) (1.25)
Realized gain on
investments-net......... - - - - - - - - - (.08) -
----- ----- ----- ----- ----- ---- ----- ------ ----- ----- -----
Total dividends and
distributions............ (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) (1.25)
----- ----- ----- ----- ----- ---- ----- ------ ----- ----- -----
Net asset value, end of
period................... $11.13 $11.25 $10.61 $12.06 $11.13 $10.23 $ 8.14 $10.21 $10.85 $10.55 $11.42
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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% 3.82% 11.74%
====== ====== ====== ====== ====== ====== ======= ===== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. .53%* .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% 1.12%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investment income-net.... 9.40%* 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% 10.65%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 $ 13,075 $ 12,577
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover 28.32% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% 22.44%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# 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.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND# INTERNATIONAL EQUITY FOCUS FUND
----------------------------------------- ----------------------------------------
The following per share FOR THE FOR THE
data and ratios have FOR THE FOR THE PERIOD FOR THE PERIOD
been derived from SIX YEAR MAY 2, SIX JULY 1,
information provided MONTHS ENDED 1994 TO MONTHS 1993+ TO
in the financial ENDED DECEMBER DECEMBER ENDED FOR THE YEAR DECEMBER
statements. JUNE 30, 31, 1995 31, 1994 JUNE 30, ENDED DECEMBER 31, 31,
------------------
INCREASE (DECREASE) IN NET 1996 1995 1994 1996 1995 1994 1993
ASSET VALUE: ---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - -
======= ======= ======= ======== ======= ======= =======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# On [ ], 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 [ ], 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 [ ], 1996 may not be indicative of its performance following [ ], 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.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
For For the
The following per share data the Period
and ratios have been derived Six June 1,
from information provided in Months 1988+ to
Ended FOR THE YEAR ENDED DECEMBER 31, Dec.
the financial statements. June 30, --------------------------------------------------------------------- 31,
INCREASE (DECREASE) IN NET 1996 1995 1994 1993 1992 1991 1990 1989 1988
ASSET VALUE: ----- ---- ---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - - - - - - -
======= ======= ======= ======= ======= ======= ======= ======= =======
* 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.
11
<PAGE> FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
PRIME BOND FUND
---------------
The following per share For The
data and ratios have been Six
derived from information Months
provided in the Ended
financial statements. June 30, For the Year Ended December 31,
----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
ASSET VALUE: ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04 $ 11.50
------- ------- ------- ------- -------- ------- ------- ------- ------- -------- -------
Investment income-net... .40 .82 .77 .70 .79 .90 .88 .90 .87 .87 .99
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions-net........ (.71) 1.34 (1.36) .71 .04 .84 (.12) .48 (.15) (1.00) .54
------- ------- ------- ------- -------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. (.31) 2.16 (.59) 1.41 .83 1.74 .76 1.38 .72 (.13) 1.53
------- ------- ------- ------- -------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income-net... (.40) (.83 ) (.76) (.70) (.81) (.90) (.87) (.90) (.80) (.87) (.99)
Realized gain on
investments-net......... - - - (.11) - - - - - (.15) -
In excess of realized
gain on investments-net. - - (.17) - - - - - - - -
------- ------- ------- ------- -------- ------- ------- ------- ------- ------- -------
Total dividends and (.40) (.83) (.93) (.81) (.81) (.90) (.87) (.90) (.80) (1.02) (.99)
distributions.............. ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period..................... $ 11.74 $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04
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% 6.75% (1.10)% 13.75%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .49%* .50% .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07% 1.12%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Investment income-net... 6.65%* 7.00% 6.74% 5.86% 6.76% 7.94% 8.01% 8.12% 8.05% 7.66% 7.98%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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 $22,499 $17,385 $20,869
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover...... 48.14% 90.12% 139.89% 115.26% 82.74% 152.18% 155.17% 144.52% 225.81% 129.46% 103.63%
======= ======= ======= ======= ======= ======= ====== ====== ====== ======= =======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# 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.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
-------------------
FOR THE
The following per share data SIX
and ratios have been derived MONTHS
from information provided ENDED
in the financial statements. JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET 1996+ 1995+ 1994+ 1993 1992 1991 1990 1989 1988 1987 1986
ASSET VALUE: ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15 $ 17.14
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Investment income-net........ .36 .58 .38 .24 .34 .43 .47 .50 .43 .42 .43
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 1.73 (.35) 3.01
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Total from investment
operations................. 1.70 6.06 (.36) 3.70 .66 6.18 .09 5.46 2.16 .07 3.44
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income-net..... (.31) (.45) (.25) (.12) (.58) (.50) (.41) (.52) (.22) (.60) (.43)
Realized gain on
investments-net......... (4.29) (.59) (.67) (.04) (.95) (1.05) (.84) - - (3.62) -
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions.............. (4.60) (1.04) (.92) (.16) (1.53) (1.55) (1.25) (.52) (.22) (4.22) (.43)
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Net asset value, end of period$29.86 $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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% 13.54% (.70)% 20.38%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses..................... .48 %* .51% .54% .62% .74% .79% .94% 1.05% 1.02% .93% 1.09%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Investment income-net........ 2.45%* 1.94% 1.39% 1.07% 1.54% 1.87% 2.36% 2.58% 2.25% 2.31% 2.41%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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 $ 20,055$ 23,986 $16,704
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover........... 48.72% 140.32% 60.57% 88.25% 62.54% 55.83% 69.05% 44.23% 32.53% 65.58% 50.96%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Average commission rate
paid##.......................$ .0619 - - - - - - - - - -
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
+ 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.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
-------------------
The following per share FOR THE
data and have been SIX
derived from MONTHS
information provided ENDED
in the financial JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
statements. ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
NET ASSET VALUE: ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 1.00 $ 1.00 $ 1.00 $ 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 .0661 .0574 .0560
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions-net........ (.0008) .0018 (.0009) .0005 .0007 .0014 .0019 .0012 .0002 .0005 .0027
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Total from investment
operations.............. .0238 .0561 .0362 .0273 .0327 .0560 .0749 .0834 .0663 .0579 .0587
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income-net (.0246) (.0543) (.0362) (.0268) (.0320) (.0546) (.0730) (.0822) (.0661) (.0574) (.0560)
Realized gain on
investments-net...... (.0001) (.0004) - (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+ (.0005)+ (.0027)+
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (.0247) (.0547) (.0362) (.0273) (.0325) (.0560) (.0749) (.0834) (.0663) (.0579) (.0587)
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 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% 6.85% 5.96% 6.05%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .61% .61% .65% .70% .79% .79% .97% 1.03% 1.01% 1.04% 1.18%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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%+ 6.65%+ 5.86%+ 5.89%+
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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 $ 24,951 $ 23,068 $ 17,214
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Includes unrealized gain (loss)
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
GLOBAL BOND FOCUS FUND#
-----------------------
FOR THE FOR THE
SIX PERIOD
The following per share data and ratios have been derived MONTHS JULY 1,
from information provided in the financial ENDED FOR THE YEAR ENDED 1993+TO
statements. JUNE 30, DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: ---------------------
PER SHARE OPERATING PERFORMANCE: 1996++ 1995++ 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
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%
======== ======== ======== ========
* 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 [ ], 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 [ ], 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.
15
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under Contracts issued by
Family Life Insurance Company ("Family Life"), formerly a wholly owned
subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). On June 12, 1991, Family
Life was sold to a non-affiliated corporation and most (although not all) of
its Contracts were transferred to MLLIC and ML of New York, two wholly owned
subsidiaries of ML&Co. Shares of the Funds currently are sold to Separate
Accounts of Family Life, MLLIC and ML of New York as well as other insurance
companies not affiliated with Family Life, MLLIC or ML of New York (together
with MLLIC, ML of New York and Family Life, "Insurance Companies") to fund
certain variable life insurance contracts and/or variable annuities issued by
such companies.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the Prospectus for each
Contract. That Prospectus describes the relationship between increases or
decreases in the net asset value of shares of a Fund, and any distributions on
such shares, and the benefits provided under a Contract. The Prospectus for
the Contracts also describes various fees payable to the Insurance Companies
and charges to the Separate Accounts made by the Insurance Companies with
respect to the Contracts. Since shares of the Funds will be sold only to the
Insurance Companies for the Separate Accounts, the terms "shareholder" and
"shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and
ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment
Adviser.
RESERVE ASSETS FUND AND DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Reserve Assets Fund and the
Domestic Money Market Fund for the seven-day period ended December 31, 1995,
computed to include and exclude realized and unrealized gains and losses, and
information as to the compounded annualized yield, excluding gains and losses,
for the same periods. The yield quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the
separate account level which, if included, would decrease the yield.
<TABLE>
<CAPTION>
RESERVE
ASSETS DOMESTIC MONEY
Fund Market Fund
<S> <C> <C>
Annualized Yield:
Including gains and losses..................... 5.34% 5.28%
Excluding gains and losses..................... 5.33% 5.28%
Compounded Annualized Yield........................ 5.47% 5.42%
Average maturity of portfolio at end of period..... 84 days 79 days
</TABLE>
16
<PAGE> INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described below. The
differences in objectives and policies among the Funds can be expected to
affect the return of each Fund and the degree of market and financial risk to
which each Fund is subject. Each Fund is classified as "diversified," as
defined in the Investment Company Act of 1940, except for the Natural Resources
Focus Fund, the Global Strategy Focus Fund, the 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 judgment of the Investment Adviser, it is
advantageous to do so. Securities in the lowest category of investment grade
debt securities may have speculative characteristics which may lead to weakened
capacity to pay interest and principal during periods of adverse economic
conditions. See Appendix A for a fuller description of corporate bond ratings.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to
preserve shareholder capital, to maintain liquidity and to achieve the highest
possible current income consistent with the foregoing objectives by investing
in short-term domestic money market securities. The Fund will invest in short-
term U.S. Government securities, U.S. Government agency securities, domestic
depository institution money instruments (including certificates of deposit,
bankers' acceptances, time deposits and bank notes), short-term debt securities
(such as commercial paper and insurance company funding agreements), variable
amount master demand notes, repurchase and reverse repurchase agreements of
U.S. issuers and other money market instruments. As a matter of fundamental
policy, which may be changed only with the approval of a majority of the
Domestic Money Market Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, the Fund may not purchase securities of foreign
issuers (including Eurodollar or Yankeedollar bank obligations). U.S.
Government securities may be purchased on a forward commitment basis. The
types of money market securities in which the Domestic Money Market Fund may
invest are described more fully in Appendix A to this Prospectus. The Domestic
Money Market Fund will be subject to portfolio maturity, quality and
diversification restrictions discussed below under "Money Market Fund Portfolio
Restrictions."
RESERVE ASSETS FUND
The investment objectives of the Reserve Assets Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in short-
term money market securities. The Fund will invest in short-term U.S.
Government securities, U.S. Government agency securities, depository
institution money instruments (including certificates of deposit, bankers'
acceptances, time deposits and bank notes), short-term debt securities (such as
commercial paper and insurance company funding agreements), variable amount
master demand notes, securities of foreign issuers (including Eurodollar,
Yankeedollar and foreign bank obligations) and repurchase and reverse
repurchase agreements. U.S. Government securities may be purchased on a
forward commitment basis. The types of money market securities in which the
Reserve Assets Fund may invest are described more fully in Appendix A to the
Prospectus. The Reserve Assets Fund will be subject to the portfolio maturity,
quality and diversification restrictions discussed below under "Money Market
Fund Portfolio Restrictions."
17
<PAGE>
PRIME BOND FUND
The principal investment objective of the Prime Bond Fund is to provide
shareholders with as high a level of current income as is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its principal objective.
The Prime Bond Fund invests primarily in securities rated in the top
three rating categories of either Standard & Poor's (AAA, AA and A) or Moody's
(Aaa, Aa and A). Additional information regarding various bond ratings is set
forth in Appendix A to the Prospectus. The financial risk of the Fund should
be minimized by the credit quality of the bonds in which it will invest, but
the long maturities that typically provide the best yield will subject the Fund
to possible substantial price changes resulting from market yield fluctuations.
The market prices of fixed-income securities such as those purchased by the
Fund are affected by changes in interest rates generally. As interest rates
rise, the market value of fixed-income securities will fall, adversely
affecting the net asset value of the Fund.
Fund management strategy will attempt to mitigate adverse price changes
and optimize favorable price changes through active trading that shifts the
maturity and/or quality structure of the Fund within the overall investment
guidelines. The Fund's investments will vary from time to time depending upon
the judgment of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. The Fund anticipates that under normal
circumstances more than 90% of the assets of the Fund will be invested in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. The Fund does not intend to invest in common
stock, rights or other equity securities. Under unusual market or economic
conditions, the Fund for defensive or other purposes may invest up to 100% of
its assets in U.S. government or government agency securities, money market or
other fixed-income securities deemed by the Investment Adviser to be consistent
with the objectives of the Fund, or the Fund may hold its assets in cash.
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund, like
the Prime Bond Fund, is to obtain the highest level of current income that is
consistent with the investment policies of the Fund and with prudent investment
management. As a secondary objective, the Fund seeks capital appreciation when
consistent with its primary objective.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard & Poor's), or in unrated securities of comparable quality.
Securities rated below Baa by Moody's and below BBB by Standard & Poor's are
commonly known as "junk bonds." Additional information regarding various bond
ratings is set forth in Appendix A to the Prospectus. The market price of
fixed-income securities such as those purchased by the Fund is affected by
changes in interest rates generally. As interest rates rise, the market value
of fixed-income securities will fall, adversely affecting the net asset value
of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater market
fluctuations and risks of loss of income and principal than lower-yielding,
higher-rated fixed-income securities. Such securities are generally issued by
corporations which are not as financially secure or as creditworthy as issuers
of higher-rated securities. There is, accordingly, a greater risk that the
issuers of higher-yielding securities will not be able to pay principal and
interest on such securities, especially during periods of adverse economic
conditions. Because investment in such high-yield securities 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
18
<PAGE>
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 judgment of the Investment
Adviser, it is advantageous to do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that
the risk of loss of income and principal may be substantially reduced with only
a relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending
upon the judgment of management as to prevailing conditions in the economy and
the securities markets and the prospects for interest rate changes among
different categories of fixed-income securities. It is anticipated that under
normal circumstances more than 90% of the Fund's assets will be invested in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. Although it is expected that, in general, the
Fund will not invest in common stocks, rights or other equity securities, it
will acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in connection with an actual or proposed conversion or exchange
of fixed-income securities. In addition, under unusual market or economic
conditions, the High Current Income Fund for defensive purposes may invest up
to 100% of its assets in U.S. GOVERNMENT OR GOVERNMENT agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or may hold
its assets in cash. The yield on such securities may be lower than the yield
on lower-rated fixed-income securities.
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.
% MARKET
VALUE
% NET CORPORATE
Rating* Assets Bonds
------- ------ ---------
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%
* 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.
19
<PAGE>
QUALITY EQUITY FUND
The Quality Equity Fund seeks to achieve the highest total investment
return, or the aggregate of income and capital value changes, consistent with
prudent risk. To do this, management will shift the emphasis among investment
alternatives for capital growth, capital stability and income as market trends
change. This "fully managed" investment policy distinguishes the Fund from
investment companies which seek either capital growth or income. The Fund's
investment philosophy is based on management's belief that the structure of the
United States economy and its securities markets will undergo continuous
change. The flexibility of the Fund is designed to reduce overall exposure to
risk by achieving below-average volatility in a falling market and above-
average volatility in a rising market.
The Quality Equity Fund's fully managed investment approach will make use
of equity, debt and convertible securities. The majority of the Fund's equity
portfolio will be in the common stocks of large-capitalization, "quality"
companies. For this purpose, "large capitalization" companies are considered
to be those companies with market capitalizations in excess of $500 million.
Management of the Company believes that a quality company is one which conforms
closely to the following criteria: good financial resources, strong balance
sheet, satisfactory rate of return on capital, good industry position and
superior management skills. The earnings of quality companies generally tend
to grow consistently. Whenever market or financial conditions warrant, the
Fund may, in order to reduce risk and achieve the highest total investment
return, invest in non-convertible, long-term debt securities, including "deep
discount" corporate debt securities of investment grade or issues of fixed-
income convertible securities which give the owner the option of a later
exchange for common stock. Management expects that over longer periods the
larger portion of the Fund's portfolio will consist of equity securities.
During defensive periods, the Fund may invest in U.S. Government and Government
agency, money-market securities or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or cash.
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.
20
<PAGE>
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.
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
21
<PAGE>
securities (E.G., common stocks and securities convertible into common stocks)
of domestic and foreign companies with substantial natural resource assets.
This investment objective is a fundamental policy and may not be changed
without a vote of the majority of outstanding shares of the Fund. The Fund
also may invest in debt, preferred or convertible securities, the value of
which is related to the market value of some natural resource asset ("asset-
based securities"). See "Asset-Based Securities" below. Management of the
Company will seek to identify companies or asset-based securities it believes
are attractively priced relative to the intrinsic value of the underlying
natural resource assets or are especially well positioned to benefit during
particular portions of inflationary cycles. There can be no assurance the
investment objectives of the Fund will be realized.
IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE
FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE COMPANY ANTICIPATES
SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY, SUCH AS HIGH
INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY EXCHANGE MARKETS, TO
INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE FOR, EXTRACT, PROCESS
OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO THE VALUE OF GOLD
BULLION. Such a switch in investment strategies could require the Fund to
liquidate portfolio securities and incur transaction costs. The Company has
been advised by counsel that it is uncertain under the current federal tax law
whether the Fund may concentrate its investments in gold and gold-related
securities without adversely affecting the federal tax status of the Contracts.
Accordingly, management of the Company has determined that the Fund will not
concentrate its investments in such securities until counsel has advised the
Company that such uncertainty has been resolved favorably.
Management attempts to achieve the investment objectives of the Fund by
seeking to identify securities of companies which, in its opinion, are
undervalued relative to the value of natural resource holdings of such
companies in light of current and anticipated economic or financial conditions.
Natural resource assets are materials derived from natural sources which have
economic value. Management will consider a company to have substantial natural
resource assets when, in its opinion, the company's holdings of the assets are
of such magnitude, when compared to the capitalization, revenues or operating
profits of the company, that changes in the economic value of the assets will
affect the market price of the equity securities of such company. Generally, a
company has substantial natural resource assets when at least 50% of the non-
current assets, capitalization, gross revenues or operating profits of the
company in the most recent or current fiscal year are involved in or result
from directly or indirectly through subsidiaries, exploring, mining, refining,
processing, fabricating, dealing in or owning natural resource assets.
Examples of natural resource assets include precious metals (E.G., gold, silver
and platinum), ferrous and nonferrous metals (E.G., iron, steel, aluminum and
copper), strategic metals (E.G., uranium and titanium), hydrocarbons (E.G.,
coal, oil and natural gas), timber land, undeveloped real property and
agricultural commodities. The Fund presently does not intend to invest
directly in natural resource assets or contracts related thereto.
Management of the Company believes that, based upon past performance, the
securities of specific companies that hold different types of substantial
natural resource assets may move relatively independently of 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."
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The Fund at all times, except during defensive periods, will maintain at
least 65% of its total assets invested in companies with substantial natural
resource assets or in asset-based securities. Current income from dividends
and interest will not be a primary consideration in selecting securities. The
Fund reserves the right as a temporary defensive measure and to provide for
redemptions, to hold short-term U.S. Government and Government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or cash, in
such proportions as, in the opinion of management, prevailing market or
economic conditions warrant.
ASSET-BASED SECURITIES. The Fund may invest in debt securities,
preferred stocks or convertible securities, the principal amount, redemption
terms or conversion terms of which are related to the market price of some
natural resource asset such as gold bullion. For the purposes of the Fund's
investment policies, these securities are referred to as "asset-based
securities." The Fund will purchase only asset-based securities which are
rated, or are issued by issuers that have outstanding debt obligations rated,
investment grade (that is AAA, AA, A or BBB by Standard & Poor's or Aaa, Aa, A
or Baa by Moody's or commercial paper rated A-1 by Standard & Poor's or Prime-1
by Moody's) or of issuers that the Investment Adviser has determined to be of
similar creditworthiness. If the asset-based security is backed by a bank
letter of credit or other similar facility, the Investment Adviser may take
such backing into account in determining the creditworthiness of the issuer.
While the market prices for an asset-based security and the related natural
resource asset generally are expected to move in the same direction, there may
not be perfect correlation in the two price movements. Asset-based securities
may not be secured by a security interest in or claim on the underlying natural
resource asset. The asset-based securities in which the Fund may invest may
bear interest or pay preferred dividends at below market (or even relatively
nominal) rates. As an example, assume gold is selling at a market price of
$300 per ounce and an issuer sells a $1,000 face amount gold-related note with
a seven-year maturity, payable at maturity at the greater of either $1,000 in
cash or the then market price of three ounces of gold. If at maturity, the
market price of gold is $400 per ounce, the amount payable on the note would be
$1,200. Certain asset-based securities may be payable at maturity in cash at
the stated principal amount or, at the option of the holder, directly in a
stated amount of the asset to which it is related. In such instance, because
the Fund presently does not intend to invest directly in natural resource
assets, the Fund would sell the asset-based security in the secondary market,
to the extent one exists prior to maturity, if the value of the stated amount
of the asset exceeds the stated principal amount, and thereby realize the
appreciation in the underlying asset.
RISK FACTORS. As indicated above, under certain circumstances, the Fund
has reserved the right to invest a majority of its assets in gold-related
companies or securities. Based on historic experience, during periods of
economic or financial instability, the securities of such companies may be
subject to extreme price fluctuations, reflecting the high volatility of gold
prices during such periods. In addition, the instability of gold prices may
result in volatile earnings of gold-related companies which, in turn, may
affect adversely the financial condition of such companies. Gold mining
companies also are subject to the risks generally associated with mining
operations.
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.
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
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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 factors as the
condition and growth potential of the various economies and securities markets
and the issuers domiciled therein, anticipated movements in interest rates in
the various capital markets and in the value of foreign currencies relative to
the U.S. dollar, tax considerations and economic, social, financial, national
and political factors which may affect the climate for investing within such
securities markets. When, in the judgment of the Investment Adviser, economic
or market conditions warrant, the Fund reserves the right to concentrate its
investments in one or more capital markets, including the United States. For
additional information concerning the risks of investing in foreign securities,
see "Other Portfolio Strategies-Foreign Securities."
The equity and convertible preferred securities in which the Global
Strategy Focus Fund may invest are primarily securities issued by quality
companies. Generally, the characteristics of such companies include a strong
balance sheet, good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be primarily those rated BBB or better by
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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 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
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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
("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
26
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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 he
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 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
27
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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
Standard & Poor's or Baa by Moody's) or deemed to be of equivalent quality in
the judgment of the Investment Adviser. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to
Standard & Poor's, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal. The Fund's commercial paper investments at the time of
purchase will be rated "A-1" or "A-2" by Standard & Poor's or "Prime-1" or
"Prime-2" by Moody's or, if not rated, will be of comparable quality as
determined by the Investment Adviser. The Fund may also invest up to 5% of its
total assets at the time of purchase in fixed income securities having a
minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The
Fund may, but need not, dispose of any security if it is subsequently
downgraded. For a description of ratings of debt securities, see Appendix A to
this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. Generally,
ADRs, which are issued in registered form, are designated for use in the United
States securities markets, and EDRs, which are issued in bearer form, are
designed for use in European securities markets. The Fund may invest in ADRs
and EDRs through both sponsored and unsponsored arrangements. In a sponsored
ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depository's transaction fees, whereas in an unsponsored
arrangement the foreign issuer assumes no obligations and the depository's
transaction fees are paid by the ADR or EDR holders. Foreign issuers in
respect of whose securities unsponsored ADRs or EDRs have been issued are not
necessarily obligated to disclose material information in the markets in which
the unsponsored ADRs or EDRs are traded and, therefore, there may not be a
correlation between such information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
UTILITY INDUSTRIES-DESCRIPTION AND RISKS. Under normal circumstances,
the Fund will invest at least 65% of its total assets in common stocks
(including preferred or debt securities convertible into common stocks), debt
securities and preferred stocks of domestic and/or foreign companies in the
utility industries. To meet its objective of current income, the Fund may
invest in domestic utility companies that pay higher than average dividends,
but have a lesser potential for capital appreciation. The average dividend
yields of common stocks 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'
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securities has underperformed that of industrial companies' securities. There
can be no assurance that positive relative returns on utility securities will
occur in the future. The Investment Adviser believes that the average dividend
yields of common stocks issued by foreign utility companies have also
historically exceeded those of foreign industrial companies' common stocks. To
meet its objective of capital appreciation, the Fund may invest in foreign
utility companies which pay lower than average dividends, but have a greater
potential for capital appreciation.
The utility companies in which the Fund will invest include companies
which are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced 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
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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 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
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underway, it is likely that both traditional telephone companies and cable
companies will soon provide a greatly expanded range of utility services,
including two-way video and informational services.
GAS. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decades, gas utility companies have been
adversely affected by disruptions in the oil industry and have also been
affected by increased concentration and competition. In the opinion of the
Investment Adviser, however, environmental considerations could improve the gas
industry outlook in the future. For example, natural gas is the cleanest of
the hydrocarbon fuels, and this may result in incremental shifts in fuel
consumption toward natural gas and away from oil and coal.
WATER. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic
companies. The Investment Adviser believes that favorable investment
opportunities may result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur
or that risk factors other than those noted above will not develop in the
future.
INVESTMENT OUTSIDE THE UTILITY INDUSTRIES. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that
are outside the utility industries. Such investments may include common
stocks, debt securities or preferred stocks and will be selected to meet the
Fund's investment objective of both capital appreciation and current income.
These securities may be issued by either U.S. or non-U.S. companies. Some of
these issuers may be in industries related to utility industries and,
therefore, may be subject to similar risks. Securities that are issued by
foreign companies or are denominated in foreign currencies are subject to the
risks outlined above.
The Global Utility Focus Fund is also permitted to invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government Securities"). Such investments may be backed by the "full
faith and credit" of the United States, including U.S. Treasury bills, notes
and bonds as well as certain agency securities and mortgage-backed securities
issued by the Government National Mortgage Association (GNMA). The guarantees
on these securities do not extend to the securities' yield or value or to the
yield or value of the Fund's shares. Other investments in agency securities
are not necessarily backed by the "full faith and credit" of the United States,
such as certain securities issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.
The Global Utility Focus Fund may invest in securities issued or
guaranteed by foreign governments. Such securities are typically denominated
in foreign currencies and are subject to the currency fluctuation and other
risks of foreign securities investments. The foreign government securities in
which the Fund intends to invest generally will consist of obligations
supported by national, state or local governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, including international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of "quasi-
governmental agencies" and debt securities denominated in multinational
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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 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
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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.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community,
the Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies-Foreign Securities" and "Risks of High Yield
Securities" below.
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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 [ ], 1996 , those countries' equity market capitalizations
totalled approximately [78%] of the world's equity market capitalization
according to data provided by Morgan Stanley Capital International. The Fund
will at all times, except during defensive periods, maintain investments in at
least three countries having smaller capital markets.
The Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called "emerging" countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more market-
oriented economies, may experience relatively high rates of economic growth.
Other countries (such as France, the Netherlands and Spain), although having
relatively mature smaller capital markets, may also be in a position to benefit
from local or international developments encouraging greater market orientation
and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information,
capability or inclination to invest in countries having smaller capital
markets. It also may not be permissible for such investors to invest directly
in certain such markets. Unlike many intermediary investment vehicles, such as
closed-end investment companies that invest in a single country, the Fund
intends to diversify investment risk among the capital markets of a number of
countries. The Fund will not necessarily seek to diversify investments on a
geographical basis or on the basis of the level of economic development of any
particular country.
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.
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The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies-Foreign Securities" and "Risks of High Yield
Securities" below.
For purposes of the Fund's investment objective, an issuer ordinarily
will be considered to be located in the country where the primary trading
market of its securities is located. The Fund, however, may consider a company
to be located in countries having smaller capital markets, without reference to
its domicile or to the primary trading market of its securities, when at least
50% of its non-current assets, capitalization, gross revenues or profits in any
one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in such countries. The Fund
also may consider closed-end investment companies to be located in the country
or countries in which they primarily make their portfolio investments.
Foreign investments in smaller capital markets involve risks not involved
in domestic investment, including fluctuations in foreign exchange rates,
future political and economic developments, different legal systems and the
existence or possible imposition of exchange controls or other foreign or
United States governmental laws or restrictions applicable to such investments.
These risks are often heightened for investments in small capital markets.
With respect to certain countries, there may be the possibility of
expropriation of assets, confiscatory 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
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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.
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
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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.
NON-DIVERSIFIED FUNDS
The Natural Resources Focus, Global Strategy Focus, 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.
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
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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.
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
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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 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
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standards and requirements comparable to those of United States companies. As
a result, traditional investment measurements, such as price/earnings ratios,
as used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in a Fund which invests in these markets incurring
additional costs and delays in transporting and custodying such securities
outside such countries. Delays in settlement could result in temporary periods
when assets of such a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible 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
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countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms than securities
of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the "Investment Company Act" or
"the Act"), the Developing Capital Markets Focus and International Equity Focus
Funds each may invest up to 10% of its total assets in securities of such
closed-end investment companies. This restriction on investments in securities
of closed-end investment companies may limit opportunities for the Fund to
invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If a Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies. A
Fund also may seek, at its own cost, to create its own investment entities
under the laws of certain countries.
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.
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
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use certain derivative instruments, including options, futures
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,
judgment may play a greater role in valuing certain of each Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund, 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
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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.
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).
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MELVIN R. SEIDEN-President of Silbanc Properties, Ltd. (real
estate, consulting and investments).
STEPHEN B. SWENSRUD-Principal of Fernwood Associates (financial
consultants).
JOE GRILLS-Member of the Committee on Investment of Employee
Benefit Assets of the Financial Executives Institute ("CIEBA"); Member of
CIEBA's Executive Committee; and Member of the Investment Advisory
Committee of the State of New York Common Retirement Fund.
ROBERT S. SALOMON, JR. -Principal of STI Management
(investment adviser).
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly owned subsidiary
of Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The
general partner of the Investment Adviser is Princeton Services, Inc., a wholly
owned subsidiary of Merrill Lynch & Co., Inc. The principal address of the
Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536
(mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment
Adviser or its affiliate, Fund Asset Management, L.P., 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
September 30, 1996, MLAM and FAM had a total of approximately $[ ]
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 commenced operations on [ ], 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 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
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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 exceeds the most restrictive expense
limitations then in effect under any state securities laws or published
regulations thereunder. At present the most restrictive expense limitation
requires the Investment Adviser to reimburse expenses which exceed 2.5% of each
Fund's first $30 million of average daily net assets, 2.0% of its average daily
net assets in excess of $30 million but less than $100 million, and 1.5% of its
average daily net assets in excess of $100 million. Expenses for this purpose
include the Investment Adviser's fee but exclude interest, taxes, brokerage
fees and commissions and extraordinary charges, such as litigation. No fee
payments will be made to the Investment Adviser with respect to any Fund during
any fiscal year which would cause the expenses of such Fund to exceed the pro
rata expense limitation applicable to such Fund at the time of such payment.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have
entered into two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"), which is less than the expense limitations imposed
by state securities laws or published regulations thereunder. The
reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide
that any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by the Investment Adviser which, in turn, will be
reimbursed by MLLA. During the Company's fiscal year ended December 31, 1995,
the Developing Capital Markets Focus Fund, International Bond Fund (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.
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-
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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.
Christopher Ayoub has served as the Domestic Money Market Fund's
Portfolio Manager since June 1992, and is primarily responsible for the Fund's
day-to-day management. He has served as Vice President of MLAM since 1985.
Fredric Lutcher has served as the Equity Growth Fund's Portfolio Manager
since June 1990, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1989.
Walter Rogers has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and employee
of the Investment Adviser since 1986.
Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have
served as the International Equity Focus Fund's Portfolio Managers since July
1993, and are primarily responsible for the Fund's day-to-day management.
Andrew Bascand has been the director of MLAM, U.K. and Vice President of
Merrill Lynch Global Asset Management Limited (MLGAM) since 1993; Chief
Economist with A.M.P. Investment (NZ) in New Zealand from 1989 to 1993;
Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand from
1987 to 1989; and Senior Research Officer of the Bank of England's
International Department from 1986 to 1987. Adrian Holmes has been the
Managing Director of MLAM, U.K. since 1993; Vice President from 1990 to 1993;
and an employee since 1987. Grace Pineda and Steve Silverman have served as
Vice Presidents of MLAM since 1989 and 1983, respectively.
Peter Lehman has served as the Natural Resources Focus Fund's Portfolio
Manager since January 1994, and is primarily responsible for the Fund's day-to-
day management. He has served as Vice President of MLAM since 1994; Senior
Fund Analyst for an international fund managed by the Investment Adviser from
1992 to 1994; Director and Senior Portfolio Manager for Prudential Insurance
Company of America from 1989 to 1991.
Jay Harbeck has served as the Prime Bond Fund's Portfolio Manager since
July 1992, and is primarily responsible for the Fund's day-to-day management.
He has served as Vice President of MLAM since 1986.
Christopher Ayoub has served as the Reserve Assets Fund's Portfolio
Manager since June 1992, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1986.
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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 has served as the Index 500 Fund's Portfolio Manager since
[ ], 1996 (the date that the Fund commenced 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 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.
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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.
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.
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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 [ ], 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 [ ], 1996, the
portfolio of the fund included debt securities rated below investment grade
(I.E., junk bonds). On [ ], 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 [ ], 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 [ ], 1996 may not be indicative of such
Fund's performance following [ ], 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
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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.
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.
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The Company has used pricing services, including Merrill Lynch Securities
Pricing{TM} 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 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 commenced operations
on [ ], 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. Family Life also
provided the initial capitalization for each of the Company's other Funds other
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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 [ ], 1996
MLLIC purchased $[ ] 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 [ ], 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.
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
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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 [ ], 1996,
which forms a part of the Registration Statement, is incorporated by reference
into this Prospectus. The Statement of Additional Information may be obtained
without charge as provided on the cover page of this Prospectus. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund (and, for
temporary or defensive purposes, each other Fund) may invest in the various
types of marketable securities issued by or guaranteed as to principal and
interest by the U.S. Government and supported by the full faith and credit of
the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a
discount basis.
GOVERNMENT AGENCY SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund (and, for
temporary or defensive purposes, each other Fund) may invest in government
agency securities, which are debt securities issued by government sponsored
enterprises, federal agencies and international institutions. Such securities
are not direct obligations of the Treasury but involve government sponsorship
or guarantees by government agencies or enterprises. The Funds may invest in
all types of government agency securities currently outstanding or to be issued
in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for
temporary or defensive purposes, each other Fund) may invest in depositary
institutions money instruments, such as certificates of deposit, including
variable rate certificates of deposit, bankers' acceptances, time deposits and
bank notes. Certificates of deposit are generally short-term, interest-bearing
negotiable certificates issued by commercial banks, savings banks or savings
and loan associations against funds deposited in the issuing institution.
Variable rate certificates of deposit are certificates of deposit on which the
interest rate is periodically adjusted prior to their stated maturity, usually
at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market
rate. As a result of these adjustments, the interest rate on these obligations
may be increased or decreased periodically. Often, dealers selling variable
rate certificates of deposit to the Funds agree to repurchase such instruments,
at the Funds' option, at par on the coupon dates. The dealers' obligations to
repurchase these instruments are subject to conditions imposed by the various
dealers; such conditions typically are the continued credit standing of the
issuer and the existence of reasonably orderly market conditions. The Funds
are also able to sell variable rate certificates of deposit in the secondary
market. Variable rate certificates of deposit normally carry a higher interest
rate than comparable fixed rate certificates of deposit because variable rate
certificates of deposit generally have a longer stated maturity than comparable
fixed rate certificates of deposit. As a matter of policy, the Domestic Money
Market Fund will invest only in these types of instruments issued by U.S.
issuers.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
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 discussed
below. Yankeedollar obligations in which the Fund may invest must be issued by
U.S. branches or subsidiaries of foreign banks which are subject to state or
federal banking regulations in the U.S. and by their terms must be general\
obligations of the foreign parent. In addition, the Fund will limit its
investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
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The Reserve Assets Fund (and, for temporary or defensive purposes, the
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 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
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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.
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
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but certain protective elements may be lacking or may be
characteristically unreliable over any length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded both during good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca-Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other market shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation:
AAA-This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the A
category.
BB-B-CCC-CC-Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms
of the obligations. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
NR-Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
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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.
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
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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 the close of the last trading day of the contract and the price
at which the futures contract is originally entered into. The Funds may engage
in transactions in stock index futures contracts based on broad market indexes
or on indexes on industry or market segments. A Fund may effect transactions
in stock index futures contracts in connection with the equity securities in
which it invests and in financial futures contracts in connection with the debt
securities in which it invests. As with stock index options, the effectiveness
of the Funds' hedging strategies depend primarily upon the degree of
correlation between movements in the value of the securities subject to the
hedge and the index or securities underlying the futures contract. 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
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currency at a specified future date (up to one year) and price at the time of
the contract. The dealings of the Funds in forward foreign exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Funds accruing
in connection with the purchase and sale of their portfolio securities, the
sale and redemption of shares of the Funds or the payment of dividends and
distributions by the Funds. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Funds will not speculate in forward foreign
exchange. Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Funds to hedge against a devaluation
that is so generally anticipated that the Funds are not able to contract to
sell the currency at a price above the devaluation level they anticipate.
The Funds are also authorized to purchase or sell listed foreign currency
options and foreign currency futures contracts as a hedge against possible
adverse variations in foreign exchange rates. Foreign currency options provide
the holder thereof the right to buy or to sell a currency at a fixed price on
or before a future date. A futures contract on a foreign currency is an
agreement between two parties to buy and sell a specified amount of a currency
for a set price on a future date. Such transactions may be effected with
respect to hedges on non-U.S.dollar-denominated securities (including
securities denominated in multi-national currency units) owned by the Funds,
sold by the Funds but not yet delivered, or committed or anticipated to be
purchased by the Funds. As an illustration, the Funds may use such techniques
to hedge the stated value in United States dollars of an investment in a
Japanese yen-denominated security. In such circumstances, for example, the
Funds may purchase a foreign currency put option enabling them to sell
a specified amount of yen for dollars at a specified price by
a future date. To the extent the hedge is successful, a loss in the
value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part,
the cost of acquiring such a put option, the Funds may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a "straddle"). By
selling such call option in this illustration, the Funds give up the
opportunity to profit without limit from increases in the relative value of the
yen to the dollar.
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
A-7
<PAGE>
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
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 judgment of the
Investment Adviser, there is expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the portfolio of securities for such hedge to be
effective. There can be no assurance that the judgment will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entail the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index or
currency. The anticipated spread between the prices may be distorted due to
differences in the nature of the markets, such as differences in margin and
maintenance requirements, the liquidity of such markets and the participation
of speculators in the futures market. However, the risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract or termination date of the option approaches.
The Funds intend to enter into exchange-traded options and futures
transactions only if there appears to be a liquid secondary market for such
options or futures. However, there can be no assurance that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to close
an options or futures transaction. The inability to close options and futures
positions could have an adverse impact on a Fund's ability to effectively hedge
its portfolio. There is also the risk of loss by a Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom a Fund has an open
position in an option or futures contract.
A-8
<PAGE>
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.
A-9
<PAGE>
PROSPECTUS
[ ], 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PHONE NO. (609) 282-2800
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its 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 [ ],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
NB119145.2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
-------------
TABLE OF CONTENTS
PAGE
Financial Highlights.................................................. 3
The Insurance Companies............................................... 7
Investment Objectives and Policies of the Funds....................... 7
Directors............................................................. 25
Investment Adviser.................................................... 26
Portfolio Transactions and Brokerage.................................. 28
Purchase of Shares.................................................... 28
Redemption of Shares.................................................. 28
Dividends, Distributions and Taxes.................................... 29
Performance Data...................................................... 29
Additional Information................................................ 30
Appendix A............................................................ A-1
2
<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.
<TABLE>
<CAPTION>
DEVELOPING CAPITAL MARKETS
BASIC VALUE FOCUS FUND FOCUS FUND
------------------------------------------ --------------------------------
The following per share data and ratios have FOR THE FOR THE FOR THE FOR THE
been derived from information provided in the SIX PERIOD SIX FOR THE PERIOD
financial statements. MONTHS JULY 1, MONTHS YEAR MAY 2,
ENDED FOR THE YEAR ENDED 1993+ TO ENDED ENDED 1994+ TO
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1996 1995 1994
PER SHARE OPERATING PERFORMANCE: ____ ____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32 $ 9.51 $ 10.00
_______ _______ _______ _______ _______ _______ _______
Investment income-net......................... .08 .18 .17 .04 .11 .20 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions-net.............................. 1.28 2.49 .08 .91 .95 (.30) (.58)
_______ _______ _______ _______ _______ _______ _______
Total from investment operations.............. 1.36 2.67 .25 .95 1.06 (.10) (.49)
_______ _______ _______ _______ _______ _______ _______
Less dividends and distributions:
Investment income-net....................... (.10) (.19) (.10) - (.23) (.09) -
Realized gain on investments-net............ (.72) (.48) - - - - -
_______ _______ _______ _______ _______ _______ _______
Total dividends and distributions............. (.82) (.67) (.10) - (.23) (.09) -
_______ _______ _______ _______ _______ _______ _______
Net asset value, end of period................ $ 13.64 $ 13.10 $ 11.10 $ 10.95 $ 10.15 $ 9.32 $ 9.51
======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ 11.03%# 25.49% 2.36% 9.50%# 11.69%# (1.08)% (4.90)%#
======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................ .64% .66% .72% .86%* 1.20%* 1.25% 1.29%*
======= ======= ======= ======= ======= ======= =======
Expenses...................................... .64%* .66% .72% .86%* 1.20%* 1.36% 1.35%*
======= ======= ======= ======= ======= ======= =======
Investment income-net......................... 1.33%* 1.68% 2.08% 1.69%* 2.37%* 2.73% 2.18%*
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......$ 397,289 $306,463 $ 164,307 $ 47,207 $ 76,849 $ 55,209 $ 36,676
======= ======= ======= ======= ======= ======= =======
Portfolio turnover............................$ 37.28% 74.10% 60.55% 30.86% 53.29% 62.53% 29.79%
======= ======= ======= ======= ======= ======= =======
Average commission rate paid##................$ .0552 - - - $ 0.0005 - -
======= ======= ======= ======= ======= ======= =======
* 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
_________________________
FOR THE FOR THE
The following per share data and ratios have SIX PERIOD
been derived from information provided in MONTHS JULY 1,
the financial statements. ENDED FOR THE YEAR ENDED 1993+ TO
INCREASE (DECREASE) IN NET ASSET JUNE 30, DECEMBER 31, DECEMBER 31,
------------------
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)
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 commision rate paid##................. $ .0596 - - -
======== ======= ======= ========
* 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND
_______________________________
FOR THE FOR THE
The following per share data and ratios have SIX PERIOD
been derived from information provided in MONTHS JULY 1,
the financial statements. ENDED FOR THE YEAR ENDED 1993+ TO
INCREASE (DECREASE) IN NET ASSET JUNE 30, DECEMBER 31, DECEMBER 31,
------------------
VALUE: 1996 1995 1994 1993
____ ____ ____ ____
<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 investments 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 - - -
======== ======= ======= ========
* 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.
5
<PAGE>
<TABLE>
<CAPTION>
GLOBAL BOND FOCUS FUND#
-----------------------
FOR THE FOR THE
SIX PERIOD
The following per share data and ratios have been derived MONTHS JULY 1,
from information provided in the financial statements. ENDED FOR THE YEAR ENDED 1993+
JUNE 30, DECEMBER 31, DECEMBER 31,
---------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1996++ 1995++ 1994 1993
____ ____ ____ ____
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C>
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%
======= ======= ======= =======
* 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 [ ], 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 [ ], 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
-------------------
FOR THE
The following per share data and SIX
ratios MONTHS
have been derived from ENDED
information JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
provided in the financial ------------------------------------------------------------------------------------
statements
INCREASE (DECREASE) IN NET 1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987 1986
ASSET VALUE:
<S> <C> <C> <C> <C> <C> <C> <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 $ 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 - - - - - - - - - -
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
* 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.
</TABLE>
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
7
<PAGE>
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 five 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 judgment of the Investment
Adviser, it is advantageous to do so. Securities in the lowest category of
investment grade debt securities may have speculative characteristics which may
lead to weakened capacity to pay interest and principal during periods of
adverse economic conditions. See Appendix A for a fuller description of
corporate bond ratings.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a discount, either from book value or historical
price-earnings ratios, or seem capable of recovering from temporarily out of
favor considerations. Particular emphasis is placed on securities which
provide an above average dividend return and sell at a below-average price-
earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the
belief that the pricing mechanism of the securities market lacks total
8
<PAGE>
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 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
9
<PAGE>
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
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
10
<PAGE>
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
preferred stocks will vary from time to time based upon the Investment
Adviser's judgement of the extent to which investments in each category will
contribute to meeting the Fund's investment objective. Fixed income securities
in which the Fund will invest generally will be limited to those rated
investment grade, that is, rated in one of the four highest rating categories
by Standard & Poor's or Moody's (I.E., securities rated at least BBB by
Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in
the judgment of the Investment Adviser. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to
Standard & Poor's, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal. The Fund's commercial paper investments at the time of
purchase will be rated "A- 1 " or "A-2" by Standard & Poor's or "Prime-1 " or
"Prime-2" by Moody's or, if not rated, will be of comparable quality as
determined by the Investment Adviser. The Fund may also invest up to 5% of its
total assets at the time of purchase in fixed income securities having a
minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The
Fund may, but need not, dispose of any security if it is subsequently
downgraded. For a description of ratings of debt securities, see Appendix A to
this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts
11
<PAGE>
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.
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
12
<PAGE>
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 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.
13
<PAGE>
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 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.
14
<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 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
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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.
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.
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Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies-Foreign Securities" and "Risk of High Yield
Securities" below.
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is
to seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental
policy and may not be changed without approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may employ a variety of investments and
techniques to hedge against market and currency risk. INVESTING ON AN
INTERNATIONAL BASIS INVOLVES SPECIAL CONSIDERATIONS. INVESTING IN SMALLER
CAPITAL MARKETS ENTAILS THE RISK OF SIGNIFICANT VOLATILITY IN THE FUND'S
SECURITY PRICES. SEE "OTHER PORTFOLIO STRATEGIES-FOREIGN SECURITIES." The
Fund is designed for investors seeking to complement their U.S. holdings
through foreign investments. The Fund should be considered as a long-term
investment and a vehicle for diversification and not as a balanced investment
program.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four
countries having the largest equity market capitalizations. Currently, these
four countries are Japan, the United Kingdom, the United States and Germany.
At [ ], 1996, those countries' equity market capitalizations totalled
approximately [78%] of the world's equity market capitalization according to
data provided by Morgan Stanley Capital International. The Fund will at all
times, except during defensive periods, maintain investments in at least three
countries having smaller capital markets.
The Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called "emerging" countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more market-
oriented economies, may experience relatively high rates of economic growth.
Other countries (such as France, the Netherlands and Spain), although having
relatively mature smaller capital markets, may also be in a position to benefit
from local or international developments encouraging greater market orientation
and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information,
capability or inclination to invest in countries having smaller capital
markets. It also may not be permissible for such investors to invest directly
in certain such markets. Unlike many intermediary investment vehicles, such as
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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 government
agencies. Examples include the World Bank, the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies-Foreign Securities" and "Risks of High Yield
Securities" below.
For purposes of the Fund's investment objective, an issuer ordinarily
will be considered to be located in the country where the primary trading
market of its securities is located. The Fund, however, may consider a company
to be located in countries having smaller capital markets, without reference to
its domicile or to the primary trading market of its securities, when at least
50% of its non-current assets, capitalization, gross revenues or profits in any
one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in such countries. The Fund
also may consider closed-end investment companies to be located in the country
or countries in which they primarily make their portfolio investments.
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Foreign investments in smaller capital markets involve risks not involved
in domestic investment, including fluctuations in foreign exchange rates,
future political and economic developments, different legal systems and the
existence or possible imposition of exchange controls or other foreign or
United States governmental laws or restrictions applicable to such investments.
These risks are often heightened for investments in small capital markets.
With respect to certain countries, there may be the possibility of
expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments which could affect
investment in those countries. In addition, certain foreign investments may be
subject to foreign withholding taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As
a result, traditional investment measurements, such as price/earnings ratios,
as used in the United States, may not be applicable in certain capital markets.
The Fund reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in countries having
smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or
foreign currencies) and short-term securities, including money market
securities. The Fund may invest in the securities of foreign issuers in the
form of American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs), Global Depositary Receipts (GDRs) or other securities convertible into
securities of foreign issuers. The Fund may invest in unsponsored ADRs. The
issuers of unsponsored ADRs are not obligated to disclose material information
in the United States, and therefore, there may not be a correlation between
such information and the market value of such ADRs.
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.
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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.
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
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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.
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
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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 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
problems could cause the Fund to miss attractive investment opportunities.
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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.
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
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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 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 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
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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, judgment may play a greater role in valuing
certain of each Fund's portfolio securities than in the case of securities
trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the 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 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
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further loans to governmental entities. In the event of a default by a
governmental entity, there may be few or no effective legal remedies available
to a Fund and there can be no assurance a Fund will be able to collect on
defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund
to limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that
compliance with these standards will not have any negative impact on the
performance of any of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
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DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not "interested persons" of the Company as defined in the Investment Company
Act of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as
follows:
ARTHUR ZEIKEL*-President of the Investment Adviser and its
affiliate, Fund Asset Management, L.P. ("FAM"); President and Director of
Princeton Services, Inc. ("Princeton Services"); Executive Vice President
of ML&Co.; and Director of Merrill Lynch Funds Distributor, Inc. (the
"Distributor"); Director of the Distributor.
WALTER MINTZ-Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN-President of Silbanc Properties, Ltd. (real
estate, consulting and investments).
STEPHEN B. SWENSRUD-Principal of Fernwood Associates (financial
consultants).
JOE GRILLS-Member of the Committee on Investment of Employee
Benefit Assets of the Financial Executives Institute ("CIEBA"); member of
CIEBA's Executive Committee; and member of the Investment Advisory
Committee of the State of New York Retirement Fund.
ROBERT SALOMON, JR.-Principal of STI Management (investment
adviser).
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., (the "Investment Adviser"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the
investment adviser for the Fund. The general partner of the Investment Adviser
is Princeton Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. The principal address of the Investment Adviser is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New
Jersey 08543-901 1). 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 September 30, 1996, the Investment Adviser and FAM had a total
of approximately [ ] 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 exceeds the most restrictive expense
limitations then in effect under any state securities laws or published
regulations thereunder. At present the most restrictive expense limitation
requires the Investment Adviser to reimburse expenses which exceed 2.5% of each
Fund's first $30 million of average daily net assets, 2.0% of its average daily
net assets in excess of $30 million but less than $100 million, and 1.5% of its
average daily net assets in excess of $100 million. Expenses for this purpose
include the Investment Adviser's fee but exclude interest, taxes, brokerage
fees and commissions and extraordinary charges, such as litigation. No fee
payments will be made to the Investment Adviser with respect to any Fund during
any fiscal year which would cause the expenses of such Fund to exceed the pro
rata expense limitation applicable to such Fund at the time of such payment.
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The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have
entered into two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"), which is less than the expense limitations imposed
by state securities laws or published regulations thereunder. The
reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide
that any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by the Investment Adviser which, in turn, will be
reimbursed by MLLA. During the Company's fiscal year ended December 31, 1995,
the Developing Capital Markets Focus Fund and International Bond Fund (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).
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
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<PAGE>
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. 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.
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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.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions
of the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send
to the Insurance Companies a written notice required by the Code designating
the amount and character of any distributions made during such year.
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PERFORMANCE DATA
From time to time the average annual total return and yield of one or
more of the Company's Funds for various specified time periods may be included
in advertisements or information furnished by the Insurance Companies to
present or prospective Contract owners. Average annual total return and yield
are computed in accordance with formulas specified by the Securities and
Exchange Commission. In connection with its reorganization on [ ], 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 [ ], 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 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 mediately 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
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dividing the sum of the value of the securities held by that Fund plus any cash
or other assets (including interest and dividends accrued) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding of that Fund at such time, rounded to the nearest cent. Expenses,
including the investment advisory fees payable to the Investment Adviser, are
accrued daily.
Securities held by each Fund will be valued as follows: Portfolio
securities which are traded on stock exchanges are valued at the last sale
price (regular way) as of the close of business on the day the securities are
being valued, or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price in the over-the-counter market prior to the time of
valuation. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. When a Portfolio writes a call
option, the amount of the premium received is recorded on the books as an asset
and an equivalent liability. The amount of the liability is subsequently
valued to reflect the current market value of the option written, based upon
the last sale price in the case of exchange-traded options or, in the case of
options being traded in the over-the-counter market, the last asked price.
Options purchased are valued at their last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-counter
market, the last bid price. Futures contracts are valued at settlement price
at the close of the applicable exchange. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company. Any assets or liabilities initially expressed in terms of non-
U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The Company has used pricing services, including Merrill Lynch Securities
Pricing<service-mark> Service ("MLSPS"), to value bonds held by certain of the
Company's Funds. The Board of Directors of the Company has examined the
methods used by the pricing services in estimating the value of securities held
by the Funds and believes that 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
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shareholders of the Company may not be binding on a class whose share-
holders have not approved such matter. Each issued and outstanding share
of a class is entitled to one vote and to participate equally in dividends and
distributions declared with respect to such class and in net assets of such
class upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of each class, when issued, will be fully
paid and nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable. Holders of shares of any
class are entitled to redeem their shares as set forth under "Redemption of
Shares." Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Company voting for the election of directors can
elect all of the directors of the Company if they choose to do so and in such
event the holders of the remaining shares would not be able to elect any
directors. The Company does not intend to hold meetings of shareholders unless
under the Investment Company Act of 1940 shareholders are required to act on
any of the following matters: (i) election of directors; (ii) approval of an
investment advisory agreement; (iii) approval of a distribution agreement; and
(iv) ratification of the selection of independent accountants.
MLLIC purchased $100 worth of shares of each of the Basic Value Focus,
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 [ ], 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.
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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 [ ], 1996, which forms a
part of the Registration Statement, is incorporated by reference into this
Prospectus. The Statement of Additional Information may be obtained without
charge as provided on the cover page of this Prospectus. The Registration
Statement, including the exhibits filed therewith, may be examined at the
office of the Securities and Exchange Commission in Washington, D.C.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, each of the Funds may invest in the
various types of marketable securities issued by or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a
discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each of the Funds may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or to
be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
depositary institutions money instruments, such as certificates of deposit,
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a
specified market rate. As a result of these adjustments, the interest rate on
these obligations may be increased or decreased periodically. Often, dealers
selling variable rate certificates of deposit to the Funds agree to repurchase
such instruments, at the Funds' option, at par on the coupon dates. The
dealers' obligations to repurchase these instruments are subject to conditions
imposed by the various dealers; such conditions typically are the continued
credit standing of the issuer and the existence of reasonably orderly market
conditions. The Funds are also able to sell variable rate certificates of
deposit in the secondary market. Variable rate certificates of deposit
normally carry a higher interest rate than comparable fixed rate certificates
of deposit because variable rate certificates of deposit generally have a
longer stated maturity than comparable fixed rate certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
For temporary or defensive purposes, the 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'
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acceptances issued by foreign branches or subsidiaries of U.S. banks
("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks
("Yankeedollar" obligations). The Fund may invest only in Eurodollar
obligations which by their terms are general obligations of the U.S. parent
bank and meet the other criteria discussed below. Yankeedollar obligations in
which the Fund may invest must be issued by U.S. branches or subsidiaries of
foreign banks which are subject to state or federal banking regulations in the
U.S. and by their terms must be general obligations of the foreign parent. In
addition, the Fund will limit its investments in Yankeedollar obligations to
obligations issued by banking institutions with more than $1 billion in assets.
For temporary or defensive purposes, the Global 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.
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
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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.
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 I 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.
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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 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.
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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, 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 depend primarily upon the degree of
correlation between movements in the value of the securities subject to the
hedge and the index or securities underlying the futures contract. See "Risk
Factors in Options, Futures and Currency Transactions" below.
HEDGING FOREIGN CURRENCY RISKS. The Global Bond Focus, Global Utility
Focus, International Equity Focus and Developing Capital Markets Focus Funds
A-5
<PAGE>
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 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.
A-6
<PAGE>
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 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 judgment of the
Investment Adviser, there is expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the portfolio of securities for such hedge to be
effective. There can be no assurance that the judgment will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entail the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index or
currency. The anticipated spread between the prices may be distorted due to
differences in the nature of the markets, such as differences in margin and
maintenance requirements, the liquidity of such markets and the participation
of speculators in the futures market. However, the risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract or termination date of the option approaches.
The Funds intend to enter into exchange-traded options and futures
transactions only if there appears to be a liquid secondary market for such
options or futures. However, there can be no assurance that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to close
an options or futures transaction. The inability to close options and futures
positions could have an adverse impact on a Fund's ability to effectively hedge
its portfolio. There is also the risk of loss by a Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom a Fund has an open
position in an option or futures contract.
A-7
<PAGE>
PROSPECTUS
[ ], 1996
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PHONE NO. (609) 282-2800
________________________
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its 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 COWANY
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 COMMSSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED [ ], 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
PAGE
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
2
<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.
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND
The following per share data and ratios have been FOR THE FOR THE
derived from information provided in the financial SIX PERIOD
statements. MONTHS JULY 1,
ENDED FOR THE YEAR ENDED 1993+TO
JUNE 30, DECEMBER 31, 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................... $ 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%*
======= ======= ======= =======
Investment income-net, and realized gain (loss)
on investments-net.................................. - - - -
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $ 397,289 $ 306,463 $ 164,307 $ 47,207
======= ======= ======= =======
Portfolio turnover..................................... 37.28% 74.10% 60.55% 30.86%
======= ======= ======= =======
Average commission rate paid##......................... $ .0552 - - -
======= ======= ======= =======
* 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
The following per share data and ratios have been FOR THE FOR THE
derived from information provided in the financial SIX MONTHS PERIOD
statements. ENDED FEBRUARY
JUNE 30, FOR THE YEAR ENDED DECEMBER 31, 20, 1992+ TO
TO ------------------------------- DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996 1995 1994 1993 1992
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
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.................................. - - - - -
========= ========= ========= ========= =========
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
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND#
___________________________
FOR THE FOR THE
The following per share data and ratios have SIX PERIOD
been derived from information provided in MONTHS FEBRUARY 28,
the financial statements. ENDED FOR THE YEAR ENDED 1992+TO
JUNE 30, DECEMBER 31, DECEMBER 31,
--------------------------------------
INCREASE (DECREASE) IN NET ASSET 1996 1995 1994 1993 1992
VALUE: -------- ---- ---- ---- ----
<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 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 - -++ (.01) - -
investments-net......................... ------- ------- ----- ----- -----
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 - - - -
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# On [ ], 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
FOR THE
The following per share SIX
data and ratios have been MONTHS
derived from information ENDED
provided in the financial JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
statements. -----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
ASSET VALUE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 $ 11.42 $ 11.39
------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Investment income-net... .52 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23 1.25
Realized and unrealized
gain (loss)
on investments and
foreign currency
transactions-net........ (.11) .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79) .03
------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Total from investment
operations............ .41 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44 1.28
------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income-net... (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) (1.25)
Realized gain on
investments-net......... - - - - - - - - - (.08) -
------- ------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Total dividends and
distributions.............. (.53) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) (1.25)
Net asset value,
end of period........... $11.13 $11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 $ 11.42
====== ====== ======= ======= ======= ======= ======= ======= ======= ======= ========
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% 3.82% 11.74%
====== ====== ======= ======= ======= ======= ======= ======= ======= ======= ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .53%* .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% 1.12%
====== ====== ======= ======= ======= ======= ======= ======= ======= ======= ========
Investment income-net... 9.40%* 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% 10.65%
====== ====== ======= ======= ======= ======= ======= ======= ======= ======= ========
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 $ 13,075 $ 12,577
======== ====== ======= ======= ======= ======= ======= ======= ======= ======= ========
Portfolio turnover...... 28.32% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% 22.44%
====== ====== ======= ======= ======= ======= ======= ======= ======= ======= ========
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
# 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.
6
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in 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 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,
7
<PAGE>
in the judgment of the Investment Adviser, it is advantageous to do so.
Securities in the lowest category of investment grade debt securities may have
speculative characteristics which may lead to weakened capacity to pay interest
and principal during periods of adverse economic conditions. See Appendix A
for a fuller description of corporate bond ratings.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Fund seeks special opportunities in
securities that are selling at a discount, either from book value or historical
price-earnings ratios, or seem capable of recovering from temporarily out of
favor considerations. Particular emphasis is placed on securities which
provide an above average dividend return and sell at a below-average price-
earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the
belief that the pricing mechanism of the securities market lacks total
efficiency and has a tendency to inflate prices of securities in favorable
market climates and depress prices of securities in unfavorable climates.
Based on this premise, management believes that favorable changes in market
prices are more likely to begin when securities are out of favor, earnings are
depressed, price-earnings ratios are relatively low, investment expectations
are limited, and there is no real general interest in the particular security
or industry involved. On the other hand, management believes that negative
developments are more likely to occur when investment expectations are
generally high, stock prices are advancing or have advanced rapidly, price-
earnings ratios have been inflated, and the industry or issue continues to gain
new investment acceptance on an accelerated basis. In other words, management
believes that market prices of securities with relatively high price-earnings
ratios are more susceptible to unexpected adverse developments while securities
with relatively low price-earnings ratios are more favorably positioned to
benefit from favorable, but generally unanticipated, events. This investment
policy departs from traditional philosophy. Management of the Fund believes
that the market risk involved in this policy is moderated somewhat by an
emphasis on securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation
of the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a
lesser extent, securities convertible into common stocks. The Basic Value
Focus Fund also may invest in preferred stocks and non-convertible debt
securities rated investment grade and utilize covered call options with respect
to portfolio securities as described below and in the Statement of Additional
Information. It reserves the right as a defensive measure to hold other types
of securities, including U.S. Government and Government agency securities,
money market securities or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or cash, in such
proportions as, in the opinion of management, prevailing market or economic
conditions warrant. The Fund may invest up to 10% of its total assets, taken
at market value at the time of acquisition, in the securities of foreign
issuers.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to
preserve shareholder capital, to maintain liquidity and to achieve the highest
possible current income consistent with the foregoing objectives by investing
in short-term domestic money market securities. The Fund will invest in short-
term U.S. Government securities, U.S. Government agency securities, domestic
depository institution money instruments (including certificates of deposit,
bankers' acceptances, time deposits and bank notes), short-term debt securities
8
<PAGE>
(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 judgment of the Investment Adviser, economic
or market conditions warrant, the Fund reserves the right to concentrate its
investments in one or more capital markets, including the United States. For
additional information, concerning the risks of investing in foreign
securities, see "Other Portfolio Strategies-Foreign Securities."
The equity and convertible preferred securities in which the Global
Strategy Focus Fund may invest are primarily securities issued by quality
companies. Generally, the characteristics of such companies include a strong
balance sheet, good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be primarily those rated BBB or better by
Standard and Poor's or Baa or better by Moody's or of comparable quality. The
Fund may also invest in debt obligations issued or guaranteed by sovereign
governments, political subdivisions thereof (including states, provinces and
municipalities) or their agencies or instrumentalities or issued or guaranteed
by international organizations designated or supported by governmental entities
to promote economic reconstruction or development ("supranational entities")
such as the International Bank for Reconstruction (the "World Bank") and the
European Coal and Steel Community. Investments in securities of supranational
entities are subject to the risk that member governments will fail to make
required capital contributions and that a supranational entity will thus be
unable to meet its obligations.
When market or financial considerations warrant, the Global Strategy Focus
Fund may invest as a temporary defensive measure up to 100% of its assets in
U.S. Government or Government agency securities issued or guaranteed by the
United States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Investment Adviser to
be consistent with a defensive posture, or may hold its assets in cash.
The Global Stategy Focus Fund may write covered call options and purchase
put options on its portfolio securities for the purpose of generating
incremental income or hedging its securities against market risk. The Fund may
seek to hedge its non-dollar denominated securities and other assets and
liabilities against adverse currency fluctuations by writing call options and
9
<PAGE>
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".
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 judgment of the Investment Adviser, it is advantageous to do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that
the risk of loss of income and principal may be substantially reduced with only
a relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending
upon the judgment of management as to prevailing conditions in the economy and
the securities markets and the prospects for interest rate changes among
10
<PAGE>
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.
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%
* 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.
</TABLE>
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 shortterm 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
11
<PAGE>
substantially all the assets of the Domestic Money Market Fund will be invested
in securities maturing in less than one year, but at times some portion may
have maturities of up to 25 months. For these purposes, the maturity of a
variable rate security is deemed to be the next coupon date on which the
interest rate is adjusted. The dollar-weighted average maturity of the Fund's
portfolio assets will not exceed 90 days.
The Domestic Money Market Fund's investments in short-term debt and
depository institution money instruments will be rated, or will be issued by
issuers who have been rated, in one of the two highest rating categories for
short-term debt obligations by a nationally recognized statistical rating
organization (an "NRSRO") or, if not rated, will be of comparable quality as
determined by the Directors of the Company. The Fund's investments in
corporate bonds and debentures (which must have maturities at the date of
purchase of 397 days (13 months) or less) will be in issuers which have
received from an NRSRO a rating, with respect to a class of short-term debt
obligations that is comparable in priority and security with the investment, in
one of the two highest rating categories for short-term obligations or, if not
rated, are of comparable quality as determined by the Directors of the Company.
Currently, there are six NRSROS: Duff & Phelps Inc., Fitch Investors Services,
Inc., IBCA Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and
Thomson BankWatch.
A regulation of the Securities and Exchange Commission (the "SEC") limits
investments by the Domestic Money Market Fund in securities issued by any one
issuer (other than the U.S. Government, its agencies or instrumentalities)
ordinarily to not more than 5% of its total assets, or in the event that such
securities do not have the highest rating, not more than 1% of its total
assets. In addition, this regulation requires that not more than 5% of the
Fund's total assets be invested in securities that have a rating lower than the
highest rating.
OTHER PORTFOLIO STRATEGIES
RESTRICTED SECURITIES. Each of the Funds is subject to limitations on the
amount of illiquid securities they may purchase; however, each Fund may
purchase without regard to that limitation certain securities that are not
registered under the Securities Act of 1933, 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
12
<PAGE>
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 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
13
<PAGE>
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in a Fund which invests in these markets incurring
additional costs and delays in transporting and custodying such securities
outside such countries. Delays in settlement could result in temporary periods
when assets of such a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund
may invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to which
a government debtor may be subject. Government debtors may default on their
debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt, including the
Fund, may be requested to participate in the rescheduling of such debt and to
extend further loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing
and emerging market countries are among the world's largest debtors to
commercial banks, other governments, international financial organizations and
other financial institutions. The issuers of the government debt securities in
which a Fund may invest have in the past experienced substantial difficulties
in servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements.
Some countries with smaller capital markets prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms than securities
of the company available for purchase by nationals.
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
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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, 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 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
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ability to service its debt obligations also may be adversely affected by
specific issuer developments or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the High Current Income Fund may invest normally do not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after the Fund purchases a particular security, in which case the Fund
may experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the
High Current Income Fund will diversify its holdings among many issuers.
However, there can be no assurance that diversification will protect the Fund
from widespread defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated fixed-
income securities, so that adverse economic events may have a greater impact on
their prices and yields than on higher-rated fixed-income securities. Zero
coupon bonds and bonds which pay interest and/or principal in additional bonds
rather than in cash are especially volatile. Like higher-rated fixed-income
securities, junk bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts. However, there are
fewer dealers in this market, which may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions
(whether or not based on economic fundamentals) may impair the liquidity of
this market, and may cause the prices the High Current Income Fund receives for
its junk bonds to be reduced, or the Fund may experience difficulty in
liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgment may play a greater role in valuing certain of the Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund. In addition, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on a
portfolio holding or to participate in the restructuring of the obligation.
SOVEREIGN DEBT. The junk bonds in which the High Current Income Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay
the principal and/or interest when due in accordance with the terms of such
debt. A governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity's
policy towards the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to timely service its debts. Consequently, governmental
entities may default on their sovereign debt.
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.
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INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund
to limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that
compliance with these standards will not have any negative impact on the
performance of any of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not "interested persons" of the Company as defined in the Investment Company
Act. The Directors of the Company are responsible for the overall supervision
of the operations of the Company and perform the various duties imposed on the
directors of investment companies by the Investment Company Act. The Board of
Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as
follows:
ARTHUR ZEIKEL*-President of the Investment Adviser and its affiliate,
Fund Asset Management, L.P. ("FAM"); President and Director of Princeton
Services, Inc. ("Princeton Services"); Executive Vice President of Merrill
Lynch & Co., Inc. ("ML&Co."); and Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor").
WALTER MINTZ-Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN-President of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD-Principal of Femwood Associates (financial
consultants).
JOE GRILLS-Member of the Committee on Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of
CIEBA's Executive Committee; and Member of the Investment Advisory
Committee of the State of New York Common Retirement Fund.
ROBERT S. SALOMON, JR.-Principal of STI Management (investment adviser).
___________
* Interested person, as defined in the Investment Company Act, of
the Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The general
partner of the Investment Adviser is Princeton Services, Inc., a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. The principal address of the
Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536
(mailing address: Box 901 1, 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 September
30, 1996, MLAM and FAM had a total of approximately $[ ] billion in
investment company and other portfolio assets under management including
accounts of certain affiliates of FAM.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the
Funds, who consider information from various sources, make the necessary
investment decisions and effect transactions accordingly. The Investment
Adviser is also obligated to perform certain administrative and management
services for the Company (certain of which it may delegate to third parties)
and is obligated to provide all the office space, facilities, equipment and
personnel necessary to perform its duties under the Agreements. The Investment
Adviser has access to the full range of the securities and economic research
facilities of Merrill Lynch.
During the Company's fiscal year ended December 31, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742, of which $1,414,380
related to the Basic Value Focus Fund (representing .60% of its average net
assets), $1,598,551 related to the Domestic Money Market Fund (representing
.50% of its average net assets), $3,348,535 related to the Global Strategy
Focus Fund (representing .65% of its average net assets), and $1,551,098
related to the High Current Income Fund (representing .50% of its average net
assets).
During the Company' s fiscal year ended December 31, 1995, the total
operating expenses of the Company's Funds (including the advisory fees paid to
the Investment Adviser), before reimbursement of a portion of such expenses,
were as follows: $1,565,649 related to the Basic Value Focus Fund (representing
.66% of its average net assets), $1,768,774 related to the Domestic Money
Market Fund (representing .55% of its average net assets), $3,719,425 related
to the Global Strategy Focus Fund (representing .72% of its average net
assets), and $1,727,859 related to the High Current Income Fund (representing
.55% of its average net assets).
The Investment Advisory Agreements require the Investment Adviser to
reimburse the Company's Funds if and to the extent that in any fiscal year the
operating expenses of each Fund exceeds the most restrictive expense
limitations then in effect under any state securities laws or published
regulations thereunder. At present the most restrictive expense limitation
requires the Investment Adviser to reimburse expenses which exceed 2.5% of each
Fund's first $30 million of average daily net assets, 2.0% of its average daily
net assets in excess of $30 million but less than $100 million, and 1.5% of its
average daily net assets in excess of $100 million. Expenses for this purpose
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include the Investment Adviser's fee but exclude interest, taxes, brokerage
fees and commissions and extraordinary charges, such as litigation. No fee
payments will be made to the Investment Adviser with respect to any Fund during
any fiscal year which would cause the expenses of such Fund to exceed the pro
rata expense limitation applicable to such Fund at the time of such payment.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have
entered into two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"), which is less than the expense limitations imposed
by state securities laws or published regulations thereunder. The
reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide
that any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by the Investment Adviser which, in turn, will be
reimbursed by MLLA. See "Investment Advisory Arrangements" in the Statement of
Additional Information. MLLA sells certain Contracts described in the
Prospectus for such Contracts.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including Insurance Companies owned by
ML&Co., pursuant to which the Investment Adviser compensates such companies for
administrative responsibilities relating to the Company which are performed by
such Insurance Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993;
Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
Christopher Ayoub has served as the Domestic Money Market Fund's Portfolio
Manager since June 1992, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1985.
Thomas R. Robinson has served as the Global Strategy Focus Fund's Portfolio
Manager since November 1995, and is primarily responsible for the Fund's day-
to-day management. He has served as a Senior Portfolio Manager of MLAM since
November 1995.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and an
employee of the Investment Adviser since 1986.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution.
While the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
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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 conunissions of $5,789,335, of which
$264,999 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company will offer shares in the Funds, without sales charge, only for
purchase by the Insurance Companies for the Separate Accounts to fund benefits
under the Contracts. The Company continuously offers shares in each of its
Funds to the Insurance Companies at prices equal to the respective per share
net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly-
owned subsidiary of the Investment Adviser, acts as the distributor of the
shares. Net asset value is determined in the manner set forth below under
"Additional Information-Determination of Net Asset Value."
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to the conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market Fund, will consist of
all payments of dividends or interest received by such Fund less the estimated
expenses of such Fund (including fees payable to the Investment Adviser).
Dividends on the Domestic Money Market Fund are declared and reinvested
daily (as of June 1, 1996, declared daily and reinvested monthly) in additional
full and fractional shares of such Fund. Dividends from net investment income
of the High Current Income Fund are declared and reinvested monthly in
additional full and fractional shares of the respective Funds at net asset
value. Dividends from net investment income of the Basic Value Focus and
Global Strategy Focus Funds are declared and reinvested at least annually in
additional full and fractional shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, a Fund will not be subject to federal income
tax on such part of its net ordinary income and net realized capital gains
which it distributes to shareholders. One of the requirements to qualify for
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treatment as a regulated investment company under the Code is that a Fund,
among other things, derive less than 30% of its gross income in each taxable
year from gains (without deduction of losses) from the sale or other
disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. This requirement may limit the
ability of certain Funds to dispose of certain securities at times when
management of the Company might otherwise deem such disposition appropriate or
desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send
to the Insurance Companies a written notice required by the Code designating
the amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present
or prospective Contract owners. Average annual total return and yield are
computed in accordance with formulas specified by the SEC.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during
the period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the offering price
per share on the last day of the period. The yield for the 30-day period
ending December 31, 1995 was 10.05% for the High Current Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount
of realized and unrealized net capital gains or losses during the period. The
value of an investment in the Fund will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost. The yield
and total return quotations 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.
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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, Kiphnger Personal Finances,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Ibbotson Associates. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market Fund is computed by
dividing the sum of the value of the securities held by that Fund plus any cash
or other assets (including interest and dividends accrued) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding of that Fund at such time, rounded to the nearest cent. Expenses,
including the investment advisory fees payable to the Investment Adviser, are
accrued daily. Because the net investment income of the Domestic Money Market
Fund (including realized and unrealized gains and losses on its portfolio
securities) are declared as a dividend each time the net income of the Fund is
determined (see "Dividends, Distributions and Taxes"), the net asset value per
share of the Fund normally remains at $1.00 per share immediately after each
such determination and dividend declaration.
Securities held by each Fund will be valued as follows: Portfolio
securities which are traded on stock exchanges are valued at the last sale
price (regular way) as of the close of business on the day the securities are
being valued, or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price in the over-the-counter market prior to the time of
valuation. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. When a Portfolio writes a call
option, the amount of the premium received is recorded on the books as an asset
and an equivalent liability. The amount of the liability is subsequently
valued to reflect the current market value of the option written, based upon
the last sale price in the case of exchange-traded options or, in the case of
options being traded in the over-the-counter market, the last asked price.
Options purchased are valued at their last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-counter
market, the last bid price. Futures contracts are valued at settlement price
at the close of the applicable exchange. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company. Any assets or liabilities initially expressed in terms of non-
U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
Securities held by the Domestic Money Market Fund with a remaining maturity of
60 days or less are valued on an amortized cost basis, unless particular
circumstances dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
Pricing{sm} 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.
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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 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 a reorganization on [ ], 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.
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 [ ], 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 bils, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a
discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each of the Funds may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or to
be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
depositary institutions money instruments, such as certificates of deposit,
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a
specified market rate. As a result of these adjustments, the interest rate on
these obligations may be increased or decreased periodically. Often, dealers
selling variable rate certificates of deposit to the Funds agree to repurchase
such instruments, at the Funds' option, at par on the coupon dates. The
dealers' obligations to repurchase these instruments are subject to conditions
imposed by the various dealers; such conditions typically are the continued
credit standing of the issuer and the existence of reasonably orderly market
conditions. The Funds are also able to sell variable rate certificates of
deposit in the secondary market. Variable rate certificates of deposit
normally carry a higher interest rate than comparable fixed rate certificates
of deposit because variable rate certificates of deposit generally have a
longer stated maturity than comparable fixed rate certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
For temporary or defensive purposes, the Global Strategy Focus Fund may
invest in certificates of deposit and bankers' acceptances issued by foreign
branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S.
branches or subsidiaries of foreign banks ("Yankeedollar" obligations). The
Fund may invest only in Eurodollar obligations which by their terms are general
obligations of the U.S. parent bank and meet the other criteria discussed
below. Yankeedollar obligations in which the Fund may invest must be issued by
U.S. branches or subsidiaries of foreign banks which are subject to state or
federal banking regulations in the U.S. and by their terms must be general
obligations of the foreign parent. In addition, the Fund will limit its
investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
For temporary or defensive purposes, the Global Strategy Focus Fund may
also invest in U.S. dollar-denominated obligations of foreign depository
institutions and their foreign branches and subsidiaries, such as certificates
of deposit, bankers' acceptances, time deposits and deposit notes. The
obligations of such foreign 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 FundsMoney 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. dollardenominated commercial paper and other short-term
obligations issued by foreign entities. Such investments are subject to
quality standards similar to those applicable to investments in comparable
obligations of domestic issuers. Investments in foreign entities in general
involve the same risks as those described in the Statement of Additional
Information in connection with investments in Eurodollar, Yankeedollar and
foreign bank obligations.
REPURCHASE AGREEMENTS
REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results
in a fixed yield for the Fund insulated from fluctuations in the market value
of the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered
into only with a member bank of the Federal Reserve System, a primary dealer in
U.S. government securities or an affiliate thereof. A purchase and sale
contract is similar to a repurchase agreement, but purchase and sale contracts,
unlike repurchase agreements, allocate interest on the underlying security to
the purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when
investing in repurchase agreements or purchase and sale 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.
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 I 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 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 wnting 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.
OPTIONS ON STOCK INDICES. The Global Strategy Focus Fund may purchase
and write call options and put options on stock indices traded on a national
securities exchange to seek to reduce the general market risk of their
securities or specific industry sectors which the Fund invests in. Options on
indices are similar to options on securities except that, on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in index options
based on a broad market index, e.g., the S&P 500, or on a narrow index
representing an industry or market segment, e.g., the Amex Oil & Gas Index.
The effectiveness of a hedge employing stock index options will depend
primarily on the degree of correlation between movements in the value of the
index underlying the option and in the portion of the portfolio being hedged.
For further discussion concerning such options, see "Risk Factors in Options,
Futures and Currency Transactions" below and the Company's Statement of
Additional Information.
STOCK INDEX AND FINANCIAL FUTURES CONTRACTS. The Global Strategy Focus
Fund may purchase and sell stock index futures contracts and financial futures
contracts to hedge its portfolio. The Fund may sell stock index futures
contracts and financial futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities market and anticipate a significant market advance,
it may purchase stock index or financial futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of
securities that the Fund intends to purchase. A stock index or financial
futures contract is a bilateral agreement pursuant to which the Fund will agree
to buy or deliver at settlement an amount of cash equal to a dollar multiplied
by the difference between the value of a stock index or financial instrument at
the close of the last trading day of the contract and the price at which the
futures contract is originally entered into. The Fund may engage in
transactions in stock index futures contracts based on broad market indexes or
on indexes on industry or market segments. The Fund may effect transactions in
stock index futures contracts in connection with the equity securities in which
it invests and in financial futures contracts in connection with the debt
securities in which it invests. As with stock index options, the effectiveness
of the Fund's hedging strategies depend primarily upon the degree of
correlation between movements in the value of the securities subject to the
hedge and the index or securities underlying the futures contract. See "Risk
Factors in Options, Futures and Currency Transactions" below.
HEDGING FOREIGN CURRENCY RISKS. The Global Strategy Focus Fund is
authorized to deal in forward foreign exchange contracts between currencies of
the different countries in which they will invest, including 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.
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-denoniinated 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 they are
permitted to enter into transactions in exchange-traded options of the same
general type. The Fund will engage in OTC options only with financial
institutions which have 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 judgment of the
Investment Adviser, there is expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the portfolio of securities for such hedge to be
effective. There can be no assurance that the judgment will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entail the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index or
currency. The anticipated spread between the prices may be distorted due to
differences in the nature of the markets, such as differences in margin and
maintenance requirements, the liquidity of such markets and the participation
of speculators in the futures market. However, the risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract or termination date of the option approaches.
The Funds intend to enter into exchange-traded options and futures
transactions only if there appears to be a liquid secondary market for such
options or futures. However, there can be no assurance that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to close
an options or futures transaction. The inability to close options and futures
positions could have an adverse impact on a Fund's ability to effectively hedge
its portfolio. There is also the risk of loss by a Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom a Fund has an open
position in an option or futures contract.
<PAGE>
[ ], 1996
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its 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 [ ], 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
PAGE
Investment Objectives and Policies
Investment Restrictions
Management of the Company
Investment Advisory Arrangements
Determination of Net Asset Value
Portfolio Transactions and Brokerage
Redemption of Shares
Dividends, Distributions and Taxes
Distribution Arrangements
Performance Data
Additional Information
Independent Auditors' Report
Audited Financial Statements
Unaudited Financial Statements
<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.
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 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.
(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.
(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.
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.
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 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}
**FOOTNOTES**
{1} The Developing Capital Markets Focus, Global Bond Focus, Global
Strategy Focus 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 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.
{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.
{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.
{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.
OVER-THE-COUNTER OPTIONS
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant
to which it will not purchase or sell OTC options if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by a Fund, the market value of the underlying securities covered
by OTC call options currently outstanding which were sold by the Fund and
margin deposits on the Fund's existing OTC options on futures contracts exceeds
15% of the total assets of the Fund, taken at market value, together with all
other assets of the Fund which are illiquid or are otherwise not readily
marketable. However, if an OTC option is sold by a Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve Bank of New York
and if the Fund has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities equal to the repurchase price
less the amount by which the option is "in-the-money" (I.E., current market
value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money'. This policy as to OTC options is
not a fundamental policy of any Fund and may be amended by the Directors of the
Company without the approval of the Company's shareholders. However, the
Company will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
RESTRICTED SECURITIES
From time to time a Fund may invest in securities the disposition of
which is subject to legal restrictions, such as restrictions imposed by the
Securities Act of 1933 (the "Securities Act") on the resale of securities
acquired in private placements. If registration of such securities under the
Securities Act is required, such registration may not be readily accomplished
and if such securities may be sold without registration, such resale may be
permissible only in limited quantities. In either event, a Fund may not be
able to sell its restricted securities at a time which, in the judgment of the
Investment Adviser, would be most opportune.
Each of the Funds is subject to limitations on the amount of securities
which are illiquid, because of restrictions under the Securities Act or
otherwise, they may purchase. Each Fund may, however, purchase without regard
to that limitation securities that are not registered under the Securities Act,
but that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Company's Board of Directors
continuously determines, based on the trading markets for the specific Rule
144A security, that it is liquid. The Board of Directors may adopt guidelines
and delegate to the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board has determined that
securities which are freely tradeable in their primary market offshore should
be deemed liquid. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations.
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
judgment upon which these techniques are based will be accurate or that such
techniques when applied will be effective. The Funds will enter into forward
commitment arrangements only with respect to securities in which they may
otherwise invest as described under "Investment Objectives and Policies of the
Funds" in the Prospectus.
EURODOLLAR AND YANKEEDOLLAR OBLIGATIONS. The Reserve Assets Fund (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.
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 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 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 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 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.
MELVIN R. SEIDEN (65)-DIRECTOR-780 Third Avenue, Suite 2502, New York,
New York 10017. President of Silbanc Properties, Ltd. (real estate, consulting
and investments) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD (62)-DIRECTOR-24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Principal of Fernwood Associates (financial consultants)
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.
CHRISTOPHER G. AYOUB (40)-VICE PRESIDENT(1)(2)-Vice President of the
Investment Adviser since 1985; Assistant Vice President from 1984 to 1985 and
an employee since 1982.
DONALD C. BURKE (35)-VICE PRESIDENT(1)(2)-Vice President of the
Investment Adviser since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
VINCENT T. LATHBURY, III (54)-VICE PRESIDENT(1)(2)-Vice President of the
Investment Adviser and FAM and Portfolio Manager of the Investment Adviser and
FAM since 1982.
FREDRIC LUTCHER (47)-VICE PRESIDENT(1)(2)-Vice President of the
Investment Adviser since 1990 and Portfolio Manager since 1989; Senior Vice
President, Lazard Freres Asset Management, Inc. from 1988 to 1989; Director, E.
F. Hutton Capital Management, Inc. from 1981 to 1988.
THOMAS R. ROBINSON (52)-VICE PRESIDENT(1)(2)-Senior Portfolio Manager of
the Investment Adviser since November 1995; Manager of International Equity
Strategy of ML & Co.'s Global Securities Research and Economics Group from 1989
to 1995.
KEVIN RENDINO (29)-VICE PRESIDENT(1)(2)-Vice President of the Investment
Adviser since December 1993; Senior Research Analyst from 1990 to 1992;
Corporate Analyst from 1988 to 1990.
WALTER D. ROGERS (53)-VICE PRESIDENT(1)(2)-Vice President of the
Investment Adviser since 1987; Vice President of Continental Insurance Asset
Management from 1984 to 1987.
GRACE PINEDA (38)-VICE PRESIDENT(1)(2)-Vice President of the Investment
Adviser since 1989. Prior to joining the Investment Adviser, Ms. Pineda was a
portfolio manager with Clemente Capital, Inc.
ANDREW JOHN BASCAND (33)-VICE PRESIDENT(1)(2)-Director of Merrill Lynch
Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global
Asset Management Limited since 1994; Senior Economist of A.M.P. Asset
Management plc in London from 1992 to 1993 and Chief Economist of A.M.P.
Investments (NZ) in New Zealand from 1989 to 1991; Economic Adviser to the
Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989.
ROBERT PARISH (40)-VICE PRESIDENT(1)(2)-Vice President and Portfolio
Manager of the Investment Adviser since 1991; Portfolio Manager of Templeton
International from 1986 to 1991 and Vice President thereof from 1989.
JAY C. HARBECK (61)-VICE PRESIDENT(1)(2)-Vice President of the Investment
Adviser since 1986.
ALDONA A. SCHWARTZ (47)-VICE PRESIDENT(1)(2)-Vice President of the
Investment Adviser since 1991 and an employee of the Investment Adviser since
1986.
GERALD M. RICHARD (46)-TREASURER(1)(2)-Senior Vice President an Treasurer
of the Investment Adviser and FAM since 1984; Treasurer of the Distributor
since 1984 and Vice President since 1981; and Senior Vice President and
Treasurer of Princeton Administrators, Inc. since 1988.
IRA P. SHAPIRO (33)-SECRETARY(1)(2)-Attorney associated with the
Investment Adviser and FAM since 1993. Prior to 1993 Mr. Shapiro was an
attorney in private practice.
(1) Interested person, as defined in the Investment Company Act of 1940, of
the Company.
(2) The Officers of the Company are officers of certain other investment
companies for which the Investment Adviser or FAM acts as investment
adviser.
The following table sets forth for the fiscal year ended December 31,
1995, compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies (including the Company) advised by the Investment Adviser
and its affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested
Directors:
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
COMPANY AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM COMPANY OF COMPANY EXPENSE DIRECTORS(1)
<S> <C> <C> <C>
Walter Mintz(1) $15,500 NONE $153,883
Melvin R. Seiden(1) 15,500 NONE 153,883
Stephen B. Swensrud(1) 15,500 NONE 161,883
Joe Grills(1) 15,500 NONE 153,883
Robert S. Salomon, Jr.*(1 -0- NONE -0-
Harry Woolf**(1) 15,500 NONE 153,883
* 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
of38 portfolios).
</TABLE>
Mr. Zeikel and the officers of the Company owned on February 29, 1996 in
the aggregate less than 1% of the outstanding Common Stock of Merrill Lynch &
Co., Inc. The Company has an Audit Committee consisting of all of the directors
of the Company who are not interested persons of the Company.
Pursuant to the terms of the Investment Advisory Agreements, the
Investment Adviser pays all compensation of officers and employees of the
Company as well as the fees of all directors of the Company who are affiliated
persons of Merrill Lynch & Co., Inc. or its subsidiaries. The fees payable by
the Company to non-interested directors are $5,000 per year plus $1,250 per
quarterly meeting of the Board of Directors attended, $5,000 per year for
serving on the Audit Committee of the Board of Directors plus $1,250 per
meeting of the Audit Committee attended if such meeting is held on a day other
than a day on which the Board of Directors meets, and reimbursement of out-of-
pocket expenses. For the year ended December 31, 1995, such fees and expenses
aggregated $79,458.
INVESTMENT ADVISORY ARRANGEMENTS
The Company has entered into seven separate investment advisory
agreements (the "Investment Advisory Agreements") relating to the Funds with
the Investment Adviser, which is a wholly owned subsidiary of Merrill Lynch &
Co., Inc. The principal business address of the Investment Adviser is 800
Scudders Mill Road, Plainsboro, New Jersey 08536. The Investment Adviser and
FAM currently act as the investment adviser to over 110 other registered
investment companies.
The principal executive officers and directors of the Investment Adviser
are Arthur Zeikel, President; Terry K. Glenn, Executive Vice President; Vincent
R. Giordano, Senior Vice President; Elizabeth Griffin, Senior Vice President;
Norman R.Harvey, Senior Vice President; Michael J. Hennewinkel, Senior Vice
President; N. John Hewitt, Senior Vice President; Philip L. Kirstein, Senior
Vice President, General Counsel, Director and Secretary; Ronald M. Kloss,
Senior Vice President 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>
<CAPTION>
Not exceeding $250 million 0.500%
<S> <C>
In excess of $250 million but not exceeding $300 million 0.450%
In excess of $300 million but not exceeding $400 million 0.425%
In excess of $400 million 0.400%
</TABLE>
PRIME BOND FUND AND HIGH CURRENT INCOME FUND
Portion of aggregate average daily value of net assets of both Funds:
<TABLE>
<CAPTION>
ADVISORY
FEE
<S> <C> <C>
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 above rates are applied to the average daily net assets of each Fund,
with reduced rates applicable to portions of the assets of each Fund to the
extent that the aggregate of the average daily net assets of the combined Funds
exceed $250 million, $500 million and $750 million (each such amount being a
breakpoint level). The portion of the assets of a Fund to which the rate at
each breakpoint level applies will be determined on a "uniform percentage"
basis. The uniform percentage applicable to a breakpoint level is determined
by dividing the amount of the aggregate of the average daily net assets of
individual Funds that falls within that breakpoint level by the aggregate of
the average daily net assets of such Funds. The amount of the fee for a Fund
at each breakpoint level is determined by multiplying the average daily net
assets of that Fund by the uniform percentage applicable to that breakpoint
level and multiplying the product by the advisory fee rate.
The Investment Advisory Agreements require the Investment Adviser to
reimburse each Fund (up to the amount of the advisory fee earned by the
Investment Adviser with respect to such Fund) if and to the extent that in any
fiscal year the operating expenses of the Fund exceed the most restrictive
expense limitation then in effect under any state securities law or the
published regulations thereunder. At present the most restrictive expense
limitation requires the Investment Adviser to reimburse expenses (excluding
interest, taxes, brokerage fees and commissions and extraordinary charges such
as litigation costs) which exceed 2.5% of each Fund's first $30 million of
average daily net assets, 2.0% of its average daily net assets in excess of $30
million but less than $100 million, and 1.5% of its average daily net assets in
excess of $100 million. It should be noted that because the Funds' shares are
sold only to the Insurance Companies, the shares are not required to be
registered under state "blue sky" or securities laws. The Investment Adviser
believes, however, that the most restrictive expense limitations imposed by
state securities laws or published regulations thereunder are an appropriate
standard.
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, $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 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 Inc. ("GSI"), Merrill Lynch Money Markets Inc. ("MMI") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), may not serve as
the Company's dealer in connection with such transactions except pursuant to
exemptive orders from the Securities and Exchange Commission, such as the one
described below. However, affiliated persons of the Company may serve as its
broker in over-the-counter transactions conducted on an agency basis, subject
to the Company's policy of obtaining best price and execution. The Company may
not purchase securities from any underwriting syndicate of which Merrill Lynch
is a member except in accordance with rules and regulations under the
Investment Company Act of 1940.
The Securities and Exchange Commission has issued an exemptive order
permitting the Company to conduct principal transactions with respect to the
Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S.
Government and government agency securities, and certain other money market
securities, subject to a number of conditions, including conditions designed to
insure that the prices to the Funds available from GSI and MMI are equal to or
better than those available from other sources. GSI and MMI have informed the
Company that they will in no way, at any time, attempt to influence or control
the activities of the Company or the Investment Adviser in placing such
principal transactions. The exemptive order allows GSI and MMI to receive a
dealer spread on any transaction with the Company no greater than their
customary dealer spreads for transactions of the type involved. Certain court
decisions have raised questions as to whether investment companies should seek
to "recapture" brokerage commissions and underwriting and dealer spreads by
effecting their purchases and sales through affiliated entities. In order to
effect such an arrangement, the Company would be required to seek an exemption
from the Investment Company Act so that it could engage in principal
transactions with affiliates. The Board of Directors has considered the
possibilities of seeking to recapture spreads for the benefit of the Company
and, after reviewing all factors deemed relevant, has made a determination not
to seek such recapture at this time. The Board will reconsider this matter
from time to time. The Company will take such steps as may be necessary to
effect recapture, including the filing of applications for exemption under the
Investment Company Act of 1940, if the Directors should determine that
recapture is in the best interests of the Company or otherwise required by
developments in the law.
While the Investment Adviser seeks to obtain the most favorable net
results in effecting transactions in the Funds' portfolio securities, dealers
who provide supplemental investment research of the Investment Adviser may
receive orders for transactions by the Funds. Such supplemental research
services ordinarily consist of assessments and analysis of the business or
prospects of a company, industry or economic sector. If, in the judgment of
the Investment Adviser, a particular Fund or Funds will be benefited by such
supplemental research services, the Investment Adviser is authorized to pay
spreads or commissions to brokers or dealers furnishing such services which are
in excess of spreads or commissions which another broker or dealer may charge
for the same transaction. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreements. The expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. In some cases, the Investment Adviser may use such
supplemental research in providing investment advice to its other investment
advisory accounts. For the year ended December 31, 1995, the Company paid
brokerage commissions of $5,789,335, of which $264,999 was paid to Merrill
Lynch. For the year ended December 31, 1994, the Company paid brokerage
commissions of $3,526,815 of which $219,686 was paid to Merrill Lynch.
PORTFOLIO TURNOVER
Each Fund has a different expected rate of portfolio turnover; however,
rate of portfolio turnover will not be a limiting factor when management of the
Company deems it appropriate to purchase or sell securities for a Fund.
Because of the short-term nature of the securities in which the Domestic Money
Market and Reserve Assets Funds will invest, and because such Funds'
investments will be constantly changing in response to market conditions, no
portfolio turnover rate may be accurately stated for the Domestic Money Market
and Reserve Assets Funds.
Below are portfolio turnover rates for each of the Funds for the fiscal
years ended December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <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 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%
Global Bond Focus Fund** 132.57% 117.58%
* For the period from May 2, 1994 (commencement of operations) to December 31, 1994.
** In connection with a reorganization on [ ], 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 [ ], 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.
</TABLE>
xxx
<PAGE>
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Securities and Exchange Commission as a result of which disposal of portfolio
securities or determination of the net asset value of each Fund is not
reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
each Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Dividends, Distributions and Taxes" in the
Prospectus.
FEDERAL INCOME TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), each
Fund of the Company will be treated as a separate corporation for federal
income tax purposes and, thus, each Fund is required to satisfy the
qualification requirements under the Code for treatment as a regulated
investment company. There will be no offsetting of capital gains and losses
among the Funds. Each Fund intends to continue to qualify as a regulated
investment company under certain provisions of the Code. Under such
provisions, a Fund will not be subject to federal income tax on such part of
its net ordinary income and net realized capital gains which it distributes to
shareholders. To qualify for treatment as a regulated investment company, a
Fund must, among other things, derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities and derive
less than 30% of its gross income in each taxable year from the gains (without
deduction for losses) from the sale or other disposition of stocks, securities,
certain options, futures or forward contracts and certain foreign currencies
held for less than three months. In addition, the Code requires that each Fund
meet certain diversification requirements, including the requirement that not
more than 25% of the value of a Fund's total assets be invested in the
securities (other than U.S. Government securities or the securities of other
regulated investment companies) of any one issuer. Each of the Company's
Funds, including the Natural Resources Focus Fund, intends to comply with the
above-described requirements.
On occasion, some amount of the distributions of the Domestic Money
Market Fund or the Reserve Assets Fund for a fiscal year may constitute a
return of capital, in which case such amount would be applied against and
reduce the Separate Account's tax basis in shares of such Fund. If such amount
were to exceed the Separate Account's tax basis for shares of the Domestic
Money Market Fund or the Reserve Assets Fund, the excess would be treated as
gain from the sale or exchange of such shares.
On occasion the net income of the Domestic Money Market Fund or the
Reserve Assets Fund may be a negative amount as a result of a net decline in
the value of the portfolio securities of the Fund which is in excess of the
interest earned. Consequently, the Fund will reduce the number of its
outstanding shares to reflect the negative net income. The adjustment may
result in gross income to shareholders in excess of the net dividend credited
to such shareholders for a period. In such a case, such shareholders' tax
basis in the shares of the Domestic Money Market Fund or the Reserve Assets
Fund may be adjusted to reflect the difference between taxable income and net
dividends actually distributed. Such difference may be realized as a capital
loss when the shares are liquidated.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code 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 [ ], 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 [ ], 1996, the portfolio of the Fund
included debt securities rated below investment grade (I.E., junk bonds). On [
], 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 [ ], 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 [ ], 1996 may not be indicative
of such Fund's performance following [ ], 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.
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
EXPRESSED AS A $1,000 OF A 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
AMERICAN BALANCED FUND:
One Year Ended December 31, 1995 20.81 1,208.10
Five Years Ended December 31, 1995 10.88 1,675.60
Inception* Through December 31, 1995 10.17 2,085.30
GLOBAL STRATEGY FOCUS FUND:
One Year Ended December 31, 1995 10.60 1,106.00
Inception* Through December 31, 1995 8.20 1,353.70
BASIC VALUE FOCUS FUND:
One Year Ended December 31, 1995 25.49 1,254.90
Inception* Through December 31, 1995 14.61 1,406.50
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
* 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.
</TABLE>
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>
[AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995]
<PAGE>
[UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1996]
<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, each of the years in the seven-year period ended December 31, 1995
and the period June 1, 1988 (commencement of operations) to December 31,
1988.
Basic Value Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the two-year period ended December 31, 1995
and the period July 1, 1993 (commencement of operations) to December 31,
1993.
Developing Capital Markets Focus Fund for the period January 1, 1996
to June 30, 1996, the year ended December 31, 1995 and the period May 2,
1994 (commencement of operations) to December 31, 1994.
Domestic Money Market Fund for the period January 1, 1996 to June 30,
1996, each of the years in the three-year period ended December 31, 1995
and the period February 20, 1992 (commencement of operations) to December
31, 1992.
Equity Growth Fund for the period January 1, 1996 to June 30, 1996 and
each of the years in the ten-year period ended December 31, 1995.
Global Strategy Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the three-year period ended December 31, 1995
and the period February 28, 1992 (commencement of operations) to December
31, 1992.
Global Utility Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the two-year period ended December 31, 1995
and the period July 1, 1993 (commencement of operations) to December 31,
1993.
High Current Income Fund for the period January 1, 1996 to June 30,
1996 and each of the years in the ten-year period ended December 31,
1995.
Government Bond Fund for the period January 1, 1996 to June 30, 1996,
the year ended December 31, 1995 and the period May 2, 1994 (commencement
of operations) to December 31, 1994.
International Equity Focus Fund for the period January 1, 1996 to June
30, 1996, each of the years in the two-year period ended December 31,
1995 and the period July 1, 1993 (commencement of operations) to December
31, 1993.
Natural Resources Focus Fund for the period January 1, 1996 to June
30, 1996, each of the years in the seven-year period ended December 31,
1995 and the period June 1, 1988 (commencement of operations) to December
31, 1988.
Prime Bond Fund for the period January 1, 1996 to June 30, 1996 and
each of the years in the ten-year period ended December 31, 1995.
Quality Equity Fund for the period January 1, 1996 to June 30, 1996
and each of the years in the ten-year period ended December 31, 1995.
Reserve Assets Fund for the period January 1, 1996 to June 30, 1996
and each of the years in the ten-year period ended December 31, 1995.
Global Bond Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the two-year period ended December 31, 1995
and the period July 1, 1993 (commencement of operations) to December 31,
1993.
Contained in Part B:
Schedules of Investments as of December 31, 1995 and as of June 30,
1996.
Statements of Assets and Liabilities as of December 31, 1995 and as of
June 30, 1996.
Statements of Operations for the year ended December 31, 1995 and for
the six-month period ended June 30, 1996.
Statements of Changes in Net Assets for the years ended December 31,
1995 and 1994 and for the six-month period ended June 30, 1996 and 1995.
Financial Highlights:
American Balanced Fund for the period January 1, 1996 to June 30, 1996
and each of the years in the five-year period ended December 31, 1995.
Basic Value Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the two-year period ended December 31, 1995,
and the period July 1, 1993 (commencement of operations) to December 31,
1993.
Developing Capital Markets Focus Fund for the period January 1, 1996
to June 30, 1996, the year ended December 31, 1995 and the period May 2,
1994 (commencement of operations) to December 31, 1994.
Domestic Money Market Fund for the period January 1, 1996 to June 30,
1996, each of the years in the three-year period ended December 31, 1995
and the period February 20, 1992 (commencement of operations) to December
31, 1992.
Equity Growth Fund for the period January 1, 1996 to June 30, 1996 and
each of the years in the five-year period ended December 31, 1995.
Global Strategy Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the three-year period ended December 31, 1995
and the period February 28, 1992 (commencement of operations) to December
31, 1992.
Global Utility Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the two-year period ended December 31, 1995
and the period July 1, 1993 (commencement of operations) to December 31,
1993.
High Current Income Fund for the period January 1, 1996 to June 30,
1996 and each of the years in the five-year period ended December 31,
1995.
Government Bond Fund for the period January 1, 1996 to June 30, 1996,
the year ended December 31, 1995 and the period May 2, 1994 (commencement
of operations) to December 31, 1994.
International Equity Focus Fund for the period January 1, 1996 to June
30, 1996, each of the years in the two-year period ended December 31,
1995 and the period July 1, 1993 (commencement of operations) to December
31, 1993.
Natural Resources Focus Fund for the period January 1, 1996 to June
30, 1996 and each of the years in the five-year period ended December 31,
1995.
Prime Bond Fund for the period January 1, 1996 to June 30, 1996 and
each of the years in the five-year period ended December 31, 1995.
Quality Equity Fund for the period January 1, 1996 to June 30, 1996
and each of the years in the five-year period ended December 31, 1995.
Reserve Assets Fund for the period January 1, 1996 to June 30, 1996
and each of the years in the five-year period ended December 31, 1995.
Global Bond Focus Fund for the period January 1, 1996 to June 30,
1996, each of the years in the two-year period ended December 31, 1995
and the period July 1, 1993 (commencement of operations) to December 31,
1993.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
Number Description
<S> <C>
1(a) - Articles of Incorporation of Registrant (a)
1(b) - Form of Articles Supplementary of Registrant (b)
1(c) - Form of Articles of Amendment of Registrant (c)
1(d) - Form of Articles Supplementary of Registrant (d)
1(e) - Form of Articles Supplementary of Registrant (e)
1(f) - Form of Articles Supplementary of Registrant (f)
1(g) - Articles Supplementary to Registrant's Articles of Incorporation relating to the
redesignation of shares of common stock as Merrill Lynch Basic Value Focus Fund
Common Stock, Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch
Global Utility Focus Fund Common Stock and Merrill Lynch International Equity
Focus Fund Common Stock(s)
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) - 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.*
2 - By-Laws of Registrant, as amended (g)
3 - None
4 - Specimen certificate for shares of common stock of Registrant (h)
5(a) - Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund (i)
5(b) - Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund, Merrill Lynch
High Current Income Fund, Merrill Lynch Quality Equity Fund and Merrill Lynch
Equity Growth Fund (j)
5(c) - 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 24, 1993)
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*
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form N-1 (the "Registration
Statement").
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1 to the Registration Statement.
(c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 7 to the Registration Statement.
(d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 10 to the Registration Statement.
(e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No. 12 to the Registration Statement.
(f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No. 16 to the Registration Statement
("Post-Effective Amendment No. 16").
(g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11 to the Registration Statement ("Post-
Effective Amendment No. 11").
(h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4 to the Registration Statement ("Post-
Effective Amendment No. 4").
(i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No. 8 to the Registration Statement ("Post-
Effective Amendment No. 8").
(j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 8.
(k) Incorporated by reference to Exhibit 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.
* To be filed by Amendment.
</TABLE>
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.
ITEM 26. NUMBERS OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AS OF
TITLE OF CLASS 1993 [ ], 1996
<S> <C>
Common stock, par value $0.10 per share, Merrill Lynch Domestic Money 4
Market Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Reserve Assets Fund 9
Class
Common stock, par value $0.10 per share, Merrill Lynch Prime Bond Fund 10
Class
Common stock, par value $0.10 per share, Merrill Lynch High Current Income 10
Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Quality Equity Fund 9
Class
Common stock, par value $0.10 per share, Merrill Lynch Equity Growth Fund 10
Class
Common stock, par value $0.10 per share, Merrill Lynch Natural Resources 10
Focus Fund Class
Common stock, par value $0.10 per share, Merrill Lynch American Balanced 10
Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Global Strategy 4
Focus Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Basic Value Focus 7
Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Global Bond Focus 7
Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Global Utility 7
Focus Fund Class
Common stock, par value $0.10 per share, Merrill Lynch International 7
Equity Focus Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Developing Capital 7
Markets Focus Fund Class
Common stock, par value $0.10 per share, Merrill Lynch Government Bond Fund 3
Class
Common stock, par value $0.10 per share, Merrill Lynch Index 500 Fund Class [ ]
</TABLE>
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
judgments, fines and amounts paid in settlement actually and reasonably
incurred by the corporate representative in connection with the proceeding, if:
(i) he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Registrant; and (ii) with respect to
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the
Maryland General Corporation Law to indemnify a corporate representative under
certain circumstances against expenses incurred in connection with the defense
of a suit or action by or in the right of the Registrant. Under the
Distribution Agreement, the Registrant has agreed to indemnify the Distributor
against any loss, liability, claim, damage or expense arising out of any untrue
statement of a material fact, or an omission to state a material fact, in any
registration statement, prospectus or report to shareholders of the Registrant.
Reference is made to Article VI of Registrant's Certificate of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF 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 Growth Fund
for Investment and Retirement, 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 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., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniEnhanced
Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, 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
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>
POSITION 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 President Executive Vice President of FAM; President and
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.
Philip L. Kirstein Senior Vice President, General Senior Vice President, General Counsel and
Counsel, Director and Secretary of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary of
Princeton Services; Director of MLFD.
Ronald M. Kloss Senior Vice President and Senior Vice President and Controller of FAM;
Controller Senior 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 and Senior Vice President and Treasurer of FAM;
Treasurer Senior 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.
(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>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OTHER
NAME WITH UNDERWRITER WITH REGISTRANT
<S> <C> <C>
Terry K. Glenn President Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
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 Treasurer
and 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.
<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 17TH DAY OF OCTOBER, 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>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director October 17, 1996
(Arthur Zeikel) (Principal Executive Officer)
* Treasurer
(Gerald M. Richard) (Principal Financial and
Accounting Officer)
* Director
(Walter Mintz)
* Director
(Melvin R. Seiden)
* Director
(Stephen B. Swensrud)
* Director
(Joe Grills)
* Director
(Robert S. Salomon, Jr.)
*By/S/ ARTHUR ZEIKEL October 17, 1996
(Arthur Zeikel)
Attorney-in-Fact
</TABLE>
