<PAGE>
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1996
REGISTRATION NO. 333-
811-3290
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Form N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 <checked-box>
PRE-EFFECTIVE AMENDMENT NO. <square>
POST-EFFECTIVE AMENDMENT NO. <square>
(CHECK APPROPRIATE BOX OR BOXES)
------------
MERRILL LYNCH VARIABLE SERIES FUNDS INC.
(Exact name of Registrant as Specified in Charter)
------------
P.O. Box 9011
Princeton, New Jersey 08543-9011
(Address of Principal Executive Offices)
(609) 282-2800
(Registrant's Telephone Number, including Area Code)
------------
Ira P. Shapiro, Esq.
Merrill Lynch Variable Series Funds, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
------------
COPIES TO:
Leonard B. Mackey, Jr., Esq.
Rogers & Wells
200 Park Avenue
New York, New York 10166
------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as
practicable after the effective date of this Registration Statement.
------------
NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER OF SHARES HAVE
PREVIOUSLY BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY
ACT OF 1940. REGISTRANT IS FILING AS AN EXHIBIT TO THIS REGISTRATION STATEMENT
A COPY OF ITS EARLIER DECLARATION UNDER RULE 24F-2. REGISTRANT FILED ITS RULE
24F-2 NOTICE ON FEBRUARY 29, 1996 FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1995.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION PROXY STATEMENT-PROSPECTUS CAPTION
<S> <C> <C>
PART A
Item 1. Beginning of Registration
Statement and Outside Front Cover
Page of Prospectus Facing page of Registration Statement; Cover page
of Proxy Statement-Prospectus
Item 2. Beginning and Outside Back
Cover Page of Prospectus Table of Contents
Item 3. Synopsis and Risk Factors Summary; Special Considerations Regarding the
Reorganizations
Item 4. Information about the Transaction Summary; Proposal No. 6 and Proposal No. 7 - The
Reorganizations
Item 5. Information about the Registrant Available Information; Summary; The Company;
Appendix C; Appendix D
Item 6. Information about the Company
Being Acquired Available Information; Summary; The Company;
Appendix C; Appendix D
Item 7. Voting Information The Meeting; Proposal No. 1 - Election of
Directors; Proposal No. 6 and Proposal No. 7 -
The Reorganizations; Appendix A
Item 8. Interest of Certain Persons and
Experts Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters Not Applicable
PART B STATEMENT OF ADDITIONAL INFORMATION CAPTION
Item 10. Cover Page Cover page of Statement of Additional Information
Item 11. Table of Contents Table of Contents
Item 12. Additional Information about
the Registrant Incorporation by Reference
Item 13. Additional Information about
the Company Being Acquired Incorporation by Reference
Item 14. Financial Statements Pro Forma Financial Information
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.
</TABLE>
<PAGE>
<PAGE>
PRELIMINARY COPY
PROXY
Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints each of Terry K. Glenn, Gerald M. Richard
and Ira P. Shapiro as proxies, each with the power to appoint his substitute,
and authorizes each of them to represent and to vote, as designated below, all
shares of common stock of Merrill Lynch Variable Series Funds, Inc. (the
"Company") held of record by the undersigned on August 12, 1996 at an annual
meeting of stockholders of the Company to be held on October 11, 1996 or any
adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4, 5, 6 AND 7.
1. To consider and act upon a proposal to elect the following persons as
Directors of the Company:
<square> FOR all nominees listed <square> WITHHOLD AUTHORITY to
below (except as marked vote for all nominees
to the contrary below) listed below
Arthur Zeikel, Joe Grills, Walter Mintz, Robert S. Salomon, Jr., Melvin
R. Seiden and Stephen B. Swensrud.
2. To consider and act upon a proposal to ratify the selection of Deloitte &
Touche LLP as the independent auditors of the Company to serve for the
current fiscal year.
<square> FOR <square> AGAINST <square> ABSTAIN
3. To consider and act upon a proposal to amend the investment restrictions
applicable to all of the Company's Funds other than the Merrill Lynch
Domestic Money Market Fund and Merrill Lynch Reserve Assets Fund. (ONLY
HOLDERS OF SHARES OF THE COMPANY'S FUNDS, OTHER THAN THE MERRILL LYNCH
DOMESTIC MONEY MARKET FUND AND THE MERRILL LYNCH RESERVE ASSETS FUND,
WILL BE PERMITTED TO VOTE ON THIS MATTER.)
<square> FOR <square> AGAINST <square> ABSTAIN
4. To consider and act upon a proposal to approve a change in the investment
objective of the Company's Merrill Lynch Intermediate Government Bond
Fund and to rename that Fund as the "Merrill Lynch Government Bond Fund".
(ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH INTERMEDIATE
GOVERNMENT BOND FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
<square> FOR <square> AGAINST <square> ABSTAIN
<PAGE>
<PAGE>
PRELIMINARY COPY
5. To consider and act upon a proposal to approve a change in the investment
objective of the Company's Merrill Lynch World Income Focus Fund and to
change the name of that Fund to the "Merrill Lynch Global Bond Focus
Fund". (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH WORLD
INCOME FOCUS FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
<square> FOR <square> AGAINST <square> ABSTAIN
6. To consider and act upon a proposal to approve the Agreement and the Plan
of Reorganization between the Company's Merrill Lynch International Bond
Fund and Merrill Lynch World Income Focus Fund and an Amendment to the
Company's Articles of Incorporation in connection therewith. (ONLY
HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH INTERNATIONAL BOND
FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
<square> FOR <square> AGAINST <square> ABSTAIN
7. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Company's Merrill Lynch Flexible Strategy Fund
and Merrill Lynch Global Strategy Focus Fund and an Amendment to the
Company's Articles of Incorporation in connection therewith. (ONLY
HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH FLEXIBLE STRATEGY FUND
WILL BE PERMITTED TO VOTE ON THIS MATTER.)
<square> FOR <square> AGAINST <square> ABSTAIN
8. In the discretion of such proxies, upon such other business as may
properly come before the meeting or any adjournment thereof.
Please sign this proxy in the space
provided below. Execution by stockholders
who are not individuals must be made by an
authorized signatory.
Dated:____________________________________
------------------------------------------
Signature
Please mark boxes (checked-box) or (solid-box) in
blue or black ink.
Please sign, date and return this Proxy
promptly using the enclosed envelope.
<PAGE>
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 11, 1996
TO THE STOCKHOLDERS OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC.:
Notice is hereby given that an Annual Meeting of Stockholders (the
"Meeting") of Merrill Lynch Variable Series Funds, Inc. (the "Company") will be
held at the offices of Merrill Lynch Asset Management, 800 Scudders Mill Road,
Plainsboro, New Jersey, on Monday, October 11, 1996 at 9:00 A.M. for the
following purposes:
(1) To elect a Board of Directors to serve until their successors
are duly elected and qualified.
(2) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP to serve as independent auditors of the Company for
its current fiscal year.
(3) To consider and act upon a proposal to amend the investment
restrictions applicable to all of the Company's Funds other than the
Merrill Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets
Fund. (ONLY HOLDERS OF SHARES OF THE COMPANY'S FUNDS, OTHER THAN THE
MERRILL LYNCH DOMESTIC MONEY MARKET FUND AND THE RESERVE ASSETS FUND,
WILL BE PERMITTED TO VOTE ON THIS MATTER.)
(4) To consider and act upon a proposal to approve a change in the
investment objective of the Company's Merrill Lynch Intermediate
Government Bond Fund and to rename that Fund as the "Merrill Lynch
Government Bond Fund". (ONLY HOLDERS OF SHARES OF THE COMPANY'S
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND WILL BE PERMITTED TO VOTE
ON THIS MATTER.)
(5) To consider and act upon a proposal to approve a change in the
investment objective of the Company's Merrill Lynch World Income Focus
Fund and to change the name of that Fund to the "Merrill Lynch Global Bond
Focus Fund". (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH WORLD
INCOME FOCUS FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
(6) To consider and act upon a proposal to approve the Agreement
and the Plan of Reorganization between the Company's Merrill Lynch
International Bond Fund and Merrill Lynch World Income Focus Fund and an
Amendment to the Company's Articles of Incorporation in connection
therewith. (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH
INTERNATIONAL BOND FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)
(7) To consider and act upon a proposal to approve the Agreement
and Plan of Reorganization between the Company's Merrill Lynch Flexible
Strategy Fund and Merrill Lynch Global Strategy Focus Fund and an
Amendment to the Company's Articles of Incorporation in connection
therewith. (ONLY HOLDERS OF SHARES OF THE COMPANY'S MERRILL LYNCH FLEXIBLE
STRATEGY FUND WILL BE PERMITTED TO VOTE ON THIS MATTER.)<PAGE>
<PAGE>
(8) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on August 12, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at the Meeting or any adjournment thereof.
A complete list of the stockholders of the Company entitled to vote at the
Meeting will be available and open to the examination of any stockholder of the
Fund for any purpose germane to the Meeting during ordinary business hours from
and after September 23, 1996, at the office of the Company, 800 Scudders Mill
Road, Plainsboro, New Jersey. Stockholders are cordially invited to attend the
Meeting. Stockholders who do not expect to attend the Meeting in person are
requested to complete, date and sign the enclosed form of proxy and return it
promptly in the envelope provided for this purpose. The enclosed proxy is
being solicited on behalf of the Board of Directors of the Fund.
By Order of the Board of Directors
Ira P. Shapiro
SECRETARY
Plainsboro, New Jersey
Dated: August [__], 1996
<PAGE>
<PAGE>
SUBJECT TO COMPLETION--DATED JULY 10, 1996
PROXY STATEMENT AND PROSPECTUS
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD OCTOBER 11, 1996
---------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Phone No. (609) 282-2800
---------------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock ("Common Stock")
is issued for each Fund.
This Proxy Statement-Prospectus is being furnished to the stockholders of
the Company in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the Company's outstanding shares of
common stock for use at an Annual Meeting of Stockholders of the Company (the
"Meeting") to be held at the offices of Merrill Lynch Asset Management, L.P.
("MLAM" or the "Investment Adviser"), 800 Scudders Mill Road, Plainsboro, New
Jersey, on Monday, October 11, 1996, at 9:00 a.m., and at any and all
adjournments thereof. The approximate mailing date of this Proxy
Statement-Prospectus is August [___], 1996. The Board of Directors of the
Company has fixed the close of business on August 12, 1996 as the record date
(the "Record Date") for the determination of stockholders entitled to notice of
and to vote at the Meeting and at any adjournment thereof. Stockholders on the
Record Date will be entitled to one vote for each share held and a fractional
vote for each fractional share held, with no shares having cumulative voting
rights. As of the Record Date, the Company had outstanding the number of
shares of each of its Funds indicated in Appendix A. Appendix A also indicates
the number of shares owned by each person who owned 5% or more of the
outstanding shares of a Fund on such date.
At the Meeting, stockholders will be asked to vote on (i) the election of
the Board of Directors, (ii) the ratification of the selection of Deloitte &
Touche LLP to serve as independent auditors for the Company's current fiscal
year, (iii) a proposal to amend the fundamental investment restrictions of each
of the Company's Funds other than the Merrill Lynch Domestic Money Market Fund
and Merrill Lynch Reserve Assets Fund, (iv) a proposal to amend the investment
objective of the Merrill Lynch Intermediate Government Bond Fund and to change
the name of that Fund, (v) a proposal to amend the investment objective of the
Merrill Lynch World Income Focus Fund and to change the name of that Fund, (vi)
a proposal to approve the Agreement and Plan of Reorganization between the
Company's Merrill Lynch International Bond Fund and its Merrill Lynch World
Income Focus Fund and an Amendment to the Company's Articles of Incorporation
in connection therewith, and (vii) a proposal to approve the Agreement and Plan
of Reorganization between the Company's Merrill Lynch Flexible Strategy Fund
and its Merrill Lynch Global Strategy Focus Fund and an Amendment to the
Company's Articles of Incorporation in connection therewith. The International
Bond Fund and the Flexible Strategy Fund are sometimes referred to herein as
the "Transferor Funds" or the "Corresponding Transferor Funds", and the World
Income Focus Fund and the Global Strategy Focus Fund are sometimes referred to
herein as the "Acquiring Funds" or the "Corresponding Acquiring Funds". ALL
STOCKHOLDERS WILL BE PERMITTED TO VOTE ON PROPOSALS 1 AND 2. WITH RESPECT TO
EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY HOLDERS OF SHARES OF THE FUNDS
AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO VOTE ON SUCH PROPOSALS.
At the Meeting, the stockholders of each Transferor Fund will be asked to
approve an Agreement and Plan of Reorganization whereby the Acquiring Fund will
acquire substantially all the assets of the Corresponding Transferor Fund by
means of a tax-free acquisition in exchange for shares of the Acquiring Fund
and the assumption by the Acquiring Fund of substantially all the liabilities
of the Corresponding Transferor Fund, which shares would then be distributed to
the stockholders of each Transferor Fund in liquidation of each Transferor
Fund. The number of shares of the Acquiring Fund to be issued to the
Corresponding Transferor Fund would be that number having an aggregate net
asset value equal to the aggregate value of the net assets of the Corresponding
Transferor Fund transferred to the Acquiring Fund. Each of these transactions,
consisting of the transfer to the Acquiring Fund of all the (CONTINUED ON
NEXT PAGE)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This Proxy Statement-Prospectus sets forth concisely the information that
stockholders of the Company should know before voting on the proposals
described above and should be retained for future reference. A description of
the Company, in general, and each Acquiring Fund and each Transferor Fund,
including each such Fund's investment objective and policies is contained
herein at Appendix C. A statement containing additional information about the
Company has been filed with the Securities and Exchange Commission (the
"Commission") by the Company in a Statement of Additional Information dated
August [__], 1996 (the "SAI"). A copy of the SAI and the Company's annual
report for its fiscal year ended December 31, 1995 may be obtained without
charge by writing to the Company at the address above or by calling (800) 456-
4587, ext. 123. The Statement of Additional Information is hereby incorporated
by reference into this Proxy Statement--Prospectus.
THE DATE OF THIS PROXY STATEMENT--PROSPECTUS IS AUGUST [__], 1996.
<PAGE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.<PAGE>
<PAGE>
(CONTINUED FROM COVER PAGE)
assets of the Corresponding Transferor Fund in exchange for the Acquiring Fund
shares and the Acquiring Fund's assumption of all the liabilities of the
Corresponding Transferor Fund, and the subsequent distribution of the Acquiring
Fund shares in liquidation of the Corresponding Transferor Fund, is referred to
herein as a "Reorganization." As a result of the Reorganization, each
stockholder of a Transferor Fund will receive that number of full and
fractional shares of the Corresponding Acquiring Fund equal in value at the
close of business on the business day preceding the effective date of the
Reorganization to the value of that stockholder's shares of the Transferor
Fund.
The terms and conditions of each Reorganization and related transactions
are more fully described in this Proxy Statement--Prospectus and in the
Agreement and Plan of Reorganization, the form of which is attached hereto as
Appendix B.
The World Income Focus, the International Bond and the Global Strategy
Focus Funds are non-diversified, open-end management investment companies. The
Flexible Strategy Fund is a diversified, open-end management investment
company. The investment objective of the World Income Focus Fund is to seek to
provide stockholders with high current income. The investment objective of the
International Bond Fund is to seek a high total investment return. However,
the investment objective of the World Income Focus Fund will be the same as the
investment objective of the International Bond Fund if stockholders of the
World Income Focus Fund approve a change in the World Income Focus Fund's
investment objective as discussed in Proposal No. 5 (which is a precondition to
consummation of the Reorganization contemplated in Proposal No. 6).
Additionally, the implementation of Proposal No. 5 is subject to the approval
of Proposal No. 6. The investment objective of each of the Flexible Strategy
Fund and the Global Strategy Focus Fund is to seek high total investment
return.
The Board of Directors of the Company knows of no business other than
that mentioned in Proposals 1 through 7 of the Notice of Meeting which will be
presented for consideration at the Meeting. If any matter is properly
presented, it is the intention of the persons named in the enclosed Proxy, as
well as any other Proxy sent by the Company in connection with the Meeting, to
vote in accordance with their best judgment.
The chart below summarizes which stockholders of the Company on the
Record Date will be entitled to vote on the proposals set forth herein.
<TABLE>
<CAPTION>
NAME OF FUND PROPOSALS ON WHICH STOCKHOLDERS
OF A FUND ARE ELIGIBLE TO VOTE
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1{*} 2{*} 3{#} 4 5 6 7
--- --- --- --- --- --- ---
American Balanced Fund X X X
Basic Value Focus Fund X X X
Developing Capital Markets Focus Fund X X X
Domestic Money Market Fund X X
Equity Growth Fund X X X
Flexible Strategy Fund X X X X
Global Strategy Focus Fund X X X
Global Utility Focus Fund X X X
High Current Income Fund X X X
Intermediate Government Bond Fund X X X X
International Bond Fund X X X X
International Equity Focus Fund X X X
Natural Resources Focus Fund X X X
Prime Bond Fund X X X
Quality Equity Fund X X X
Reserve Assets Fund X X
World Income Focus Fund X X X X
<FN>
{*} Vote tabulated on an aggregate basis.
{#} All stockholders of indicated Funds may vote, but votes will be tabulated
on a Fund by Fund basis.
</TABLE>
ii<PAGE>
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION.........................................................1
SUMMARY.......................................................................2
SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATIONS..........................7
THE COMPANY..................................................................10
THE MEETING..................................................................10
PROPOSAL NO. 1 - ELECTION OF DIRECTORS.......................................12
PROPOSAL NO. 2 - SELECTION OF INDEPENDENT AUDITORS...........................16
PROPOSAL NO. 3 - AMENDMENT TO THE FUNDAMENTAL INVESTMENT
RESTRICTIONS OF EACH OF THE FUNDS...........................17
PROPOSAL NO. 4 - TO CHANGE THE INVESTMENT OBJECTIVE OF THE
COMPANY'S MERRILL LYNCH INTERMEDIATE GOVERNMENT
BOND FUND AND RENAME THAT FUND AS THE "MERRILL
LYNCH GOVERNMENT BOND FUND".................................27
PROPOSAL NO. 5 - TO CHANGE THE INVESTMENT OBJECTIVE OF THE
COMPANY'S MERRILL LYNCH WORLD INCOME FOCUS
FUND AND RENAME THAT FUND AS THE "MERRILL
LYNCH GLOBAL BOND FOCUS FUND"...............................28
PROPOSAL NO. 6 AND PROPOSAL NO. 7 - THE REORGANIZATIONS......................30
LEGAL PROCEEDINGS............................................................40
LEGAL OPINIONS...............................................................40
EXPERTS......................................................................40
MEETINGS OF SHAREHOLDERS.....................................................40
APPENDIX A..................................................................A-1
APPENDIX B..................................................................B-1
APPENDIX C..................................................................C-1
APPENDIX D..................................................................D-1
iii<PAGE>
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Investment
Company Act of 1940, as amended (the "1940 Act"), and in accordance therewith
is required to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W. Washington, D.C. 20549, and at the Commission's New York Regional
Office, Seven World Trade Center, New York, New York 10048 and Chicago Regional
Office, Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such materials can be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a registration statement on Form
N-14 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Proxy Statement--Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the shares of the Merrill Lynch
International Bond Fund and the Merrill Lynch Flexible Strategy Fund issuable
pursuant to the reorganization, reference is hereby made to the Registration
Statement. This Proxy Statement--Prospectus constitutes a prospectus of the
Company with respect to the shares of the Company to be issued in connection
with the reorganization discussed herein.
A statement containing additional information about the Company, including
pro forma financial information with respect to the Reorganizations, has been
filed with the Securities and Exchange Commission (the "Commission") by the
Company in a Statement of Additional Information, dated August [__], 1996 the
("SAI"), and may be obtained without charge by writing to the Company at P.O.
Box 9011, Princeton, New Jersey 08543-9011, Attention: Ira P. Shapiro, or
calling (800) 456-4587, ext. 123. The SAI is incorporated by reference into
this Proxy Statement--Prospectus.
1<PAGE>
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT--PROSPECTUS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
THE MORE DETAILED INFORMATION CONTAINED HEREIN. STOCKHOLDERS SHOULD READ THE
ENTIRE PROXY STATEMENT--PROSPECTUS. CERTAIN CAPITALIZED TERMS IN THIS SUMMARY
ARE DEFINED ELSEWHERE IN THIS PROXY STATEMENT--PROSPECTUS.
THE COMPANY
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock ("Common Stock")
is issued for each Fund. Appendix A contains a list of each Fund of the
Company as well as the number of shares outstanding of each of its Funds on the
Record Date. Appendix A also indicates the number of shares owned by each
person who owned 5% or more of the outstanding shares of a Fund on such date.
The shares of the Company are sold only to separate accounts of certain
insurance companies (the "Insurance Companies"), including Merrill Lynch Life
Insurance Company and ML Life Insurance Company of New York, or to Insurance
Companies directly, in connection with variable annuity contracts and/or
variable life insurance contracts (the "Contracts") issued by such companies.
In accordance with their view of, and to the extent required by present
applicable law and interpretations thereof, the Insurance Companies generally
will vote the shares of the Funds held in such separate accounts based on the
instructions timely received from owners of the Contracts (the "Contract
Owners") having a voting interest in the shares to be voted. Each Insurance
Company generally will also vote shares of a Fund held in such separate
accounts for which no voting instructions from Contract Owners are timely
received, as well as shares of the Funds which such Insurance Company owns
directly, in the same proportion as those shares of a Fund for which voting
instructions from Contract Owners are timely received. In connection with the
solicitation of such instructions from Contract Owners, it is expected that the
Insurance Companies will furnish a copy of this Proxy Statement--Prospectus to
Contract Owners.
The rights of the Insurance Companies as stockholders should be
distinguished from the rights of a Contract Owner, which are set forth in the
Contract. A Contract Owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the prospectus for each
Contract. That prospectus describes the relationship between increases or
decreases in the net asset value of shares of a Fund, and any distributions on
such shares, and the benefits provided under a Contract. The prospectus for
the Contracts also describes various fees payable to the Insurance Companies
and charges to the separate accounts made by the Insurance Companies with
respect to the Contracts. Because shares of the Funds will be sold only to the
Insurance Companies, the terms "stockholder" and "stockholders" in this Proxy
Statement--Prospectus refer to the Insurance Companies.
THE MEETING
This Proxy Statement--Prospectus is being furnished to the stockholders
of the Company in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the Company's outstanding shares of
2<PAGE>
<PAGE>
common stock for use at an Annual Meeting of Stockholders of the Company (the
"Meeting") to be held at the offices of Merrill Lynch Asset Management, L.P.
("MLAM" or the "Investment Adviser"), 800 Scudders Mill Road, Plainsboro, New
Jersey, on Monday, October 11, 1996, at 9:00 a.m., and at any and all
adjournments thereof.
The Board of Directors of the Company has fixed the close of business on
August 12, 1996 as the Record Date for the determination of stockholders
entitled to notice of and to vote at the Meeting and at any adjournment
thereof. Stockholders on the Record Date will be entitled to one vote for each
share held and a fractional vote for each fractional share held, with no shares
having cumulative voting rights. This Proxy Statement--Prospectus is first
being mailed to stockholders of the Funds on or about August [ ], 1996.
All properly marked proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted "FOR" election of the Board of Directors, "FOR" the ratification of
the selection of Deloitte & Touche LLP to serve as independent auditors for the
Company's current fiscal year, "FOR" the proposal to amend the fundamental
investment restrictions of each of the Company's Funds other than the Merrill
Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets Fund, "FOR"
the proposal to amend the investment objective of the Merrill Lynch
Intermediate Government Bond Fund and to change the name of that Fund, "FOR"
the proposal to amend the investment objective of the Merrill Lynch World
Income Focus Fund and to change the name of that Fund, "FOR" the proposal to
approve the Agreement and Plan of Reorganization between the Company's Merrill
Lynch International Bond Fund and its Merrill Lynch World Income Focus Fund and
an Amendment to the Company's Articles of Incorporation (the "Articles") in
connection therewith, and "FOR" the proposal to approve the Agreement and Plan
of Reorganization between the Company's Merrill Lynch Flexible Strategy Fund
and its Merrill Lynch Global Strategy Focus Fund and an Amendment to the
Articles in connection therewith.
ALL STOCKHOLDERS WILL BE PERMITTED TO VOTE ON PROPOSALS 1 AND 2. WITH
RESPECT TO EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY HOLDERS OF SHARES OF THE
FUNDS AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO VOTE ON SUCH PROPOSALS.
The details of each proposal to be voted on by the stockholders of each
Fund and the vote required for approval of each proposal are set forth under
the description of each proposal in this Proxy Statement--Prospectus. Unless
the Board of Directors determines otherwise, it is anticipated that Proposal 3,
4, and 5, if approved by the stockholders of the relevent Funds, will be
implemented on the Effective Date (as defined below) of the Reorganizations.
THE REORGANIZATION
Based on the recommendation of MLAM, at a meeting of the Board of
Directors held on July 10, 1996, the Board approved the combination of the
Merrill Lynch International Bond Fund and the Merrill Lynch World Income Focus
Fund and the combination of the Merrill Lynch Flexible Strategy Fund and the
Merrill Lynch Global Strategy Focus Fund. The International Bond Fund and the
Flexible Strategy Fund are sometimes referred to herein as the "Transferor
Funds" or the "Corresponding Transferor Funds", and the World Income Focus Fund
and the Global Strategy Focus Fund are sometimes referred to herein as the
"Acquiring Funds" or the "Corresponding Acquiring Funds".
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The Agreement and Plan of Reorganization (the "Plan") provides that upon
the closing of the transaction, each Acquiring Fund will acquire substantially
all the assets of its Corresponding Transferor Fund and assume substantially
all the liabilities of the Corresponding Transferor Fund in exchange for the
shares of such Acquiring Fund on the effective date of the Reorganization (the
"Effective Date"), which is expected to be on or about Friday, December 13,
1996 or such earlier or later date as the Company's Board of Directors
determines. The number of full and fractional shares of any Acquiring Fund to
be issued to the holders of shares of the Corresponding Transferor Fund, is to
be determined on the basis of the net asset value per share of such Acquiring
Fund.
On the Effective Date, each Transferor Fund will liquidate and will
distribute pro rata to its holders of record the shares of the Corresponding
Acquiring Fund received by the Transferor Fund. The liquidation and
distribution will be accomplished by the establishment of an account on the
share records of the Company with respect to each Acquiring Fund in the name of
each stockholder of the Corresponding Transferor Fund representing the number
of full and fractional shares of the Acquiring Fund due such stockholder.
Fractional shares of the Acquiring Funds will be carried to the fourth decimal
place. Simultaneously with the establishment of accounts on the share records
of the Company with respect to the shares of an Acquiring Fund due to the
Transferor Fund stockholders, Transferor Fund shares held by those stockholders
will be cancelled. [New certificates for shares will be issued only upon
written stockholder request, and any certificate representing shares of an
Acquiring Fund to be issued in replacement of a certificate representing shares
of a Transferor Fund will be issued only upon the surrender of the certificate
representing the Transferor Fund shares.]
Stockholders of each Transferor Fund will also be asked to approve an
Amendment to the Articles, which must be filed under Maryland law in order to
implement each Reorganization. A copy of the proposed Amendment is attached as
an exhibit to the Plan, the form of which is attached hereto as Appendix B.
Consummation of the Plan is subject to the conditions set forth therein,
including the condition that all necessary orders or exemptions under the
Investment Company Act with respect to the Reorganization shall have been
granted by the Commission. The Plan may be terminated, in its entirety or with
respect to any Transferor Fund and its Corresponding Acquiring Fund, by the
Board and the Reorganization abandoned at any time prior to the closing of the
Reorganization on the Effective Date.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
On the Effective Date, the Company will receive an opinion from Rogers &
Wells, counsel to the Company, with respect to the U.S. federal income tax
consequences of the Reorganization. The tax opinion will be substantively to
the effect that, with respect to each Transferor Fund and its Corresponding
Acquiring Fund, on the basis of then current law and certain representations
and assumptions, and subject to certain limitations: (i) the Reorganization
will constitute a reorganization within the meaning of Section 368(a)(1)(D) of
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) the
stockholders of the Transferor Fund who receive shares of the Acquiring Fund
pursuant to the Reorganization will not recognize any gain or loss upon the
exchange of their shares of the Transferor Fund for shares of the Acquiring
Fund; (iii) the aggregate tax basis of the shares of the Acquiring Fund
4<PAGE>
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received by each stockholder of the Transferor Fund will be the same as the
aggregate tax basis of the shares of the Transferor Fund surrendered in the
exchange; and (iv) the holding period of shares of the Acquiring Fund received
by each stockholder of the Transferor Fund will include the holding period of
the shares of the Transferor Fund which are surrendered in exchange thereof,
provided that the shares of the Transferor Fund constitute capital assets of
such stockholder on the Effective Date.
COMPARISON OF THE FUNDS IN THE REORGANIZATION
GENERAL
The World Income Focus, the International Bond and the Global Strategy
Focus Funds are non-diversified, open-end management investment companies. The
Flexible Strategy Fund is a diversified, open-end management investment
company. The investment objective of the World Income Focus Fund is to seek to
provide stockholders with high current income. The investment objective of the
International Bond Fund is to seek a high total investment return. However,
the investment objective of the World Income Focus Fund will be the same as the
investment objective of the International Bond Fund if stockholders of the
World Income Focus Fund approve a change in the World Income Focus Fund's
investment objective as discussed in Proposal No. 5 (which is a precondition to
consummation of the Reorganization contemplated in Proposal No. 6).
Additionally, the implementation of Proposal No. 5 is subject to the approval
of Proposal No. 6. See Appendix C to this Proxy Statement--Prospectus for a
description of the investment objective and policies of the World Income Focus
Fund as such investment objective and policies of the Fund will read if
Proposal No. 5 is approved. The investment objective of each of the Flexible
Strategy Fund and the Global Strategy Focus Fund is to seek high total
investment return.
INVESTMENT OBJECTIVE AND POLICIES
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND. The investment
objective of the World Income Focus Fund is to seek to provide stockholders
with high current income. The investment objective of the International Bond
Fund is to seek a high total investment return. However, the investment
objective of the World Income Focus Fund will be the same as the investment
objective of the International Bond Fund if stockholders of the World Income
Focus Fund approve a change in the World Income Focus Fund's investment
objective as discussed above in Proposal No. 5. If Proposal No. 5 is not
approved, the Reorganization contemplated by Proposal No. 6 will not be
consummated. The investment objectives and policies of each of the Funds are
described more fully in Appendix C to this Proxy Statement--Prospectus.
Assuming Proposal No. 5 is approved by the stockholders of the World Income
Focus Fund, the investment objectives and policies of the World Income Focus
Fund and the International Bond Fund will be substantially similar with one
noteworthy exception. The focus of the World Income Focus Fund is on both U.S
and non-U.S. debt instruments, including government and corporate fixed income
securities, whereas the focus of the International Bond Fund is primarily non-
U.S. debt instruments. Therefore, investors in the World Income Focus Fund are
likely to have a greater exposure to debt securities in the U.S. market,
although there is no requirement that the World Income Focus Fund have any
fixed percentage of its assets in U.S. government or corporate fixed income
securities.
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND. The investment
objectives, policies and styles of the Funds are substantially similar. The
investment objective of each of the Flexible Strategy Fund and the Global
Strategy Focus Fund is to seek high total investment return. However, the
Global Strategy Focus Fund is a non-diversified investment company, and the
Flexible Strategy Fund is a diversified investment company. The investment
5<PAGE>
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objectives of each of the Funds is stated more fully in Appendix C to this
Proxy Statement--Prospectus. The main difference between these Funds is that
the Flexible Strategy Fund seeks to meet its investment objective by investing
primarily in the securities of U.S. issuers whereas the Global Strategy Focus
Fund seeks to achieve its investment objective by investing primarily in the
securities of issuers located in the United States, Canada, Western Europe and
the Far East. The Flexible Strategy Fund has, as a matter of operating policy,
limited its investment in foreign issuers to no more than 25% of its total
assets. The Global Strategy Focus Fund has no similar limitation.
Additionally, the Flexible Strategy Fund emphasizes investment in common stocks
of larger-capitalization issuers. The Global Strategy Focus Fund invests in
issuers that MLAM believes to be quality companies, which includes such
companies that have a strong balance sheet, good financial resources, a
satisfactory rate of return on capital, a good industry position and superior
management. The capitalization of such quality companies may be considered by
MLAM but is not a controlling factor. Both Funds limit investment in corporate
debt securities to those securities rated investment grade by Standard & Poor's
Ratings Group ("S&P") or Moody's Investors Services, Inc. ("Moody's") or of
comparable quality. The Global Strategy Focus Fund may invest a greater
percentage of its assets in non-U.S. securities than the Flexible Strategy
Fund, and investing on an international basis involves special considerations.
See "Special Considerations Regarding the Reorganization."
Unlike the Flexible Strategy Fund, the Global Strategy Focus Fund may
engage in certain of the options, futures and currency transactions discussed
in Annex A to Appendix C of this Proxy Statement--Prospectus. See "Proposal No.
6 and Proposal No. 7 - The Reorganization-Comparison of Investment Objectives
and Policies--Flexible Strategy Fund and Global Strategy Focus Fund."
-----------------------
A more detailed description of the types of securities in which each of
the Acquiring Funds invests, its fundamental and non-fundamental investment
policies and the risks associated with an investment in the Fund is contained
in more detail in Appendix C of this Proxy Statement--Prospectus and in the SAI,
which is available upon request.
MANAGEMENT OF THE TRANSFEROR FUNDS AND ACQUIRING FUNDS
MLAM acts as the investment adviser for, and manages the investment and
reinvestment of the assets of, each Transferor Fund and its Corresponding
Acquiring Fund. The terms of the investment management agreement for each
Transferor Fund and Corresponding Acquiring Fund are substantively identical,
including the fees payable by each Transferor Fund and its Corresponding
Acquiring Fund to MLAM. Such fees will remain the same after the
Reorganization. Each of the World Income Focus Fund and the International Bond
Fund has agreed to pay MLAM a monthly fee at an annual rate of 0.60% of such
Fund's average daily net assets for the services and facilities furnished by
MLAM. Each of the Global Strategy Focus Fund and the Flexible Strategy Fund
has agreed to pay MLAM a monthly fee at an annual rate of 0.65% of such Fund's
average daily net assets for the services and facilities furnished by MLAM.
DESCRIPTION OF SHARES OF THE ACQUIRING FUND
Full and fractional shares of the Acquiring Funds will be issued without
the imposition of a sales load or other fee to the stockholders of the
Corresponding Transferor Funds in accordance with the procedures described
above. The shares of each Acquiring Fund to be issued in the Reorganization
will be fully paid and nonassessable when issued and will have no preemptive or
conversion rights. In addition, the voting procedures of the Transferor Funds
and the Acquiring Funds are identical.
6<PAGE>
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SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATIONS
The Flexible Strategy Fund and the Global Strategy Focus Fund have similar
investment objectives and portfolio composition, which in the opinion of
management should minimize any risks that might otherwise be associated with
the Reorganization. The World Income Focus Fund and International Bond Fund
currently have different investment objectives and portfolio compositions.
However, if Proposal No. 5 relating to a change in the investment objective of
the World Income Focus Fund is approved by the stockholders of such Fund, the
World Income Focus Fund and the International Bond Fund would have similar
investment objectives and management believes such Funds would have upon the
implementation of Proposal No. 5 a similar portfolio composition.
Each Acquiring Fund, in general, may invest in a broader range of
securities or other assets than the Corresponding Transferor Fund, and
stockholders of the Transferor Funds should consider the special considerations
and risks discussed below with respect to the Corresponding Acquiring Fund, as
well as the discussion of risks with respect to the Corresponding Acquiring
Fund contained in Appendix C of this Proxy Statement--Prospectus.
ADDITIONAL RISKS ASSOCIATED WITH THE GLOBAL STRATEGY FOCUS FUND
Unlike the Flexible Strategy Fund, the Global Strategy Focus Fund may
engage in transactions in futures contracts, options on futures contracts,
forward foreign exchange contracts, currency options and options on portfolio
securities and on stock indexes only for hedging purposes and not for
speculation. Additionally, the Global Strategy Focus Fund may write call
options on stock indexes for the purpose of achieving, through receipt of
premium income, a greater average total return than it would otherwise realize
from holding portfolio securities alone. There can be no assurance that the
objective sought to be realized through the use of the foregoing instruments
will be achieved. The Global Strategy Focus Fund's use of such instruments may
be limited by certain Code requirements for qualification of such Fund for the
favorable tax treatment afforded investment companies. There can be no
assurance that the Global Strategy Focus Fund's hedging transactions will be
effective. Furthermore, the Global Strategy Focus Fund will only engage in
hedging activities from time to time and will not necessarily engage in hedging
transactions in all the markets in which it may be invested in any given time.
The foregoing investment strategies and their use by the Global Strategy Focus
Fund are subject to special risks which are discussed under the heading
"Transactions in Options, Futures and Currency-Restrictions on Use of Futures
Transactions" in Annex A to Appendix C of this Proxy Statement--Prospectus.
ADDITIONAL RISKS ASSOCIATED WITH THE WORLD INCOME FOCUS FUND
AND THE GLOBAL STRATEGY FOCUS FUND
The Flexible Strategy Fund has, as a matter of operating policy, limited
its investment in foreign issuers to no more than 25% of its total assets. The
Global Strategy Focus Fund has no similar limitation. As a result, the Global
Strategy Focus Fund may invest a greater percentage of its assets in non-U.S.
securities than the Flexible Strategy Fund, and investing on an international
basis involves special considerations. Each of the International Bond Fund and
the World Income Focus Fund is not limited in the amount of assets that it may
invest in foreign securities, and the risks associated with an investment in
each Fund (as discussed below) are similar with respect to each such Fund's
investment in foreign securities and sovereign debt.
FOREIGN SECURITIES. Each of the Global Strategy Focus and World Income
Focus Funds may invest in securities of foreign issuers. Investments in
foreign securities, particularly those of non-governmental issuers, involve
7<PAGE>
<PAGE>
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 the particular Fund. The Global Strategy Focus Fund may
concentrate its investments in any particular country. The Global Strategy
Focus and World Income Focus Funds may from time to time be substantially
invested in non-dollar-denominated securities of foreign issuers. A Fund's
return on investments in non-dollar-denominated securities may be reduced or
enhanced as a result of changes in foreign currency rates during the period in
which the Fund holds such investments. Changes in foreign currency exchange
rates may affect the value of securities in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Foreign currency exchange rates are determined by forces of
supply and demand in the foreign exchange markets. These forces are, in turn,
affected by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With
respect to certain countries, there may be the possibility of expropriation of
assets, confiscatory taxation, high rates of inflation, political or social
instability or diplomatic developments which could affect investment in those
countries. In addition, certain foreign investments may be subject to foreign
withholding taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As
a result, traditional investment measurements, such as price/earnings ratios,
as used in the Untied States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than Untied States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in a Fund incurring additional costs and delays in
transporting and custodying such securities outside such countries. Delays in
settlement could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
8<PAGE>
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intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. There is generally less government supervision and
regulation of exchanges, brokers and issuers in countries having smaller
capital markets than there is in the United States.
As a result, management of a Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular country. A Fund may invest in countries
in which foreign investors, including management of the Fund, have had no or
limited prior experience.
SOVEREIGN DEBT. The Global Strategy Focus and World Income Focus Funds
may invest in debt securities issued by foreign governments. Investments in
foreign government debt securities involve special risks. The governmental
entity that controls the repayment of sovereign debt may not be able or willing
to repay the principal and/or interest when due in accordance with the terms of
such debt. A governmental entity's willingness or ability to repay principal
and interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the availability
of sufficient foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the governmental entity's
policy towards the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to timely service its debts.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country.
Holders of sovereign debt, including the Global Strategy Focus Fund and
the World Income Focus Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
In the event of a default by a governmental entity, there may be few or no
effective legal remedies available to a Fund, and there can be no assurance a
Fund will be able to collect on defaulted sovereign debt in whole or in part.
OTHER RISKS. In some countries, banks or other financial institutions may
constitute a substantial number of the leading companies or the companies with
the most actively traded securities. Also, the Investment Company Act
restricts a Fund's investments in any equity security of an issuer which, in
its most recent fiscal year, derived more than 15% of its revenues from
"securities related activities," as defined by the rules thereunder. These
provisions may also restrict a Fund's investments in certain foreign banks and
other financial institutions.
9<PAGE>
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THE COMPANY
Merrill Lynch Variable Series Funds, Inc. is an open-end management
investment company which has a wide range of investment objectives among its
seventeen separate Funds. A separate class of common stock is issued for each
Fund. Appendix A contains a list of each Fund of the Company as well as the
number of shares outstanding of each of its Funds on the Record Date.
Appendix A also indicates the number of shares owned by each person who owned
5% or more of the outstanding shares of a Fund on such date.
The shares of the Company are sold only to separate accounts of certain
insurance companies (the "Insurance Companies"), including Merrill Lynch Life
Insurance Company and ML Life Insurance Company of New York, or to Insurance
Companies directly, in connection with variable annuity contracts and/or
variable life insurance contracts (the "Contracts") issued by such companies.
In accordance with their view of, and to the extent required by present
applicable law and interpretations thereof, the Insurance Companies generally
will vote the shares of the Funds held in such separate accounts based on the
instructions timely received from owners of the Contracts (the "Contract
Owners") having a voting interest in the shares to be voted. Each Insurance
Company generally will also vote shares of a Fund held in such separate
accounts for which no voting instructions from Contract Owners are timely
received, as well as shares of the Funds which such Insurance Company owns
directly, in the same proportion as those shares of a Fund for which voting
instructions from Contract Owners are timely received. In connection with the
solicitation of such instructions from Contract Owners, it is expected that the
Insurance Companies will furnish a copy of this Proxy Statement--Prospectus to
Contract Owners.
The rights of the Insurance Companies as stockholders should be
distinguished from the rights of a Contract Owner, which are set forth in the
Contract. A Contract Owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the prospectus for each
Contract. That prospectus describes the relationship between increases or
decreases in the net asset value of shares of a Fund, and any distributions on
such shares, and the benefits provided under a Contract. The prospectus for
the Contracts also describes various fees payable to the Insurance Companies
and charges to the separate accounts made by the Insurance Companies with
respect to the Contracts. Because shares of the Funds will be sold only to the
Insurance Companies, the terms "stockholder" and "stockholders" in this Proxy
Statement--Prospectus refer to the Insurance Companies.
THE MEETING
GENERAL
This Proxy Statement--Prospectus is being furnished to the stockholders of
the Company in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the Company's outstanding shares of
common stock for use at an Annual Meeting of Stockholders of the Company (the
"Meeting") to be held at the offices of Merrill Lynch Asset Management, L.P.
("MLAM" or the "Investment Adviser"), 800 Scudders Mill Road, Plainsboro, New
Jersey, on Monday, October 11, 1996, at 9:00 a.m., and at any and all
adjournments thereof. The cost of printing and mailing the enclosed proxy,
accompanying notice and Proxy Statement--Prospectus to Contract Owners will be
paid by the Insurance Companies, and all other costs will be paid by the
Company. Additional solicitation may be made by letter, telephone or telegraph
by officers of the Company, by officers or employees of Merrill Lynch & Co. or
MLAM, or by dealers and their representatives.
10<PAGE>
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The Board of Directors of the Company has fixed the close of business on
August 12, 1996 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Meeting and at any
adjournment thereof. Stockholders on the Record Date will be entitled to one
vote for each share held and a fractional vote for each fractional share held,
with no shares having cumulative voting rights.
This Proxy Statement--Prospectus is first being mailed to stockholders of
the Funds on or about August [ ], 1996.
VOTING; PROXIES
All properly marked proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted "FOR" election of the Board of Directors, "FOR" the ratification of
the selection of Deloitte & Touche LLP to serve as independent auditors for the
Company's current fiscal year, "FOR" the proposal to amend the fundamental
investment restrictions of each of the Company's Funds other than the Merrill
Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets Fund, "FOR"
the proposal to amend the investment objective of the Merrill Lynch
Intermediate Government Bond Fund and to change the name of that Fund, "FOR"
the proposal to amend the investment objective of the Merrill Lynch World
Income Focus Fund and to change the name of that Fund, "FOR" the proposal to
approve the Agreement and Plan of Reorganization between the Company's Merrill
Lynch International Bond Fund and its Merrill Lynch World Income Focus Fund and
an Amendment to the Articles in connection therewith, and "FOR" the proposal to
approve the Agreement and Plan of Reorganization between the Company's Merrill
Lynch Flexible Strategy Fund and its Merrill Lynch Global Strategy Focus Fund
and an Amendment to the Articles in connection therewith.
ALL STOCKHOLDERS WILL BE PERMITTED TO VOTE ON PROPOSALS 1 AND 2. WITH
RESPECT TO EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY HOLDERS OF SHARES OF THE
FUNDS AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO VOTE ON SUCH PROPOSALS.
A quorum of stockholders is required to take action at the Meeting. A
majority of the shares entitled to vote at the Meeting, represented in person
or by proxy, will constitute a quorum of stockholders at that Meeting. Votes
cast by proxy or in person at the Meeting will be tabulated by the inspectors
of elections appointed for the Meeting. The inspectors of election will
determine whether or not a quorum is present at the Meeting. The inspectors of
election will treat abstentions as shares that are present and entitled to vote
for purposes of determining a quorum.
For purposes of determining the approval of the matters submitted to the
stockholders for a vote, an abstention with respect to a proposal (except
Proposal No. 1) will be treated as a vote against approval of such proposal.
The details of each proposal to be voted on by the stockholders and the vote
required for approval of each proposal are set forth under the description of
each proposal below. Stockholders who execute proxies may revoke them at any
time before they are voted by filing with the Company a written notice of
revocation, by delivering a duly executed proxy bearing a later date, or by
attending the meeting and voting in person.
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PROPOSAL NO. 1 - ELECTION OF DIRECTORS
At the Meeting, each Board member will be elected to serve for an
indefinite term until his successor is elected and qualified, until his death,
until he resigns or its otherwise removed under the charter or until December
31 of the year in which he reaches age 72. It is the intention of the persons
named in the enclosed proxy to nominate and vote in favor of the election of
the persons listed below.
The Board knows of no reason why any of these nominees will be unable to
serve, but in the event of any such unavailability, the proxies received will
be voted for such substitute nominee or nominees as the Board may recommend.
Certain information concerning the nominees is set forth as follows:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
PRINCIPAL OCCUPATIONS OF THE COMPANY
NAME AND ADDRESS DURING PAST FIVE YEARS DIRECTOR BENEFICIALLY OWNED AT
OF NOMINEES AGE AND PUBLIC DIRECTORSHIPS SINCE AUGUST 12, 1996
- ------------------------ ----- -------------------------------------- -------- -----------------------
<S> <C> <C> <C> <C>
Arthur Zeikel(1) 64 President of MLAM and Fund Asset 1981
P.O. Box 9011 Management, Inc. ("FAM") since 1977;
Princeton, New Jersey President and Director of Princeton
08543-9011 Services, Inc. ("Princeton Services")
since 1993; Executive Vice President
of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990; Director of Merrill
Lynch Funds Distributor, Inc.
("MLFD").
Joe Grills(2) 61 Member of the Committee of Investment 1994
183 Soundview Lane of Employee Benefit Assets of the
New Canaan, Connecticut Financial Executives Institute
06840 ("CIEBA") since 1986, member of
CIEBA's Executive Committee since
1988 and its Chairman from 1991 to
1992; Assistant Treasurer of
International Business Machines
Incorporated ("IBM") and Chief
Investment Officer of IBM Retirement
Funds from 1986 until 1993; Member of
the Investment Advisory Committee of
the State of New York Common
Retirement Fund; Director Duke
Management Company and LaSalle Street
Fund.
Walter Mintz(2) 67 Special Limited Partner of Cumberland 1993
1114 Avenue of the Americas Partners (investment partnership) since
New York, New York 10036 1982.
</TABLE>
12<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
PRINCIPAL OCCUPATIONS OF THE COMPANY
NAME AND ADDRESS DURING PAST FIVE YEARS DIRECTOR BENEFICIALLY OWNED AT
OF NOMINEES AGE AND PUBLIC DIRECTORSHIPS SINCE AUGUST 12, 1996
- ------------------------ ----- -------------------------------------- -------- -----------------------
<S> <C> <C> <C> <C>
Melvin R. Seiden(2) 65 President of Silbanc Properties, Ltd. 1993
780 Third Avenue (real estate, consulting and
New York, New York 10017 investments) since 1987; Chairman and
President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964
to 1987.
Robert S. Salomon, Jr.(2) 59 Principal of STI Management (investment 1996
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.
Stephen B. Swensrud(2) 62 Principal of Fernwood Associates 1981
24 Federal Street (financial consultants).
Boston, Massachusetts 02110
<FN>
(1) Interested person, as defined in the Investment Company Act, of the Company.
(2) Member of Audit and Nominating Committee of the Board of Directors.
</TABLE>
COMMITTEES AND BOARD OF DIRECTORS' MEETINGS. The Board has a standing
Audit and Nominating Committee (the "Committee"), which consists of the Board
members who are not "interested persons" of the Company within the meaning of
the Investment Company Act. The principal purpose of the Committee is to
review the scope of the annual audit conducted by the Company's independent
auditors and the evaluation by such auditors of the accounting procedures
followed by the Company. The Committee will also select and nominate the Board
members who are not "interested persons" of the Company within the meaning of
the Investment Company Act. The Committee generally will not consider nominees
recommended by stockholders of the Company. The non-interested Board members
have retained independent legal counsel to assist them in connection with these
duties.
During the Company's last fiscal year, each of the nominees served as a
Board member of the Company, except Mr. Salomon. During the Company's last
fiscal year, the Board of Directors held four meetings. Each of the Board
members attended at least 75% of the aggregate of (i) the total number of
meetings of the Board held during the last fiscal year and (ii) if a member,
the total number of meetings of the Committee held during the last fiscal year.
INTERESTED PERSONS. The Fund considers Mr. Zeikel to be an "interested
person" of the Fund within the meaning of Section 2(a)(19) of the Investment
Company Act as a result of the position he holds with MLAM and its affiliates.
Mr. Zeikel is the President of the Company and the President of MLAM and FAM.
13<PAGE>
<PAGE>
COMPENSATION OF DIRECTORS. MLAM, the investment adviser for each of the
Funds of the Company, pays all compensation of all officers of the Company and
all Directors of the Company who are affiliated with ML & Co. or its
subsidiaries. The Company pays each Director not affiliated with ML & Co. or
its subsidiaries a fee of $5,000 per year plus $1,250 per quarterly meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Company also pays each member of its Audit
Committee a fee of $5,000 per year plus $1,250 per meeting attended if such
meeting is held on a day other than a day on which the Board of Directors
meets, together with such Director's out-of-pocket expenses relating to
attendance at meetings. These fees and expenses aggregated $79,458 for the
fiscal year ended December 31, 1995.
The following table sets forth for the fiscal year ended December 31,
1995, compensation paid by the Company 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 MLAM and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors:
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
PENSION OR RETIREMENT COMPANY AND
AGGREGATE COMPENSATION BENEFITS ACCRUED AS MLAM/FAM ADVISED
NAME OF DIRECTOR FROM COMPANY PART OF COMPANY EXPENSE FUNDS PAID TO DIRECTORS(1)
- --------------------------- ---------------------- ----------------------- --------------------------
<S> <C> <C> <C>
Joe Grills(1)(2) $15,500 NONE $153,883
Walter Mintz(1) 15,500 NONE 153,883
Robert S. Salomon, Jr.(1) -0- NONE -0-
Melvin R. Seiden(1) 15,500 NONE 153,883
Stephen B. Swensrud(1) 15,500 NONE 161,883
Harry Woolf*(1) 15,500 NONE 153,883
<FN>
- --------------------
* Mr. Woolf retired as a Director of the Company on December 31, 1995.
(1) In addition to the Company, the Directors serve on the boards of other MLAM/FAM Advised Funds as follows:
Mr. Mintz (21 funds and portfolios); Mr. Seiden (37 funds and portfolios); Mr. Salomon (37 funds and portfolios);
Mr. Swensrud (47 funds and portfolios); [Mr. Grills (37 funds and portfolios)]; and Mr. Woolf prior to his
retirement, effective December 31, 1995, pursuant to the Fund's retirement policy (33 funds and portfolios).
(2) Mr. Salomon was elected a Director of the Company on January 17, 1996.
</TABLE>
OFFICERS OF THE COMPANY. The Board of Directors has elected twenty
officers of the Company. The following sets forth information concerning each
of these officers:
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- ----------------------------- ------ --- -------
<S> <C> <C> <C>
Arthur Zeikel President 64 1986
President of MLAM and FAM since 1977; President and
Director of Princeton Services since 1993;
Executive Vice President of ML&Co. since 1990;
Director of MLFD.
Terry K. Glenn Executive Vice President 55 1986
Executive Vice President of MLAM and FAM since
1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD
since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P.
since 1988.
</TABLE>
14<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- ----------------------------- ------ --- -------
<S> <C> <C> <C>
Norman R. Harvey Senior Vice President 62 1986
Senior Vice President of MLAM and FAM since 1982.
N. John Hewitt Senior Vice President 61 1986
Senior Vice President of MLAM and FAM since 1980.
Joseph T. Monagle, Jr. Senior Vice President 47 1990
Senior Vice President of MLAM since 1990; Vice
President of MLAM from 1978 to 1990.
Christopher G. Ayoub Vice President 40 1992
Vice President of MLAM since 1985.
Andrew John Bascand Vice President 33 1993
Director of Merrill Lynch Asset Management U.K.
Limited since 1993 and Director of Merrill Lynch
Global Asset Management Limited since 1994;
Senior Economist of A.M.P. Asset Management plc
in London from 1992 to 1993 and Chief Economist
of A.M.P. Investments (NZ) in New Zealand from
1989 to 1991; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand
from 1987 to 1989.
Donald C. Burke Vice President 35 1990
Vice President of MLAM since 1990.
Jay C. Harbeck Vice President 61 1992
Vice President of MLAM since 1986.
Vincent T. Lathbury, III Vice President 54 1993
Vice President of MLAM and FAM since 1982.
Peter A. Lehman Vice President 37 1994
Vice President of MLAM since 1994 and employee of
MLAM since 1992.
Fredric Lutcher Vice President 47 1990
Vice President of MLAM since 1990 and Portfolio
Manager since 1989; Senior Vice President,
Lazard Freres Asset Management, Inc. from 1988
to 1989; Director, E. F. Hutton Capital
Management, Inc. from 1981 to 1988.
Robert Parish Vice President 40 1993
Vice President and Portfolio Manager of MLAM since
1991; Portfolio Manager of Templeton
International from 1986 to 1991 and Vice
President thereof from 1989.
Grace Pineda Vice President 38 1993
Vice President of MLAM since 1989.
</TABLE>
15<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- ----------------------------- ------ --- -------
<S> <C> <C> <C>
Kevin Rendino Vice President 29 1993
Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst
from 1988 to 1990.
Thomas R. Robinson Vice President 52 1995
Senior Portfolio Manager of MLAM since November
1995; Manager of International Equity Strategy
of ML & Co.'s Global Securities Research and
Economics Group from 1989 to 1995.
Walter D. Rogers Vice President 53 1993
Vice President of MLAM since 1987.
Aldona A. Schwartz Vice President 47 1993
Vice President of MLAM since 1991 and an employee
of MLAM since 1986.
Gerald M. Richard Treasurer 46 1986
Senior Vice President and Treasurer of MLAM and FAM
since 1984 and Vice President since 1981;
Treasurer of MLFD since 1984 and Vice President
since 1981; Senior Vice President and Treasurer
of Princeton Administrators, Inc. since 1988.
Ira P. Shapiro Secretary 33 1996
Attorney associated with MLAM and FAM since 1993.
</TABLE>
STOCK OWNERSHIP. [As of the Record Date, the Directors and officers of
the Company as a group owned no shares of Common Stock of the Company
outstanding at such date.]
VOTING. The election of the six nominees requires the affirmative vote of
a majority of the votes cast at a meeting at which a quorum is present. Under
the Company's By-laws, the presence in person or by proxy of stockholders
entitled to cast a majority of the votes entitled to be cast thereat shall
constitute a quorum. For this purpose, abstentions and broker non-votes will
be counted in determining whether a quorum is present at the Meeting, but will
not be counted as votes cast at the Meeting. ALL OF THE STOCKHOLDERS OF THE
COMPANY ON THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON THIS PROPOSAL.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
PROPOSAL NO. 2 - SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of the Company, including a majority of the
Directors who are not interested persons of the Company, has selected the firm
of Deloitte & Touche LLP ("D&T"), Independent Auditors, to examine the
financial statements of the Company for the current fiscal year. The Company
knows of no direct or indirect financial interest of D&T in the Company. Such
16<PAGE>
<PAGE>
appointment is subject to ratification or rejection by the stockholders of the
Company. Unless a contrary specification is made, the accompanying proxy will
be voted in favor of ratifying the selection of such auditors.
D&T also acts as independent auditors for ML & Co. and all of its
subsidiaries and for most other investment companies for which MLAM or FAM acts
as investment adviser. The fees received by D&T from these other entities are
substantially greater, in the aggregate, than the total fees received by it
from the Company. The Board of Directors of the Company considered the fact
that D&T has been retained as the independent auditors for ML & Co. and the
other entities described above in its evaluation of the independence of D&T
with respect to the Company.
Representatives of D&T are expected to be present at the meeting and will
have the opportunity to make a statement if they so desire and to respond to
questions from stockholders.
The ratification of the selection of D&T as independent accountants
requires the affirmative vote of a majority of the votes cast at a meeting at
which a quorum is present. For this purpose, abstentions and broker non-votes
will be counted in determining whether a quorum is present at the Meeting, but
will not be counted as votes cast at the Meeting. ALL OF THE STOCKHOLDERS OF
THE COMPANY ON THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON THIS PROPOSAL.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
PROPOSAL NO. 3 - AMENDMENT TO THE FUNDAMENTAL
INVESTMENT RESTRICTIONS OF EACH OF THE FUNDS
The Company has adopted investment restrictions that govern generally the
operations of each of its seventeen Funds. Investment restrictions applicable
to a Fund that are deemed fundamental may not be changed without a vote of the
outstanding shares of the Fund, while non-fundamental investment restrictions
may be changed by the Company's Board if it deems it in the best interest of
the Fund and its stockholders to do so. In addition to investment
restrictions, each of the Funds operates pursuant to investment objectives and
policies, described in the Company's Prospectus dated April 26, 1996 and
Statement of Additional Information dated April 26, 1996, that govern the
investment activities of the Fund and further limit its ability to invest in
certain types of securities or engage in certain types of transactions. These
investment objectives and policies will be unaffected by the adoption of the
proposed investment restrictions (but, for certain Funds, may be affected by
the adoption of other proposals contained in this Proxy Statement--Prospectus).
Generally the investment objective of a Fund is a fundamental policy of the
Fund that may be changed only by stockholder vote. The investment policies of
a Fund are non-fundamental and may not be changed unless and until (i) the
Board of Directors of the Company explicitly authorizes, by resolution, a
change in the investment policy of the Fund and (ii) the Prospectus of the Fund
is amended to reflect the change in policy and, if appropriate, to include
additional disclosure. Stockholders should note that certain of the proposed
fundamental investment restrictions are stated in terms of "to the extent
permitted by applicable law." Applicable law can change over time and may
become more or less restrictive as a result. The restrictions have been
drafted in this manner so that a change in law would not require the Fund to
seek a stockholder vote to amend the restriction to conform to applicable law,
as revised.
The existing investment restrictions may differ among Funds depending on
prevailing regulations and the nature of the securities markets at the time the
17<PAGE>
<PAGE>
particular Fund commenced operations. As a result, similar Funds have
different investment restrictions, which may disadvantage one Fund over another
in the current marketplace and make administration and compliance monitoring
unnecessarily difficult.
To address this problem, MLAM has analyzed the various fundamental and
non-fundamental investment restrictions of the Funds, as well as the investment
restrictions of all of the other MLAM-advised non-money market mutual funds, in
light of each Fund's investment objectives and policies, and has created a set
of standard fundamental and non-fundamental investment restrictions. The
proposed uniform restrictions are designed to provide each Fund with as much
investment flexibility as possible under the Investment Company Act and
applicable state insurance regulations, and to help promote operational
efficiencies and facilitate monitoring of compliance. Substantially all of the
MLAM/FAM Advised Funds operate under investment restrictions substantially
similar to the proposed restrictions.
The proposed changes to the investment restrictions are not expected to
affect materially the current operations of the Funds. Although adoption of
new or revised investment restrictions is not likely to have any effect on the
current investment techniques employed by a Fund, it will contribute to the
overall goal of uniformity and standardization, as well as provide each Fund
with a greater ability to make future changes in non-fundamental investment
restrictions through Board action. In this regard, the Board proposes that
each Fund adopt, as described below, the uniform, updated investment
restrictions.
The proposed restrictions restate many of the fundamental and non-
fundamental restrictions currently in effect for each Fund. In some instances,
certain fundamental or non-fundamental restrictions have been modified or
eliminated in accordance with developments in Federal regulations or in the
securities markets since the inception of the Fund. In other instances,
certain restrictions previously deemed fundamental have been redesignated
non-fundamental. Fundamental investment restrictions may not be changed
without a vote of the stockholders of the Fund, and the costs of stockholder
meetings for these purposes generally are borne by the Fund and its
stockholders. By making certain restrictions non-fundamental, the Board may
amend a restriction as it deems appropriate and in the best interest of the
Fund and its stockholders, without incurring the costs of seeking a stockholder
vote.
Each Fund's current investment restrictions are set forth in Appendix C.
Set forth below is each proposed restriction, followed by a commentary
describing the proposed restriction and detailing the significance, if any, of
the proposed changes for the Funds.
PROPOSED FUNDAMENTAL INVESTMENT RESTRICTIONS. The fundamental investment
restrictions discussed below are proposed for each of the Funds except the
Domestic Money Market and Reserve Assets Funds and except as otherwise noted
below. Under the proposed fundamental investment restrictions, a Fund may not:
18<PAGE>
<PAGE>
1. MAKE ANY INVESTMENT INCONSISTENT WITH THE FUND'S{1} CLASSIFICATION
AS A DIVERSIFIED COMPANY UNDER THE INVESTMENT COMPANY ACT.
Commentary: Current applicable law regarding diversification of assets
requires that with respect to 75% of its total assets, a Fund may not
invest more than 5% of its total assets (taken at market value at the time
of each investment) in the securities of any one issuer or acquire more
than 10% of the voting securities of any one issuer. The U.S. Government,
its agencies and instrumentalities are not included within the definition
of "issuer" for purposes of these limitations. Certain Funds apply this
diversification restriction to 100% of total assets.
At one time, state blue sky regulations applied the diversification
restriction to 100% of a mutual fund's assets, thereby prohibiting an
investment company from investing more than 5% of total assets in a single
issuer or from holding more than 10% of the voting securities of a single
issuer. These state blue sky limitations, however, have been eliminated.
If the uniform restrictions are approved, each Fund currently classified
as "diversified" would be subject, as a matter of investment policy, to
the diversification restriction described above only with respect to 75%
of its total assets. As to the remaining 25% of total assets, there would
be no fundamental investment limitation on the amount of (i) total assets
the Fund could invest in a single issuer or (ii) voting securities of a
single issuer that could be held by the Fund. A Fund could, for example,
invest up to 25% of its assets in a single issuer without limitation as to
the percentage ownership of that issuer's outstanding securities. The
primary purpose of the proposal is to give the Funds that presently have a
diversification restriction with respect to 100% of their assets the same
investment flexibility as MLAM Funds that have a diversification
restriction with respect to 75% of their assets, as well as to enable the
Funds to comply with any future changes in applicable law regarding
diversification requirements without incurring the costs of soliciting a
stockholder vote.
2. INVEST MORE THAN 25% OF ITS ASSETS, TAKEN AT MARKET VALUE, IN THE
SECURITIES OF ISSUERS IN ANY PARTICULAR INDUSTRY (EXCLUDING THE U.S. GOVERNMENT
AND ITS AGENCIES AND INSTRUMENTALITIES).{2}
- ------------------
{1} The Natural Resource Focus, Global Strategy Focus, World Income Focus,
Developing Capital Markets Focus and International Bond Funds are
classified as non-diversified investment companies under the
Investment Company Act, and therefore this restriction is not proposed
to be adopted by such Funds. In addition, the Code contains its own,
less restrictive, diversification requirements in order for a fund to
qualify as a "regulated investment company" under the Code. The
Natural Resource Focus, Global Strategy Focus, World Income Focus,
Developing Capital Markets Focus and International Bond Funds will
continue to comply with the Code diversification requirements.
{2} A Fund that concentrates in a particular industry (i.e., more than
25%) will continue to use its present concentration restriction. A
typical restriction in this regard reads as follows:
The Fund will not invest more than 25% of its assets, taken at
market value, in the securities of issuers in any particular
industry (excluding the U.S. Government, its agencies and
instrumentalities), except that, under normal circumstances, the
Fund will invest more than 25% of its total assets in the
securities of issuers in the {name of industry}.
19<PAGE>
<PAGE>
Commentary: The proposed restriction, which addresses concentration in a
particular industry, is in substance identical to the applicable
restriction in effect for each Fund. Certain Funds currently do not
exclude explicitly the U.S. Government, its agencies and instrumentalities
from the definition of "industry." However, such entities have not been
considered to constitute "industries" for purposes of concentration, and
therefore explicit reference to such entities in the proposed restriction
does not change a Fund's concentration policy. In addition, for purposes
of this restriction, states, municipalities and their political
subdivisions are not considered to be part of any industry.
3. MAKE INVESTMENTS FOR THE PURPOSE OF EXERCISING CONTROL OR
MANAGEMENT.
Commentary: The proposed restriction is in substance identical to the
applicable restriction in effect for each Fund. The Developing Capital
Markets Focus Fund goes on to state in this restriction that investment by
the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed the making of investments for the
purpose of exercising control or management. This language, which is
considered by the Fund to be explanatory in nature, will continue to be
set forth in the investment restrictions.
4. PURCHASE OR SELL REAL ESTATE, EXCEPT THAT A FUND MAY INVEST IN
SECURITIES DIRECTLY OR INDIRECTLY SECURED BY REAL ESTATE OR INTERESTS THEREIN
OR ISSUED BY COMPANIES WHICH INVEST IN REAL ESTATE OR INTERESTS THEREIN.
Commentary: The proposed restriction is substantially similar to the
applicable restriction in effect for each Fund. Under the proposed
uniform restrictions, investment in real estate limited partnerships is
prohibited in non-fundamental investment restriction (g) to provide the
flexibility to the Board to modify the restriction in response to future
changes in applicable law without incurring the expense of a stockholder
vote.
5. MAKE LOANS TO OTHER PERSONS, EXCEPT THAT THE ACQUISITION OF BONDS,
DEBENTURES OR OTHER CORPORATE DEBT SECURITIES AND INVESTMENT IN GOVERNMENT
OBLIGATIONS, COMMERCIAL PAPER, PASS-THROUGH INSTRUMENTS, CERTIFICATES OF
DEPOSIT, BANKERS ACCEPTANCES, REPURCHASE AGREEMENTS OR ANY SIMILAR INSTRUMENTS
SHALL NOT BE DEEMED TO BE THE MAKING OF A LOAN, AND EXCEPT FURTHER THAT THE
FUND MAY LEND ITS PORTFOLIO SECURITIES, PROVIDED THAT THE LENDING OF PORTFOLIO
SECURITIES MAY BE MADE ONLY IN ACCORDANCE WITH APPLICABLE LAW AND THE
GUIDELINES SET FORTH IN THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION,
AS THEY MAY BE AMENDED FROM TIME TO TIME.
- --------------------
None of the Funds concentrate in a particular industry. However, the
Global Utility Focus Fund invests, under normal circumstances, 65% or
more of its total assets in equity and debt securities issued by
domestic and foreign companies in the utilities industries (I.E.,
electricity, telecommunications, gas or water), and the Natural
Resources Focus Fund may invest greater than 25% of its assets in
gold-related companies.
20<PAGE>
<PAGE>
Commentary: The proposed restriction, with respect to the making of
loans, is in substance similar to the applicable restrictions in effect
for each Fund. Certain Funds address loans to other persons and
securities lending in two separate restrictions. A Fund may, as an
investment policy, restrict investment in the instruments specifically
permitted in the exception beyond the limitations set forth in the
proposed restriction.
Each Fund is permitted to engage in securities lending but the Funds have
a variety of different investment restrictions in this regard. For
example, certain Funds have a fundamental investment restriction limiting
securities lending to less than 20% of total assets. In addition to
investment restrictions, certain Funds have imposed limitations on
securities lending as an investment policy.
Applicable law generally permits the lending of a Fund's portfolio
securities in an amount up to 33 1/3 % of the Fund's total assets,
provided that such loans are made in accordance with prescribed guidelines
which are set forth in the Company's Statement of Additional Information.
Each Fund will continue to be subject to the lending limitations set forth
as an investment policy in the Prospectus and Statement of Additional
Information following approval of the proposed uniform investment
restrictions, unless and until the Board determines that an amendment to
such investment policy is in the best interest of the Fund and its
stockholders and the Prospectus of the Fund is amended.
6. ISSUE SENIOR SECURITIES TO THE EXTENT SUCH ISSUANCE WOULD VIOLATE
APPLICABLE LAW.
Commentary: Certain Funds currently limit the extent to which the Fund
may issue senior securities, while other Funds have no restriction on the
issuance of senior securities. The proposed restriction substitutes
instead a limitation on the issuance of senior securities based upon
applicable law.
Applicable law currently prohibits the issuance of senior securities,
defined as any bond, debenture, note or similar obligation or instrument
evidencing indebtedness, and any stock of any class having priority as to
any other class as to distribution of assets or payment of dividends, but
not including (i) bank borrowings provided that immediately thereafter the
Fund has 300% asset coverage for all borrowings, or (ii) any note or other
evidence of indebtedness representing a loan made to the Fund for
temporary purposes (I.E., to be repaid in 60 days without extension or
renewal) in an amount not exceeding 5% of the Fund's total assets when the
loan is made.
Certain other investment techniques, which involve leverage or establish a
prior claim to the Fund's assets, may be considered senior securities,
absent appropriate segregation of assets or exemptive relief. These
techniques include standby commitment agreements, contracts for the
purchase of securities on a delayed delivery basis (I.E., firm commitment
agreements), reverse repurchase agreements, engaging in financial futures
and options thereon, forward foreign currency contracts, put and call
options, the purchase of securities on a when-issued basis and short
sales. The manner and extent to which a Fund can issue senior securities
is governed by applicable law, must be set forth in the Prospectus and
Statement of Additional Information and may be changed only upon
resolution of the Board.
Investments in swaps, to the extent permitted, are not treated as senior
securities so long as the Fund segregates high-grade liquid debt
securities with the Fund's custodian in an amount equal to any net
payments required to be made on the swaps.
21<PAGE>
<PAGE>
7. BORROW MONEY, EXCEPT THAT (I) THE FUND MAY BORROW FROM BANKS (AS
DEFINED IN THE INVESTMENT COMPANY ACT) IN AMOUNTS UP TO 33 1/3% OF ITS TOTAL
ASSETS (INCLUDING THE AMOUNT BORROWED), (II) THE FUND MAY BORROW UP TO AN
ADDITIONAL 5% OF ITS TOTAL ASSETS FOR TEMPORARY PURPOSES, (III) THE FUND MAY
OBTAIN SUCH SHORT-TERM CREDIT AS MAY BE NECESSARY FOR THE CLEARANCE OF
PURCHASES AND SALES OF PORTFOLIO SECURITIES AND (IV) THE FUND MAY PURCHASE
SECURITIES ON MARGIN TO THE EXTENT PERMITTED BY APPLICABLE LAW. THE FUND MAY
NOT PLEDGE ITS ASSETS OTHER THAN TO SECURE SUCH BORROWINGS OR, TO THE EXTENT
PERMITTED BY THE FUND'S INVESTMENT POLICIES AS SET FORTH IN THE PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM TIME TO TIME,
IN CONNECTION WITH HEDGING TRANSACTIONS, SHORT SALES, WHEN-ISSUED AND FORWARD
COMMITMENT TRANSACTIONS AND SIMILAR INVESTMENT STRATEGIES.
Commentary: Each Fund has one or more express limitations on various
forms of borrowing, a number of which are more restrictive than the
limitations set forth in the proposed restriction. For example, a number
of Funds limit borrowings to 5% of total assets. To the extent the Fund's
investment policies, as stated in the Prospectus and Statement of
Additional Information, include a limitation on borrowing, or on the
pledging of assets to secure borrowings, that is more restrictive than the
restrictions in proposed restriction (7), the Fund will continue to be
limited by such investment policy on a non-fundamental basis. Moreover,
if a Fund intends to borrow from a bank or to offer debt securities
privately as part of its investment policies, it will so state in its
Prospectus. If the Fund limits borrowing to 5% of total assets, a
statement to that effect in the Prospectus will suffice. On the other
hand, if the Fund intends as an investment policy to engage in a higher
level of borrowing for investment purposes, additional disclosure with
respect to the purposes of such borrowing and the consequences of leverage
will be included in the Prospectus and Statement of Additional
Information.
With regard to purchases on margin, under current applicable law, a Fund
may not establish or use a margin account with a broker for the purpose of
effecting securities transactions on margin, except that a Fund may obtain
such short term credit as necessary for the clearance of transactions.
However, a Fund may pay initial or variation margin in connection with
futures and related options transactions, as set forth in investment
restriction (9) below, without regard to this prohibition.
8. UNDERWRITE SECURITIES OF OTHER ISSUERS EXCEPT INSOFAR AS THE FUND
TECHNICALLY MAY BE DEEMED AN UNDERWRITER UNDER THE SECURITIES ACT OF 1933 IN
SELLING PORTFOLIO SECURITIES.
Commentary: The proposed restriction is in substance identical to the
applicable restriction in effect for each Fund.
9. PURCHASE OR SELL COMMODITIES OR CONTRACTS ON COMMODITIES, EXCEPT TO
THE EXTENT THE FUND MAY DO SO IN ACCORDANCE WITH APPLICABLE LAW AND THE
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM
TIME TO TIME, AND WITHOUT REGISTERING AS A COMMODITY POOL OPERATOR UNDER THE
COMMODITY EXCHANGE ACT.
Commentary: Certain Funds prohibit investment in commodities; others have
no restriction on investment in commodities. Under the Investment Company
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Act, a Fund must state its policy relating to the purchase and sale of
commodities. In general, the Funds currently do not anticipate investment
directly in tangible commodities other than currency and would be greatly
restricted from making such direct investments by the current provisions
of the Federal tax laws; however, the Funds may invest in financial
instruments linked to commodities as described below. Adoption of the
proposed uniform restrictions will enable a Fund to invest in commodities
only in accordance with applicable law and with the Fund's investment
policies as stated in the Prospectus and Statement of Additional
Information.
The Company has obtained an exemptive order from the Commission which,
among other things, permits investment in the commodities markets to the
extent such investment is limited to financial futures and options thereon
for hedging purposes only. The terms of the exemptive order are slightly
more restrictive than currently applicable law.
Regulations of the Commodity Futures Trading Commission applicable to the
Funds provide that futures trading activities, as described in the
Prospectus and Statement of Additional Information, will not result in the
Fund being deemed a "commodity pool operator" as defined under such
regulations if the Fund adheres to certain restrictions. In particular, a
Fund that may, as a matter of investment policy, purchase and sell futures
contracts and options thereon may do so (i) for bona fide hedging purposes
and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options do
not exceed 5% of the liquidation value of such Fund's portfolio, after
taking into account unrealized profits and unrealized losses on any such
contracts and options. In addition, certain of the Funds may invest in
securities whose potential investment returns are based on the change in
value of specific commodities.
--------------------
If approved by the stockholders, the above-listed restrictions will
replace the fundamental investment restrictions for each Fund (other than for
the Domestic Money Market and Reserve Assets Funds) and, accordingly, will
become the only fundamental investment restrictions under which each such Fund
will operate. If approved, the above restrictions may not be changed without
the approval of the holders of a majority of a Fund's outstanding shares (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares). PERSONS WHO ARE STOCKHOLDERS OF EACH FUND (EXCEPT THE DOMESTIC MONEY
MARKET AND RESERVE ASSETS FUNDS) ON THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON
AMENDING THE INVESTMENT RESTRICTIONS, AS DESCRIBED HEREIN, AS A SEPARATE FUND.
Unless the Board of Directors determines otherwise, it is anticipated that this
proposal, if approved by the stockholders of the Funds, will be implemented on
the Effective Date (as defined under the heading "Proposal No. 6 and Proposal
No. 7 - The Reorganizations") of the Reorganizations.
PROPOSED NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Board has adopted
the following non-fundamental investment restrictions, subject to approval of
the fundamental investment restrictions described above. Certain of the
proposed non-fundamental restrictions are in substance similar or identical to
current fundamental investment restrictions. Redesignating a restriction as
non-fundamental allows the Board the flexibility to modify the restriction in
response to changes in the securities markets or applicable law if the Board
deems it in the best interest of the Fund and its stockholders to do so.
Although future modification of a non-fundamental investment restriction would
not require a stockholder vote, modification of these restrictions would
require both (i) authorization by resolution by the Board and (ii) amendment of
the Fund's Prospectus.
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Under the proposed non-fundamental investment restrictions, each Fund may
not:
A. PURCHASE SECURITIES OF OTHER INVESTMENT COMPANIES, EXCEPT TO THE
EXTENT SUCH PURCHASES ARE PERMITTED BY APPLICABLE LAW.
Commentary: Each of the Funds currently states a restriction relating to
securities of other investment companies as a fundamental, rather than a
non-fundamental, restriction. In addition, a number of the restrictions
currently in effect set forth specifically the applicable law. Applicable
law currently allows a Fund to purchase the securities of other investment
companies if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the
total outstanding stock of any one closed-end investment company.
Certain Funds have excepted from the prohibition on purchases of
securities of other investment companies purchases made in connection with
a plan of merger, consolidation, reorganization, or acquisition, or
purchases made in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than the customary broker's commission, is involved. This exception is
not required and has therefore been deleted from the proposed restriction.
B. MAKE SHORT SALES OF SECURITIES OR MAINTAIN A SHORT POSITION EXCEPT
TO THE EXTENT PERMITTED BY APPLICABLE LAW.
Commentary: In a short sale, an investor sells a borrowed security and
has a corresponding obligation to "cover" by delivering at a later date
the identical security. In a short sale "against the box," an investor
sells the securities short while either owning the same securities in the
same amount or having the right to obtain securities to cover through, for
example, the investor's ownership of warrants, options, or convertible
securities. Certain Funds currently prohibit short sales under any
circumstances; others are specifically authorized to engage in short sales
in forward currency contracts, options, futures contracts and options on
futures contracts.
Under current applicable law, short sales are considered to involve the
creation of senior securities. A Fund that includes short sales in its
investment policies must secure its obligation to replace the borrowed
security by depositing collateral in a segregated account in compliance
with Commission guidelines.
Short sales "against the box" are not considered speculative sales and do
not create senior securities. Funds that are not specifically authorized
to engage in short sales "against the box" have not considered short sales
"against the box" to be short sales for purposes of their investment
restrictions.
The majority of the Funds, as a matter of investment policy, do not enter
into short sales of any kind. If the proposed investment restrictions are
adopted, the Funds that currently are authorized to make short sales will
continue to have that ability within the confines of applicable law; the
Funds that are not currently authorized to make short sales will not make
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<PAGE.
short sales unless and until such policy is amended by resolution of the
Board and the Prospectus is amended. However, short sales "against the
box" will continue to be authorized to the extent permitted under
applicable law.
C. INVEST IN SECURITIES WHICH CANNOT BE READILY RESOLD BECAUSE OF LEGAL
OR CONTRACTUAL RESTRICTIONS OR WHICH CANNOT OTHERWISE BE MARKETED, REDEEMED OR
PUT TO THE ISSUER OR A THIRD PARTY, IF AT THE TIME OF ACQUISITION MORE THAN 15%
OF ITS TOTAL ASSETS WOULD BE INVESTED IN SUCH SECURITIES. THIS RESTRICTION
SHALL NOT APPLY TO SECURITIES WHICH MATURE WITHIN SEVEN DAYS OR SECURITIES
WHICH THE BOARD OF DIRECTORS HAS OTHERWISE DETERMINED TO BE LIQUID PURSUANT TO
APPLICABLE LAW.
Commentary: Certain Funds limit investment in restricted and illiquid
securities to 5% or 10% of Fund assets. Under the Investment Company Act,
open-end investment companies are required to determine net asset value
and offer redemption on a daily basis with payment to follow within seven
days. In order to ensure that adequate cash is available at all times to
cover redemptions, a Fund is required to limit its investments in
securities deemed illiquid to 15% of the Fund's net assets.
Under current applicable law, an illiquid asset is any asset which may not
be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which a Fund has valued the investment.
The types of securities that will be considered illiquid will vary over
time based on changing market conditions and regulatory interpretations.
Under current Commission interpretations, a Fund may purchase, without
regard to the foregoing limitation, securities which are not registered
under the Securities Act of 1933, as amended (the "Securities Act"),
provided that they are determined to be liquid pursuant to guidelines and
procedures established by the Board. Included among such securities are
foreign securities traded in a foreign securities market and securities
which can be offered and sold to "qualified institutional buyers," as
defined in Rule 144A under the Securities Act ("Rule 144A Securities").
The Funds are currently permitted to invest in Rule 144A Securities.
The proposed investment restriction would increase the Funds' flexibility
with respect to the amount of securities deemed illiquid in which the Fund
may invest up to the current Commission limit, assuming that the Fund is
not otherwise limited with respect to investment in illiquid securities.
The Company, in the Prospectus and Statement of Additional Information,
may limit investment in illiquid securities by a Fund to a percentage of
less than 15% for certain reasons.
Current applicable law does not require a Fund to state its limitation on
investment in illiquid securities as a fundamental policy; however, the
Funds currently state their limitations on illiquid securities as a
fundamental, rather than a non-fundamental, restriction.
D. INVEST IN WARRANTS IF, AT THE TIME OF ACQUISITION, ITS INVESTMENTS
IN WARRANTS, VALUED AT THE LOWER OF COST OR MARKET VALUE, WOULD EXCEED 5% OF
THE FUND'S TOTAL ASSETS; INCLUDED WITHIN SUCH LIMITATION, BUT NOT TO EXCEED 2%
OF THE FUND'S TOTAL ASSETS, ARE WARRANTS WHICH ARE NOT LISTED ON THE NEW YORK
STOCK EXCHANGE OR AMERICAN STOCK EXCHANGE OR A MAJOR FOREIGN EXCHANGE. FOR
PURPOSES OF THIS RESTRICTION, WARRANTS ACQUIRED BY THE FUND IN UNITS OR
ATTACHED TO SECURITIES MAY BE DEEMED TO BE WITHOUT VALUE.
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Commentary: If a Fund is otherwise authorized to invest in warrants as a
matter of investment policy, such Fund will now be subject to the
limitation set forth in proposed non-fundamental investment restriction
(d). A Fund that is currently prohibited from investing in warrants as a
matter of investment policy will not invest in warrants unless and until
such policy is amended by resolution of the Board and the Prospectus is
amended.
E. INVEST IN SECURITIES OF COMPANIES HAVING A RECORD, TOGETHER WITH
PREDECESSORS, OF LESS THAN THREE YEARS OF CONTINUOUS OPERATION, EXCEPT TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW. THIS RESTRICTION SHALL NOT APPLY TO
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES OR OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
Commentary: The proposed restriction, which addresses investment by a
Fund in "unseasoned issuers," is in substance identical to the applicable
restriction in effect for certain Funds; however, each of the Funds except
the Developing Capital Markets Focus Fund state this restriction as a
fundamental, rather than a non-fundamental, restriction. There is
currently no applicable legal limitation concerning investment in
unseasoned issuers.
F. PURCHASE OR RETAIN THE SECURITIES OF ANY ISSUER, IF THOSE INDIVIDUAL
OFFICERS AND DIRECTORS OF THE COMPANY, THE OFFICERS AND GENERAL PARTNER OF THE
INVESTMENT ADVISER, THE DIRECTORS OF SUCH GENERAL PARTNER OR THE OFFICERS AND
DIRECTORS OF ANY SUBSIDIARY THEREOF EACH OWNING BENEFICIALLY MORE THAN ONE-HALF
OF ONE PERCENT OF THE SECURITIES OF SUCH ISSUER OWN IN THE AGGREGATE MORE THAN
5% OF THE SECURITIES OF SUCH ISSUER.
Commentary: The proposed restriction, which addresses investment by a
Fund in securities of an issuer in which management of the Fund owns
shares, is in substance similar to the applicable restriction in effect
for the Funds; however, each of the Funds except the Developing Capital
Markets Focus and the International Bond Funds currently state this
restriction as a fundamental, rather than a non-fundamental, restriction.
The proposed restriction applies only to MLAM and certain affiliates.
MLFD, the distributor of the shares of the Company, is specifically
referenced in the restriction set forth in the International Bond Fund.
[Under the revised restriction, MLFD, as a subsidiary of the Investment
Adviser, will continue to be included in and covered by the revised
restriction.]
G. INVEST IN REAL ESTATE LIMITED PARTNERSHIP INTERESTS OR INTERESTS IN
OIL, GAS OR OTHER MINERAL LEASES, OR EXPLORATION OR DEVELOPMENT PROGRAMS,
EXCEPT THAT THE FUND MAY INVEST IN SECURITIES ISSUED BY COMPANIES THAT ENGAGE
IN OIL, GAS OR OTHER MINERAL EXPLORATION OR DEVELOPMENT ACTIVITIES.
Commentary: The proposed restriction is in substance similar to the
applicable restriction in effect for each Fund; however, each of the Funds
except the Developing Capital Markets Focus Fund state this restriction,
in whole or in part, as a fundamental, rather than a non-fundamental,
restriction.
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H. WRITE, PURCHASE OR SELL PUTS, CALLS, STRADDLES, SPREADS OR
COMBINATIONS THEREOF, EXCEPT TO THE EXTENT PERMITTED IN THE PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM TIME TO TIME.
Commentary: The proposed restriction is in substance similar to the
applicable restriction in effect for each Fund. However, certain Funds
state the restriction as a fundamental restriction while the Funds
authorized to engage in these types of transactions do not state any
restrictions. As a practical matter, the adoption of the foregoing as a
non-fundamental restriction will not change the current policy of the
Funds.
If the proposed restrictions are approved, Funds that currently are
authorized to engage in puts, calls, straddles, spreads and combinations
thereof will be subject to the proposed restriction and will continue to
engage in such transactions to the extent set forth in the Prospectus and
Statement of Additional Information. Funds that are not currently
authorized to engage in these types of transactions would not be permitted
to engage in such transactions unless and until the Board determines to
establish an investment policy in this regard and the Prospectus is
amended.
Elimination of Restrictions Applicable to Foreign Securities. Investment
restrictions relating to investment in foreign securities have been eliminated
in the proposed uniform restrictions. Certain Funds that commenced operations
more than 10 years ago included an investment restriction limiting or
prohibiting investment in foreign securities. If this proposal is adopted,
these Funds will no longer state this policy as an investment restriction but
instead include investment policies with respect to foreign securities in their
prospectuses and statements of additional information.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
PROPOSAL NO. 4 - TO CHANGE THE INVESTMENT OBJECTIVE OF THE COMPANY'S MERRILL
LYNCH INTERMEDIATE GOVERNMENT BOND FUND AND RENAME THAT FUND AS THE "MERRILL
LYNCH GOVERNMENT BOND FUND"
The investment objective of the Merrill Lynch Intermediate Government Bond
Fund (the "Government Bond Fund") presently is "to seek the highest possible
current income consistent with the protection of capital afforded by investing
in intermediate-term debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities with a maximum maturity not to
exceed fifteen years." It is proposed that the Government Bond Fund's
investment objective be changed to read as follows: "The investment objective
of the Government Bond Fund is to seek the highest possible current income
consistent with the protection of capital afforded by investing in debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities." Accordingly, adoption of this proposal would permit the
Fund to invest in debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities with a maturity GREATER THAN fifteen years.
Modifying the Fund's investment objective in the manner proposed would
permit the Fund to expand the eligible investments in which it may invest. It
is important to note that MLAM, the investment adviser for the Fund, and the
Board of Directors of the Company believe that the Fund can meet its investment
27<PAGE>
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objective of providing the highest possible current income consistent with the
protection of capital without this additional flexibility, and the proposed
change does not reflect a concern about the ability of the Fund to meet its
investment objective; rather, the Board and MLAM believe that stockholders will
benefit from an expansion of the available range of eligible investments in
which the Fund can invest. If the Fund is permitted to invest in securities
with longer maturities, the Fund may be able to provide a higher return because
securities with longer maturities tend to have greater yields than securities
with shorter maturities. At the same time, the net asset value of the Fund
would be subject to greater volatility because the prices at which securities
with longer maturities trade tend to vary more with changes in interest rates
than do securities with shorter maturities. Under the Fund's present
investment objective, the Fund, depending on market conditions, anticipates an
average maturity of six to eight years. If the proposal is approved by the
stockholders of the Fund, the Fund anticipates that the average maturity of its
portfolio will be from six to fifteen years.
In addition, the name of the Government Bond Fund is proposed to be
changed by dropping the term "Intermediate" from the Fund's name to reflect the
fact that the Fund will, if the proposal is approved by the stockholders, be
able to invest in debt securities with maturities exceeding fifteen years.
This proposal must be approved by the lesser of a majority of the
outstanding shares of the Government Bond Fund or 67% of the shares of the
Government Bond Fund voting at the Meeting if a quorum is present. ONLY
PERSONS WHO ARE STOCKHOLDERS OF THE GOVERNMENT BOND FUND ON THE RECORD DATE
WILL BE ELIGIBLE TO VOTE ON THIS PROPOSAL. Unless the Board of Directors
determines otherwise, it is anticipated that this proposal, if approved by the
stockholders of the Intermediate Government Bond Fund, will be implemented on
the Effective Date (as defined under the heading "Proposal No. 6 and Proposal
No. 7 - The Reorganizations") of the Reorganizations.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
PROPOSAL NO. 5 - TO CHANGE THE INVESTMENT OBJECTIVE OF THE COMPANY'S MERRILL
LYNCH WORLD INCOME FOCUS FUND AND RENAME THAT FUND AS THE "MERRILL LYNCH GLOBAL
BOND FOCUS FUND"
The investment objective of the Merrill Lynch World Income Focus Fund
presently is "to seek to provide stockholders with high current income by
investing in a global portfolio of fixed income securities denominated in
various currencies, including multinational currency units." It is proposed
that the World Income Focus Fund's investment objective be changed to read as
follows: "The investment objective of the Fund is to seek to provide
stockholders with a high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units." Accordingly, adoption of this
proposal would change the investment objective of the Fund from seeking "to
provide to stockholders high current income" to seeking "to provide to
stockholders a high total investment return".
If this proposal is approved by the stockholders of the Fund, high current
income will only be one of the factors that MLAM will consider in selecting
portfolio securities for the Fund. As a general matter, in evaluating
investments for the Fund, MLAM will consider, among other factors, the relative
levels of interest rates prevailing in various countries, the potential
appreciation of such investments in their denominated currencies and, for debt
instruments not denominated in U.S. Dollars, the potential movement in the
value of such currencies compared to the U.S. Dollar.
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If this proposal is adopted, the Fund will cease investing in high yield,
high risk securities (commonly known as "junk bonds") and will only invest in
securities which have a credit rating of A or better by S&P or by Moody's or
commercial paper rated A-1 by S&P or Prime-1 by Moody's or obligations that
MLAM has determined to be of similar creditworthiness. In addition, if this
proposal is adopted, the Fund will, as a matter of operating policy, cease
investing in mortgage-related securities. Further, if this proposal is
adopted, the Fund, in seeking capital appreciation, may invest in relatively
low yielding instruments in expectation of favorable currency fluctuations or
interest rate movements, thereby potentially reducing the Fund's current yield.
In seeking income, the Fund may invest in short term instruments with
relatively high yields (as compared to other debt securities) meeting the
Fund's investment criteria, notwithstanding that the Fund may not anticipate
that such instruments will experience substantial capital appreciation.
Investments not meeting the Fund's new credit quality criteria or not otherwise
consistent with the Fund's revised investment policy will be sold as soon as
practicable, and such sales are expected to be completed within [one] month
following the implementation of this proposal.
Although the implementation of the proposed change in the investment
objective of the Fund may have the effect of reducing the Fund's current yield
to stockholders, the Board of Directors of the Company believes that the change
in the Fund's investment objective will give the Fund the opportunity to seek
an overall greater longer term investment return to stockholders of the Fund.
However, no assurances can be given that the Fund's new investment objective,
if approved by the stockholders of the Fund, will be achieved.
In addition, the name of the World Income Focus Fund is proposed to be
changed so that the name of the Fund will more appropriately reflect that its
investment objective will, if the proposal is approved by the stockholders, no
longer be to seek to provide to stockholders "high current income" but rather
will be to seek to provide to stockholders "a high total investment return".
PLEASE SEE APPENDIX C TO THIS PROXY STATEMENT - PROSPECTUS FOR A
DESCRIPTION OF THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND AS SUCH
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND WILL READ IF THIS PROPOSAL IS
APPROVED.
This proposal must be approved by the lesser of a majority of the
outstanding shares of the World Income Focus Fund or 67% of the shares
outstanding at the Meeting if a quorum is present. ONLY PERSONS WHO ARE
STOCKHOLDERS OF THE WORLD INCOME FOCUS FUND ON THE RECORD DATE WILL BE ELIGIBLE
TO VOTE ON THIS PROPOSAL. THEREFORE, STOCKHOLDERS OF THE COMPANY'S MERRILL
LYNCH INTERNATIONAL BOND FUND ON THE RECORD DATE, WHO WILL VOTE ON PROPOSAL NO.
6 DISCUSSED BELOW, WILL NOT BE ELIGIBLE TO VOTE FOR ON THIS PROPOSAL. HOWEVER,
THIS PROPOSAL WILL NOT BE IMPLEMENTED IF PROPOSAL NO. 6 IS NOT APPROVED, AND IF
THIS PROPOSAL IS NOT APPROVED, THE REORGANIZATION CONTEMPLATED BY PROPOSAL NO.
6 WILL NOT BE CONSUMMATED. Unless the Board of Directors determines otherwise,
it is anticipated that this proposal, if approved by the stockholders of the
World Income Focus Fund, will be implemented on the Effective Date (as defined
under the heading "Proposal No. 6 and Proposal No. 7 - The Reorganizations") of
the Reorganizations.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
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PROPOSAL NO. 6 AND PROPOSAL NO. 7 - THE REORGANIZATIONS
THE TERMS AND CONDITIONS UNDER WHICH THE PROPOSED REORGANIZATIONS MAY BE
CONSUMMATED ARE SET FORTH IN EACH AGREEMENT AND PLAN OF REORGANIZATION FOR THE
FUNDS INVOLVED. SIGNIFICANT PROVISIONS OF THE AGREEMENTS ARE SUMMARIZED BELOW;
HOWEVER, THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
AGREEMENTS, THE FORM OF WHICH IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT--PROSPECTUS.
GENERAL
Based on the recommendation of MLAM, at a meeting of the Board of
Directors held on July 10, 1996, the Board approved the combination of the
Merrill Lynch International Bond Fund and the Merrill Lynch World Income Focus
Fund and the combination of the Merrill Lynch Flexible Strategy Fund and the
Merrill Lynch Global Strategy Focus Fund. The International Bond Fund and the
Flexible Strategy Fund are sometimes referred to herein as the "Transferor
Funds" or the "Corresponding Transferor Funds", and the World Income Focus Fund
and the Global Strategy Focus Fund are sometimes referred to herein as the
"Acquiring Funds" or the "Corresponding Acquiring Funds". The Board of
Directors of the Company recommends to the stockholders of each Transferor Fund
that they approve the combination of each Transferor Fund and its Corresponding
Acquiring Fund by means of a tax-free acquisition of substantially all the
assets of each Transferor Fund by its Corresponding Acquiring Fund in exchange
for shares of its Corresponding Acquiring Fund and the assumption by the
Corresponding Acquiring Fund of substantially all the liabilities of the
Transferor Fund, which shares would then be distributed to the stockholders of
each Transferor Fund in liquidation of each Transferor Fund. The Board, in
accepting the recommendation of MLAM, concluded that each Reorganization would
be in the best interest of each Transferor Fund and its stockholders in
recommending that the stockholders approve the proposed Reorganization.
MLAM made its recommendation to the Board based on the similarities in
investment objectives, policies and styles of each Transferor Fund and its
Corresponding Acquiring Fund and based on the fact that each Transferor Fund
and Corresponding Acquiring Fund utilizes the same management personnel. MLAM
believes that each Reorganization would eliminate any existing or future
competition between a Transferor Fund and Corresponding Acquiring Fund for
investment opportunities and for stockholders and would provide economies of
scale by eliminating duplicative functions and permitting larger portfolio
transactions.
[The Board reviewed the pro forma combined funds and noted that the
expense ratio of each pro forma combined fund following each Reorganization
would be no greater than the expense ratio of the Corresponding Transferor Fund
prior to the Reorganization.] Additionally, the Board noted that the World
Income Focus Fund, with its much larger asset base and resulting economies of
scale, has a significantly lower expense ratio before reimbursement of expenses
than does the smaller International Bond Fund, and it expects holders of the
International Bond Fund to benefit from this lower expense ratio.
The Board also noted that the proposed combination of Acquiring Funds and
Transferor Funds would eliminate the need for separate outside audits of the
respective Funds and that the relatively fixed cost of auditing the Acquiring
Funds would be spread across the larger asset base of each combined Fund,
resulting in lower auditing expenses per dollar of assets. Other costs of the
Company which vary based on the number of Funds in existence would be subject
to similar consolidation and cost-spreading, to the benefit of stockholders of
both Funds.
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The Board also noted that the combination of the Transferor Funds with the
Corresponding Acquiring Funds is expected to facilitate portfolio management.
Because the securities in which the combining Funds may invest are
substantially similar, their combination will eliminate the need for the
portfolio managers to track and allocate purchases by the separate funds. The
combinations also may enable each combined Fund to purchase in greater volume,
creating the potential for more favorable pricing of the securities purchased
by the Funds. To the extent that these operational and economic benefits are
realized, they too will work to the advantage of stockholders of the Transferor
Funds and Corresponding Acquiring Funds.
The Board also considered among other things: (i) the terms and
conditions of each Reorganization; (ii) the Reorganization would not result in
a dilution of stockholders' interests; (iii) the investment objectives and
policies of each Transferor Fund and each Acquiring Fund; (iv) the fact that
certain expenses in connection with printing and mailing this Proxy
Statement--Prospectus and other proxy materials to Contract Owners would be
borne by the Insurance Companies while other expenses incurred in connection
with the Reorganization would be borne by the Company; (v) the benefits of each
Reorganization to persons other than the Transferor Funds; (vi) the fact that
each Acquiring Fund will assume all the liabilities of the Corresponding
Transferor Fund; (vii) the expected U.S. federal income tax consequences of
each Reorganization; and (viii) the pro forma information contained in the SAI.
Based on the factors described above, the Board of Directors of the
Company, including the Board members who are not interested persons (as such
term is defined under the Investment Company Act), unanimously determined that
each Reorganization (including the Amendment to the Articles necessary to
consummate each Reorganization under Maryland law) would be in the best
interests of each Transferor Fund and each Transferor Fund's stockholders and
would not result in dilution of the interests of stockholders, and recommends
that each Transferor Fund's stockholders approve the proposed Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND. The investment
objective of the World Income Focus Fund is to seek to provide stockholders
with high current income. The investment objective of the International Bond
Fund is to seek a high total investment return. However, the investment
objective of the World Income Focus Fund will be the same as the investment
objective of the International Bond Fund if stockholders of the World Income
Focus Fund approve a change in the World Income Focus Fund's investment
objective as discussed above in Proposal No. 5. If Proposal No. 5 is not
approved, the Reorganization contemplated by Proposal No. 6 will not be
consummated. The investment objectives and policies of each of the Funds are
described more fully in Appendix C to this Proxy Statement--Prospectus.
Assuming Proposal No. 5 is approved by the stockholders of the World Income
Focus Fund, the investment objectives and policies of the World Income Focus
Fund and the International Bond Fund will be substantially similar with one
noteworthy exception. The focus of the World Income Focus Fund is on both U.S
and non-U.S. debt instruments, including government and corporate fixed income
securities, whereas the focus of the International Bond Fund is primarily non-
U.S. debt instruments. Therefore, investors in the World Income Focus Fund are
likely to have a greater exposure to debt securities in the U.S. market,
although there is no requirement that the World Income Focus Fund have any
fixed percentage of its assets in U.S. government or corporate fixed income
securities.
Each of the Funds is classified as a non-diversified investment company
under the Investment Company Act. Additionally, each Fund may engage in
certain of the options, futures and currency transactions discussed Appendix C
31<PAGE>
<PAGE>
to this Proxy Statement--Prospectus. However, unlike the International Bond
Fund, the World Income Focus Fund may also purchase and write call and put
options on futures contracts in connection with its hedging activities.
Generally, these strategies are utilized under the same market conditions
(I.E., conditions relating to specific types of investments) in which the World
Income Focus Fund enters into futures transactions. The World Income Focus
Fund may purchase put options or write call options on futures contracts rather
than selling the underlying futures contracts in anticipation of a decline in
the equities markets or in the value of a foreign currency. Similarly, the
World Income Focus Fund may purchase call options, or write put options on
futures contracts as a substitute for the purchase of such futures to hedge
against the increased cost resulting from appreciation of equity securities or
in the currency in which securities which the Fund intends to purchase are
denominated. The World Income Focus Fund's transactions in options on futures
contracts are limited in the same manner as futures transactions in general are
limited for each of the Funds. See "Transactions in Options, Futures and
Currency - Restrictions on Use of Futures Transactions" discussed in Annex A to
Appendix C of this Proxy Statement--Prospectus.
A more detailed description of the types of securities in which the World
Income Focus Fund invests, its fundamental and non-fundamental investment
policies and the risks associated with an investment in the Fund is contained
in more detail in Appendix C to this Proxy Statement--Prospectus and in the SAI,
which is available upon request.
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND. The investment
objectives, policies and styles of the Funds are substantially similar. The
investment objective of the Flexible Strategy Fund and the Global Strategy
Focus Fund is to seek high total investment return. However, the Global
Strategy Focus Fund is a non-diversified investment company, and the Flexible
Strategy Fund is a diversified investment company. The investment objectives
of each of the Funds is stated more fully in Appendix C to this Proxy
Statement--Prospectus. The main difference between these Funds is that the
Flexible Strategy Fund seeks to meet its investment objective by investing
primarily in the securities of U.S. issuers whereas the Global Strategy Focus
Fund seeks to achieve its investment objective by investing primarily in the
securities of issuers located in the United States, Canada, Western Europe and
the Far East. The Flexible Strategy Fund has, as a matter of operating policy,
limited its investment in foreign issuers to no more than 25% of its total
assets. The Global Strategy Focus Fund has no similar limitation.
Additionally, the Flexible Strategy Fund emphasizes investment in common stocks
of larger-capitalization issuers. The Global Strategy Focus Fund invests in
issuers that MLAM believes to be quality companies, which includes such
companies that have a strong balance sheet, good financial resources, a
satisfactory rate of return on capital, a good industry position and superior
management. The capitalization of such quality companies may be considered by
MLAM but is not a controlling factor. Both Funds limit investment in corporate
debt securities to those securities rated investment grade by S&P or Moody's or
of comparable quality. The Global Strategy Focus Fund may invest a greater
percentage of its assets in non-U.S. securities than the Flexible Strategy
Fund, and investing on an international basis involves special considerations.
See "Special Considerations Regarding the Reorganization."
Unlike the Flexible Strategy Fund, the Global Strategy Focus Fund may
engage in transactions in futures contracts, options on futures contracts,
forward foreign exchange contracts, currency options and options on portfolio
securities and on stock indexes only for hedging purposes and not for
speculation. Additionally, the Global Strategy Focus Fund may write call
options on stock indexes for the purpose of achieving, through receipt of
premium income, a greater average total return than it would otherwise realize
from holding portfolio securities alone. There can be no assurance that the
objective sought to be realized through the use of the foregoing instruments
will be achieved. The Global Strategy Focus Fund's use of such instruments may
32<PAGE>
<PAGE>
be limited by certain Code requirements for qualification of such Fund for the
favorable tax treatment afforded investment companies. There can be no
assurance that the Global Strategy Focus Fund's hedging transactions will be
effective. Furthermore, the Global Strategy Focus Fund will only engage in
hedging activities from time to time and will not necessarily engage in hedging
transactions in all the markets in which it may be invested in any given time.
See "Transactions in Options, Futures and Currency-Restrictions on Use of
Futures Transactions" discussed in Annex A to Appendix C of this Proxy
Statement--Prospectus and "Special Considerations Regarding the Reorganization."
A more detailed description of the types of securities in which the Global
Strategy Focus Fund invests, its fundamental and non-fundamental investment
policies and the risks associated with an investment in the Fund is contained
in more detail in Appendix C to this Proxy Statement--Prospectus and in the SAI,
which is available upon request.
COMPARISON OF INVESTMENT RESTRICTIONS
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND. Each of the Funds
currently has similar investment restrictions, and, if the stockholders of each
Fund adopt the uniform investment restrictions proposed in Proposal No. 3, each
Fund would have identical fundamental investment restrictions. The current
investment restrictions of the World Income Focus Fund and the International
Bond Fund substantively differ as follows: (i) the World Income Focus Fund may
maintain short positions in forward currency contracts, options, futures
contracts and options on futures contracts whereas the International Bond Fund
may not; (ii) the World Income Focus Fund may lend its portfolio securities up
to 20% of its total assets whereas the International Bond Fund may lend its
portfolio securities up to 33 1/3 % of its total assets; (iii) the World Income
Focus Fund may not borrow amounts in excess of 20% of its total assets whereas
the International Bond Fund may not borrow amounts in excess of 10% of its
total assets. However, each Fund is limited in the same manner in which it may
utilize borrowings (I.E., for temporary emergency purpose or to meet redemption
requests), except that the World Income Focus Fund will not purchase securities
while borrowings exceeding 5% of its total assets are outstanding; (iv) the
World Income Focus Fund is limited to investing no more than 10% of its total
assets in illiquid securities whereas the International Bond Fund is limited to
15%; (v) the World Income Focus Fund has a fundamental restriction that it will
not purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, MLAM or any subsidiary thereof each
owning beneficially more than 1/2 of 1% of the securities of such issuer, own
in the aggregate more than 5% of the securities of such issuer, whereas the
International Bond Fund has such investment restriction as a non-fundamental
investment restriction and refers only to MLFD, the distributor of the shares
of the Company, in place of "any subsidiary". If the uniform investment
restrictions set forth above in Proposal No. 3 are adopted by the World Income
Focus Fund, then the restriction will also be non-fundamental for such Fund;
and (vi) the World Income Focus Fund is not prohibited from issuing senior
securities whereas the International Bond Fund is so prohibited, although it is
not the current intention of the World Income Focus Fund to issue senior
securities.
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND. The investment
restrictions of the Funds are substantially similar, and, if the stockholders
of each Fund adopt the uniform investment restrictions proposed in Proposal No.
3, each Fund would have identical fundamental investment restrictions.
However, the investment restrictions of the Funds differ in several ways
because the Global Strategy Focus Fund is permitted to engage in transactions
in options on securities, forward currency contracts and options thereon. The
current investment restrictions of the Flexible Strategy Fund and the Global
Strategy Focus Fund differ as follows: (i) the Flexible Strategy Fund limits
investment in any one issuer to no more than 5% of its total assets, whereas
the Global Strategy Focus Fund has no similar restriction; (ii) the Global
Strategy Focus Fund may purchase securities of issuers which invest in oil, gas
33<PAGE>
<PAGE>
or other mineral exploitation or development programs or commodities or
commodity contracts and the Global Strategy Focus Fund may engage in
transactions in currency and options on interests in oil, gas or other mineral
exploitation or development programs or commodities or commodity contracts,
forward currency contracts, futures contracts and options thereon and purchase,
sell or otherwise invest or deal in commodities or commodities contracts. The
Flexible Strategy Fund may not purchase such securities or engage in any of the
foregoing transactions. The Global Strategy Focus Fund currently does not
anticipate investment directly in tangible commodities other than currency and
would be greatly restricted from making such direct investments by the current
provisions of the federal tax laws; however, the Global Strategy Focus Fund may
invest in financial instruments linked to commodities as described above; (iii)
the Flexible Strategy Fund may not write, purchase or sell puts, calls,
straddles, spreads or combinations thereof (such Fund may write cover call
options under its investment restrictions but does not as a matter of non-
fundamental investment policy). The Global Strategy Focus Fund is not so
limited by its investment restrictions; (iv) the Global Strategy Focus Fund may
make margin payments in connection with, and maintain short positions in,
options, forward currency contracts, futures contracts and options on futures
contracts whereas the Flexible Strategy Fund may not; and (v) the Global
Strategy Focus Fund may not borrow amounts in excess of 10% of its total assets
whereas the Flexible Strategy Fund is limited to 5% of its total assets.
However, the Global Strategy Focus Fund will borrow only to meet redemption
requests and will not purchase securities while borrowings are outstanding.
INFORMATION ABOUT THE REORGANIZATIONS
AGREEMENT AND PLAN OF REORGANIZATION. The Agreement and Plan of
Reorganization (the "Plan") for each Reorganization provides that upon the
closing of the transaction, each Acquiring Fund will acquire substantially all
the assets of its Corresponding Transferor Fund and assume substantially all
the liabilities of the Corresponding Transferor Fund in exchange for the shares
of such Acquiring Fund on the effective date of the Reorganization (the
"Effective Date"), which is expected to be on or about Friday, December 13,
1996 or such earlier or later date as the Company's Board of Directors
determines. The number of full and fractional shares of an Acquiring Fund to
be issued to the holders of shares of the Corresponding Transferor Fund, is to
be determined on the basis of the net asset value per share of such Acquiring
Fund.
On the Effective Date, each Transferor Fund will liquidate and will
distribute pro rata to its holders of record the shares of the Corresponding
Acquiring Fund received by the Transferor Fund. The liquidation and
distribution will be accomplished by the establishment of an account on the
share records of the Company with respect to each Acquiring Fund in the name of
each stockholder of the Corresponding Transferor Fund representing the number
of full and fractional shares of the Acquiring Fund due such stockholder.
Fractional shares of the Acquiring Funds will be carried to the fourth decimal
place. Simultaneously with the establishment of accounts on the share records
of the Company with respect to the shares of an Acquiring Fund due to the
Transferor Fund stockholders, Transferor Fund shares held by those stockholders
will be cancelled. [New certificates for shares will be issued only upon
written stockholder request, and any certificate representing shares of an
Acquiring Fund to be issued in replacement of a certificate representing shares
of a Transferor Fund will be issued only upon the surrender of the certificate
representing the Transferor Fund shares.]
As a result of the Reorganizations, each Acquiring Fund will add to its
gross assets substantially all the assets of the Corresponding Transferor Fund,
other than cash to be used to make a final distribution of ordinary income and
capital gains to the stockholders of the Corresponding Transferor Fund as of
the Effective Date, and the stockholders of each Transferor Fund will become
stockholders of the Corresponding Acquiring Fund. For Federal income tax
reasons, each Transferor Fund must distribute all of its income and capital
gains prior to the end of its fiscal year, which would occur on the Effective
Date. Additionally, although not required, each Acquiring Fund intends to
distribute all of its income and capital gains prior to the Effective Date.
34<PAGE>
<PAGE>
On or before the Effective Date, the Company will file an Amendment to its
Articles which will make the Reorganization effective for purposes of Maryland
corporate law (the "Charter Amendment"). A copy of the form of the Charter
Amendment is included in the Plan, which is attached hereto as Appendix B.
Consummation of the Plan is subject to the conditions set forth therein,
including the condition that all necessary orders or exemptions under the
Investment Company Act with respect to the Reorganization shall have been
granted by the Commission. The Plan may be terminated, in its entirety or with
respect to any Transferor Fund and its Corresponding Acquiring Fund, by the
Board and the Reorganization abandoned at any time prior to the closing of the
Reorganization on the Effective Date.
CHARTER AMENDMENT. Because the Company is organized as a Maryland
corporation, the Charter Amendment must be filed with the Department of
Taxation and Assessments of the State of Maryland in order to implement the
terms of the Reorganizations. From a Maryland state law perspective, each
Reorganization does not involve a transfer of assets in exchange for issuance
of shares, because the Funds are series of shares issued by the same corporate
entity. For Maryland state law purposes, each Reorganization is characterized
as a reclassification of shares. Therefore, the Charter Amendment will
reclassify unissued shares of each class of the Transferor Fund into unissued
shares of the Corresponding Acquiring Fund and reclassify all of the
outstanding shares of the Transferor Fund into outstanding shares of the
Corresponding Acquiring Fund in accordance with a formula that reflects the
terms of each Reorganization described above (I.E., based on relative net asset
values of the outstanding shares of the Transferor Fund and Corresponding
Acquiring Fund). The text of the Charter Amendment is attached as an exhibit
to the Plan, which is attached hereto as Appendix B.
DESCRIPTION OF SHARES OF THE ACQUIRING FUND. Full and fractional shares
of the Acquiring Funds will be issued without the imposition of a sales load or
other fee to the stockholders of the Corresponding Transferor Funds in
accordance with the procedures described above. The shares of each Acquiring
Fund to be issued in the Reorganization will be fully paid and nonassessable
when issued and will have no preemptive or conversion rights. In addition, the
voting procedures of the Transferor Funds and the Acquiring Funds are
identical.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION. On the
Effective Date, the Company will receive an opinion from Rogers & Wells,
counsel to the Company, with respect to the U.S. federal income tax
consequences of the Reorganization. The tax opinion will be substantively to
the effect that, with respect to each Transferor Fund and its Corresponding
Acquiring Fund, on the basis of then current law and certain representations
and assumptions, and subject to certain limitations: (i) the Reorganization
will constitute a reorganization within the meaning of Section 368(a)(1)(D) of
the Code; (ii) the stockholders of the Transferor Fund who receive shares of
the Acquiring Fund pursuant to the Reorganization will not recognize any gain
or loss upon the exchange of their shares of the Transferor Fund for shares of
the Acquiring Fund; (iii) the aggregate tax basis of the shares of the
Acquiring Fund received by each stockholder of the Transferor Fund will be the
same as the aggregate tax basis of the shares of the Transferor Fund
surrendered in the exchange; and (iv) the holding period of shares of the
Acquiring Fund received by each stockholder of the Transferor Fund will include
the holding period of the shares of the Transferor Fund which are surrendered
in exchange thereof, provided that the shares of the Transferor Fund constitute
capital assets of such stockholder on the Effective Date. The tax opinion will
address certain U.S. federal income tax consequences of the Reorganization in
addition to those set forth above and is described in greater detail in
Section 7(f) of the Plan which is attached hereto as Appendix B. The Company
has no intention of consulting the Internal Revenue Service as to the foregoing
matters.
35<PAGE>
<PAGE>
THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION AND SHOULD NOT BE
CONSIDERED TO BE TAX ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL
REVENUE SERVICE WILL CONCUR ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE.
TRANSFEROR FUND STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS
REGARDING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES WITH RESPECT TO THE
FOREGOING MATTERS AND ANY OTHER CONSIDERATIONS WHICH MAY BE APPLICABLE TO THEM.
CAPITALIZATION. The following tables show the capitalization and net
asset values per share of each Transferor Fund and each Acquiring Fund as of
December 31, 1995 and on a pro forma basis as of that date after giving effect
to each Reorganization.
WORLD INCOME FOCUS FUND AND INTERNATIONAL BOND FUND
---------------------------------------------------
PRO FORMA CAPITALIZATION
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
International World Income Pro Forma Pro Forma
Bond Fund Focus Fund Adjustments Combined
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net assets $18,120,544 $81,844,632 ($1,093,675)(1) $98,871,501
=========== =========== =============== ===========
Shares outstanding 1,722,139 8,360,366 126,663(2) 10,209,168
========= ========= ========== ==========
Net asset value per share
As of December 31, 1995 $10.52 $9.79
====== =====
After distribution of
net investment income and
realized capital gains(3) $10.41 $9.70
====== =====
After Reorganization-related
expense and distribution of
net investment income and
realized capital gains $9.68
=====
<FN>
(1) The adjusted balances are presented as if the Reorganization were
effective as of the beginning of the period ending December 31, 1995 for
information purposes only. The actual Effective Date of the
Reorganization is expected to be December 13, 1996, at which time the
results would be reflective of the actual composition of stockholders'
equity at that date. Assumes distributions of net investment income and
realized capital gains and accrual of estimated Reorganization-related
expenses of $135,000. Additionally, the pro forma adjustment includes an
adjustment of $112,261 to reflect the fact that MLAM does not intend
voluntarily to reimburse the combined Fund for certain expenses or to waive
its management fee with respect to the combined Fund.
(2) Assumes the issuance of 1,848,802 Acquiring Fund shares in exchange for
the net assets of the Transferor Fund, which number is based on the net
asset value of the Acquiring Fund shares, and the net asset value of the
Transferor Fund, as of December 31, 1995, after adjustment for the
distributions referred to in (3) below. The issuance of such number of
Acquiring Fund shares would result in the distribution of 1.073550
Acquiring Fund shares for each Transferor Fund share upon liquidation of
the Transferor Fund. Based on the issuance of 1,848,802 additional
Acquiring Fund shares and the cancellation of 1,722,139 Transferor Fund
shares.
(3) Assumes the Transferor Fund distributes all its undistributed net
investment income and realized capital gains to its stockholders and the
Acquiring Fund distributes all of its undistributed net investment income
and realized capital gains to its stockholders.
</TABLE>
36<PAGE>
<PAGE>
GLOBAL STRATEGY FOCUS FUND AND FLEXIBLE STRATEGY FUND
-----------------------------------------------------
PRO FORMA CAPITALIZATION
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Global
Flexible Strategy Pro Forma Pro Forma
Strategy Fund Focus Fund Adjustments Combined
------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net assets $320,233,663 $540,241,613 ($39,199,386)(1) $821,275,890
============ ============ ============= ============
Shares outstanding 19,443,457 43,064,280 3,889,916(2) 66,397,653
========== ========== ========= ==========
Net asset value per share
As of December 31, $16.47 $12.55
1995 ====== ======
After distribution of
net investment income
and realized capital
gains(3) $14.85 $12.37
====== ======
After Reorganization-
related expense and
distribution of net
investment income and
realized capital gains $12.37
======
<FN>
(1) The adjusted balances are presented as if the Reorganization were
effective as of the beginning of the period ending December 31, 1995 for
information purposes only. The actual Effective Date of the
Reorganization is expected to be December 13, 1996, at which time the
results would be reflective of the actual composition of stockholders'
equity at that date. Assumes distributions of net investment income and
realized capital gains and accrual of estimated Reorganization-related
expenses of $135,000.
(2) Assumes the issuance of 23,333,373 Acquiring Fund shares in exchange for
the net assets of the Transferor Fund, which number is based on the net
asset value of the Acquiring Fund shares, and the net asset value of the
Transferor Fund, as of December 31, 1995, after adjustment for the
distributions referred to in (3) below. The issuance of such number of
Acquiring Fund shares would result in the distribution of 1.200063
Acquiring Fund shares for each Transferor Fund share upon liquidation of
the Transferor Fund. Based on the issuance of 23,333,367 additional
Acquiring Fund shares and the cancellation of 19,443,457 Transferor Fund
shares.
(3) Assumes the Transferor Fund distributes all its undistributed net
investment income and realized capital gains to its stockholders and the
Acquiring Fund distributes all of its undistributed net investment income
and realized capital gains to its stockholders.
</TABLE>
VALUATION. The value of each Transferor Fund's assets to be acquired and
the liabilities to be assumed by the Corresponding Acquiring Fund and the net
asset value per share for the shares to be issued by the Corresponding
Acquiring Fund will be determined by MLAM as of the Effective Date of the
Reorganization. To determine the net asset value per share for the Funds, the
value of the securities held by each Fund plus any cash or other assets
(including interest and dividends accumulated but not yet received) minus all
liabilities (including accrued expenses) is divided by the total number of
shares outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily. The number of shares of an Acquiring
Fund to be issued to the Corresponding Transferor Fund pursuant to the
Reorganization will be calculated based on the determinations of MLAM.
37<PAGE>
<PAGE>
Accordingly, as a result of the Reorganization, every stockholder of the
Transferor Fund would own shares of the Corresponding Acquiring Fund that would
have an aggregate net asset value immediately after the Effective Date equal to
the aggregate net asset value of that stockholder's Transferor Fund shares
immediately prior to the Effective Date. Because the Acquiring Fund shares
would be issued at net asset value in exchange of net assets of the Transferor
Fund having a value equal to the aggregate net asset value of those shares, the
net asset value per share of the Acquiring Fund shares should remain virtually
unchanged by the Reorganization. Thus, the Reorganization should result in
virtually no dilution of net asset value of any stockholder's holdings. See
"Pro Forma Financial Information" in the SAI. However, as a result of the
Reorganization, a stockholder of either a Transferor Fund or a Corresponding
Acquiring Fund would likely hold a reduced percentage of ownership in the
larger combined entity than he or she did in either of such Funds.
MANAGEMENT OF THE FUNDS
MLAM acts as the investment adviser for, and manages the investment and
reinvestment of the assets of, each Transferor Fund and its Corresponding
Acquiring Fund. The terms of the investment management agreement for each
Transferor Fund and Corresponding Acquiring Fund are substantively identical,
including the fees payable by each Transferor Fund and its Corresponding
Acquiring Fund to MLAM. Such fees will remain the same after the
Reorganization. Each of the World Income Focus Fund and the International Bond
Fund has agreed to pay MLAM a monthly fee at an annual rate of 0.60% of such
Fund's average daily net assets for the services and facilities furnished by
MLAM. Each of the Global Strategy Focus Fund and the Flexible Strategy Fund
has agreed to pay MLAM a monthly fee at an annual rate of 0.65% of such Fund's
average daily net assets for the services and facilities furnished by MLAM.
Thomas R. Robinson has served as the portfolio manager of the Flexible
Strategy Focus Fund and Global Strategy Focus Fund since November 1995, and
will continue to serve as the portfolio manager of the Global Strategy Focus
Fund, as the surviving Fund. Vincent Lathbury, III and Robert Parish have
served as the World Income Focus Fund's portfolio managers since July 1993, and
Mr. Parish also has served as the International Bond Fund's portfolio manager
since May 1994. Mr. Parish will continue to serve as the portfolio manager of
the World Income Focus Fund, as the surviving Fund.
EXPENSES
The Company's Investment Advisory Agreements require MLAM to reimburse
each Fund (up to the amount of the advisory fee earned by MLAM with respect to
such Fund) if and to the extent that in any fiscal year the operating expenses
of the Fund exceed the most restrictive expense limitation then in effect under
any state securities law or the published regulations thereunder. At present
the most restrictive expense limitation requires MLAM to reimburse expenses
(excluding interest, taxes, brokerage fees and commissions and extraordinary
charges such as litigation costs) which exceed 2.5% of each Fund's first $30
million of average daily net assets, 2.0% of its average daily net assets in
excess of $30 million but less than $100 million, and 1.5% of its average daily
net assets in excess of $100 million. It should be noted that because the
Funds' shares are sold only to the Insurance Companies, the shares are not
required to be registered under state "blue sky" or securities laws. MLAM
believes, however, that the most restrictive expense limitations imposed by
state securities laws or published regulations thereunder are an appropriate
standard.
38<PAGE>
<PAGE>
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") entered into two
reimbursement agreements, dated April 30, 1985 and February 11, 1992 (the
"Reimbursement Agreements"), that provide that the expenses paid by each Fund
(excluding interest, taxes, brokerage fees and commissions and extraordinary
charges such as litigation costs) will be limited to 1.25% of its average net
assets. Any expenses in excess of this percentage will be reimbursed to the
Fund by MLAM which, in turn, will be reimbursed by MLLA. The Reimbursement
Agreements may be amended or terminated by the parties thereto upon prior
written notice to the Company.
For the fiscal year ended December 31, 1995, the expense ratios of the
Flexible Strategy, Global Strategy Focus and World Income Focus Funds were
.71%, .72% and .68%, respectively, and no expenses were reimbursed under the
Reimbursement Agreements. For the fiscal year ended December 31, 1995, the
expense ratio of the International Bond Fund was .95% prior to reimbursement by
MLAM. During the fiscal year ended December 31, 1995, MLAM earned fees of
$70,573, all of which was voluntarily waived, from the International Bond Fund
and also voluntarily reimbursed the International Bond Fund for $41,688 in
additional expenses, which resulted in an expense ratio (net of such
reimbursement) of 0%. During 1996, MLAM has continued to waive all of its fees
and reimburse all expenses of the International Bond Fund, and MLAM has no
current intention to cease reimbursing the International Bond Fund for certain
expenses and waiving its fee (but may cease to do so at any time). However,
other than as may be required under the Reimbursement Agreements, MLAM has no
present intention of waiving its fee payable by the World Income Focus Fund or
reimbursing the World Income Focus Fund for any expenses.
INFORMATION ABOUT THE FUNDS
Information about the Acquiring Funds and the Transferor Funds is included
in Appendix C to this Proxy Statement--Prospectus. Additional information
concerning the Acquiring Funds and Transferor Funds is included in the
Statement of Additional Information dated August [__], 1996, which is also
incorporated herein by reference. A copy of the SAI can be obtained without
charge by writing to the Company at P.O. Box 9011, Princeton, New Jersey 08543-
9011 or by calling (609) 282-2800. Please see "Available Information" for
additional information available at the offices of the Commission.
VOTING INFORMATION
Approval of the Plan and the Charter Amendment, with respect to a
Transferor Fund, requires the affirmative vote of the holders of greater than
50% of the outstanding shares of a Transferor Fund.
ONLY PERSONS WHO ARE STOCKHOLDERS OF THE INTERNATIONAL BOND FUND ON THE
RECORD DATE WILL BE ELIGIBLE TO VOTE ON PROPOSAL NO. 6 - APPROVAL OF THE
AGREEMENT AND THE PLAN OF REORGANIZATION BETWEEN THE INTERNATIONAL BOND FUND
AND THE WORLD INCOME FOCUS FUND AND AN AMENDMENT TO THE ARTICLES IN CONNECTION
THEREWITH. ONLY PERSONS WHO ARE STOCKHOLDERS OF THE FLEXIBLE STRATEGY FUND ON
THE RECORD DATE WILL BE ELIGIBLE TO VOTE ON PROPOSAL NO. 7 - APPROVAL OF THE
AGREEMENT AND THE PLAN OF REORGANIZATION BETWEEN THE FLEXIBLE STRATEGY FUND AND
THE GLOBAL STRATEGY FOCUS FUND AND AN AMENDMENT TO THE ARTICLES IN CONNECTION
THEREWITH. HOWEVER, IF PROPOSAL NO. 5 IS NOT APPROVED, THE REORGANIZATION
CONTEMPLATED BY PROPOSAL NO. 6 WILL NOT BE CONSUMMATED, AND IF PROPOSAL NO. 6
IS NOT APPROVED, PROPOSAL NO. 5 WILL NOT BE IMPLEMENTED. Shares represented by
proxies that reflect abstentions will be shares present and entitled to vote on
the matter for purposes of determining the presence of a quorum. However, an
39<PAGE>
<PAGE>
abstention has the effect of a negative vote on the proposals. Shares that are
not voted and for which no proxy has been given will not be counted as present
at the Meeting. Dissenting stockholders do not have any appraisal rights in
connection with the Reorganization.
Votes of the stockholders of the Acquiring Funds are not being solicited
in connection with the Reorganizations, since their approval or consent is not
necessary for the consummation of the Reorganization.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE BOARD MEMBERS WHO ARE
NOT INTERESTED PERSONS (AS SUCH TERM IS DEFINED UNDER THE INVESTMENT COMPANY
ACT), UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL NO. 6 AND PROPOSAL
NO. 7, AS APPLICABLE.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party.
LEGAL OPINIONS
Certain legal matters in connection with the shares to be issued pursuant
to the Reorganization will be passed upon by Rogers & Wells, New York, New
York. Rogers & Wells will rely as to matters of Maryland law on the opinion of
Wilmer, Cutler & Pickering, Baltimore, Maryland.
EXPERTS
The audited statement of assets, liabilities and capital of the Funds,
incorporated into the SAI by reference, has been so included in reliance on the
report of Deloitte & Touche LLP, independent auditors, and on their authority
as experts in auditing and accounting. The principal business address of
Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey 08540.
MEETINGS OF SHAREHOLDERS
The Company's by-laws do not require that the Company hold an annual
meeting of stockholders in any year in which none of the following is required
to be acted on by the stockholders of the Company under the Investment Company
Act: (1) election of directors, (2) approval of the investment advisory
agreement, (3) ratification of the election of independent public accountants,
and (4) approval of a distribution agreement. The Company will be required to
call an annual or special meeting of stockholders of a Fund in accordance with
the requirements of the Investment Company Act to seek approval of a change in
the fundamental policies, objectives or restrictions with respect to such Fund.
The Company also would be required to hold a special stockholders' meeting to
elect new Board members at such time as less than a majority of the Board
members holding office have been elected by stockholders. In addition, the by-
laws of the Company provide for the calling of meetings of stockholders of a
Fund at the request a majority of the Board members, the President or upon the
written request of at least 25% of the outstanding shares entitled to vote at
such meeting.
40<PAGE>
<PAGE>
--------------------
STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WHO WISH
TO HAVE THEIR SHARES VOTED ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY
AND RETURN IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
41<PAGE>
<PAGE>
APPENDIX A
OUTSTANDING SHARES OF EACH FUND
<TABLE>
<CAPTION>
SHARES OUTSTANDING
NAME OF FUND ON RECORD DATE
------------ --------------
<S> <C> <C>
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Company's management, on the Record Date the
following persons owned beneficially five percent or more of the outstanding
shares of a Fund.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
NAME OF FUND BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------ ---------------- -------------------- --------
<S> <C> <C> <C>
</TABLE>
A-1<PAGE>
<PAGE>
APPENDIX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as
of the [___] day of [ ], 1996, by and between the [Merrill Lynch World
Income Focus Fund/Merrill Lynch Global Strategy Focus Fund] (the "Acquiring
Fund"), a fund of the Merrill Lynch Variable Series Funds, Inc., a Maryland
corporation (the "Company"), and [Merrill Lynch International Bond
Fund/Merrill Lynch Flexible Strategy Fund] (the "Transferor Fund"), also a
fund of the Company.
The Company is an open-end management investment company which has a
wide range of investment objectives among its seventeen separate funds, of
which the Transferor Fund and Acquiring Fund constitute two. A separate
class of common stock is issued for each of the seventeen funds of the
Company. The shares of the Company are sold only to separate accounts of
certain insurance companies (the "Insurance Companies"), including Merrill
Lynch Life Insurance Company and ML Life Insurance Company of New York, to
fund benefits under variable annuity contracts and/or variable life insurance
contracts (the "Contracts") issued by such companies. In accordance with
their respective legal obligations, it is expected that the Insurance
Companies will generally vote the shares of the Transferor Fund based on the
instructions received from the owners of the Contracts (the "Contract
Owners") having the voting interest in the shares to be voted.
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by the Acquiring Fund
of substantially all of the assets, and the assumption of all of the
liabilities, of the Transferor Fund in exchange solely for an equal aggregate
value of Acquiring Fund's shares of common stock, with a par value of $0.10
per share ("Acquiring Fund Common Stock"), and the subsequent distribution to
Transferor Fund stockholders in liquidation of the Transferor Fund of all of
the Acquiring Fund Common Stock received in exchange for their corresponding
shares of common stock of Transferor Fund, with a par value of $0.10 per
share ("Transferor Fund Common Stock"), upon and subject to the terms
hereinafter set forth (the "Reorganization").
In the course of the Reorganization, Acquiring Fund Common Stock will be
distributed to Transferor Fund stockholders as follows: each holder of
Transferor Fund Common Stock will be entitled to receive the number of shares
of Acquiring Fund Common Stock to be received by Transferor Fund equal to the
aggregate net asset value of the Transferor Fund Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 6 of this Agreement).
In consideration therefor, on the Exchange Date the Acquiring Fund shall
assume all of the Transferor Fund's obligations and liabilities then
existing, whether absolute, accrued, contingent or otherwise. It is intended
that the Reorganization described in this Plan shall be a reorganization
within the meaning of Section 368(a)(1)(D) of the Internal Revenue Code of
1986, as amended (the "Code"), and any successor provision.
As used in this Agreement, the term "Investments" shall mean (i) the
investments of the Transferor Fund shown on the schedule of its investments
as of the Valuation Time (as defined in Section 2(c) of this Agreement)
furnished to the Acquiring Fund, with such additions thereto and deletions
therefrom as may have arisen in the course of the Transferor Fund's business
up to the Valuation Time; and (ii) all other assets owned by the Transferor
Fund or liabilities incurred as of the Valuation Time, except that the
Transferor Fund shall retain cash, bank deposits or cash equivalent
securities in an estimated amount necessary to (1) pay its income dividends
and capital gains distributions, if any, payable for the period prior to the
Valuation Time, and (2) pay such contingent and other liabilities as the
B-1<PAGE>
<PAGE>
Directors of the Company reasonably shall deem to exist against the
Transferor Fund, if any, at the Valuation Time, for which contingent and
other appropriate liability reserves shall be established on the Transferor
Fund's books. The Transferor Fund also shall retain any and all rights which
it may have over and against any other person which may have accrued up to
the Valuation Time. Any unexpended portion of the foregoing funds so
retained by the Transferor Fund shall be disbursed by the Transferor Fund pro
rata to its stockholders upon termination of the Transferor Fund as a final
liquidating dividend.
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and
intending to be legally bound, the Transferor Fund and the Acquiring Fund
hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE FUNDS.
(a) The Acquiring Fund and the Transferor Fund represents and
warrants to, and agrees with, each other that:
(i) The execution, delivery and performance of this
Agreement has been duly authorized by all necessary action of the Company's
Board of Directors, and this Agreement will constitute a valid and binding
obligation of such Fund enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(ii) Such Fund has been furnished with a statement of
assets, liabilities and capital and a schedule of investments of the other
Fund, each as of December 31, 1995, said financial statements having been
audited by Deloitte & Touche LLP, independent public accountants. An
unaudited statement of assets, liabilities and capital of such Fund and an
unaudited schedule of investments of such Fund, each as of the Valuation
Time, will be furnished to the other Fund at or prior to the Exchange Date
for the purpose of determining the number of shares of the Acquiring Fund
Common Stock to be issued pursuant to Section 3 of this Agreement; and each
unaudited statement will fairly present the financial position of such Fund
as of the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
(iii) Such Fund has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since December 31,
1995 and those incurred in connection with the Reorganization. As of the
Valuation Time, such Fund will advise the other Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the ordinary
course of business, existing or accrued as of such time.
(iv) Such Fund has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be filed
by it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of such Fund have adequately been provided
for on its books, and no tax deficiency or liability of such Fund has been
asserted and no question with respect thereto has been raised by the Internal
B-2<PAGE>
<PAGE>
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the
Exchange Date occurs.
(b) The Transferor Fund represents and warrants to, and agrees
with, the Acquiring Fund that:
(i) The Transferor Fund will not sell or otherwise dispose
of any of the shares of the Acquiring Fund to be received in the
Reorganization, except in distribution to the stockholders of the Transferor
Fund.
(ii) At both the Valuation Time and the Exchange Date, the
Transferor Fund will have full right, power and authority to sell, assign,
transfer and deliver the Investments. At the Exchange Date, subject only to
the delivery of the Investments as contemplated by this Agreement, the
Transferor Fund will have good and marketable title to all of the
Investments, and the Acquiring Fund will acquire all of the Investments free
and clear of any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed by the Federal
or state securities laws and those imperfections of title or encumbrances as
do not materially detract from the value or use of the Investments or
materially affect title thereto).
(c) The Acquiring Fund represents and warrants to, and agrees
with, the Transferor Fund that:
(i) The Acquiring Fund Common Stock to be issued to the
Transferor Fund pursuant to this Agreement will have been duly authorized
and, when issued and delivered pursuant to this Agreement, will be legally
and validly issued and will be fully paid and nonassessable and will have
full voting rights, and no stockholder of the Acquiring Fund will have any
preemptive right of subscription or purchase in respect thereof.
(ii) At or prior to the Exchange Date, the Acquiring Fund
Common Stock to be transferred to the Transferor Fund on the Exchange Date
will be duly qualified for offering to the public in all states of the United
States in which the sale of shares of the Acquiring Fund presently are
qualified, and there are a sufficient number of such shares registered under
the 1933 Act and with each pertinent state securities commission to permit
the transfers contemplated by this Agreement to be consummated.
(iii) At or prior to the Exchange Date, the Acquiring Fund
will have obtained any and all regulatory and Director approvals necessary to
issue the Acquiring Fund Common Stock to the Transferor Fund.
2. THE REORGANIZATION. (a) Subject to the requisite approval of the
stockholders of the Transferor Fund, and to the other terms and conditions
contained herein, the Transferor Fund agrees to convey, transfer and deliver
to the Acquiring Fund for the benefit of the Acquiring Fund, and the
Acquiring Fund agrees to acquire from the Transferor Fund for the benefit of
the Acquiring Fund, on the Exchange Date all of the Investments (including
interest accrued as of the Valuation Time on debt instruments) of the
Transferor Fund, and assume all of the liabilities of the Transferor Fund, in
exchange solely for that number of shares of the Acquiring Fund Common Stock
provided in Section 3 of this Agreement. Pursuant to this Agreement, as soon
as practicable the Transferor Fund will distribute all the Acquiring Fund
Common Stock received by it to its stockholders in exchange for their
corresponding Transferor Fund Common Stock. Such distribution shall be
accomplished by the opening of stockholder accounts on the stock ledger
records of the Acquiring Fund in the amounts due the stockholders of the
Transferor Fund based on their respective holdings in the Transferor Fund as
of the Valuation Time.
B-3<PAGE>
<PAGE>
(b) The Transferor Fund will pay or cause to be paid any interest
it receives on or after the Exchange Date with respect to the Investments
transferred to the Acquiring Fund hereunder.
(c) The Valuation Time shall be [4:00 P.M.], New York time, on
[December 13, 1996], or such earlier or later day and time as mutually may be
agreed upon in writing (the "Valuation Time").
(d) The Acquiring Fund will acquire substantially all of the
assets of, and assume all of the known liabilities of, the Transferor Fund,
except that recourse for such liabilities will be limited to the Acquiring
Fund. The known liabilities of each Fund as of the Valuation Time shall be
confirmed in writing to the other Fund pursuant to Section 1(a)(iii) of this
Agreement.
3. ISSUANCE AND VALUATION OF THE ACQUIRING FUND COMMON STOCK IN THE
REORGANIZATION. Full shares of the Acquiring Fund Common Stock of an
aggregate net asset value or liquidation preference, as the case may be,
equal (to the nearest one ten thousandth of one cent) to the value of the
assets of the Transferor Fund acquired determined as hereinafter provided,
reduced by the amount of liabilities assumed by the Acquiring Fund, shall be
issued by the Acquiring Fund in exchange for such assets of the Transferor
Fund. The assets of the Transferor Fund and the Acquiring Fund shall be
determined in accordance with the procedures described in the Acquiring Fund
Offering Documents as of the Valuation Time, and no formula will be used to
adjust the net asset value so determined of either the Transferor Fund or the
Acquiring Fund to take into account differences in realized and unrealized
gains and losses. Values in all cases shall be determined as of the
Valuation Time. The value of the Investments of the Transferor Fund to be
transferred to the Acquiring Fund shall be determined by the Acquiring Fund
pursuant to the procedures utilized by the Acquiring Fund in valuing its own
assets and determining its own liabilities for purposes of the
Reorganization. Such valuation and determination shall be made by the
Acquiring Fund in cooperation with the Transferor Fund and shall be confirmed
in writing to the Acquiring Fund by the Transferor Fund. The net asset value
per share of the Acquiring Fund Common Stock shall be determined in
accordance with such procedures and the Acquiring Fund shall certify the
computations involved. [The Acquiring Fund shall issue to the Transferor Fund
separate certificates or share deposit receipts for the Acquiring Fund Common
Stock registered in the name of the Transferor Fund.] The Transferor Fund
then shall distribute the Acquiring Fund Common Stock to its corresponding
stockholders of the Transferor Fund Common Stock by redelivering the
certificates or share deposit receipts evidencing ownership of the Acquiring
Fund Common Stock to Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
as the transfer agent and registrar for the Acquiring Fund Common Stock. With
respect to any Transferor Fund stockholder holding certificates evidencing
ownership of the Transferor Fund Common Stock as of the Exchange Date, and
subject to the Acquiring Fund being informed thereof in writing by the
Transferor Fund, the Acquiring Fund will not permit such stockholder to
receive new certificates evidencing ownership of the Acquiring Fund Common
Stock, exchange the Acquiring Fund Common Stock credited to such
stockholder's account for shares of other investment companies managed by
Merrill Lynch Asset Management, L.P. or any of its affiliates, or pledge or
redeem such the Acquiring Fund Common Stock, in any case, until notified by
the Transferor Fund or its agent that such stockholder has surrendered his or
her outstanding certificates evidencing ownership of the Transferor Fund
Common Stock or, in the event of lost certificates, posted adequate bond.
The Transferor Fund will request its stockholders to surrender their
outstanding certificates evidencing ownership of the Transferor Fund Common
Stock or post adequate bond therefor.
4. PAYMENT OF EXPENSES. (a) With respect to expenses incurred in
connection with the Reorganization, the Acquiring Fund shall pay, subsequent
to the Exchange Date, all expenses incurred by the Acquiring Fund or the
Transferor Fund in connection with the Reorganization, including, but not
limited to, all costs related to the preparation and distribution of the
registration statement filed by the Company on Form N-14 relating to the
B-4<PAGE>
<PAGE>
Acquiring Fund Common Stock to be issued pursuant to this Agreement, and any
supplement or amendment thereto or to the documents therein (as amended, the
"N-14 Registration Statement"), all costs related to the preparation and
filing of an exemptive order application with the Securities and Exchange
Commission (the "Commission") with respect to the transactions contemplated
herein and the fees of special counsel to the Reorganization. Such fees and
expenses shall include legal, accounting and state securities or blue sky
fees, printing costs, filing fees, stock exchange fees, portfolio transfer
taxes (if any), and any similar expenses incurred in connection with the
Reorganization. Neither the Transferor Fund nor the Acquiring Fund shall pay
any expenses of its respective stockholders arising out of or in connection
with the Reorganization, and neither the Transferor Fund nor the Acquiring
Fund shall pay for the costs of printing and mailing the form of proxy, the
notice of the Company's annual meeting of stockholders and the Proxy
Statement--Prospectus forming part of the N-14 Registration Statement to
Contract Owners.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages, [PROVIDED, HOWEVER,
that the Transferor Fund and the Acquiring Fund will bear all expenses
incurred by the Acquiring Fund or the Transferor Fund in connection with the
Reorganization in proportion to the net assets of each Fund].
5. COVENANTS OF THE TRANSFEROR FUND AND THE ACQUIRING FUND. (a) The
Transferor Fund agrees to call a meeting of its stockholders as soon as is
practicable after the effective date of the N-14 Registration Statement for
the purpose of considering the Reorganization as described in this Agreement.
As a condition to the obligations of each of the parties hereto, the holders
of more than fifty percent of the shares of the Transferor Fund Common Stock
issued and outstanding and entitled to vote thereon shall have approved this
Agreement at such a meeting at or prior to the Valuation Time.
(b) The Transferor Fund and the Acquiring Fund each covenants to
operate its respective business as presently conducted between the date
hereof and the Exchange Date.
(c) The Transferor Fund agrees that following the consummation of
the Reorganization, it will liquidate in accordance with the laws of the
State of Maryland and any other applicable law, it will not make any
distributions of any Acquiring Fund Common Stock other than to the
stockholders of the Transferor Fund and without first paying or adequately
providing for the payment of all of the Transferor Fund's liabilities not
assumed by the Acquiring Fund, if any, and on and after the Exchange Date it
shall not conduct any business except in connection with its liquidation.
(d) The Company will file the N-14 Registration Statement with
the Commission and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as practicable. The
Transferor Fund and the Acquiring Fund agree to cooperate fully with each
other, and each will furnish to the other the information relating to itself
to be set forth in the N-14 Registration Statement as required by the 1933
Act, the 1940 Act and the rules and regulations thereunder and the state
securities or blue sky laws.
(e) The Acquiring Fund agrees to advise the Transferor Fund
promptly in writing if at any time prior to the Exchange Date the assets of
the Transferor Fund include any assets which the Acquiring Fund is not
permitted, or reasonably believes to be unsuitable for it, to acquire,
including without limitation any security which, prior to its acquisition by
the Transferor Fund, the Acquiring Fund has informed the Transferor Fund is
unsuitable for the Acquiring Fund to acquire. Moreover, the Acquiring Fund
has no plan or intention to sell or otherwise dispose of the assets of the
Transferor Fund to be acquired in the Reorganization, except for dispositions
made in the ordinary course of business.
B-5<PAGE>
<PAGE>
(f) Each of the Transferor Fund and the Acquiring Fund agrees
that by the Exchange Date all of its Federal and other tax returns and
reports required to be filed on or before such date shall have been filed and
all taxes shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such taxes. In
connection with this covenant, the Funds agree to cooperate with each other
in filing any tax return, amended return or claim for refund, determining a
liability for taxes or a right to a refund of taxes or participating in or
conducting any audit or other proceeding in respect of taxes. The Acquiring
Fund agrees to retain for a period of ten years following the Exchange Date
all returns, schedules and work papers and all material records or other
documents relating to tax matters of the Transferor Fund for its taxable
period first ending after the Exchange Date and for all prior taxable
periods. Any information obtained under this subsection shall be kept
confidential except as otherwise may be necessary in connection with the
filing of returns or claims for refund or in conducting an audit or other
proceeding. After the Exchange Date, the Transferor Fund shall prepare, or
cause its agents to prepare, any Federal, state or local tax returns,
including any Forms 1099, required to be filed by the Transferor Fund with
respect to the Transferor Fund's final taxable year ending with its complete
liquidation and for any prior periods or taxable years and further shall
cause such tax returns and Forms 1099 to be duly filed with the appropriate
taxing authorities. Notwithstanding the aforementioned provisions of this
subsection, any expenses incurred by the Transferor Fund (other than for
payment of taxes) in connection with the preparation and filing of said tax
returns and Forms 1099 after the Exchange Date shall be borne by the
Transferor Fund to the extent such expenses would have been accrued by the
Transferor Fund in the ordinary course without regard to the Reorganization;
any excess expenses shall be borne by the Acquiring Fund at the time such tax
returns and Forms 1099 are prepared.
(g) The Transferor Fund agrees to mail to its respective
stockholders of record entitled to vote at the meeting of stockholders at
which action is to be considered regarding this Agreement, in sufficient time
to comply with requirements as to notice thereof, a combined Proxy Statement
and Prospectus which complies in all material respects with the applicable
provisions of the 1933 Act and Section 20(a) of the 1940 Act, and the rules
and regulations, respectively, thereunder.
(h) Following the consummation of the Reorganization, the
Acquiring Fund expects to stay in existence and continue its business.
6. EXCHANGE DATE. (a) An instrument of transfer conveying the assets
of the Transferor Fund to be transferred, together with any other
Investments, and an instrument ordering the issuance to the Transferor Fund
of the Acquiring Fund Common Stock to be issued, shall be delivered at the
offices of Rogers & Wells, 200 Park Avenue, New York, New York 10166, at
[10:00 A.M.] on the next full business day following the Valuation Time, or
at such other place, time and date agreed to by the Transferor Fund and the
Acquiring Fund, the date and time upon which such delivery is to take place
being referred to herein as the "Exchange Date." To the extent that any
Investments, for any reason, are not transferable on the Exchange Date, the
Transferor Fund shall cause such Investments to be transferred to the
Acquiring Fund's account with The Bank of New York at the earliest
practicable date thereafter.
(b) The Transferor Fund will deliver to the Acquiring Fund on the
Exchange Date confirmations or other adequate evidence as to the tax basis of
each of the Investments delivered to the Acquiring Fund hereunder, certified
by Deloitte & Touche LLP.
(c) The Acquiring Fund shall have made prior arrangements for the
delivery on the Exchange Date of the Investments to The Bank of New York as
the custodian for the Acquiring Fund.
B-6<PAGE>
<PAGE>
(d) As soon as practicable after the close of business on the
Exchange Date, the Transferor Fund shall deliver to the Acquiring Fund a list
of the names and addresses of all of the stockholders of record of the
Transferor Fund on the Exchange Date and the number of shares of the
Transferor Fund Common Stock owned by each such stockholder, certified by
MLFDS as its transfer agent or by the President of the Company to the best of
their knowledge and belief.
7. CONDITIONS TO CONSUMMATION OF THE REORGANIZATION. The obligations
of Funds hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of more than fifty percent of the Transferor Fund Common Stock,
issued and outstanding and entitled to vote thereon; and that the Board of
Directors of the Company, including a majority of the members of the Board of
Directors of the Company who are not "interested persons" as defined under
the 1940 Act, shall have approved this Agreement.
(b) That each Fund shall have furnished to the other Fund a
statement of its assets, liabilities and capital, with values determined as
provided in Section 3 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified by the Company's
President (or any Vice President) and its Treasurer, and a certificate signed
by the Company's President (or any Vice President) and its Treasurer, dated
as of the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date there has been no material adverse change in the financial
position of each Fund since December 31, 1995, other than changes in its
portfolio securities since that date or changes in the market value of its
portfolio securities. For purposes of this paragraph, a decline in the net
asset value per share of a Fund, the discharge or incurrence of a Fund's
liabilities in the ordinary course of business or the redemption of a Fund's
Common Stock by stockholders of such Fund shall not constitute a material
adverse change.
(c) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(d) That the Company shall have received an opinion of Wilmer,
Cutler & Pickering, Maryland counsel to the Company, in form satisfactory to
the Company and dated the Exchange Date, to the effect that: (i) the Company
is a corporation duly organized, validly existing and in good standing in
conformity with the laws of the State of Maryland; (ii) the Acquiring Fund
Common Stock to be delivered to the Transferor Fund stockholders as provided
for by this Agreement is duly authorized and, upon delivery, will be validly
issued and outstanding and fully paid and nonassessable by the Acquiring
Fund, and no stockholder of the Acquiring Fund has any preemptive right to
subscribe or purchase in respect thereof (pursuant to the Articles of
Incorporation, as amended, or the by-laws of the Company or, to the best of
such counsel's knowledge, otherwise); (iii) the Transferor Fund has the power
to sell, assign, transfer and deliver the assets transferred by it hereunder
and, upon consummation of the Reorganization in accordance with the terms of
this Agreement, the Transferor Fund will have duly transferred such assets
and liabilities in accordance with this Agreement; (iv) this Agreement has
been duly authorized, executed and delivered by the Company, and represents a
valid and binding obligation, enforceable in accordance with its terms,
subject to the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto; PROVIDED, that such
counsel need not express an opinion with respect to the application of
equitable principles in any proceeding, whether at law or in equity; (v) the
execution and delivery of this Agreement did not, and the consummation of the
Reorganization will not, violate the Articles of Incorporation, as amended,
the by-laws of the Company or Maryland General Corporate Law; (vi) no consent,
approval, authorization or order of any Maryland court or governmental
B-7<PAGE>
<PAGE>
authority is required for the consummation by the Acquiring Fund and the
Transferor Fund of the Reorganization, except such as have been obtained under
Maryland law; (vii) all necessary corporate action, including stockholders
action, has been taken in connection with the consummation of the
Reorganization; and (viii) such opinion is solely for the benefit of the
Company and its Directors and officers. In giving the opinion set forth above,
Wilmes Cutler & Pickering may state that it is relying on certificates of
officers of the Company with regard to matters of fact and certain certificates
and written statements of governmental officials with respect to the good
standing of the company.
(e) That the Company shall have received an opinion of Rogers &
Wells, in form satisfactory to the Company and dated the Exchange Date, to
the effect that (i) no consent, approval, authorization or order of any
United States Federal court or governmental authority is required for the
consummation by the Transferor Fund and the Acquiring Fund of the
Reorganization, except such as have been obtained under the 1933 Act and the
1940 Act and the published rules and regulations of the Commission thereunder
and such as may be required under state securities or blue sky laws; (ii) the
N-14 Registration Statement has become effective under the 1933 Act, to the
best of such counsel's knowledge, no stop order suspending the effectiveness
of the N-14 Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or contemplated under the
1933 Act, and the N-14 Registration Statement, and each amendment or
supplement thereto, as of their respective effective dates, appear on their
face to be appropriately responsive in all material respects to the
requirements of the 1933 Act and the 1940 Act and the published rules and
regulations of the Commission thereunder; (iii) the descriptions in the N-14
Registration Statement of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the information
required to be shown; (iv) such counsel does not know of any statutes, legal
or governmental proceedings or contracts or other documents related to the
Reorganization of a character required to be described in the N-14
Registration Statement which are not described therein or, if required to be
filed, filed as required; (v) the execution and delivery of this Agreement
does not, and the consummation of the Reorganization will not, violate any
material provision of any agreement (known to such counsel) to which the
Acquiring Fund or the Transferor Fund is a party or by which the Acquiring
Fund or the Transferor Fund is bound; (vi) the Company, to the knowledge of
such counsel, is not required to qualify to do business as a foreign
corporation in any jurisdiction except as may be required by state securities
or blue sky laws, and except where it has so qualified or the failure so to
qualify would not have a material adverse effect on the Acquiring Fund or the
Transferor Fund, or their respective stockholders; (vii) such counsel does
not have actual knowledge of any material suit, action or legal or
administrative proceeding pending or threatened against the Acquiring Fund or
the Transferor Fund, the unfavorable outcome of which would materially and
adversely affect the Acquiring Fund or the Transferor Fund; and (viii) all
corporate actions required to be taken by the Company to authorize this
Agreement and to effect the Reorganization have been duly authorized by all
necessary corporate actions on the part of the Company. Such opinion also
shall state that (x) while such counsel cannot make any representation as to
the accuracy or completeness of statements of fact in the N-14 Registration
Statement or any amendment or supplement thereto, nothing has come to their
attention that would lead them to believe that, on the respective effective
dates of the N-14 Registration Statement and any amendment or supplement
thereto, (1) the N-14 Registration Statement or any amendment or supplement
thereto contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; and (2) the prospectus and statement of
additional information included in the N-14 Registration Statement contained
any untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel does not
express any opinion or belief as to the financial statements, other financial
data, statistical data or information relating to the Acquiring Fund or the
Transferor Fund contained or incorporated by reference in the N-14
Registration Statement. In giving the opinion set forth above, Rogers &
Wells may state that it is relying on certificates of officers of the Company
with regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing of the
Company and on the opinion of Wilmer, Cutler & Pickering as to matters of
Maryland law.
B-8<PAGE>
<PAGE>
(f) That the Company shall have received an opinion of Rogers &
Wells, to the effect that for Federal income tax purposes (i) the transfer of
substantially all of the Investments of the Transferor Fund to the Acquiring
Fund in exchange solely for the Acquiring Fund Common Stock as provided in
this Agreement will constitute a reorganization within the meaning of Section
368(a)(1)(D) of the Code; the Transfer Fund and the Acquiring Fund will be a
"party to a reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized to the Transferor Fund as a result of
the Reorganization; (iii) no gain or loss will be recognized to the Acquiring
Fund as a result of the Reorganization; (iv) no gain or loss will be recognized
to the stockholders of the Transferor Fund on the distribution to them by the
Transferor Fund of the Acquiring Fund Common Stock in exchange for their
corresponding Transferor Fund Common Stock, and gain, if any, will be
recognized with respect to any cash or property other than the Acquiring Fund
Common Stock received; (v) in accordance with Section 1032 of the Code, no gain
or loss will be recognized by the stockholders of the Acquiring Fund upon the
issuance of the Acquiring Fund Common Stock and the distribution of such the
Acquiring Fund Common Stock to the Transferor Fund stockholders in the
Reorganization; (vi) the basis to the Acquiring Fund of the Investments will be
the same as the basis of the Investments in the hands of the Transferor Fund
immediately prior to the consummation of the Reorganization; (vii) after the
Reorganization, the basis of the Acquiring Fund Common Stock received by each
stockholder of the Transferor Fund in the Reorganization will equal the basis
of the stock of the Transferor Fund exchanged therefor; (viii) a stockholder's
holding period for its Acquiring Fund Common Stock will be determined by
including the period for which it held Transferor Fund Common Stock exchanged
therefor, PROVIDED that it held such Transferor Fund Common Stock as a capital
asset; (ix) the Acquiring Fund's holding period with respect to the Investments
will include the period for which such Investments were held by the Transferor
Fund; and (x) no gain or loss will be recognized to the Transferor Fund or its
stockholders upon the liquidation of the Transferor Fund in connection with the
Reorganization. In addition, such opinion shall state that, without any
independent investigation having been made with respect to the qualification
of either the Transferor Fund or the Acquiring Fund as a regulated investment
company underthe Code and based upon certain representations by the Transferor
Fund and the Acquiring Fund, the status of the Transferor Fund and the
Acquiring Fund as regulated investment companies under Sections 851-855 of the
Code will not be affected as a result of the Reorganization, except that upon
the liquidation of the Transferor Fund in connection with the Reorganization
its regulated investment company status will terminate.
(g) That all proceedings taken by each Fund in connection with
the Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to the other Fund.
(h) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of the Company, contemplated
by the Commission.
(i) That the Company shall have received from Deloitte & Touche
LLP a letter dated as of the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the Exchange
Date, in form and substance satisfactory to the Company, to the effect that
(i) they are independent public accountants with respect to the Funds within
the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements and
supplementary information of the Funds included or incorporated by reference
in the N-14 Registration Statement and reported on by them comply as to form
in all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; (iii) on the
basis of limited procedures agreed upon by the Company and described in such
letter (but not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of the Funds included in
the N-14 Registration Statement, and inquiries of certain officials of the
Company responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited financial
B-9<PAGE>
<PAGE>
statements and related unaudited supplementary information do not comply as
to form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis substantially
consistent with that of the audited financial statements, or (c) such
unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
and (iv) on the basis of limited procedures agreed upon by the Company and
described in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to the Funds appearing
in the N-14 Registration Statement, which information is expressed in dollars
(or percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of the Funds or from schedules prepared by officials of the Company having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(j) That the Company shall have received a letter from Deloitte &
Touche LLP, dated the Exchange Date, stating that such firm has performed a
limited review of the Federal, state and local income tax returns of the
Transferor Fund for the period ended December 31, 1995 (which returns
originally were prepared and filed by the Transferor Fund), and that based on
such limited review, nothing came to their attention which caused them to
believe that such returns did not properly reflect, in all material respects,
the Federal, state and local income taxes of the Transferor Fund for the
period covered thereby; and that for the period from December 31, 1995 to and
including the Exchange Date such firm has performed a limited review to
ascertain the amount of applicable Federal, state and local taxes, and has
determined that either such amount has been paid or reserves established for
payment of such taxes, this review to be based on unaudited financial data;
and that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from December
31, 1995 to and including the Exchange Date and for any taxable year of the
Transferor Fund ending upon the liquidation of the Transferor Fund or that
the Transferor Fund would not continue to qualify as a regulated investment
company for Federal income tax purposes.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of the Acquiring Fund or
would prohibit the Reorganization.
(l) That the Company shall have received from the Commission an
order of exemptive relief from the provisions of Section 17 of the 1940 Act
as may, in the view of its counsel, be required in order to consummate the
Reorganization, and that the Company shall have received from the Commission
such other orders as counsel for the Company deems reasonably necessary or
desirable under the 1933 Act and the 1940 Act in connection with the
Reorganization, and all such orders shall be in full force and effect.
(m) That the Investments to be transferred to the Acquiring Fund
shall not include any assets or liabilities which the Acquiring Fund may not
properly acquire or assume.
(n) That prior to the Exchange Date, the Transferor Fund shall
have declared a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to its stockholders all of
its net investment company taxable income for the period from [January 1,
1996] to and including the Exchange Date, if any (computed without regard to
any deduction or dividends paid), and all of its net capital gain, if any,
realized for the period from [January 1, 1996] to and including the Exchange
Date.
B-10<PAGE>
<PAGE>
(o) That any condition stated in the N-14 Registration Statement
as a precondition to the consummation of the Reorganization shall have been
met prior to the Exchange Date.
8. ARTICLES OF AMENDMENT. For purposes of Maryland law, the
transactions contemplated by this Agreement will be effectuated by Articles
of Amendment, substantially in the form attached hereto as Exhibit A, which
will amend the Articles of Incorporation of the Company to provide, among
other things, that all shares of the Transferor Fund will be exchanged for,
and converted and reclassified into shares of the Acquiring Fund.
9. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization abandoned
at any time (whether before or after adoption thereof by the stockholders of
the Transferor Fund) prior to the Exchange Date, or the Exchange Date may be
postponed by action of the Board of Directors of the Company for any reason,
including if any condition set forth in Section 7 of this Agreement has not
been fulfilled or waived by the Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by [December 31, 1996], this Agreement automatically shall
terminate on that date, unless a later date is approved by the Board of
Directors of the Company.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either the Transferor Fund or
the Acquiring Fund or persons who are their directors, officers, agents or
stockholders in respect of this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of the
Company on behalf of either the Transferor Fund or the Acquiring Fund,
respectively (whichever is entitled to the benefit thereof), if, in the
judgment of the Board after consultation with its counsel, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement to the stockholders of their respective fund, on behalf of
which such action is taken. In addition, the Board of Directors of the
Company hereby delegates to Merrill Lynch Asset Management, L.P. the ability
to make non-material changes to the transaction if it deems it to be in the
best interests of both the Transferor Fund and the Acquiring Fund to do so.
(e) The representations and warranties of each Fund contained in
Section 1 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither the Transferor Fund, the
Acquiring Fund nor any of their stockholders nor any agents, officers or
directors of the Company shall have any liability with respect to such
representations or warranties after the Exchange Date. This provision shall
not protect any agent, officer or director of the Company or any stockholder
of the Transferor Fund or the Acquiring Fund against any liability to the
entity for which that officer, director or trustee, agent or stockholder so
acts or to its stockholders to which that officer, director or trustee, agent
or stockholder otherwise would be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties in the
conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any
B-11<PAGE>
<PAGE>
terms or conditions which are determined by action of the Board of Directors
of the Company to be acceptable, such terms and conditions shall be binding
as if a part of this Agreement without further vote or approval of the
stockholders of the Transferor Fund, unless such terms and conditions shall
result in a change in the method of computing the number of shares of the
Acquiring Fund Common Stock to be issued to the Transferor Fund in which
event, unless such terms and conditions shall have been included in the proxy
solicitation materials furnished to the stockholders of the Transferor Fund
prior to the meeting at which the Reorganization shall have been approved,
this Agreement shall not be consummated and shall terminate unless the
Company promptly shall call a special meeting of stockholders of the
Transferor Fund at which such conditions so imposed shall be submitted for
approval.
10. OTHER MATTERS.
(a) All covenants, agreements, representations and warranties
made under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each of
the parties, notwithstanding any investigation made by them or on their
behalf.
(b) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be deemed to have
been given if delivered or mailed, first class postage prepaid, addressed to
the Transferor Fund or the Acquiring Fund, in either case at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attn: Arthur Zeikel, President.
(c) This Agreement supersedes all previous correspondence and
oral communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization, may
not be changed except by a letter of agreement signed by each party and shall
be governed by and construed in accordance with the laws of the State of New
York applicable to agreements made and to be performed in said state.
(d) Copies of the Articles of Incorporation, as amended, of the
Company are on file with the Department of Assessments and Taxation of the
State of Maryland and notice is hereby given that this instrument is executed
on behalf of the Directors of the Company.
B-12<PAGE>
<PAGE>
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.,
on behalf of the Acquiring Fund
By:_____________________________________________
Witness:
- -----------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.,
on behalf of the Transferor Fund
By:_____________________________________________
Witness:
- -----------------------------------
B-13<PAGE>
<PAGE>
EXHIBIT A
FORM OF AMENDMENT TO ARTICLES OF INCORPORATION
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
ARTICLES OF AMENDMENT
Merrill Lynch Variable Series Funds, Inc., a Maryland corporation,
having its principal office in Baltimore City, Maryland (which is hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended as follows:
(1) ARTICLE V of the charter of the Corporation is hereby
amended to add Section (d) to read in its entirety as
follows:
"(d) The Corporation currently has classified capital stock
consisting of Common Stock, par value $0.10 per share, that
are designated in seventeen (17) classes as separate funds,
including classes of Common Stock, par value $0.10 per
share, that are designated as funds as follows:
<TABLE>
<CAPTION>
Name of Fund and Number of Shares
Class of Common Stock of Common Stock
--------------------- ---------------
<S> <C>
Merrill Lynch International Bond Fund 100,000,000
Merrill Lynch World Income Focus Fund 100,000,000
Merrill Lynch Flexible Strategy Fund 100,000,000
Merrill Lynch Global Strategy Focus Fund 100,000,000
</TABLE>
Merrill Lynch International Bond Fund, a separate fund
and class of Common Stock ("International Bond Fund"),
Merrill Lynch World Income Focus Fund, a separate fund and
class of Common Stock ("World Income Focus Fund"), and the
Corporation have entered into an Agreement and Plan of
Reorganization dated even date herewith (the
"International/World Income Plan of Reorganization"), that
provides for the transfer of substantially all of assets of
International Bond Fund to World Income Focus Fund in
exchange for consideration in the form of stock designated
as World Income Focus Fund and the assumption of the
liabilities of International Bond Fund by World Income Focus
Fund.
Merrill Lynch Flexible Strategy Fund, a separate fund
and class of Common Stock ("Flexible Strategy Fund"),
Merrill Lynch Global Strategy Focus Fund, a separate fund
A-1<PAGE>
<PAGE>
and class of Common Stock ("Global Strategy Focus Fund"),
and the Corporation have entered into an Agreement and Plan
of Reorganization dated even date herewith (the "Flexible
Strategy/Global Strategy Plan of Reorganization), that
provides for the transfer of substantially all of the assets
of Flexible Strategy Fund to Global Strategy Focus Fund in
exchange for consideration in the form of stock designated
as Global Strategy Focus Fund and the assumption of the
liabilities of Flexible Strategy Fund by Global Strategy
Focus Fund.
In furtherance of, and to consummate the transactions
contemplated by, each of those Agreements and Plans of
Reorganization the following actions shall be
simultaneously effective as of the "Effective Time" (as
defined hereinafter):
(i) Pursuant to the authority expressly vested in the
Board of Directors of the Corporation pursuant to Section 2-
208 of the Maryland General Corporation Law and Article V,
Section (c) of the charter of the Corporation, each
authorized and unissued share of Common Stock of the
Corporation designated as International Bond Fund is hereby
duly reclassified as one authorized and unissued share of
Common Stock of the Corporation designated as World Income
Focus Fund.
(ii) Pursuant to the authority expressly vested in the
Board of Directors of the Corporation pursuant to Section 2-
208 of the Maryland General Corporation Law and Article V,
Section (c) of the charter of the Corporation, each
authorized and unissued share of Common Stock of the
Corporation designated as Flexible Strategy Fund is hereby
duly reclassified as one share of Common Stock of the
Corporation designated as Global Strategy Focus Fund.
(iii) Each issued and outstanding share of Common
Stock of the Corporation designated as International Bond
Fund is hereby exchanged and duly reclassified into such
number of share(s), or fraction thereof, of Common Stock of
the Corporation designated as World Income Focus Fund
calculated at the International Bond Fund Conversion Rate
(as hereinafter defined).
(iv) Each issued and outstanding share of Common Stock
of the Corporation designated as Flexible Strategy Fund is
hereby exchanged and duly reclassified into such number of
share(s), or fraction thereof, of Common Stock of the
Corporation designated as Global Strategy Focus Fund
calculated at the Flexible Strategy Fund Conversion Rate (as
hereinafter defined).
(v) All assets and liabilities belonging to the
shares of Common Stock of the Corporation designated as
International Bond Fund shall at the Effective Time be
A-2<PAGE>
<PAGE>
transferred and belong to the class of Common Stock of the
Corporation designated as World Income Focus Fund.
(vi) All assets and liabilities belonging to the
shares of Common Stock of the Corporation designated as
Flexible Strategy Fund shall at the Effective Time be
transferred and belong to the class of Common Stock of the
Corporation designated as Global Strategy Focus Fund.
(vii) Pursuant to Article V, Section (b)(3) of the
charter of the Corporation, all general liabilities of the
Corporation shall be reallocated among the authorized
classes of Common Stock of the Corporation based on the
proportionate interest in the assets of the Corporation
belonging to each designated class of Common Stock of the
Corporation.
(viii) The term "International Bond Fund Conversion
Rate" means the number (or fraction) of share(s) of World
Income Focus Fund into which each share of International
Bond Fund shall have been exchanged and reclassified as
determined by multiplying each share of Common Stock
designated as International Bond Fund by a fraction, of
which the numerator shall be the aggregate net asset value
of all assets belonging to the shares of Common Stock
designated as International Bond Fund and the denominator
shall be the aggregate net asset value of all assets
belonging to the shares of Common Stock designated as World
Income Focus Fund. The assets belonging to each such class
of Common Stock and the net asset value thereof have been
determined in accordance with the provisions of the
International Bond/World Income Plan of Reorganization.
(ix) The term "Flexible Strategy Fund Conversion Rate" means
the number (or fraction) of share(s) of Global Strategy Focus Fund
into which each share of Flexible Strategy Fund shall have been
exchanged and reclassified determined by multiplying each share of
Common Stock designated as Flexible Strategy Fund by a fraction, of
which the numerator shall be the aggregate net asset value of all
assets belonging to the shares of Common Stock designated as
Flexible Strategy Fund and the denominator shall be the aggregate
net asset value of all assets belonging to the shares of Common
Stock designated as Global Strategy Focus Fund. The assets
belonging to each such class of Common Stock and the net asset value
thereof have been determined in accordance with the provisions of
the Flexible Strategy/Global Strategy Plan of Reorganization.
(x) The classifications of the Common Stock
designated as International Bond Fund and Flexible Strategy
Fund are hereby canceled and references thereto in the
charter of the Corporation are deleted.
(xi) "Effective Time" means the later of (a) the date
on which these Articles of Amendment, having been duly
advised and approved shall be filed with, and accepted for
record by, the Maryland State Department of Assessments and
A-3<PAGE>
<PAGE>
Taxation, or (b) 4:00 p.m. Eastern Time on __________, 1996."
(2) ARTICLE V of the charter of the Corporation is hereby
amended to add Section (e) to read in its entirety as
follows:
"(e) Pursuant to Section 2-605(4) of the Maryland General
Corporation Law and Article X of the charter of the
Corporation, the name of the class of shares of Common
Stock, par value $0.10 per share, of the Corporation
designated as "Merrill Lynch Intermediate Government Bond
Fund" is changed and redesignated as "Merrill Lynch
Government Bond Fund", and the name of the class of shares
of Common Stock, par value $0.10 per share, of the
Corporation designated as "Merrill Lynch World Income Focus
Fund" is changed and redesignated as "Merrill Lynch Global
Bond Focus Fund."
SECOND: The amendments do not increase the authorized stock of
the Corporation.
THIRD: The Corporation is registered as an open-end company
under the Investment Company Act of 1940.
FOURTH: The foregoing amendments to the charter of the
Corporation set forth in Article FIRST (1) hereof have been advised by the
Board of Directors and approved by the stockholders of the Corporation entitled
to vote on the amendments.
FIFTH: The foregoing amendments to the charter of the
Corporation set forth in Article FIRST (2) hereof are limited to changes
expressly permitted by Section 2-605(4) of the Maryland General Corporation
Law.
A-4<PAGE>
<PAGE>
IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has
caused these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary on ________________________ , 1996.
WITNESS MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- -------------------- ---------------------------------
Name: Ira P. Shapiro Name: Arthur Zeikel
Title: Secretary Title: President
THE UNDERSIGNED, President of Merrill Lynch Variable Series Funds,
Inc., who executed on behalf of the Corporation the foregoing Articles of
Amendment of which this Certificate is made a part, hereby acknowledges in the
name and on behalf of said Corporation the foregoing Articles of Amendment to
be the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
-------------------------------
PRESIDENT
A-5<PAGE>
<PAGE>
APPENDIX C
INFORMATION REGARDING THE ACQUIRING FUNDS AND TRANSFEROR FUNDS
FINANCIAL HIGHLIGHTS
The following table presents supplementary financial information with
respect to each of the Acquiring Funds and Transferor Funds. The table has
been audited by Deloitte & Touche LLP, independent auditors, in connection with
their annual audits of the Company's financial statements. Financial
statements for the year ended December 31, 1995 and the independent auditors'
report thereon are incorporated into the SAI. The information in the following
table should be read in conjunction with the financial statements.
<TABLE>
<CAPTION>
FLEXIBLE STRATEGY FUND
------------------------------------------------------------------------------------------------------
FOR THE
The following per share data PERIOD
and ratios have been derived MAY 1,
information provided in the 1986 <DAGGER> TO
financial statements. FOR THE YEAR ENDED DECEMBER 31, DEC. 31,
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET 1995 1994
ASSET VALUE: <DAGGER> <DAGGER>
<DAGGER> <DAGGER> 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 $ 9.97 $ 10.22 $ 10.00
of period ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Investment income-net .47 .37 .28 .33 .47 .65 .48 .52 .24 .11
Realized and unrealized gain
(loss) on investments
and foreign currency
transactions-net 1.99 (1.02) 1.94 .25 2.52 (.08) 1.67 .60 .03 .11
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment 2.46 (.65) 2.22 .58 2.99 .57 2.15 1.12 .27 .22
operations ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net (.42) (.30) (.15) (.54) (.66) (.46) (.55) (.25) (.34) -
Realized gain on (.27) (.54) (.03) (.68) (.09) - - - (.18) -
investments-net ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and (.69) (.84) (.18) (1.22) (.75) (.46) (.55) (.25) (.52) -
distributions ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of $ 16.47 $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 $ 9.97 $ 10.22
period ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per 17.40% (4.20)% 15.80% 4.25% 24.98% 4.81% 20.29% 11.26% 2.43% 2.20%#
share ======= ======= ======= ======= ======= ======= ======= ======= ======= ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses .71% .73% .80% .90% .96% 1.08% 1.19% 1.09% 1.07% 1.25%*
======= ======= ======= ======= ======= ======= ======= ======= ======= ========
Investment income-net 3.07% 2.52% 2.26% 2.62% 3.51% 5.19% 3.94% 4.37% 2.84% 3.65%*
======= ======= ======= ======= ======= ======= ======= ======= ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) $320,234 $274,498 $194,777 $82,549 $55,221 $47,428 $47,837 $46,662 $61,305 $20,640
======== ======== ======== ======= ======= ======= ======= ======= ======= ========
Portfolio turnover 135.83% 65.54% 56.42% 55.25% 67.13% 52.95% 83.31% 80.07% 74.09% 48.88%
======= ======= ======= ====== ====== ====== ====== ====== ====== =======
<FN>
___________________
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
<dagger> Commencement of Operations.
<dagger><dagger> Based on average shares outstanding during the year.
# Aggregate total investment return.
</TABLE>
C-1<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND
--------------------------------------------------------------------
FOR THE
PERIOD
The following per share data and ratios FEBRUARY 28,
have been derived from information FOR THE YEAR ENDED DECEMBER 31, 1992 <DAGGER>
provided in the financial statements. ------------------------------------------------ TO DECEMBER 31,
1995 1994 1993 1992
INCREASE (DECREASE) IN NET ASSET VALUE: ---- ---- ---- ---------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.73 12.17 10.22 $ 10.00
------- ----- ----- -------
Investment income--net .39 .30 .16 .13
Realized and unrealized gain (loss) on investments and .82 (.48) 1.96 .13
------- ----- ----- -------
foreign currency transactions--net
Total from investment operations 1.21 (.18) 2.12 .26
------- ----- ----- -------
Less dividends and distributions:
Investment income--net (.39) (.21) (.17) (.04)
Realized gain on investments--net - (.04) - -
In excess of realized gain on investments--net -<dagger><dagger> (.01) - -
------- ----- ----- -------
Total dividends and distributions (.39) (.26) (.17) (.04)
------- ----- ----- -------
Net asset value, end of period $ 12.55 $ 11.73 $ 12.17 $ 10.22
======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 10.60% (1.46)% 21.03% 2.62%#
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .72% .77% .88% 1.25%*
======= ======= ======= =======
Expenses .72% .77% .88% 1.35%*
======= ======= ======= =======
Investment income--net 3.33% 2.85% 2.41% 2.66%*
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 540,242 $ 515,407 $ 269,627 $15,527
======= ======= ======= =======
Portfolio turnover 27.23% 21.03% 17.07% 14.47%
======= ======= ======= =======
<FN>
___________________
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
<dagger> Commencement of Operations.
<dagger><dagger> Amount is less than $.01 per share.
# Aggregate total investment return.
</TABLE>
C-2<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND
-------------------------------------------------
The following per share data and ratios have been derived from information FOR THE
provided in the financial statements. PERIOD
FOR THE YEAR MAY 2,
ENDED 1994<DAGGER> TO
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995 1994
PER SHARE OPERATING PERFORMANCE: ------------- ----------------
<S> <C> <C>
Net asset value, beginning of period $ 9.70 $ 10.00
------- -------
Investment income--net .72 .38
Realized and unrealized gain (loss) on investments and .82 (.35)
------- --------
foreign currency transactions--net
Total from investment operations 1.54 .03
------- -------
Less dividends:
Investment income--net (.72) (.33)
------- --------
Total dividends (.72) (.33)
------- --------
Net asset value, end of period $ 10.52 $ 9.70
======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 16.35% 0.37%#
======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .00% .00%*
======= =======
Expenses .95% 1.08%*
======= =======
Investment income--net 7.05% 6.34%*
======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 18,121 $9,933
======= =======
Portfolio turnover 2.23% 152.20%
======= =======
<FN>
___________________
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
<dagger> Commencement of Operations.
# Aggregate total investment return.
</TABLE>
C-3<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
WORLD INCOME FOCUS FUND
--------------------------------------------------------
The following per share data and ratios have been derived from FOR THE
information in the financial statements. PERIOD
JULY 1,
FOR THE YEAR ENDED 1993<DAGGER> TO
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995<DAGGER><DAGGER> 1994 1993
PER SHARE OPERATING PERFORMANCE: -------------------- ---- ---------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.17 $ 10.38 $ 10.00
-------- -------- -------
Investment income--net .85 .76 .25
Realized and unrealized gain (loss) on investments and .61 (1.19) .33
foreign currency transactions-net -------- -------- -------
Total from investment operations 1.46 (.43) .58
-------- -------- -------
Less dividends and distributions:
Investment income--net (.84) (.76) (.20)
In excess of realized gain on investments--net - (.02) -
-------- -------- -------
Total dividends and distributions (.84) (.78) (.20)
-------- -------- -------
Net asset value, end of period $ 9.79 $ 9.17 $ 10.38
======== ======== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 16.69% (4.21)% 5.90%#
======== ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses .68% .75% .94%*
======== ======== =======
Investment income--net 8.99% 8.01% 6.20%*
======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 81,845 $ 75,150 $ 50,737
======== ======== =======
Portfolio turnover 132.57% 117.58% 54.80%
======== ======== =======
<FN>
___________________
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
<dagger> Commencement of Operations.
<dagger><dagger> Based on average shares outstanding during the year.
# Aggregate total investment return.
</TABLE>
C-4<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION OF PERFORMANCE
OF THE ACQUIRING FUNDS AND THE TRANSFEROR FUNDS{1}
THE ENVIRONMENT
As 1995 drew to a close, the pace of US economic activity apparently
slowed. There was strong evidence of a slowing economy by mid-year, a trend
that was quickly reversed as gross domestic product growth rebounded to a 4.2%
pace during the third calendar quarter of 1995. However, recent economic
releases suggest that this rate of expansion has not been sustained.
A number of key measures of economic growth indicate evidence of slowing
momentum. Retail sales for November were soft, a trend that continued
throughout the all-important holiday season, reflecting ongoing caution on the
part of debt-burdened consumers. At the same time, there has been an increase
in initial unemployment claims, along with weak job and income growth. As labor
costs continue to decelerate and commodity price pressures remain subdued,
inflationary pressures continue to be well under control.
These developments led the Federal Reserve Board to ease its monetary
policy slightly at the December 19, 1995 Federal Open Market Committee meeting.
However, the Clinton Administration and Congress have yet to reach an agreement
in their current Federal budget deliberations. While the probable direction of
economic activity will continue to be the primary focus of investors in the
months ahead, a credible plan for reducing the Federal budget deficit will also
be an important factor in the investment outlook.
FLEXIBLE STRATEGY FUND
The US equity sector, particularly the commitments in selected technology,
financial services and healthcare stocks, was a positive contributor to overall
performance. On the other hand, foreign equities as a whole provided returns
that were significantly below those of the US market. US and foreign bonds also
provided returns below US equities. However, the major factor in holding down
the overall return was the cash position, given the large differential between
the returns on US money market instruments and the US stock market during 1995.
As of December 31, 1995, the asset allocation of Flexible Strategy
Portfolio was: US equities, 29%; foreign equities, 6%; dollar-denominated
government and corporate bonds, 13%; and cash reserves, 52%. In the bond
sector, we liquidated commitments in Deutschemark- and lira-denominated bonds
as well as commitments in Danish kroner bonds established in prior months.
These sales reflected our belief that a rally in the US dollar versus these
currencies could offset any yield pick-up over dollar-denominated bonds. On the
other hand, we did not significantly change the US bond commitment. We expect
the decline in intermediate-term and longer-term US interest rates, which
commenced in late 1994, to continue during 1996.
We significantly increased the cash reserve position of the Fund during the
last two months of 1995, reflecting a restructuring and reduction of the
commitments in US and foreign equities. We became increasingly cautious toward
the US equity market following the strong gains during much of 1995. In the
remaining US equity holdings, we retained commitments in the consumer staples
area as well as credit-sensitive and energy areas, which we expect to do well
in an environment of sluggish economic growth. In expectation of additional
monetary easing by the Federal Reserve Board, we retained commitments in "early
cycle" equities in the consumer cyclical and basic industry sectors. We reduced
our position in technology equities and maintained representation in the
- ---------------------------
[FN]
{1} The information under this heading has been taken from the Company's
Annual Report for the fiscal year ended December 31, 1995.
C-5<PAGE>
<PAGE>
aerospace industry. On balance, we are not uncomfortable with the large cash
position over the near term. Our intention is to recommit the cash primarily to
US and foreign equities in the months ahead as opportunities present
themselves.
GLOBAL STRATEGY FOCUS FUND
The primary positive contributor to overall Fund returns was the US equity
sector, since the US stock market was among the highest-returning equity
markets in 1995. With the exception of Switzerland, the returns of other equity
markets represented in the portfolio lagged those of the United States.
Although attractive on a historic basis, returns on the portfolio's US and
foreign bonds were below that of US equities. The Fund's average cash position,
which was 34.4% of net assets, was also a major factor in holding down the
portfolio's return during 1995.
As of December 31, 1995, Global Strategy Focus Fund's asset allocation was:
foreign equities, 22%; US equities, 18%; US bonds, 19%; foreign bonds, 6%; and
cash reserves, 35%. The positions in Deutschemark- and lira-denominated bonds
were liquidated in late 1995, leaving foreign bond positions in the United
Kingdom and Canada. On the other hand, we maintained our position in US bonds.
In our opinion, the potential exists for a further interest rate decline in the
United States during 1996, reflecting a historically low rate of inflation.
The cash reserve position as of December 31, 1995 reflects a significant
increase during the last two months of 1995 and resulted from the reduction of
foreign equity positions. Evidence of slowing economic growth in Europe and the
emerging economies, particularly those of Asia, resulted in a less-optimistic
assessment of prospects for these markets. Our remaining positions in these
markets reflect a highly selective approach. We retained a significant
commitment to Japanese equities, since we believed that an improving economic
and financial background could lead to favorable relative performance for the
Japanese stock market in the coming months. We reduced our commitment in US
equities in response to our cautious outlook. In the remaining US equity
holdings, we retained significant commitments in areas which we expected to
perform well in a sluggish economic environment, including consumer staples,
financial services and energy. Our current intention is to recommit the cash
primarily to US and foreign equities as opportunities present themselves in
coming months.
INTERNATIONAL BOND FUND
Bond markets provided positive rates of return in the December calendar
quarter. The decline in economic activity throughout most of the world led to a
steady decline in interest rates. A significant part of the decline in interest
rates was in response to the continued low inflation levels reached across the
economies. While in general financial trends have been similar worldwide, there
have been noteworthy differences.
In Japan, the government implemented strong stimulative fiscal packages to
revive economic activity. Sectors of the economy have been negatively affected
by the strong yen and banking crisis. In an effort to promote consumer and
capital spending, the monetary authority has reflated the money supply. The
effect thus far has been a low level of short-term interest rates at
approximately 0.5%. On the other hand, long- term interest rates have been kept
high to assist the banks' earnings.
In contrast, European authorities have implemented fiscal austerity
programs to reign in government deficits. This has had the unfavorable
consequence of slowing their economies at a time of unacceptably high
unemployment levels. Accordingly, central banks have been keen to lower
interest rates. Short-term interest rates that are more easily controlled by
the monetary authorities on a near-term basis have been lowered. However,
long-term interest rates have remained relatively high given present and
expected inflation levels.
C-6<PAGE>
<PAGE>
In the dollar bloc countries, Canada and Australia, economies remain
lackluster. Fiscal austerity also remains the norm in these two countries.
While monetary policy is on the side of easing, its consequent impact on
exchange rates makes it a slower process and one dependent on outside factors.
We remain underweighted in Japanese assets late in the fiscal year as
investments in this sector appear to be defensive in nature and the other
markets appear to offer better value at greater absolute yield levels.
Investments in Europe were at the long end of the yield curve in those
countries with a steep curve, such as Germany, Belgium and Denmark. In
contrast, in countries with a flatter curve, such as Spain and Sweden,
investments were kept at the shorter end of the maturity spectrum. In the
United Kingdom and Italy, prospects for lower interest rates and the favorable
yield pick ups suggested that an appropriate portfolio strategy would be to
have maturities longer than the JP Morgan Government Bond Index which has an
average maturity of 7.1 years. In France, investments were kept neutral to this
index as the volatility of the market in response to social unrest appeared to
warrant a more cautious approach.
In Canada and Australia, investments continued to be at the longer end of
the yield curve as the favorable yield pick-up and expectations of lower
interest rates appeared to make these investments particularly attractive.
With respect to currency, the US dollar currently appears to be in a
consolidation phase. Although the outlook for the dollar over the longer term
appears favorable, there is a near-term risk that the fragility and instability
of the Japanese banking system may place pressure on the US dollar. Hence, the
currency exposure in the portfolio is neutral to the index and unhedged, in
general.
The favorable inflation levels and low growth experienced by the major
industrialized countries over the past year put in place the necessary
ingredients for the international bond market. For the year, yields declined
worldwide providing better-than expected returns. Additionally, the decline in
the US dollar benefited foreign investments. However, this trend was reversed
during the second half of the year. Nevertheless, returns on international
investments were favorable for the year. For the portfolio, the volatility of
the dollar affected returns particularly during the first half of the year when
the Fund underperformed the JP Morgan International Government Bond Index.
However, by the second half of the year investment strategies were changed and
the Fund outperformed the index but did not completely recoup the relative
underperformance of the first half.
World Income Focus Fund
World growth continues to slow and inflation remains subdued, although the
US economy remains the most resilient, owing largely to the substantial
interest rate declines seen this year. The 4.2% annualized increase in US third
quarter 1995 gross domestic product, while overstating the economy's underlying
strength, suggests the fourth quarter began at an above-trend pace. However, a
decline in October industrial production and retail sales without a rebound in
November brought this notion into question.
European growth continues to disappoint as demand has remained weak with
interest rate- sensitive spending not yet responding to this year's decline in
interest rates. German economic weakness clearly can be seen in the drop in
third quarter capacity utilization, the sharp drop in fourth quarter industrial
production and waning business and consumer confidence. The Bundesbank lowered
interest rates over 100 basis points (1.00%) in 1995 from 4.85% at year- end
1994, with its latest reduction in December, but the continued softness
suggests more needs to be done. Meanwhile, France announced a very tough fiscal
reform package coupled with an immediate sharp hike in taxes, in an effort to
ensure growth will stay soft, especially given France's desire to maintain a
"Franc fort" policy. The risks of a sharp inventory correction in the United
Kingdom have risen, posing a dilemma for policymakers following the United
C-7<PAGE>
<PAGE>
Kingdom's relatively tight November budget. Italy shows clear signs of slowing
but interest rate declines are unlikely while inflation stays high and
political stability remains uncertain, as Prime Minister Dini's resignation at
year-end could lead to elections over the next few months. The "no" vote on
Quebec separatism has lifted a major cloud over the Canadian market, while in
Australia inflation drifts upward, albeit against a slowdown in economic
activity. A brighter picture for Latin American markets emerged over the last
six months resulting from stable political environments, a firm dollar and US
bond market, and rising global liquidity.
During the fourth quarter of 1995, virtually all of the major markets in
which your Fund is invested continued their 1995 rallies. The dollar remained
in a fairly narrow range as compared to all other currencies other than the
yen, which declined just over 4% relative to the dollar. Since August, the US
bond market rally has continued as economic growth remained soft and
inflationary pressures remained subdued. Expectations for a constructive
Federal budget agreement have faded but have not been dashed. With the
background of a poor holiday selling season and a weather- induced weak start
to the new year, a positive tone to the US bond market is likely to persist
over the near term. European economic activity remains below trend which, along
with continued low inflation, has allowed many countries to lower interest
rates. Continued below-trend growth is expected for the first quarter of 1996,
which should provide a solid underpinning to the European markets. Not
surprisingly, in this environment of a steady dollar and rising bond prices,
the higher-yielding markets in Europe have outperformed Germany. Although the
Australian market underperformed the US market during the December quarter, the
Australian market finished the year ahead of the two other dollar bloc markets,
the United States and Canada.
During the December quarter, the Fund's exposure to the US high-yield
sector remained unchanged at 42%, while the European exposure dropped slightly
following a reduction in the United Kingdom. In the dollar bloc (Canada,
Australia and New Zealand), we moved 1% from New Zealand to Australia while
slightly extending the average portfolio maturity. In Europe, we raised the
Danish exposure to 5% of net assets from 3% while extending the average
portfolio maturity from 5.2 years to 6.5 years. We also extended the average
portfolio maturities in the United Kingdom, Italy and Denmark. These
extensions, while allowing us to maintain overweighted positions in the
higher-yielding European markets, substantially boosted performance in the
December quarter. In the emerging markets arena, we reduced our small exposure
to Mexico, given the recent sharp deterioration in the peso and continued
negative growth announced for the third quarter.
The outlook for global bond prices remains positive, given sluggish world
economic activity, falling inflation and/or inflationary expectations and
expanding liquidity. However, since these positive factors are recognized
globally, there is little value to insulate prices from adverse news regarding
any of the aforementioned factors. We will continue to utilize emerging markets
debt as a dollar bloc alternative, constantly maintaining our preference for
the most liquid and creditworthy issuers.
From a currency perspective, the dollar is likely to remain within a broad
trading range given the easier monetary policy stances of the Bank of Japan and
the Bundesbank, while set against a background of what appears to be much
slower fourth quarter economic growth relative to the third quarter in the
United States. The performance of the European economies over the next year
will be critical in determining the continued adherence to the current monetary
union timetable. Failure to maintain the present timetable could cause undue
volatility within European markets.
The market driver in the high-yield market for the year and quarter was
falling interest rates. Yields on ten-year US Treasury bonds fell from 7.85% to
5.63% over the course of the year as investors reacted positively to moderate
economic growth, low inflation and falling short-term interest rates. Because
of its greater sensitivity to overall interest rates, the higher-quality
BB-rated sector of the high-yield market outperformed issues rated B or less.
The air transportation industry (Delta Air Lines Inc., United Air Lines Inc.,
USAir Inc.) outperformed all other high-yield industry groups with a return of
33.8%. Other above-average performers included: homebuilders, +28.2%; cable TV,
C-8<PAGE>
<PAGE>
+26%; telecommunications, +24.7%; electric utilities, +23%; and, broadcasting,
+22%. The weak performers were: retailers, -0.7%, and restaurants, +7.2%.
Companies in these industries struggled with weak earnings and a number of
defaults. Default rates rose from 1.4% in 1994 to 2.8% in 1995. The average
annual default rate since 1978 has been 3.1%, and 1995 represents a
normalization after several very low years, in our opinion. The portfolio
experienced a surprise bankruptcy in November when Harrah's Jazz Company, a
casino project in New Orleans, filed for protection after the bank lenders
withdrew financing. We are pursuing recovery vigorously.
At year-end 1995, the high-yield portion of the Fund was structured in a
fashion that we believe will enhance returns over the new year. As modest
economic growth and relatively stable interest rates seem the most likely
environment, at least for the next six months, corporate profits may become the
dominant force behind high-yield bond prices. Therefore, in 1996 industry and
company selection seem likely to dominate investment performance to an even
greater degree than in 1995.
During the fiscal year, we attempted to stay fully invested in the
high-yield portion of the Fund's portfolio to seek to reap the benefits of
generally rising bond prices. While maintaining an overweighted position in
higher-quality credits, we added to holdings in undervalued companies with
rising earnings and sold bonds of issuers with weak earnings. This strategy
enhanced the total return for our high-yield investments. Overall, however, the
Fund underperformed its benchmark for the fiscal year ended December 31, 1995,
largely because of its overweighted exposures to the dollar and higher-yielding
European markets entering the year. This posture reflected our belief that
solid growth in the United States would continue in the first half of the year
as would the dollar rally which had begun in October 1994. At the end of the
1995 fiscal year, in an environment of a rising dollar, your Fund is
overweighted in the higher-yielding European markets as their currencies are
generally rising versus the Deutschemark. The Mexican peso devaluation in late
December 1994 began to seriously affect the higher- yielding currencies in
February by casting a negative light on all high-deficit countries. This led to
massive "safe haven" capital flows from the high-yielding European countries
into the Deutschemark and Swiss Franc. This, coupled with negative implications
regarding the US bailout of Mexico, caused new historic lows for the dollar. At
the end of the first quarter of 1995, with the recovery beginning in the
emerging markets along with the first easing by the Bundesbank, the
higher-yielding markets started their recovery. Adjusting our investment
posture allowed us to take advantage of this recovery, which helped enhance
total return.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Year Five Years Ten Years Since
Ended Ended Ended Inception to
12/31/95 12/31/95 12/31/95 12/31/95
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Flexible Strategy Fund<dagger> +17.40% +11.16% - +9.90%
Global Strategy Focus Fund<dagger> +10.60% - - +8.20%
International Bond Fund<dagger> +16.35% - - +9.76%
World Income Focus Fund<dagger> +16.69% - - +6.98%
- --------------------
<FN>
<dagger> The Flexible Strategy Fund, the Global Strategy Focus Fund, the
International Bond Fund and the World Income Focus Fund commenced
operations on May 1, 1986, February 28, 1992, May 2, 1994 and July 1, 1993,
respectively.
</TABLE>
C-9<PAGE>
<PAGE>
FLEXIBLE STRATEGY FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the S&P 500 Index and a Weighted Index. Beginning
and ending values are:
<TABLE>
<CAPTION>
5/01/86** 12/95
------- ----
<S> <C> <C>
Flexible Strategy Fund*+ $10,000 $24,918
S&P 500 Index++ $10,000 $35,482
Weighted Index+++ $10,000 $28,891
<FN>
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ Flexible Strategy Fund, through a flexible investment policy, invests
in equity securities, intermediate- and long-term debt obligations and
money market securities of domestic and foreign issuers.
++ This unmanaged broad-based Index is comprised of common stocks.
+++ This unmanaged Index, which is an equally weighted blend of the S&P 500
Index and the Merrill Lynch B0A0 Index, is comprised of common stocks
as well as investment-grade bonds.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
GLOBAL STRATEGY FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the Morgan Stanley Capital International World Index
and a Weighted Index. Beginning and ending values are:
<TABLE>
<CAPTION>
2/28/92** 12/95
------- -----
<S> <C> <C>
Global Strategy Focus Fund*+ $10,000 $13,537
Morgan Stanley Capital International World Index++ $10,000 $15,277
Weighted Index+++ $10,000 $14,634
<FN>
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ Global Strategy Focus Fund invests primarily in a portfolio of equity
and fixed-income securities of US and foreign issuers.
++ This unmanaged market capitalization-weighted index is comprised of a
representative sampling of stocks of large-, medium-, and
small-capitalization companies in 22 countries, including the United
States.
+++ This unmanaged Index, which is an equally weighted blend of the Morgan
Stanley World Index, the Salomon Brothers World Government Bond Index,
and the Salomon Brothers World Money Market Index, is comprised of a
representative sampling of stocks of large-, medium-, and
small-capitalization companies in 22 countries, government bonds and
money market securities in the major markets, including the United
States.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
C-10<PAGE>
<PAGE>
INTERNATIONAL BOND FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the JP Morgan Non-US Dollar Government Bond Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
5/02/94** 12/95
------- -----
<S> <C> <C>
International Bond Fund*+ $10,000 $11,678
JP Morgan Non-US Dollar Government Bond Index++ $10,000 $12,500
<FN>
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ International Bond Fund invests only in a non-US international
portfolio of debt instruments denominated in various currencies and
multinational currency units.
++ This unmanaged Index is comprised of global government bonds of the
economies of the Organization for Economic Organization and
Development, other than the United States.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
WORLD INCOME FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph depicting the growth of an investment in the Fund compared to
growth of an investment in the Merrill Lynch G5A0 Index and a Weighted Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
7/01/93** 12/95
------- -----
<S> <C> <C>
World Income Focus Fund*+ $10,000 $11,834
Merrill Lynch G5A0 Index++ $10,000 $11,526
Weighted Index+++ $10,000 $14,188
<FN>
* Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
** Commencement of Operations.
+ World Income Focus Fund invests in US and foreign government and
corporate bonds, including US high-yield bonds.
++ This unmanaged Index is comprised of intermediate-term Government bonds
maturing in one to ten years.
+++ The weighted index consists of 40% High Yield Master Index MLJ0A0 and
60% JP Morgan Global Government Bond Index excluding Japan.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
C-11<PAGE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
OF THE ACQUIRING FUNDS AND TRANSFEROR FUNDS{2}
INVESTMENT OBJECTIVES
Each Acquiring Fund and Corresponding Transferor Fund has a similar
investment objective, which each pursues through separate investment policies
as described below. The Flexible Strategy Fund is classified as "diversified,"
as defined in the Investment Company Act of 1940, and each of the Global
Strategy Focus Fund, the World Income Focus Fund and International Bond Fund is
classified as "non-diversified." The investment objectives and classification
of each Fund may not be changed without the approval of the holders of a
majority of the outstanding shares of each Fund affected. The investment
objectives and policies of each Fund are discussed below.
FIXED INCOME SECURITY RATINGS. Securities purchased by a Fund may
subsequently be downgraded. Such securities may continue to be held and will
be sold only if, in the judgment of the Investment Adviser, it is advantageous
to do so. Securities in the lowest category of investment grade debt
securities may have speculative characteristics which may lead to weakened
capacity to pay interest and principal during periods of adverse economic
conditions. See Annex A hereto for a fuller description of corporate bond
ratings.
FLEXIBLE STRATEGY FUND
The investment objective of the Flexible Strategy Fund is to seek a high
total investment return consistent with prudent risk. Total investment return
consists of interest, dividends, discount accruals and capital changes,
including changes in the value of non-dollar denominated securities and other
assets and liabilities resulting from currency fluctuations. This investment
objective is a fundamental policy and may not be changed without a vote of the
majority of outstanding shares of the Fund. The Fund will seek to achieve its
objective by utilizing a flexible investment policy which permits the Fund to
vary its investment emphasis among equity securities, intermediate and long-
term debt obligations and money market securities and, to a lesser extent,
between the securities of domestic and foreign issuers. While the Fund will
generally emphasize investment in common stocks of larger-capitalization
issuers and in investment-grade debt obligations, the Fund may from time to
time invest a portion of its assets in small company and emerging growth
company stocks when consistent with the Fund's objective. The Fund may also
seek to enhance the return on its common stock portfolio by writing covered
call options listed on United States securities exchanges. The Fund's success
in achieving its investment objective depends upon management's ability to
assess the effect of economic and market trends on U.S. and foreign capital
market and on different sectors of those markets. There can be no assurance
that the Fund's investment objective will be achieved. As a matter of
operating policy, this Fund may not invest more than 25% of its assets in the
securities of foreign issuers.
Management will determine the composition of the Fund's portfolio based
upon its assessment of economic and market trends and the anticipated relative
total return available from investment in a particular type of security.
Accordingly, at any given time, the Fund may be substantially invested in
common stocks, bonds and notes or money market securities. Similarly, the
portion of the Fund's assets which are invested in foreign securities will be
varied, subject to the operating policy referred to above, in accordance with
management's judgment as to the anticipated relative performance of foreign
- ---------------------------
{2} The investment objectives and policies discussed below are the current
investment objectives and policies of the Acquiring Funds and Transferor
Funds except that the discussion below with respect to the World Income
Focus Fund assumes that Proposals 5 and 6 have been approved.
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capital markets as compared to U.S. markets. Management will consider, among
other factors, the condition and growth potential of the various economies and
securities markets, currency and tax considerations and other pertinent
financial, social, national and political factors. The Fund's investments in
foreign securities may include American Depository Receipts and European
Depository Receipts, and the Fund may invest in non-dollar denominated
securities.
Because of the flexible investment policy of the Fund, portfolio turnover
may be greater resulting in increased transaction costs to the Fund.
GLOBAL STRATEGY FOCUS FUND
The investment objective of the Global Strategy Focus Fund is to seek high
total investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of U.S. and foreign
issuers. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of non-dollar
denominated securities and other assets and liabilities resulting from currency
fluctuations. INVESTING ON AN INTERNATIONAL BASIS INVOLVES SPECIAL
CONSIDERATIONS. SEE "SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATIONS."
The Global Strategy Focus Fund seeks to achieve its objective by investing
primarily in the securities of issuers located in the United States, Canada,
Western Europe and the Far East. There are no prescribed limits on the
geographical allocation of the Fund among these regions. Such allocation will
be made primarily on the basis of the anticipated total return from investments
in the securities of issuers wherever located, considering such factors as the
condition and growth potential of the various economies and securities markets
and the issuers domiciled therein, anticipated movements in interest rates in
the various capital markets and in the value of foreign currencies relative to
the U.S. dollar, tax considerations and economic, social, financial, national
and political factors which may affect the climate for investing within such
securities markets. When, in the judgment of the Investment Adviser, economic
or market conditions warrant, the Fund reserves the right to concentrate its
investments in one or more capital markets, including the United States. For
additional information concerning the risks of investing in foreign securities,
see "Special Considerations Regarding the Reorganizations."
The equity and convertible preferred securities in which the Global
Strategy Focus Fund may invest are primarily securities issued by quality
companies. Generally, the characteristics of such companies include a strong
balance sheet, good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management.
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be primarily those rated BBB or better by S&P or
Baa or better by Moody's or of comparable quality. The Fund may also invest in
debt obligations issued or guaranteed by sovereign governments, political
subdivisions thereof (including states, provinces and municipalities) or their
agencies or instrumentalities or issued or guaranteed by international
organizations designated or supported by governmental entities to promote
economic reconstruction or development ("supranational entities") such as the
International Bank for Reconstruction and Development (the "World Bank") and
the European Coal and Steel Community. Investments in securities of
supranational entities are subject to the risk that member governments will
fail to make required capital contributions and that a supranational entity
will thus be unable to meet its obligations.
When market or financial conditions warrant, the Global Strategy Focus Fund
may invest as a temporary defensive measure up to 100% of its assets in U.S.
Government or Government agency securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market securities
or other fixed income securities deemed by the Investment Adviser to be
consistent with a defensive posture, or may hold its assets in cash.
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The Global Strategy Focus Fund may write covered call options and purchase
put options on its portfolio securities for the purpose of generating
incremental income or hedging its securities against market risk. The Fund may
seek to hedge its non-dollar denominated securities and other assets and
liabilities against adverse currency fluctuations by writing call options and
purchasing put options on currency, purchasing or selling futures contracts and
futures contract options on currency and entering into forward foreign exchange
transactions in currency. See "Transactions in Options, Futures and Currency"
below.
WORLD INCOME FOCUS FUND
The investment objective of the World Income Focus Fund is currently to
seek to provide shareholders with high current income by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units. However, it is proposed in Proposal
No. 5 that the World Income Focus Fund's investment objective be changed to
read as follows: "The investment objective of the Fund is to seek to provide
stockholders with a high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units." Accordingly, adoption of Proposal No.
5 would change the investment objective of the Fund from seeking "to provide to
stockholders high current income" to seeking "to provide to stockholders a high
total investment return". The discussion of the investment objective and
policies of the World Income Focus Fund set forth below assumes that the Fund's
investment objective has been changed in accordance with Proposal No. 5.
The Fund may invest in United States and foreign government and corporate
fixed income securities which have a credit rating of A or better by S&P or by
Moody's or commercial paper rated A-1 by S&P or Prime-1 by Moody's or
obligations that MLAM has determined to be of similar creditworthiness. The
Fund will, under normal conditions, invest at least 90% of its total assets in
such fixed income securities. In pursuing its investment objective, the Fund
will allocate its investments among different types of fixed income securities
denominated in various currencies based upon the Investment Adviser's analysis
of the yield, maturity, potential appreciation and currency considerations
affecting such securities. INVESTING ON AN INTERNATIONAL BASIS INVOLVES
SPECIAL CONSIDERATIONS. SEE "SPECIAL CONSIDERATIONS REGARDING THE
REORGANIZATIONS." The Fund should be considered as a long-term investment and
a vehicle for diversification and not as a balanced investment program.
The Fund may purchase fixed income securities issued by United States or
foreign corporations or financial institutions, including debt securities of
all types and maturities, convertible securities and preferred stocks. The
Fund also may purchase securities issued or guaranteed by United States or
foreign governments (including foreign states, provinces and municipalities) or
their agencies and instrumentalities ("governmental entities") or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
("supranational entities").
INTERNATIONAL INVESTING. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of
a multinational currency unit is the European Currency Unit ("ECU") which is a
"basket" consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment
Adviser does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities (described further below), in particular, issue ECU-
denominated obligations. The Fund may invest in securities denominated in the
currency of one nation although issued by a governmental entity, corporation or
financial institution of another nation. For example, the Fund may invest in a
British pound sterling-denominated obligation issued by a United States
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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 World Income Focus
Fund. As a general matter, in evaluating investments for the Fund, the
Investment Adviser will consider, among other factors, the relative levels of
interest rates prevailing in various countries, the potential appreciation of
such investments in their denominated currencies and, for debt instruments not
denominated in U.S. Dollars, the potential movement in the value of such
currencies compared to the U.S. Dollar. Additionally, the Fund, in seeking
capital appreciation, may invest in relatively low yielding instruments in
expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
The Fund will allocate its investments among fixed income securities of
various types, maturities and issuers in the various global markets based upon
the analysis of the Investment Adviser. In its evaluating the portfolio, the
Investment Adviser will utilize its internal financial, economic and credit
analysis resources as well as information in this regard obtained from other
sources.
The average maturity of the World Income Focus Fund's portfolio securities
will vary based upon the investment Adviser's assessment of economic and market
conditions. As with all fixed income securities, changes in market yields will
affect the Fund's asset value as the prices of portfolio securities generally
increase when interest rates decline and decrease when interest rates rise.
Prices of longer-term securities generally fluctuate more in response to
interest rate changes than do shorter-tenn securities. The Fund does not
expect the average maturity of its portfolio to exceed ten years.
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INTERNATIONAL BOND FUND
The investment objective of the International Bond Fund is to seek a high
total investment return by investing in an international portfolio of non-U.S.
debt instruments denominated in various currencies and multinational currency
units. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of non-dollar
denominated securities and other assets and liabilities resulting from currency
fluctuations. The investment objective of the Fund is a fundamental policy and
may not be changed without approval of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund's investment objective will be
achieved. Under normal circumstances, the Fund will invest at least 65% of its
assets in non-U.S. debt instruments. The Fund may seek to hedge against
interest rate and currency risks through the use of option, futures and
currency transactions. The Fund is designed for investors seeking to
complement their U.S. holdings through foreign investments. The Fund should be
considered as a vehicle for diversification and not as a balanced investment
program.
The Fund may purchase debt obligations issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
("supranational entities") such as the International Bank for Reconstruction
and Development (the "World Bank") and the European Coal and Steel Community,
or issued by foreign corporations or financial institutions.
With respect to the creditworthiness of the Fund's portfolio securities,
under normal conditions all of the securities owned by the Fund will be
obligations which have a credit rating of A or better by S&P or by Moody's or
commercial paper rated A-1 by S&P or Prime-1 by Moody's or obligations that the
Fund's Investment Adviser has determined to be of similar creditworthiness.
The Fund's Investment Adviser may determine that a non-dollar denominated
obligation of a foreign government is of similar creditworthiness
notwithstanding S&P's or Moody's less favorable rating of a dollar denominated
obligation of the same issuer, provided that the Investment Adviser believes
that such dollar denominated obligation is assigned a lower rating because it
is denominated in a currency other than the foreign government's own currency.
In evaluating obligations, the Investment Adviser will utilize its internal
credit analysis resources as well as financial and economic information
obtained from other sources. With respect to foreign corporate issuers, the
Investment Adviser will consider the financial condition of the issuer and
market and economic conditions relevant to its operations. In terms of foreign
governmental obligations, the Investment Adviser will review the financial
position of the issuer and political and economic conditions in the country.
Investment in securities of supranational entities is subject to the additional
risk to be considered by the Investment Adviser that member governments will
fail to make required capital contributions and that a supranational entity
will thus be unable to meet its obligations.
The Fund's fully managed approach enables it to seek high total investment
return by investing in debt instruments denominated in various currencies and
currency units on the basis of the potential capital appreciation of such
instruments in U.S. dollars and the rates of income paid on such instruments.
As a general matter, in evaluating investments, the Fund will consider, among
other factors, the relative levels of interest rates prevailing in various
countries, the potential appreciation of such investments in their denominated
currencies and, for debt instruments not denominated in U.S. dollars, the
potential movement in the value of such currencies compared to the U.S. dollar.
In seeking capital appreciation, the Fund may invest in relatively low-yielding
instruments in expectation of favorable currency fluctuations or interest rate
movements, thereby potentially reducing the Fund's current yield. In seeking
income, the Fund may invest in short-term instruments with relatively high
yields (as compared to other debt securities) meeting the Fund's investment
criteria, notwithstanding that the Fund may not anticipate that such
instruments will experience substantial capital appreciation.
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The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. As
with all debt securities, changes in market yields will affect the Fund's asset
value as the prices of portfolio securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer-term
securities generally fluctuate more in response to interest rate changes than
do shorter-term securities. The Fund does not expect the average maturity of
its portfolio to exceed ten years.
The Fund may invest in debt instruments denominated in any currency or
multinational currency unit. An illustration of a multinational currency unit
is the European Currency Unit ("ECU") which is a "basket" consisting of
specified amounts of the currencies of certain of the twelve member states of
the European Community, a Western European economic cooperative association
including France, Germany, the Netherlands and the United Kingdom. The
specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies. The Investment Adviser does not believe
that such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of such securities. European supranationals,
in particular, issue ECU-denominated obligations. The Fund may invest in debt
instruments denominated in the currency of one nation although issued by a
governmental entity, corporation or financial institution of another nation.
For example, the Fund may invest in a Japanese yen-denominated obligation
issued by a German corporation. Such investments involve credit risks
associated with the issuer and currency risks associated with the currency in
which the obligation is denominated. It is anticipated that the Fund will
invest primarily in marketable instruments denominated in the currencies of the
U.S., Japan, Canada, Western European nations, New Zealand and Australia as
well as in ECUs. Further, it is anticipated that such instruments will be
issued primarily by entities located in such countries and by supranational
entities. Under certain adverse conditions, the Fund may restrict the
financial markets or currencies in which its assets will be invested and may
invest its assets solely in U.S. dollar-denominated obligations.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in foreign markets, to hold
cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term
securities, including money market securities.
NON-DIVERSIFIED FUNDS
The Global Strategy Focus, World Income Focus and International Bond Funds
are classified as non-diversified investment companies under the Investment
Company Act of 1940. However, each Fund will have to limit its investments to
the extent required by the diversification requirements applicable to regulated
investment companies under the Internal Revenue Code. To qualify as a
regulated investment company, a Fund, at the close of each fiscal quarter, may
not have more than 25% of its total assets invested in the securities (except
obligations of the U.S. Government, its agencies or instrumentalities) of any
one issuer or of any two or more issues that the Fund controls and that are
determined to be in the same business or similar or related business, 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
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outstanding voting securities (including a majority of the shares of each
Fund). Investors are referred to the SAI for a complete description of such
restrictions and policies.{3}
OTHER PORTFOLIO STRATEGIES
RESTRICTED SECURITIES. Each of the Funds is subject to limitations on the
amount of illiquid securities they may purchase; however, each Fund may
purchase without regard to that limitation certain securities that are not
registered under the Securities Act of 1933 (the "Securities Act"), including
(a) commercial paper exempt from registration under Section 4(2) of the
Securities Act, and (b) securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Company's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Investment Adviser the daily
function of determining and monitoring liquidity of restricted securities. The
Board has determined that securities sold under Rule 144A which are freely
tradeable in their primary market offshore should be deemed liquid. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
INDEXED AND INVERSE SECURITIES. A Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an "Index"). As an illustration, a Fund may invest in a security that
pays interest and returns principal based on the change in an index of interest
rates or on the value of a precious or industrial metal. Interest and
principal payable on a security may also be based on relative changes among
particular indices. In addition, certain of the Funds may invest in securities
whose potential investment return is inversely based on the change in
particular indices. For example, a Fund may invest in securities that pay a
higher rate of interest and principal when a particular index decreases and pay
a lower rate of interest and principal when the value of the index increases.
To the extent that a Fund invests in such types of securities, it will be
subject to the risks associated with changes in the particular indices, which
may include reduced or eliminated interest payments and losses of invested
principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities.
The Company believes that indexed securities, including inverse securities,
represent flexible portfolio management instruments that may allow a Fund to
seek potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
FOREIGN SECURITIES. The Flexible Strategy, Global Strategy Focus, World
Income Focus and International Bond Funds may invest in securities of foreign
issuers. Investments in foreign securities, particularly those of non-
- ---------------------------
{3} However, it is proposed in Proposal No. 3 that each Fund adopt uniform
fundamental investment restrictions as set forth in such proposal.
C-18<PAGE>
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governmental issuers, involve considerations and risks which are not ordinarily
associated with investing in domestic issuers. See "Special Considerations
Regarding the Reorganizations."
LENDING OF PORTFOLIO SECURITIES. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash or securities issued or guaranteed by the U.S. Government which, while
the loan is outstanding, will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities plus accrued
interest. Such cash collateral will be invested in short-term securities, the
income from which will increase the return to the Fund.
FORWARD COMMITMENTS. Each of the Funds may purchase securities on a when-
issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be
more or less than its purchase price. A Fund entering into such transactions
will maintain a segregated account with its custodian of cash or liquid, high-
grade debt obligations in an aggregate amount equal to the amount of its
commitments in connection with such delayed delivery and purchase transactions.
TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
The Flexible Strategy, Global Strategy Focus, World Income Focus and
International Bond Funds may engage in certain of the options, futures and
currency transactions discussed in Annex A hereto. A Fund may engage in
transactions in futures contracts, options on futures contracts, forward
foreign exchange contracts, currency options and options on portfolio
securities and on stock indexes only for hedging purposes and not for
speculation. A Fund may write call options on portfolio securities and on
stock indexes for the purpose of achieving, through receipt of premium income,
a greater average total return than it would otherwise realize from holding
portfolio securities alone. There can be no assurance that the objectives
sought to be obtained from the use of these instruments will be achieved. A
Fund's use of such instruments may be limited by certain Code requirements for
qualification of the Fund for the favorable tax treatment afforded investment
companies. There can be no assurance that a Fund's hedging transactions will
be effective. Furthermore, a Fund will only engage in hedging activities from
time to time and will not necessarily engage in hedging transactions in all the
smaller capital markets in which certain of the Funds may be invested at any
given time.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Contract Owners, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." In addition, each
Fund has undertaken, at the request of the State of California Department of
Insurance, to observe certain investment related requirements of the Insurance
Code of the State of California. The Investment Adviser believes that
compliance with these standards will not have any negative impact on the
performance of any of the Funds.
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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.
INVESTMENT ADVISER
Merrill Lynch Asset Management L.P., an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the investment adviser for each Acquiring Fund
and each Transferor Fund. The general partner of the Investment Adviser is
Princeton Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. The principal address of the Investment Adviser is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New
Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset
Management, L.P. ("FAM"), acts as the investment adviser for over 130 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. In
the aggregate, as of March 31, 1996, MLAM and FAM had a total of approximately
$207.7 billion in investment company and other portfolio assets under
management including accounts of certain affiliates of FAM.
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the company, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Funds and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser provides the portfolio managers for the
Funds, who consider information from various sources, make the necessary
investment decisions and effect transactions accordingly. The Investment
Adviser is also obligated to perform certain administrative and management
services for the Company (certain of which it may delegate to third parties)
and is obligated to provide all the office space, facilities, equipment and
personnel necessary to perform its duties under the Agreements. The Investment
Adviser has access to the full range of the securities and economic research
facilities of Merrill Lynch.
During the Company's fiscal year ended December 31, 1995, the advisory fees
expense incurred by the Company totalled $21,376,742, of which $1,941,598
related to the Flexible Strategy Fund (representing .65% of its average net
assets), $3,348,535 related to the Global Strategy Focus Fund (representing
.65% of its average net assets), $464,049 related to the World Income Focus
Fund (representing .60% of its average net assets), $70,573 related to the
International Bond Fund (representing .60% of its average net assets).
During the Company's fiscal year ended December 31, 1995, the total
operating expenses of the Acquiring Funds and Transferor Funds (including the
advisory fees paid to the Investment Adviser), before reimbursement of a
portion of such expenses, were as follows: $2,128,925 related to the Flexible
Strategy Fund (representing .71% of its average net assets), $3,719,425 related
to the Global Strategy Focus Fund (representing .72% of its average net
assets), $527,752 related to the World Income Focus Fund (representing .68% of
its average net assets) and $112,261 related to the International Bond Fund
(representing .95% of its average net assets).
The Investment Advisory Agreements require the Investment Adviser to
reimburse the Company's Funds if and to the extent that in any fiscal year the
operating expenses of each Fund exceeds the most restrictive expense
limitations then in effect under any state securities laws or published
regulations thereunder. At present the most restrictive expense limitation
requires the Investment Adviser to reimburse expenses which exceed 2.5% of each
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Fund's first $30 million of average daily net assets, 2.0% of its average daily
net assets in excess of $30 million but less than $100 million, and 1.5% of its
average daily net assets in excess of $100 million. Expenses for this purpose
include the Investment Adviser's fee but exclude interest, taxes, brokerage
fees and commissions and extraordinary charges, such as litigation. No fee
payments will be made to the Investment Adviser with respect to any Fund during
any fiscal year which would cause the expenses of such Fund to exceed the pro
rata expense limitation applicable to such Fund at the time of such payment.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have
entered into two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"), which is less than the expense limitations imposed
by state securities laws or published regulations thereunder. The
reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide
that any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by the Investment Adviser which, in turn, will be
reimbursed by MLLA. During the Company's fiscal year ended December 31, 1995,
the International Bond Fund was reimbursed for operating expenses. Such
reimbursement amounted to $112,261. MLLA sells the Contracts described in the
Prospectus for the Contracts.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including Merrill Lynch Life Insurance
Company ("MLLIC") and ML Life Insurance Company of New York, pursuant to which
the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
PORTFOLIO MANAGERS
Thomas R. Robinson has served as the Portfolio Manager of the Flexible
Strategy Focus Fund and Global Strategy Focus Fund since November 1995, and is
primarily responsible for each such Fund's day-to-day management. Vincent
Lathbury, III and Robert Parish have served as the World Income Focus Fund's
Portfolio Managers since July 1993 and are primarily responsible for that
Fund's day-to-day management. Robert Parish also has served as the
International Bond Fund's Portfolio Manager since May 1994 and is primarily
responsible for the Fund's day-to-day management.
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Mr. Robinson has served as a Senior Portfolio Manager of MLAM since
November 1995. Mr. Lathbury has served as Vice President of MLAM since 1982.
Mr. Parish has served as Vice President of MLAM since 1991, and was Vice
President and Senior Portfolio Manager for Templeton International from 1987 to
1991.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Funds has any obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policy established by the Board of Directors of the Company, the Investment
Adviser is primarily responsible for the Company's portfolio decisions and the
placing of the Company's portfolio transactions. In placing orders, it is the
policy of each Fund to obtain the most favorable net results, taking into
account various factors, including price, dealer spread or commission, if any,
size of the transactions and difficulty of execution. While the Investment
Adviser generally seeks reasonably competitive spreads or commissions, the
Company will not necessarily be paying the lowest spread or commission
available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Commission. Affiliated
persons of the Company may serve as its broker in over-the-counter transactions
conducted on an agency basis. For the year ended December 31, 1995, the
Company paid brokerage commissions of $5,789,335, of which $264,999 was paid to
Merrill Lynch.
PURCHASE OF SHARES
The Company continuously offers shares in each of its Funds to the
Insurance Companies at prices equal to the respective per share net asset value
of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary
of the Investment Adviser, acts as the distributor of the shares. Net asset
value is determined in the manner set forth below under "Additional
Information-Determination of Net Asset Value."
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund will consist of all payments of dividends or interest
received by such Fund less the estimated expenses of such Fund (including fees
payable to the Investment Adviser).
Dividends from net investment income of the World Income Focus and
International Bond Funds are declared and reinvested monthly in additional full
and fractional shares of the respective Funds at net asset value. Dividends
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from net investment income of the Flexible Strategy and Global Strategy Focus
Funds are declared and reinvested at least annually in additional full and
fractional shares of the respective Funds.
All net realized long-term or short-term capital gains of the Funds, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Code. Under such provisions, a Fund will not
be subject to federal income tax on such part of its net ordinary income and
net realized capital gains which it distributes to shareholders. One of the
requirements to qualify for treatment as a regulated investment company under
the Code is that a Fund, among other things, derive less than 30% of its gross
income in each taxable year from gains (without deduction of losses) from the
sale or other disposition of stocks, securities and certain options, futures or
forward contracts held for less than three months. This requirement may limit
the ability of certain Funds to dispose of certain securities at times when
management of the Company might otherwise deem such disposition appropriate or
desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of dividend interest or sales proceeds, the Fund,
allocated income greater than the amount of cash distributed to it, and
therefore may have to dispose of securities and use the proceeds thereof to
make distributions in amounts necessary to satisfy its distribution
requirements under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock of United States issues, its
distributions to the Insurance Companies will be eligible for the present 70%
dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the separate accounts.
Not later than 60 days after the end of each calendar year, the Company will
send to the Insurance Companies a written notice required by the Code
designating the amount and character of any distributions made during such
year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various time periods may be included in
advertisements or information furnished by the Insurance Companies to present
or prospective Contract Owners. Average annual total return and yield are
computed in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
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invested to the investment at the end of each period. Average annual total
return will be computed assuming all dividends and distributions are reinvested
and taking into account all applicable recurring and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield to maturity of each security earned
during the period by (b) the average daily number of shares outstanding during
the period that were entitled to receive dividends multiplied by the offering
price per share on the last day of the period. The yield for the 30-day period
ending December 31, 1995 was 8.50% for the World Income Fund and 6.08% for the
International Bond Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount
of realized and unrealized net capital gains or losses during the period. The
value of an investment in the Fund will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost. The yield
and total return quotations may be of limited use for comparative purposes
because they do not reflect charges imposed at the separate account level
which, if included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value
Line Composite Index, the Dow Jones Industrial Average, or performance data
published by Lipper Analytical Services, Inc., or Variable Annuity Research
Data Service or contained in publications such as Morningstar Publications,
Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World
Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Abbotson Associates. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund is computed by dividing the sum of the value of the
securities held by that Fund plus any cash or other assets (including interest
and dividends accrued) minus all liabilities (including accrued expenses) by
the total number of shares outstanding of that Fund at such time, rounded to
the nearest cent. Expenses, including the investment advisory fees payable to
the Investment Adviser, are accrued daily.
Securities held by each Fund will be valued as follows: Portfolio
securities which are traded on stock exchanges are valued at the last sale
price (regular way) as of the close of business on the day the securities are
being valued, or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price in the over-the-counter market prior to the time of
valuation. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. When a Fund writes a call
option, the amount of the premium received is recorded on the books as an asset
and an equivalent liability. The amount of the liability is subsequently
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valued to reflect the current market value of the option written, based upon
the last sale price in the case of exchange-traded options or, in the case of
options being traded in the over-the-counter market, the last asked price.
Options purchased are valued at their last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-counter
market, the last bid price. Futures contracts are valued at settlement price
at the close of the applicable exchange. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company. Any assets or liabilities initially expressed in terms of non-
U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis, unless particular circumstances dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
Pricing Service ("MLSPS"), to value bonds held by certain of the Funds. The
Board of Directors of the Company has examined the methods used by the pricing
services in estimating the value of securities held by the Funds and believes
that such methods will reasonably and fairly approximate the price at which
those securities may be sold and result in a good faith determination of the
fair value of such securities; however, there is no assurance that securities
can be sold at the prices at which they are valued. During the year ended
December 31, 1995, the Flexible Strategy Fund and the World Income Focus Fund
paid MLSPS $368 and $4,613, respectively.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981 under the laws of the
State of Maryland. The Flexible Strategy Fund, the Global Strategy Focus Fund,
the World Income Focus Fund and the International Bond Fund commenced
operations on May 1, 1986, February 28, 1992, July 1, 1993 and May 2, 1994,
respectively. The authorized capital stock of the Company consists of
3,300,000,000 shares of Common Stock, par value $0.10 per share. The shares of
Common Stock are divided into seventeen classes designated Merrill Lynch
Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock,
Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality
Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock,
Merrill Lynch Flexible Strategy Fund Common Stock, Merrill Lynch Natural
Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common
Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch
Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund
Common Stock, Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch
Global Utility Focus Fund Common Stock, Merrill Lynch International Equity
Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund
Common Stock, Merrill Lynch International Bond Fund Common Stock and Merrill
Lynch Intermediate Government Bond Fund Common Stock, respectively. The
Company may, from time to time, at the sole discretion of its Board of
Directors and without the need to obtain the approval of its shareholders or of
Contract Owners, offer and sell shares of one or more of such classes. Each
class consists of 100,000,000 shares except for Domestic Money Market Fund
Common Stock which consists of 1,300,000,000 shares and Reserve Assets Fund
Common Stock which consists of 500,000,000 shares. All shares of Common Stock
have equal voting rights, except that only shares of the respective classes are
entitled to vote on matters concerning only that class. Pursuant to the
Investment Company Act of 1940 and the rules and regulations thereunder,
certain matters approved by a vote of all shareholders of the Company may not
be binding on a class whose shareholders have not approved such matter. Each
issued and outstanding share of a class is entitled to one vote and to
participate equally in dividends and distributions declared with respect to
such class and in net assets of such class upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities. The shares of each
class, when issued, will be fully paid and nonassessable, have no preference,
preemptive, conversion, exchange or similar rights, and will be freely
transferable. Holders of shares of any class 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
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Company if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any directors. The Company does not intend
to hold meetings of shareholders unless under the Investment Company Act of
1940 shareholders are required to act on any of the following matters:
(i) election of directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of the
selection of independent accountants.
MLLIC purchased $100 worth of shares of the Global Strategy Focus Fund on
February 6, 1992, $2,000,000 worth of shares of the Global Strategy Focus Fund
on February 28, 1992, $100 worth of shares of the World Income Focus Fund on
June 28, 1993, $8,000,000 worth of shares of the World Income Focus Fund on
July 1, 1993 and $5,000,000 worth of shares of the International Bond Fund on
May 2, 1994. The organizational expenses of each of the Company's Funds are
paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC
for all such expenses over a five-year period.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ("BONY"), 110 Washington Street, New York, New York
10286, acts as custodian of the assets of each Acquiring Fund and Transferor
Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly-
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's transfer
agent and is responsible for the issuance, transfer and redemption of shares
and the opening and maintenance of shareholder accounts. MLFDS will receive an
annual redemption fee of $5,000 per Fund and will be entitled to reimbursement
of out-of-pocket expenses. Prior to June 1, 1990, BONY was the Company's
transfer agent.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing
the Funds' portfolio securities and other information. An annual report
containing financial statements, audited by independent auditors, will be sent
to shareholders each year.
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ANNEX A
U.S. GOVERNMENT SECURITIES
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest
in the various types of marketable securities issued by or guaranteed as to
principal and interest by the U.S. Government and supported by the full faith
and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the
length of their maturity. Treasury bills, the most frequently issued
marketable government security, have a maturity of up to one year and are
issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest
in government agency securities, which are debt issued by government sponsored
enterprises, federal agencies and international institutions. Such securities
are not direct obligations of the Treasury but involve government sponsorship
or guarantees by government agencies or enterprises. The Funds may invest in
all types of government agency securities currently outstanding or to be issued
in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest
in depositary institutions money instruments, such as certificates of deposits
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon a
specified market rate. As a result of these adjustments, the interest rate on
these obligations may be increased or decreased periodically. Often, dealers
selling variable rate certificates of deposit to the Funds agree to repurchase
such instruments, at the Funds' option, at par on the coupon dates. The
dealers' obligations to repurchase these instruments are subject to conditions
imposed by the various dealers; such conditions typically are the continued
credit standing of the issuer and the existence of reasonably orderly market
conditions. The Funds are also able to sell variable rate certificates of
deposit in the secondary market. Variable rate certificates of deposit
normally carry a higher interest rate than comparable fixed rate certificates
of deposit because variable rate certificates of deposit generally have a
longer stated maturity than comparable fixed rate certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest
in certificates of deposit and bankers' acceptances issued by foreign branches
or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S. branches or
subsidiaries of foreign banks ("Yankeedollar" obligations). The Fund may
invest only in Eurodollar obligations which by their terms are general
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obligations of the U.S. parent bank and meet the other criteria discussed
below. Yankeedollar obligations in which the Fund may invest must be issued by
U.S. branches or subsidiaries of foreign banks which are subject to state or
federal banking regulations in the U.S. and by their terms must be general
obligations of the foreign parent. In addition, the Fund will limit its
investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may also
invest in U.S. dollar-denominated obligations of foreign depository
institutions and their foreign branches and subsidiaries, such as certificates
of deposit, bankers' acceptances, time deposits and deposit notes. The
obligations of such foreign branches and subsidiaries may be the general
obligation of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government regulation.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations, no Fund may invest in any bank
money instrument-issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United States,
has total assets of at least $1 billion and its deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets
of a Fund (taken at market value at the time of each investment) in
certificates of deposit issued by banks and savings and loan associations with
assets of less than $1 billion if the principal amount of each such certificate
of deposit is fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, for temporary or defensive purposes, may invest
in commercial paper (including variable amount master demand notes and
insurance company funding agreements), which refers to short-term, unsecured
promissory notes issued by corporations, partnerships, trusts and other
entities to finance short-term credit needs and by trusts issuing asset-backed
commercial paper. Commercial paper is usually sold on a discount basis and has
a maturity at the time of issuance not exceeding nine months. Variable amount
master demand notes are demand obligations that permit the investment of
fluctuating amounts at varying market rates of interest pursuant to
arrangements between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes. Because variable amount master
notes are direct lending arrangements between the lender and borrower, it is
not generally contemplated that such instruments will be traded and there is no
secondary market for the notes. Typically, agreements relating to such notes
will provide that the lender may not sell or otherwise transfer the note
without the borrower's consent. Such notes provide that the interest rate on
the amount outstanding is adjusted periodically, typically on a daily basis, in
accordance with a stated short-term interest rate benchmark. Because the
interest rate of a variable amount master note is adjusted no less often than
every 60 days and since repayment of the note may be demanded at any time, the
Investment Adviser values such a note on an amortized cost basis, unless
particular circumstances dictate otherwise.
Each of the Flexible Strategy, Global Strategy Focus, World Income Focus
and International Bond Funds, may also invest in U.S. dollar-denominated
commercial paper and other short-term obligations issued by foreign entities.
Such investments are subject to quality standards similar to those applicable
to investments in comparable obligations of domestic issuers. Investments in
foreign entities in general involve the same risks as those set forth in the
SAI in connection with investments in Eurodollar, Yankeedollar and foreign bank
obligations.
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REPURCHASE AGREEMENTS
REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results
in a fixed yield for the Fund insulated from fluctuations in the market value
of the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered
into only with a member bank of the Federal Reserve System, a primary dealer in
U.S. government securities or an affiliate thereof. A purchase and sale
contract is similar to a repurchase agreement, but purchase and sale contracts,
unlike repurchase agreements, allocate interest on the underlying security to
the purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when
investing in repurchase agreements or purchase and sale contracts.
Nevertheless, if the seller were to default on its obligation to repurchase a
security under a repurchase agreement or purchase and sale contract and the
market value of the underlying security at such time was less than the Fund had
paid to the seller, the Fund would realize a loss. Repurchase agreements and
purchase and sale contracts maturing in more than seven days will be considered
"illiquid securities."
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.
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B-Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca-Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation:
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB-B-CCC-CC-Bonds rated BB, B, CCC, and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR-Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
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TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY
OPTIONS ON PORTFOLIO SECURITIES. Each of the Flexible Strategy, Global
Strategy Focus, World Income Focus and International Bond Funds may from time
to time sell ("write") cover call options on its portfolio securities in which
it may invest and may engage in closing purchase transactions with respect to
such options. A covered call option is an option where the Fund, in return for
a premium, gives another party a right to buy particular securities held by the
Fund at a specified future date and at a price set at the time of the contract.
The principal reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater return than would be realized on the
securities alone. By writing covered call options, a Fund gives up the
opportunity, while the option is in effect, to profit from any price increase
in the underlying security above the option exercise price. In addition, the
Fund's ability to sell the underlying security will be limited while the option
is in effect unless the Fund effect a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a
partial hedge against the price of the underlying security declining.
Each of the Global Strategy Focus, World Income Focus and International
Bond Funds also may write put options, which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. A Fund will write only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. A
Fund may engage in closing transactions in order to terminate put options that
it has written.
The Global Strategy Focus, World Income Focus and International Bond Funds
may purchase put options on portfolio securities. In return for payment of a
premium, the purchase of a put option gives the holder thereof the right to
sell the security underlying the option to another party at a specified price
until the put option is closed out, expires or is exercised. Each Fund will
only purchase put options to seek to reduce the risk of a decline in value of
the underlying security. The total return on the security may be reduced by
the amount of the premium paid for the option by the Fund. Prior to its
expiration, a put option may be sold in a closing sale transaction and profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased.
In certain circumstances, a Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
Each of the Funds may engage in options transactions on exchanges and in
the over-the-counter ("OTC") markets. In general, exchange traded contracts
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See "Over-the-Counter Options"
below for information as to restrictions on the use of OTC options.
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OPTIONS ON STOCK INDICES. The Global Strategy Focus, World Income Focus
and International Bond Funds may purchase and write call options and put
options on stock indices traded on a national securities exchange to seek to
reduce the general market risk of their securities or specific industry sectors
in which the Fund invests. Options on indices are similar to options on
securities except that, on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Funds may invest in index options based on a broad market index,
e.g., the S&P 500, or on a narrow index representing an industry or market
segment, e.g., the Amex Oil & Gas Index. The effectiveness of a hedge
employing stock index options will depend primarily on the degree of
correlation between movements in the value of the index underlying the option
and in the portion of the portfolio being hedged. For further discussion
concerning such options, see "Risk Factors in Options, Futures and Currency
Transactions" below and the SAI.
STOCK INDEX AND FINANCIAL FUTURES CONTRACTS. The Global Strategy Focus,
World Income Focus and International Bond Funds may purchase and sell stock
index futures contracts and financial futures contracts to hedge their
portfolios. The Funds may sell stock index futures contracts and financial
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Funds' securities portfolios that
might otherwise result. When the Funds are not fully invested in the
securities market and anticipate a significant market advance, they may
purchase stock index or financial futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of
securities that the Funds intend to purchase. A stock index or financial
futures contract is a bilateral agreement pursuant to which the Funds will
agree to buy or deliver at settlement an amount of cash equal to a dollar
multiplied by the difference between the value of a stock index or financial
instrument at the close of the last trading day of the contract and the price
at which the futures contract is originally entered into. The Funds may engage
in transactions in stock index futures contracts based on broad market indexes
or on indexes on industry or market segments. A Fund may effect transactions
in stock index futures contracts in connection with the equity securities in
which it invests and in financial futures contracts in connection with the debt
securities in which it invests. As with stock index options, the effectiveness
of the Funds' hedging strategies depend primarily upon the degree of
correlation between movements in the value of the securities subject to the
hedge and the index or securities underlying the futures contract. See "Risk
Factors in Options, Futures and Currency Transactions" below.
HEDGING FOREIGN CURRENCY RISKS. The Global Strategy Focus, World Income
Focus and International Bond Funds are authorized to deal in forward foreign
exchange contracts between currencies of the different countries in which they
will invest, including multi-national currency units, as a hedge against
possible variations in the foreign exchange rate between these currencies and
the United States dollar. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date (up to one
year) and price at the time of the contract. The dealings of the Funds in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Funds accruing in connection with the purchase and sale of
their portfolio securities, the sale and redemption of shares of the Funds or
the payment of dividends and distributions by the Funds. Position hedging is
the sale of forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The Funds will not
speculate in forward foreign exchange. Hedging against a decline in the value
of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value of the hedged
currency should rise. Moreover, it 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.
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The Global Strategy Focus, World Income Focus and International Bond Funds
are also authorized to purchase or sell listed foreign currency options and
foreign currency futures contracts as a hedge against possible adverse
variations in foreign exchange rates. Foreign currency options provide the
holder thereof the right to buy or to sell a currency at a fixed price on or
before a future date. A futures contract on a foreign currency is an agreement
between two parties to buy and sell a specified amount of a currency for a set
price on a future date. Such transactions may be effected with respect to
hedges on non-U.S. dollar-denominated securities (including securities
denominated in multi-national currency units) owned by the Funds, sold by the
Funds but not yet delivered, or committed or anticipated to be purchased by the
Funds. As an illustration, the Funds may use such techniques to hedge the
stated value in United States dollars of an investment in a Japanese yen-
denominated security. In such circumstances, for example, the Funds may
purchase a foreign currency put option enabling them to sell a specified amount
of yen for dollars at a specified price by a future date. To the extent the
hedge is successful, a loss in the value of the yen relative to the dollar will
tend to be offset by an increase in the value of the put option. To offset, in
whole or in part, the cost of acquiring such a put option, the Funds may also
sell a call option which, if exercised, requires it to sell a specified amount
of yen for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option in this illustration, the Funds give
up the opportunity to profit without limit from increases in the relative value
of the yen to the dollar.
The Global Strategy Focus, World Income Focus and International Bond Funds
will not speculate in foreign currency options or futures. Accordingly, the
Funds will not hedge a currency substantially in excess of the market value of
the securities denominated in such currency which they own, the expected
acquisition price of securities which they have committed or anticipate to
purchase which are denominated in such currency, and, in the case of securities
which have been sold by the Funds but not yet delivered, the proceeds thereof
in its denominated currency. Further, if a security with respect to which a
currency hedging transaction has been executed should subsequently decrease in
value, the Funds will direct their custodian to segregate liquid, high-grade
debt securities having a market value equal to such decrease in value, less any
initial or variation margin held in the account of their broker.
As in the case of forward foreign exchange contracts, employing currency
futures and options in hedging transactions does not eliminate fluctuations in
the market price of a security and such transactions preclude or reduce the
opportunity for gain if the hedged currency should move in a favorable
direction.
OPTIONS ON FUTURES CONTRACTS. The Global Strategy Focus and World Income
Focus Funds may also purchase and write call and put options on futures
contracts in connection with their hedging activities. Generally, these
strategies are utilized under the same market conditions (i.e., conditions
relating to specific types of investments) in which the Funds enter into
futures transactions. The Funds may purchase put options or write call options
on futures contracts rather than selling the underlying futures contract in
anticipation of a decline in the equities markets or in the value of a foreign
currency. Similarly, the Funds may purchase call options, or write put options
on futures contracts, as a substitute for the purchase of such futures to hedge
against the increased cost resulting from appreciation of equity securities or
in the currency in which securities which the Funds intend to purchase are
denominated. Limitations on transactions in options on futures contracts are
described below.
OVER-THE-COUNTER OPTIONS. The Global Strategy Focus, World Income Focus
and International Bond Funds may engage in options transactions in the over-
the-counter markets. In general, over-the-counter ("OTC") options are two-
party contracts with price and terms negotiated by the buyer and seller,
whereas exchange-traded options are third-party contracts (i.e., performance of
the parties' obligations is guaranteed by an exchange or clearing corporation)
with standardized strike prices and expiration dates. OTC options include put
and call options on individual securities, cash settlement options on groups of
securities, and options on currency. The Funds may engage in an OTC options
C-33<PAGE>
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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 Strategy Focus, World Income Focus and International Bond Funds' futures
transactions constitute bona fide hedging transactions or, with respect to non-
hedging transactions, that the Fund not enter into such transactions, if,
immediately thereafter, the sum of the amount of initial margin deposits on the
respective Fund's existing non-hedging futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total assets.
When a Fund purchases a futures contract, a call option thereon or writes a
put option, an amount of cash and cash equivalents will be deposited in a
segregated account with the Company's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
As order has been obtained from the Securities and Exchange Commission
which exempts the Company from certain provisions of the Investment Company Act
of 1940 in connection with transactions involving futures contracts and options
thereon.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. A Fund's
ability to effectively hedge all or a portion of its portfolio of securities
through transactions in options on stock indexes, stock index futures and
financial futures depends on the degree to which price movements in the index
underlying the hedging instrument correlates with price movements in the
relevant portion of the securities portfolio. The securities portfolio will
not duplicate the components of the index. As a result, the correlation will
not be perfect. Consequently, a Fund bears the risk that the price of the
portfolio securities being hedged will not move in the same amount or direction
as the underlying index or securities and that the Fund would experience a loss
on one position which is not completely offset by a gain on the other position.
It is also possible that there may be a negative correlation between the index
or securities underlying an option or futures contract in which a Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the securities and the hedging instrument. A
Fund will invest in a hedging instrument only if, in the judgement of the
Investment Adviser, there is expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the portfolio of securities for such hedge to be
effective. There can be no assurance that the judgment will be accurate.
Investment in stock index and currency futures, financial futures and
options thereon entail the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index or
currency. The anticipated spread between the prices may be distorted due to
differences in the nature of the markets, such as differences in margin and
maintenance requirements, the liquidity of such markets and the participation
of speculators in the futures market. However, the risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract or termination date of the option approaches.
The Funds intend to enter into exchange-traded options and futures
transactions only if there appears to be a liquid secondary market for such
options or futures. However, there can be no assurance that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to close
an options or futures transaction. The inability to close options and futures
positions could have an adverse impact on a Fund's ability to effectively hedge
its portfolio. There is also the risk of loss by a Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom a Fund has an open
position in an option or futures contract.
C-34<PAGE>
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APPENDIX D
EXISTING INVESTMENT RESTRICTIONS OF THE FUNDS
CURRENT RESTRICTIONS APPLICABLE TO THE PRIME BOND FUND
The Prime Bond Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities) of any one issuer (including repurchase
agreements with any one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of such Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase
obligations in private placements, and provided further that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
D-1<PAGE>
<PAGE>
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 10% of the Fund's total assets, taken at market value at the time
thereof.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers except that the Fund may
invest in securities of foreign issuers if at the time of acquisition no more
than 10% of its total assets, taken at market value at the time of the
investment, would be invested in such securities, provided however, that up to
25% of the total assets of the Prime Bond Fund may be invested in securities
(i) issued, assumed or guaranteed by foreign governments, or political
subdivisions or instrumentalities thereof, (ii) assumed or guaranteed by
domestic issuers, including Eurodollar securities or (iii) issued, assumed or
guaranteed by foreign issuers having a class of securities listed for trading
on the New York Stock Exchange (see "Other Portfolio Strategies-Foreign
Securities" in the Prospectus). Consistent with the general policy of the
Securities and Exchange Commission, the nationality or domicile of an issuer
for determination of foreign issuer status may be (i) the country under whose
laws the issuer is organized, (ii) the country in which the issuer's securities
are principally traded, or (iii) a country in which the issuer derives a
significant proportion (at least 50%) of its revenues or profits from goods
produced or sold, investments made, or services performed in the country, or in
which at least 50% of the assets of the issuer are situated.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities. If through the appreciation of restricted securities or the
depreciation of unrestricted securities held by a Fund, more than 10% of the
assets of the Fund should be invested in restricted securities, the Fund will
consider appropriate steps to assure maximum flexibility.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers primarily engaged in the
same industry (utilities will be divided according to their services; for
example, gas, gas transmission, electric and telephone each will be considered
a separate industry for purposes of this restriction).
(17) participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not include the "bunching" of orders for
the sale or purchase of portfolio securities with the other Funds or with
individually managed accounts advised or sponsored by the Investment Adviser or
any of its affiliates to reduce brokerage commissions or otherwise to achieve
best overall execution).
(18) purchase, either alone or together with any other Fund or Funds, more
than either 10% (a) in principal amount of the outstanding securities of an
issuer, or (b) of the outstanding voting securities of an issuer except that
such restriction will not apply to U.S. Government or government agency
securities, bank money instruments or bank repurchase agreements.
D-2<PAGE>
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CURRENT RESTRICTIONS APPLICABLE TO THE HIGH CURRENT INCOME FUND
The High Current Income Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities) of any one issuer (including repurchase
agreements with any one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of such Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 10% of the Fund's total assets, taken at market value at the time
thereof.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
D-3<PAGE>
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(12) invest in the securities of foreign issuers; except that the High
Current Income Fund may invest in securities of foreign issuers if at the time
of acquisition no more than 10% of its total assets, taken at market value at
the time of the investment, would be invested in such securities, provided
however, that up to 25% of the total assets of the Fund may be invested in
securities (i) issued, assumed or guaranteed by foreign governments, or
political subdivisions or instrumentalities thereof, (ii) assumed or guaranteed
by domestic issuers, including Eurodollar securities or (iii) issued, assumed
or guaranteed by foreign issuers having a class of securities listed for
trading on the New York Stock Exchange (see "Other Portfolio Strategies-Foreign
Securities" in the Prospectus). Consistent with the general policy of the
Securities and Exchange Commission, the nationality or domicile of an issuer
for determination of foreign issuer status may be (i) the country under whose
laws the issuer is organized, (ii) the country in which the issuer's securities
are principally traded, or (iii) a country in which the issuer derives a
significant proportion (at least 50%) of its revenues or profits from goods
produced or sold, investments made, or services performed in the country, or in
which at least 50% of the assets of the issuer are situated.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund, taken at market value, would be invested in
the securities. If through the appreciation of restricted securities or the
depreciation of unrestricted securities held by a Fund, more than 10% of the
assets of the Fund should be invested in restricted securities, the Fund will
consider appropriate steps to assure maximum flexibility.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owing beneficially more than 1/2 of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers primarily engaged in the
same industry (utilities will be divided according to their services; for
example, gas, gas transmission, electric and telephone each will be considered
a separate industry for purposes of this restriction).
(17) participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not include the "bunching" of orders for
the sale or purchase of portfolio securities with the other Funds or with
individually managed accounts advised or sponsored by the Investment Adviser or
any of its affiliates to reduce brokerage commissions or otherwise to achieve
best overall execution).
(18) purchase, either alone or together with any other Fund or Funds, more
than either 10% (a) in principal amount of the outstanding securities of an
issuer, or (b) of the outstanding voting securities of an issuer except that
such restriction will not apply to U.S. Government or government agency
securities, bank money instruments or bank repurchase agreements.
D-4<PAGE>
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CURRENT RESTRICTIONS APPLICABLE TO THE QUALITY EQUITY FUND
The Quality Equity Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of such Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof,
except that the Fund may write covered call options.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit,
bankers' acceptances and variable amount notes shall not be deemed the making
of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned; and provided further that the
Fund may only make loans to New York Stock Exchange Member firms, other
brokerage firms having net capital of at least $10 million and financial
institutions, such as registered investment companies, banks and insurance
companies, having at least $10 million in capital and surplus.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, or acquisition cost if it is lower, and then only from banks as a
temporary measure for extraordinary or emergency purposes. The Fund will not
purchase securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 15% of the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge);
D-5<PAGE>
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although the Fund has the authority to mortgage, pledge or hypothecate more
than 10% of its total assets under this investment restriction (10), as a
matter of operating policy, the Fund will not mortgage, pledge or hypothecate
in excess of 10% of total net assets.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers except that the Equity
Growth Fund may invest in securities of foreign issuers if at the time of
acquisition no more than 10% of its total assets, taken at market value at the
time of the investment, would be invested in such securities. Consistent with
the general policy of the Securities and Exchange Commission, the nationality
or domicile of an issuer for determination of foreign issuer status may be (i)
the country under whose laws the issuer is organized, (ii) the country in which
the issuer's securities are principally traded, or (iii) a country in which the
issuer derives a significant proportion (at least 50%) of its revenues or
profits from goods produced or sold, investments made, or services performed in
the country, or in which at least 50% of the assets of the issuer are situated.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in the securities.
(14) Quality Equity Fund may not invest in securities for which there are
legal or contractual restrictions on resale, and it may not invest in
securities for which there is no readily available market if at the time of
acquisition more than 5% of its total assets would be invested in such
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company and the Investment Adviser or any
subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer, own in the aggregate more than 5% of the securities
of such issuer.
(16) concentrate its investments in any particular industry; provided that
if it is deemed appropriate for the attainment of the Fund's investment
objectives, up to 25% of its total assets (taken at acquisition cost at the
time of each investment) may be invested in any one industry.
(17) invest, either alone or together with any other Fund or Funds, in
securities of any single issuer, if immediately after and as a result of such
investment, the Fund owns more than 10% of the outstanding securities, or more
than 10% of the outstanding voting securities, of such issuer.
(18) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.)
CURRENT RESTRICTIONS APPLICABLE TO THE EQUITY GROWTH FUND
The Equity Growth Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
D-6<PAGE>
<PAGE>
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed the Fund's total assets, taken at market value at the time thereof.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of foreign issuers except that the Quality Equity
Fund may invest in securities of foreign issuers if at the time of acquisition
no more than 10% of its total assets, taken at market value at the time of the
investment, would be invested in such securities. Consistent with the general
policy of the Securities and Exchange Commission, the nationality or domicile
of an issuer for determination of foreign issuer status may be (i) the country
under whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) a country in which the
issuer derives a significant proportion (at least 50%) of its revenues or
profits from goods produced or sold, investments made, or services performed in
the country, or in which at least 50% of the assets of the issuer are situated.
D-7<PAGE>
<PAGE>
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 5% of
the total assets of the Fund, taken at market value, would be invested in the
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(16) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(17) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment
more than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(18) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.)
CURRENT RESTRICTIONS APPLICABLE TO THE FLEXIBLE STRATEGY FUND
The Flexible Strategy Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of such Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interest
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof,
except that the Fund may write covered call options.
D-8<PAGE>
<PAGE>
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 15% of the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge);
although the Fund has the authority to mortgage, pledge or hypothecate more
than 10% of its total assets under this investment restriction (10), as a
matter of operating policy, the Fund will not mortgage, pledge or hypothecate
in excess of 10% of total net assets.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(13) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund, taken at market value, would be invested in
the securities.
(14) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(15) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(16) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment
more than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(17) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.)
D-9<PAGE>
<PAGE>
CURRENT RESTRICTIONS APPLICABLE TO THE NATURAL RESOURCES FOCUS FUND
The Natural Resources Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of investors which invest or deal in any
of the above, and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities
or commodities contracts. (As a matter of operating policy, however, the Fund
at present does not intend to engage in transactions in commodities or
commodities contracts, other than foreign currency, futures contracts and
option on futures contracts.)
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(5) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(6) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (7) below; and the Fund may purchase
obligations in private placements; and provided further that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(8) borrow amounts in excess of 10% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually, only "leveraged" investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding. Interest paid on such borrowings
will reduce net income.
(9) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(7) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (8)
D-10<PAGE>
<PAGE>
above, and then such mortgaging, pledging or hypothecating may not exceed 10%
of the Fund's total assets, taken at market value at the time thereof (the
deposit in escrow by the Fund of underlying securities in connection with the
writing of call options is not deemed to be a pledge).
(10) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities.
(13) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(14) invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers primarily engaged in the
same industry, except that when management anticipates significant economic,
political or financial instability, the Natural Resources Focus Fund may invest
more than 25% of its total assets in gold-related companies. In determining
compliance by the Natural Resources Focus Fund with its policy on investing in
the securities of issuers primarily engaged in the same industry, management
will rely on industrial classifications contained in Standard & Poor's Register
of Corporations, Directors and Executives.
CURRENT RESTRICTIONS APPLICABLE TO THE AMERICAN BALANCED FUND
The American Balanced Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
D-11<PAGE>
<PAGE>
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof,
except that the Fund may write covered call options.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 15% of the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge);
although the Fund has the authority to mortgage, pledge or hypothecate more
than 10% of its total assets under this investment restriction (10), as a
matter of operating policy, the Fund will not mortgage, pledge or hypothecate
in excess of 10% of total net assets.
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers. Consistent with the
general policy of the Securities and Exchange Commission, the nationality or
domicile of an issuer for determination of foreign issuer status may be (i) the
country under whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) a country in which the
issuer derives a significant proportion (at least 50%) of its revenues or
profits from goods produced or sold, investments made, or services performed in
the country, or in which at least 50% of the assets of the issuer are situated.
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(16) invest more than 25% of the assets (taken at market value at the time
of each investment) in securities of issuers in any particular industry.
D-12<PAGE>
<PAGE>
(17) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment
more than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(18) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.)
CURRENT RESTRICTIONS APPLICABLE TO THE GLOBAL STRATEGY FOCUS FUND
The Global Strategy Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above, and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities
or commodities contracts.
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payment in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(5) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(6) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (7) below; and the Fund may purchase
obligations in private placements; and provided further that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances.
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value, at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(8) borrow amounts in excess of 10% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only "leveraged" investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
D-13<PAGE>
<PAGE>
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding. Interest paid on such borrowings
will reduce net income.
(9) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(7) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (8)
above, and then such mortgaging, pledging or hypothecating may not exceed 15%
of the Fund's total assets, taken at market value at the time thereof (the
deposit in escrow by the Fund of underlying securities in connection with the
writing of call options is not deemed to be a pledge); although the Fund has
the authority to mortgage, pledge or hypothecate more than 10% of its total
assets under this investment restriction (9), as a matter of operating policy,
the Fund will not mortgage, pledge or hypothecate in excess of 10% of total
assets.
(10) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities.
(13) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(14) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular industry.
(15) invest, either alone or together with any other Fund or Funds, in
securities of any one issuer (other than the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment
more than 10% of the outstanding securities, or more than 10% of any class of
securities, of such issuer would be owned by the Fund.
(16) invest in warrants if at the time of acquisition more than 2% of its
total assets, taken at market value, would be invested in warrants. (For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.)
CURRENT RESTRICTIONS APPLICABLE TO THE BASIC VALUE FOCUS FUND
The Basic Value Focus Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
D-14<PAGE>
<PAGE>
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof,
except that the Fund may write covered call options.
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and provided further that for
purposes of this restriction the acquisition of a portion of an issue of
publicly distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 10% of the Fund's total assets, taken at market value at the time
thereof (the deposit in escrow by the Fund of underlying securities in
connection with the writing of call options is not deemed to be a pledge).
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in the securities of foreign issuers except that the Basic
Value Focus Fund may invest in securities of foreign issuers if at the time of
acquisition no more than 10% of its total assets, taken at market value at the
time of the investment, would be invested in such securities. Consistent with
the general policy of the Securities and Exchange Commission, the nationality
or domicile of an issuer for determination of foreign issuer status may be
(i) the country under whose laws the issuer is organized, (ii) the country in
which the issuer's securities are principally traded, or (iii) a country in
which the issuer derives a significant proportion (at least 50%) of its
revenues or profits from goods produced or sold, investments made, or services
performed in the country, or in which at least 50% of the assets of the issuer
are situated.
D-15<PAGE>
<PAGE>
(13) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(14) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 5% of
the total assets of the Fund taken at market value, would be invested in the
securities.
(15) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(16) invest less than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(including securities issued or guaranteed by the government of any one foreign
country, but excluding the U.S. Government, its agencies and
instrumentalities).
CURRENT RESTRICTIONS APPLICABLE TO THE WORLD INCOME FOCUS FUND
The World Income Focus Fund may not:
(1) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(2) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commissions, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
the Fund may invest in securities secured by real estate or interests therein
or securities issued by companies which invest in real estate or interest
therein, and except further, that the Fund may engage in transactions in
currency and options thereon, forward currency contracts, futures contracts and
options thereon and purchase, sell or otherwise invest or deal in commodities
or commodities contracts.
(4) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(5) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(6) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (7) below; and the Fund may purchase
obligations in private placements; and provided further that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
D-16<PAGE>
<PAGE>
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(8) borrow amounts in excess of 20% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only "leveraged" investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding, except that the Fund may purchase
securities if their outstanding borrowings do not exceed 5% of their total
assets. Interest paid on such borrowings will reduce net income.
(9) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(7) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (8)
above, and then such mortgaging, pledging or hypothecating may not exceed 10%
of the Fund's total assets, taken at market value at the time thereof (the
deposit in escrow by the Fund of underlying securities in connection with the
writing of call options is not deemed to be a pledge).
(10) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(12) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities.
(13) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(14) invest less than 25% of the assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(including securities issued or guaranteed by the government of any one foreign
country, but excluding the U.S. Government, its agencies and
instrumentalities).
CURRENT RESTRICTIONS APPLICABLE TO THE GLOBAL UTILITY FOCUS FUND
The Global Utility Focus Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
D-17<PAGE>
<PAGE>
(3) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein and except further, that the Fund may engage in transactions
in currency and options thereon, forward currency contracts, futures contracts
and options thereon and purchase, sell or otherwise invest or deal in
commodities or commodities contracts.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(6) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase
obligations in private placements; and provided further that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 10% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only "leveraged" investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding, except that the Fund may purchase
securities if their outstanding borrowings do not exceed 5% of their total
assets. Interest paid on such borrowings will reduce net income.
(10) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(8) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in (9)
above, and then such mortgaging, pledging or hypothecating may not exceed 10%
of the Fund's total assets, taken at market value at the time thereof (the
deposit in escrow by the Fund of underlying securities in connection with the
writing of call options is not deemed to be a pledge).
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
D-18<PAGE>
<PAGE>
(12) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(13) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities. However, the asset-backed securities which the Fund has the option
to put to the issuer or a stand-by bank or broker and receive the principal
amount or redemption price thereof less transaction costs on no more than seven
days' notice or when the Fund has the right to convert such securities into a
readily marketable security in which it could otherwise invest upon not less
than seven days' notice are not subject to this restriction.
(14) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(15) invest less than 65% of its total assets in equity and debt securities
issued by domestic and foreign companies in the utilities industries, except
during temporary defensive periods.
CURRENT RESTRICTIONS APPLICABLE TO THE INTERNATIONAL EQUITY FOCUS FUND
The International Equity Focus Fund may not:
(1) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government or
government agency securities or securities issued by instrumentalities of the
U.S. Government) of any one issuer (including repurchase agreements with any
one bank).
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities or other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of the Fund's total assets, taken at market value, would be invested in such
securities.
(4) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may invest in securities secured by real estate or interests
therein or securities issued by companies which invest in real estate or
interest therein and except further, that the Fund may engage in transactions
in currency and options thereon, forward currency contracts, futures contracts
and options thereon and purchase, sell or otherwise invest or deal in
commodities or commodities contracts.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and the Fund may make margin payments in
connection with transactions in options, forward currency contracts, futures
contracts and options on futures contracts.
(6) make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts).
D-19<PAGE>
<PAGE>
(7) make loans to other persons; provided that the Fund may lend securities
owned or held by it pursuant to (8) below; and the Fund may purchase
obligations in private placements; and provided further that for purposes of
this restriction the acquisition of a portion of an issue of publicly
distributed bonds, debentures or other corporate debt securities or of
government obligations, short-term commercial paper, certificates of deposit
and bankers' acceptances shall not be deemed the making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to the
current market value of the securities loaned.
(9) borrow amounts in excess of 10% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. Usually only "leveraged" investment companies may borrow
in excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding, except that the Fund may purchase
securities if their outstanding borrowings do not exceed 5% of their total
assets. Interest paid on such borrowings will reduce net income.
(10) except as may be necessary in connection with transactions in options,
foreign currency contracts, futures contracts and options on futures contracts,
mortgage, pledge, hypothecate or in any manner transfer (except as provided in
(8) above), as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in
(9) above, and then such mortgaging, pledging or hypothecating may not exceed
10% of the Fund's total assets, taken at market value at the time thereof (the
deposit in escrow by the Fund or underlying securities in connection with the
writing of call options is not deemed to be a pledge).
(11) act as an underwriter of securities, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets of the Fund, taken at market value at the time of
investment, would be invested in such securities.
(13) invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities held by a Fund, more than 10%
of the total assets of the Fund taken at market value, would be invested in the
securities.
(14) purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
(15) invest more than 25% of the assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(including securities issued or guaranteed by the government of any one foreign
country, but excluding the U.S. Government, its agencies and
instrumentalities).
D-20<PAGE>
<PAGE>
CURRENT RESTRICTIONS APPLICABLE TO THE DEVELOPING CAPITAL MARKETS FOCUS FUND
The Developing Capital Markets Focus Fund may not:
(1) invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
(2) make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under the
laws of certain countries will not be deemed the making of investments for the
purpose of exercising control or management.
(3) purchase securities of other investment companies, except to the extent
permitted by applicable law.
(4) purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by real
estate or interests therein or issued by companies including real estate
investment trusts, which invest in real estate or interests therein.
(5) purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities. The payment by the Fund of initial or variation
margin in connection with futures or related options transactions, if
applicable, shall not be considered the purchase of a security on margin.
(6) make short sales of securities or maintain a short position.
(7) make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts shall not
be deemed to be the making of a loan, and except further that the Fund may lend
its portfolio securities as set forth in (8) below.
(8) lend its portfolio securities in excess of 33 1/3 % of its total
assets, taken at market value; provided that such loans may only be made in
accordance with the guidelines set forth below.
(9) issue senior securities, borrow money or pledge its assets in excess of
20% of its total assets taken at market value (including the amount borrowed)
and then only from a bank as a temporary measure for extraordinary or emergency
purposes including to meet redemptions or to settle securities transactions.
Usually only "leveraged" investment companies may borrow in excess of 5% of
their assets; however, the Fund will not borrow to increase income but only as
a temporary measure for extraordinary or emergency purposes including to meet
redemptions or to settle securities transactions which may otherwise require
untimely dispositions of Fund securities. The Fund will not purchase
securities while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding borrowings
have been obtained exclusively for settlements of other securities
transactions. (For the purpose of this restriction, collateral arrangements
with respect to the writing of options, and, if applicable, futures contracts,
options on futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures or related
options are deemed to be the issuance of a senior security.)
(10) invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are otherwise not readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
D-21<PAGE>
<PAGE>
more than seven days, if at the time of acquisition more than 15% of its net
assets would be invested in such securities.
(11) underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act"), in selling portfolio securities.
(12) purchase or sell interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in securities issued by
companies that engage in oil, gas or other mineral exploration or development
activities.
Additional investment restrictions adopted by the Company for the
Developing Capital Markets Focus Fund, which may be changed by the Board of
Directors, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of the
Fund's net assets; included within such limitation, but not to exceed 2% of the
Fund's net assets, are warrants which are not listed on the New York or
American Stock Exchange. For purposes of this restriction, warrants acquired
by the Fund in units or attached to securities may be deemed to be without
value. (ii) Purchase or sell commodities or commodity contracts, except that
the Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest and purchase and sell stock index
and currency options, stock index futures, financial futures and currency
futures contracts and related options on such futures. (ii) Invest in
securities of corporate issuers having a record, together with predecessors, of
less than three years of continuous operation, if more than 5% of its total
assets, taken at market value, would be invested in such securities.
(iv) Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent described in the Fund's Prospectus and in this
Statement of Additional Information, as amended from time to time.
(v) Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer own in the aggregate more than 5% of the securities of such issuer.
CURRENT RESTRICTIONS APPLICABLE TO THE INTERNATIONAL BOND FUND
The International Bond Fund may not:
(1) make investments for the purpose of exercising control or management.
(2) purchase securities of other investment companies, except to the extent
permitted by applicable law.
(3) purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
(4) purchase or sell commodities or commodity contracts except that the
Fund may deal in forward foreign exchange between currencies in which its
portfolio securities are denominated and the Fund may purchase and sell
interest rate and currency options, futures contracts and related options.
(5) invest more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of corporate issuers in any
particular industry.
(6) purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities, or make short sales of securities or maintain a short
position. (The deposit or payment by the Fund of initial or variation margin
in connection with futures or options transactions is not considered the
purchase of a security on margin.)
D-22<PAGE>
<PAGE>
(7) make loans to other persons (except as provided in (8) below), provided
that the purposes of this restriction the acquisition of a portion of publicly
distributed bonds, debentures, or other corporate debt securities and
investment in governmental and supranational obligations, short-term commercial
paper, certificates of deposit, bankers' acceptances and repurchase agreements
shall not be deemed to be the making of a loan.
(8) lend its portfolio securities in excess of 33 1/3 % of its total
assets, taken at market value, provided that such loans shall be made in
accordance with the guidelines set forth below.
(9) issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank as a temporary measure for extraordinary or
emergency purposes or to meet redemption in amounts not exceeding 10% (taken at
the market value) of its total assets and pledge its assets to secure such
borrowings. (For the purpose of this restriction, collateral arrangements with
respect to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge of assets and neither such arrangements
nor the purchase or sale of options, futures or related options are deemed to
be the issuance of a senior security.)
(10) invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable if,
regarding all such securities, more than 15% of its net assets, taken at market
value, would be invested in such securities.
(11) underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(12) purchase or sell interests in oil, gas or other mineral exploration or
development programs.
(13) invest in securities of corporate issuers having a record, together
with predecessors, of less than three years of continuous operation if more
than 5% of its total assets, taken at market value, would be invested in such
securities.
The Directors have established the policy that the Fund will not purchase
or retain the securities of any issuer if those individual officers and
Trustees of the Company, the Investment Adviser or Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), each owning beneficially more than one-
half of 1% of the securities of each issuer, own in the aggregate more than 5%
of the securities of such issuer.
CURRENT RESTRICTIONS APPLICABLE TO THE INTERMEDIATE GOVERNMENT BOND FUND
The Intermediate Government Bond Fund may not:
(1) invest in any security which is not issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities which has a stated
maturity greater than fifteen years from the date of purchase.
(2) make Investments for the purpose of exercising control over, or
management of, any issuer.
(3) purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Fund may purchase securities of issuers which invest or deal in any of
the above, and the Fund may purchase and sell financial futures contracts and
related options.
(4) purchase any securities on margin (except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities) or make short sales of securities or maintain a short
D-23<PAGE>
<PAGE>
position. (The deposit or payment by the Fund of initial or variation margin
in connection with futures or options transactions is not considered the
purchase of a security on margin.)
(5) make loans, except as provided in (6) below and except through the
purchase of obligations in private placements (the purchase of publicly traded
obligations not being considered the making of a Loan).
(6) lend its portfolio securities in excess of 33 1/3 % of its total
assets, taken at market value at the time of the loan, and provided that such
loan shall be made in accordance with the guidelines set forth above.
(7) borrow amounts in excess of 10% of its total assets, taken at market
value at the time of the borrowing, and then only from banks as a temporary
measure for extraordinary or emergency purposes.
(8) mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (7) above (and then such
mortgaging, pledging or hypothecating may not exceed 10% of such Fund's total
assets taken at market value at the time thereof). (For the purpose of this
restriction, collateral arrangements with respect to the writing of options,
and, if applicable, futures contracts, options on futures contracts, and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither such arrangements nor the purchase
or sale of futures or related options are deemed to be the issuance of a senior
security.)
(9) underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(10) participate on a joint (or a joint and several) basis in any trading
account in securities (but) this does not include the "bunching" of orders for
the sale or purchase of portfolio securities or with individually managed
accounts advised or sponsored by the Investment Adviser or any of its
affiliates to reduce brokerage commissions or otherwise to achieve best overall
execution.
(11) purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the Investment Adviser or any subsidiary
thereof each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own in the aggregate more than 5% of the securities of such
issuer.
The Directors have established a policy that the Fund will not invest in
financial futures or options thereon or write, purchase or sell puts, calls or
combinations thereof.
D-24<PAGE>
<PAGE>
August [ ], 1996
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 Phone No. (609) 282-2800
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its seventeen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock is issued for each
Fund.
The Company is holding an Annual Meeting of Stockholders of the Company
(the "Meeting") at the offices of Merrill Lynch Asset Management, L.P. ("MLAM"
or the "Investment Adviser"), 800 Scudders Mill Road, Plainsboro, New Jersey,
on Monday, October 11, 1996, at 9:00 a.m. The Board of Directors of the
Company has fixed the close of business on August 12, 1996 as the record date
(the "Record Date") for the determination of stockholders entitled to notice of
and to vote at the Meeting and at any adjournment thereof. Stockholders on the
Record Date will be entitled to one vote for each share held and a fractional
vote for each fractional share held, with no shares having cumulative voting
rights.
At the Meeting, stockholders will be asked to vote on (i) Proposal No. 1 -
the election of the Board of Directors, (ii) Proposal No. 2 - the ratification
of the selection of Deloitte & Touche LLP to serve as independent auditors for
the Company's current fiscal year, (iii) Proposal No. 3 - to amend the
fundamental investment restrictions of each of the Company's Funds other than
the Merrill Lynch Domestic Money Market Fund and Merrill Lynch Reserve Assets
Fund, (iv) Proposal No. 4 - to amend the investment objective of the Merrill
Lynch Intermediate Government Bond Fund and to change the name of that Fund;
(v) Proposal No. 5 - to amend the investment objective of the Merrill Lynch
World Income Focus Fund and to change the name of that Fund, (vi) Proposal
No. 6 - to approve the Agreement and Plan of Reorganization between the
Company's Merrill Lynch International Bond Fund and its Merrill Lynch World
Income Focus Fund, and (vii) Proposal No. 7 - to approve the Agreement and Plan
of Reorganization between the Company's Merrill Lynch Flexible Strategy Fund
and its Merrill Lynch Global Strategy Focus Fund. The International Bond Fund
and the Flexible Strategy Fund are sometimes referred to herein as the
"Transferor Funds" or the "Corresponding Transferor Funds", and the World
Income Focus Fund and the Global Strategy Focus Fund are sometimes referred to
herein as the "Acquiring Funds" or the "Corresponding Acquiring Funds". ALL
STOCKHOLDERS WILL BE PERMITTED TO VOTE ON PROPOSALS 1 AND 2. WITH RESPECT TO
EACH OF PROPOSALS 3, 4, 5, 6 AND 7, ONLY HOLDERS OF SHARES OF THE FUNDS
AFFECTED BY THOSE PROPOSALS WILL BE ENTITLED TO VOTE ON SUCH PROPOSALS. For
further information concerning the Meeting and the proposals to considered,
please see the Proxy Statement--Prospectus dated August [ ], 1996.
___________________
THIS STATEMENT OF ADDITIONAL INFORMATION OF THE COMPANY IS NOT A PROSPECTUS AND
SHOULD BE READ IN CONJUNCTION WITH THE PROXY STATEMENT--PROSPECTUS OF THE
COMPANY DATED AUGUST [ ], 1996 WHICH HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND WHICH IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE BY
CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH
ABOVE.
<PAGE>
<PAGE>
TABLE OF CONTENTS
Incorporation by Reference. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Pro Forma Financial Information . . . . . . . . . . . . . . . . . . . . . . . 4
2<PAGE>
<PAGE>
INCORPORATION BY REFERENCE
This Statement of Additional Information is accompanied by the Statement
of Additional Information of the Company dated April 26, 1996 (the "Company
SAI"). The information in the Company SAI is incorporated herein by reference.
The Company SAI has been filed with the Securities and Exchange Commission (the
"Commission") by the Company.
3<PAGE>
<PAGE>
PRO FORMA FINANCIAL INFORMATION
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND
---------------------------------------------------
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL WORLD ADJUSTMENTS PRO FORMA
BOND INCOME FOR
FUND FOCUS COMBINED
FUND FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* $17,459,395 $79,448,018 $ 0 $96,907,413
Cash 812 13,497 14,309
Foreign cash 2,251 - 2,251
Interest receivable 475,274 2,445,075 2,920,349
Receivable for securities sold 537,598 - 537,598
Receivable for capital shares sold 183,421 17,699 201,120
Receivable from investment adviser 9,242 - (9,242) (2) 0
Deferred organization expenses 2,667 3,944 (2,667) 3,944
Prepaid registration fees and other assets 3,008 6,032 9,040
(Note 1f) ---------- ---------- -------- -----------
Total assets 18,673,668 81,934,265 (2,667) 100,605,266
---------- ---------- -------- -----------
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign
exchange contracts - 5,151 5,151
Payable for dividends to shareholders - - 956,008(1) 956,008
Payable for securities purchased 536,115 - 536,115
Payable to investment adviser - 38,386 103,019(2) 141,405
Payable for capital shares redeemed 384 28,906 29,290
Accrued expenses and other liabilities 16,625 17,190 135,000(3) 168,815
------- ------ ------- -------
Total liabilities 553,124 89,633 1,194,027 1,836,784
------- ------ --------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 18,120,544 $ 81,844,632 ($1,205,936) $ 98,759,240
=============== =============== ========== ===============
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+ $ 172,214 $ 836,037 12,666 $ 1,020,917
Paid-in capital in excess of par 17,186,094 83,350,355 (262,594) 273,855
Undistributed investment income-net 88,192 765,308 (853,500) 0
Undistributed (accumulated) realized
capital gains (losses) on investments
and foreign currency transactions-net
102,508 (2,777,024) (102,508) (2,777,024)
Accumulated distributions in excess of
realized capital gains-net - - -
Unrealized appreciation on investments
and foreign currency transactions-net 571,536 (330,044) 241,492
---------- ---------- -------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 18,120,544 $ 81,844,632 ($1,205,936) $ 98,759,240
============== =============== =========== ==============
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING 1,722,139 8,360,366 126,663 10,209,168
============== =============== =========== ==============
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 10.52 $ 9.79 $ 9.67
============== =============== =========== ===============
- -------------------------------------------------------------------------------------------------------------------------------
*IDENTIFIED COST $ 16,888,004 $ 79,792,576 $ 96,680,580
============== =============== =========== ==============
+AUTHORIZED SHARES 100,000,000 100,000,000 200,000,000
============== =============== =========== ==============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes the distribution of undistributed net investment income and
realized capital gains from each of the Funds.
(2) MLAM does not intend voluntarily to reimburse the combined Fund for
certain expenses or to waive its management fee with respect to the
combined Fund. The adjustment reflects this intention.
(3) Reflects the charge for estimated reorganization expenses of $135,000.
4<PAGE>
<PAGE>
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND
-----------------------------------------------------
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FLEXIBLE GLOBAL PRO FORMA
STRATEGY STRATEGY FOR
FUND FOCUS COMBINED
FUND ADJUSTMENTS FUNDS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a) $321,042,917 $527,857,629 $ 0 $848,900,546
Unrealized appreciation on forward
foreign exchange contracts (Note 1b) - 9,681,629 9,681,629
Cash 24,217 576,498 600,715
Interest receivable 603,012 2,034,611 2,637,623
Receivable for securities sold 119,466 645,794 765,260
Dividends receivable 169,134 584,726 753,860
Receivable for capital shares sold 13,787 426,771 440,558
Prepaid registration fees and other
assets
Note (1f) 26,761 41,934 68,695
----------- ----------- ---------- -----------
Total assets 321,999,294 541,849,592 0 863,848,886
----------- ----------- ---------- -----------
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for dividends to shareholders - - 39,064,386(1) 39,064,386
Payable for securities purchased 1,277,730 1,066,036 2,343,766
Payable to investment adviser (Note 2) 164,372 275,588 439,960
Payable for capital shares redeemed 269,553 98,531 368,084
Accrued expenses and other liabilities 53,976 167,824 135,000(2) 356,800
----------- ----------- ---------- -----------
Total liabilities 1,765,631 1,607,979 39,199,386 42,572,996
----------- ----------- ---------- -----------
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 320,233,663 $ 540,241,613 ($39,199,386) $ 821,275,890
================ ================ ============ ================
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value+ $ 1,944,346 $ 4,306,428 388,991 $ 6,639,765
Paid-in capital in excess of par 274,133,560 505,710,448 (523,991) 779,320,017
Undistributed investment income-net 4,603,408 7,489,615 (12,093,023) 0
Undistributed (accumulated) realized
capital gains (losses) on investments
and foreign currency transactions-net
(Note 4) 26,971,363 (23,380,052) (26,971,363) (23,380,052)
Accumulated distributions in excess of
realized capital gains-net - (369,180) (369,180)
Unrealized appreciation on investments
and foreign currency transactions-net 12,580,986 46,484,354 59,065,340
----------- ----------- ------------ -----------
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 320,233,663 $ 540,241,613 ($39,199,386) $ 821,275,890
================ ================ ============ ===============
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES OUTSTANDING 19,443,457 43,064,280 3,889,916 66,397,653
================ ================ ============ ===============
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 16.47 $ 12.55 $ 12.37
================ ================ ============ ===============
- --------------------------------------------------------------------------------------------------------------------------------
*IDENTIFIED COST $ 308,461,552 $ 491,055,965 $ 799,517,517
================ ================ ============ ===============
+AUTHORIZED SHARES 100,000,000 100,000,000 200,000,000
================ ================ ============ ===============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes the distribution of undistributed net investment income and
realized capital gains from each of the Funds.
(2) Reflects the charge for estimated reorganization expenses of $135,000.
5<PAGE>
<PAGE>
The following unaudited pro forma condensed income statements for the Funds
have been derived from the statements of operations of the Company for the
fiscal year ended December 31, 1995, and adjust such information to
give effect to the Reorganizations as if the Reorganizations had occurred on
January 1, 1995. The pro forma condensed income statements are presented
for informational purposes only and do not purport to be indicative of the
results of operations that actually would have resulted if the
Reorganizations had been consummated on January 1, 1995 nor which may
result from future operations. The Pro Forma Condensed Income Statements
should be read in conjunction with the notes thereto and the Company's
financial statements and related notes thereto which are incorporated by
reference into this Statement of Additional Information.
INTERNATIONAL BOND FUND AND WORLD INCOME FOCUS FUND
---------------------------------------------------
PRO FORMA CONDENSED INCOME STATEMENT
JANUARY 1, 1995 THROUGH DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL WORLD INCOME PRO FORMA PRO FORMA
BOND FUND FOCUS FUND ADJUSTMENTS FOR
COMBINED FUNDS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest income{*} $ 829,012 $ 7,350,623 - $ 8,179,635
Dividends - 26,246 - 26,246
Other Income - 103,874 - 103,874
EXPENSES
Management fees 70,573 464,049 - 534,622
All other expenses 41,688 63,703 135,000 (1) 240,391
------------ ------------- -------- -------------
Expenses before
reimbursement 112,261 527,752 135,000 775,013
Reimbursement of expenses (112,261) - 112,261 (2) -
------------ ------------- -------- -------------
Total expenses after
reimbursement - 527,752 - 775,013
------------ ------------- -------- -------------
Net investment income 829,012 6,952,991 (237,261) 7,534,742
------------ ------------- -------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss)
from investment and foreign
currency transactions 201,199 510,287 - 711,486
Net change in unrealized
appreciation/depreciation
of investments 735,220 4,502,738 - 5,237,958
------------ ------------- -------- -------------
Net gain from
investments 936,419 5,013,025 - 5,949,444
------------ ------------- -------- -------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $1,765,431 $11,966,016 ($237,261) $13,484,186
============ ============= ========== =============
- ----------------------------------------------------------------------------------------------------------
* Net of withholding tax
on interest $3,338 $60,326 - $63,664
============ ============= ========== =============
</TABLE>
(1) Reflects charge for estimated reorganization expenses of $135,000.
(2) MLAM does not intend voluntarily to reimburse the combined Fund for
certain expenses or to waive its management fee with respect to the
combined Fund.
6<PAGE>
<PAGE>
FLEXIBLE STRATEGY FUND AND GLOBAL STRATEGY FOCUS FUND
-----------------------------------------------------
PRO FORMA CONDENSED INCOME STATEMENT
JANUARY 1, 1995 THROUGH DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FLEXIBLE GLOBAL PRO FORMA
STRATEGY STRATEGY PRO FORMA FOR
FUND FOCUS FUND ADJUSTMENTS COMBINED FUNDS
- ----------------------------------------------------------------------------------------------------------
<S <C> <C> <C> <C>
INVESTMENT INCOME
Interest income{*} $ 8,453,860 $ 14,006,863 $ - $ 22,460,723
Dividends{**} 2,824,136 6,858,616 - 9,682,752
Other Income 17,632 - - 17,632
EXPENSES
Management fees 1,941,598 3,348,535 - 5,290,133
All other expenses 187,327 370,890 135,000(1) 693,217
------------- ------------ ------------ -------------
Total expenses 2,128,925 3,719,425 135,000 5,983,350
------------- ------------ ------------ -------------
Net investment income 9,166,703 17,146,054 (135,000) 26,177,757
------------- ------------ ------------ -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) from
investment and foreign
currency transactions 27,052,018 (23,380,052) - 3,671,966
Net change in unrealized
appreciation/depreciation
of investments 11,822,579 58,162,628 - 69,985,207
------------- ------------ ------------ -------------
Net gain from
investments 38,874,597 34,782,576 - 73,657,173
------------- ------------ ------------ -------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $48,041,300 $51,928,630 ($135,000) $99,834,930
============= ============ ============ =============
- ----------------------------------------------------------------------------------------------------------
* Net of withholding tax on
interest $ 0 $ 50,929 - $ 50,929
============= ============ ============ =============
** Net of withholding tax on
dividends $ 84,307 $ 535,933 - $ 620,240
============= ============ ============ =============
</TABLE>
(1) Reflects charge for estimated reorganization expenses of $135,000.
7<PAGE>
<PAGE>
PRO FORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
COMBINED SCHEDULE - WORLD INCOME FOCUS FUND AND INTERNATIONAL BOND FUND AS OF DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERCENT OF
AFRICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
South Africa Foreign Government US$ 500,000 Republic of South Africa, 9.625% $498,425 $540,000 0.5%
Obligations due 12/15/1999
-------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 498,425 540,000 0.5
South Africa
-------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 498,425 540,000 0.5
Africa
- ----------------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA AND THE CARIBBEAN
- ----------------------------------------------------------------------------------------------------------------------------------
Argentina Telecommunications 500,000 Telefonica de Argentina, S.A., 490,040 517,500 0.5
11.875% due 11/01/2004
--------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 490,040 517,500 0.5
Argentina
- ----------------------------------------------------------------------------------------------------------------------------------
Brazil Banking 500,000 +UNIBANCO - Uniao de Bancos 498,750 502,500 0.5
Brasilerios, S.A., 10.25% due
6/12/1997
--------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 498,750 502,500 0.5
Brazil
- ----------------------------------------------------------------------------------------------------------------------------------
Mexico Energy 500,000 Petroleos Mexicanos, 8.25% due 521,875 488,750 0.5
2/04/1998
--------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 521,875 488,750 0.5
Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
Trinidad & Tobago Foreign Government 350,000 Republic of Trinidad & Tobago, 11.50% 368,500 369,250 0.4
Obligations due 11/20/1997
--------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 368,500 369,250 0.4
Trinidad & Tobago
--------------------------------------------------------------------------------------------------------------
Total Investments in Latin American 1,879,165 1,878,000 1.9
and Caribbean Securities
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NORTH PERCENT OF
AMERICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Canada Foreign Government Canadian Government Bonds:
Obligations C$ 600,000 6.50% due 6/01/2004 $ 413,533 $ 425,053 0.4%
600,000 8.75% due 12/01/2005 478,644 491,461 0.5
-----------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments
in Canada 892,177 916,514 0.9
- ----------------------------------------------------------------------------------------------------------------------------------
United States Airlines US$
500,000 United Air Lines, Inc., 10.02% due
3/22/2014 506,250 598,175 0.6
100,000 United Air Pass Through, 10.125%
due 3/22/2015 109,036 120,015 0.1
500,000 USAir Inc., 10.375% due 3/01/2013 504,688 465,000 0.5
------- ------ ---
1,119,974 1,183,190 1.2
-----------------------------------------------------------------------------------------------------------------
Automotive 500,000 Walbro Corp., 9.875% due 7/15/2005 490,000 498,750 0.5
-----------------------------------------------------------------------------------------------------------------
Broadcasting & 500,000 SCI Television Inc., 11.00% due 520,625 528,750 0.5
Publishing 6/30/2005
250,000 Sinclair Broadcast Group Inc., 250,000 255,625 0.3
10.00% due 9/30/2005 ------- ------- ---
770,625 784,375 0.8
-----------------------------------------------------------------------------------------------------------------
Broadcasting/Cable 1,011,242 American Telecasting Inc., 12.59* 642,918 695,229 0.7
due 6/15/2004
1,000,000 Videotron Holdings PLC, 11.05%* due 652,360 697,500 0.7
7/01/2004 ------- ------- ---
1,295,278 1,392,729 1.4
-----------------------------------------------------------------------------------------------------------------
Building Materials 500,000 Pacific Lumber Co., 10.50% due
3/01/2003 492,000 473,750 0.5
-----------------------------------------------------------------------------------------------------------------
Chemicals 1,225,000 G-I Holdings, Inc., 12.86%* due
10/01/1998 886,971 946,313 1.0
-----------------------------------------------------------------------------------------------------------------
9<PAGE>
<PAGE>
NORTH PERCENT OF
AMERICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------
Communications US$ 1,375,000 Panamsat L.P., 11.35%* due $ 987,186 $ 1,127,500 1.1%
8/01/2003
1,000,000 Rogers Communications, Inc., 1,007,500 1,045,000 1.1
10.875% due 4/15/2004
500,000 USA Mobile Communications Holdings, 454,375 495,000 0.5
Inc., 9.50% due 2/01/2004 --------- --------- ----
2,449,061 2,667,500 2.7
-----------------------------------------------------------------------------------------------------------------
Conglomerates Coltec Industries Inc.:
150,000 9.75% due 11/01/1999 159,000 154,500 0.2
600,000 10.25% due 4/01/2002 622,000 616,500 0.6
500,000 J.B. Poindexter & Co., Inc., 12.50%
due 5/15/2004 500,000 401,250 0.4
500,000 Jordan Industries, Inc., 10.375%
due 8/01/2003 495,688 445,000 0.4
500,000 Sequa Corp., 9.375% due 12/15/2003 508,750 465,000 0.5
500,000 Sherritt Gordon, Ltd., 9.75% due
4/01/2003 503,625 532,500 0.5
--------- --------- ----
2,789,063 2,614,750 2.6
-----------------------------------------------------------------------------------------------------------------
Customer Products 1,000,000 Polymer Group Inc., 12.25% due
7/15/2002 1,001,250 1,030,000 1.0
1,000,000 Revlon Consumer Products Corp.,
9.375% due 4/01/2001 872,167 1,012,500 1.0
1,000,000 Samsonite Corp., 11.125% due
7/15/2005 963,125 960,000 1.0
--------- --------- ----
2,836,542 3,002,500 3.0
-----------------------------------------------------------------------------------------------------------------
Diversified Foamex L.P.:
191,000 9.50% due 6/01/2000 186,464 188,613 0.2
500,000 11.25% due 10/01/2002 498,125 500,000 0.5
--------- --------- ----
684,589 688,613 0.7
-----------------------------------------------------------------------------------------------------------------
10<PAGE>
<PAGE>
NORTH PERCENT OF
AMERICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------
Energy US$ 2,000,000 Clark R & M Holdings, Inc.,
10.52* due 12/15/2000 $ 1,268,150 $ 1,330,000 1.3%
250,000 Consolidated-Hydro Inc., 186,735 145,937 0.1
16.05* due 7/15/2003
500,000 TransTexas Gas Corp., 12.55% 500,000 516,250 0.5
due 6/15/2002 --------- --------- ----
1,954,885 1,992,187 1.9
-----------------------------------------------------------------------------------------------------------------
Entertainment 500,000 Marvel Holdings, Inc., 9.125% 448,000 460,000 0.5
due 2/15/1998
350,000 SpectraVision Inc., 11.50%* due 303,557 70,000 0.0
10/01/2001 --------- --------- ----
751,557 530,000 0.5
--------------------------------------------------------------------------------------------------------------
Financial Services 500,000 Penn Financial Corp., 9.25% due 498,750 507,500 0.5
12/15/2003
500,000 Reliance Group Holdings, Inc., 460,000 514,375 0.5
9.00% due 11/15/2000 --------- --------- ----
958,750 1,021,875 1.0
---------------------------------------------------------------------------------------------------------------
Food & Beverage 500,000 Chiquita Brands International 497,500 495,000 0.5
Corp., 9.125% due 3/01/2004
750,000 Del Monte Corp., 10.00% due 740,000 665,625 0.7
5/01/2003
500,000 Envirodyne Industries, Inc., 509,375 367,500 0.4
10.25% due 12/01/2001
250,000 Specialty Foods Corp., 250,000 235,000 0.2
10,25% due 8/15/2001 --------- ------- ----
8/15/2001
1,996,875 1,763,125 1.8
-----------------------------------------------------------------------------------------------------------------
11<PAGE>
<PAGE>
NORTH PERCENT OF
AMERICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------
Gaming US$ 1,000,000 Bally's Park Place Funding, Inc., $ 920,000 $ 1,017,500 1.0%
9.25% due 3/15/2004
1,100,000 Greate Bay Properties, Inc., 990,750 965,250 1.0
10.875% due 1/15/2004
500,000 Harrah's Jazz Company, 14.25% due 482,500 137,500 0.1
due 11/15/2001
500,000 Showboat, Inc., 13.00% due 500,000 562,500 0.6
8/01/2009
750,000 Trump Plaza Funding, Inc., 10.875% 741,250 776,250 0.8
due 6/15/2001
103,633 Trump Taj Mahal Funding, Inc., 98,002 92,411 0.1
due 11/15/1999(a)(c) --------- --------- ----
3,732,502 3,551,411 3.6
-----------------------------------------------------------------------------------------------------------------
Home Building 500,000 Del E. Webb Corp. 9.00% due
2/15/2006 500,000 475,000 0.5
-----------------------------------------------------------------------------------------------------------------
Hotel(s) 500,000 +HMC Acquisition Properties, 9.00% 500,000 505,000 0.5
due 12/15/2007
1,000,000 John Q. Hammons Hotel, Inc., 8.875% 887,500 990,000 1.0
due 2/15/2004 --------- --------- ----
1,387,500 1,495,000 1.5
-----------------------------------------------------------------------------------------------------------------
Metals & Mining 250,000 Maxxam Group, Inc., 14.04%* due 183,690 171,250 0.2
8/01/2003
-----------------------------------------------------------------------------------------------------------------
Packaging 500,000 Anchor Glass Container Co., 9.875% 493,125 295,000 0.3
due 12/15/2008
500,000 Owens-Illinois, Inc., 11.00% 512,500 565,000 0.6
due 12/01/2003
500,000 Portola Packaging Inc., 10.75% due 500,000 515,000 0.5
10/01/2005 --------- --------- ----
1,505,625 1,375,000 1.4
-----------------------------------------------------------------------------------------------------------------
12<PAGE>
<PAGE>
NORTH PERCENT OF
AMERICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------
Paper US$ 250,000 Riverwood International Corp., $ 274,813 $ 271,250 0.3%
11.25% due 16/15/2002
500,000 S.D. Warren Co., 12/15/2004 500,000 551,250 0.5
100,000 Stone Container Group, 10.75% 99,000 103,250 0.1
10/01/2002 --------- --------- ----
873,813 925,750 0.9
-----------------------------------------------------------------------------------------------------------------
Restaurants 750,000 Flagstar Corp., 11.375% due 762,500 532,500 0.6
9/15/2003
250,000 Foodmaker, Inc., 9.75% due 246,563 230,000 0.2
11/01/2003 --------- --------- ----
1,009,063 762,500 0.8
-----------------------------------------------------------------------------------------------------------------
Specialty Retailing 500,000 Bradlees Inc., 11.00% due 8/01/2002 489,375 125,000 0.1
487,000 +Cumberland Farms, 10.50% due 476,651 448,040 0.5
10/01/2003 --------- --------- ----
966,026 573,040 0.6
-----------------------------------------------------------------------------------------------------------------
Steel 500,000 WCI Steel Inc., 10.50% due 500,000 486,250 0.5
3/01/2002
-----------------------------------------------------------------------------------------------------------------
Textiles 500,000 Tultex Corp., 10.625% due 3/15/2005 500,000 512,500 0.5
1,500,000 WestPoint Stevens Inc., 9.375% due 1,451,875 1,481,250 1.5
12/15/2005 --------- --------- ----
1,951,875 1,993,750 2.0
-----------------------------------------------------------------------------------------------------------------
Transport Services 250,000 Eletson Holdings Inc., 9.25% due 250,000 245,937 0.3
11/15/2003
1,050,000 Transtar Holdings L.P., 12.52%* due 699,453 693,000 0.7
12/15/1999
250,000 Viking Star Shipping Co., 9.625% 250,937 256,250 0.2
due 7/15/2003 --------- --------- ----
1,200,390 1,195,187 1.2
-----------------------------------------------------------------------------------------------------------------
13<PAGE>
<PAGE>
NORTH PERCENT OF
AMERICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------
Utilities 494,000 Beaver Valley Funding Corp., $ 466,212 $ 416,679 0.4%
9.00% due 6/01/2017
86,583 Midland Congeneration Venture L.P., 84,851 91,310 0.1
10.33% due 7/23/2002
233,383 +Tucson Electric Power Co., 10.732% 223,464 234,865 0.2
due 1/01/2013 ------- ------- ---
774,527 742,854 0.7
-----------------------------------------------------------------------------------------------------------------
Waste Management 500,000 Mid-American Waste System, Inc., 511,250 470,000 0.5
12.25% due 2/15/2003
-----------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 34,572,431 33,776,649 33.8
the United States
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
NORTH AMERICA INDUSTRY SHARES HELD STOCKS & WARRANTS COST VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Broadcasting/Cable 4,700 American Telecasting Inc. $ 11,222 $ 29,375 0.0%
(Warrants)(b)
---------------------------------------------------------------------------------------------------------------
Broadcasting & 2,572 K-III Communications Corp. (Non- 253,090 254,628 0.3
Publishing Convertible Preferred)
---------------------------------------------------------------------------------------------------------------
Supermarkets 17,675 Grand Union Co. 917,437 130,346 0.1
---------------------------------------------------------------------------------------------------------------
Total Stocks & Warrants in the 1,181,749 414,349 0.4
United States
---------------------------------------------------------------------------------------------------------------
Total Investments in North 36,646,357 35,107,512 35.5
American Securities
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
PACIFIC BASIN INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Australia Foreign Government Australian Government Bonds:
Obligations- A$ 7,000,000 10.00% due 10/15/2002 5,743,662 5,744,771 5.8
Regional & Agency 1,200,000 9.50% due 8/15/2003 962,680 963,982 1.0
350,000 9.00% due 9/15/2004 261,381 274,124 0.3
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 6,967,723 6,982,877 7.1
Australia
- ----------------------------------------------------------------------------------------------------------------------------------
Japan Foreign Government Y 65,000,000 Asian Development Bank, 750,697 737,578 0.7
Obligations 5.625% due 2/18/2002
50,000,000 European Investment Bank, 545,588 539,762 0.5
4.625% due 2/26/2003
40,000,000 Japanese Government Bond-182 395,762 385,420 0.4
3.00% due 9/20/2005
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 1,692,047 1,662,760 1.6
Japan
- ----------------------------------------------------------------------------------------------------------------------------------
15<PAGE>
<PAGE>
PERCENT OF
PACIFIC BASIN INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
New Zealand Foreign Government New Zealand Government Bond:
Obligations NZ$ 4,100,000 10.00% due 7/15/1997 $ 2,780,898 $ 2,752,102 2.8%
800,000 8.00% due 7/15/1998 515,668 525,292 0.5
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 3,296,566 3,277,394 3.3
New Zealand
- ----------------------------------------------------------------------------------------------------------------------------------
Philippines Telecommunications US$ 1,000,000 Philippine Long Distance Telephone 1,000,000 1,051,250 1.1
Co., 9.125% due 8/01/2002
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 1,000,000 1,051,250 1.1
the Philippines
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments in Pacific Basin 12,956,336 12,974,281 13.1
Securities
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES HELD/ PRESENT OF
WESTERN EUROPE INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Austria Foreign Government Ats 4,000,000 Republic of Austria, 7.625% due 419,440 429,864 0.5
Obligations 10/18/2004
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 419,440 429,864 0.5
Austria
- ----------------------------------------------------------------------------------------------------------------------------------
Denmark Foreign Government Denmark Government Bonds:
Obligations Dkr 13,250,000 9.00% due 11/15/2000 2,569,181 2,655,020 2.7
2,500,000 8.00% due 5/15/2003 468,522 480,471 0.5
4,730,000 8.00% due 3/15/2006 854,226 897,616 0.9
3,300,000 7.00% due 11/10/2024 530,814 530,334 0.5
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 4,422,743 4,563,441 4.6
Denmark
- ----------------------------------------------------------------------------------------------------------------------------------
16<PAGE>
<PAGE>
SHARES HELD/ PRESENT OF
WESTERN EUROPE INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
France Foreign Government French Government *B-Tran*:
Obligations Frf 2,500,000 4.75% due 4/12/1999 423,692 499,509 0.5%
2,000,000 7.00% due 10/12/2000 420,453 427,462 0.4
4,500,000 French Oat Strips, ++6.33757* 600,123 647,668 0.7
due 10/25/2001
2,000,000 Government of France, 7.75% due 423,657 440,165 0.5
10/25/2005
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 1,867,925 2,014,804 2.1
France
- ----------------------------------------------------------------------------------------------------------------------------------
Germany Foreign Government DM 890,000 Bundes Obligations, 6.25% due 569,521 579,137 0.6
Obligations 1/04/2024
1,000,000 Bundesrepublic Deutschland, 6.875% 733,343 739,225 0.7
due 5/12/2005
1,000,000 Export Import Bank, 7.75% due 729,491 761,439 0.8
2/12/2005
5,000,000 German Unity, 8.00% due 3,938,016 3,936,430 4.0
1/21/2002
800,000 Kingdom of Belgium, due 472,882 568,914 0.6
10/06/2003
500,000 Landes Banken Badenwurtt, 6.75% 344,882 360,112 0.3
due 6/22/2005
800,000 World Bank, 6.125% due 541,224 572,546 0.6
9/27/2002
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 7,329,359 7,517,803 7.6
Germany
- ----------------------------------------------------------------------------------------------------------------------------------
17<PAGE>
<PAGE>
SHARES HELD/ PRESENT OF
WESTERN EUROPE INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
Italy Foreign Government Buoni Poliennali del Tesoro
Obligations (Italian Government Bonds):
Lit 6,750,000,000 10.50% due 4/01/2000 $4,129,686 $ 4,291,041 4.3%
600,000,000 10.50% due 4/01/2005 356,303 376,088 0.4%
1,760,000,000 10.50% due 9/01/2005 1,038,832 1,100,750 1.1
2,600,000,000 Credit Local de France S.A., 1,627,204 1,646,120 1.7
12.20% due 6/12/1996
Y 80,000,000 Government of Italy, 3.75% due 800,625 787,679 0.8
6/08/2005
Lit 600,000,000 Nordic Investment Bank, 10.80% due 368,311 382,107 0.4
5/24/2003
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 8,320,961 8,583,785 8.7
Italy
- ----------------------------------------------------------------------------------------------------------------------------------
Netherlands Foreign Government Nlg 1,000,000 Netherlands Government Bond, 6.75% 647,163 656,634 0.7
Obligations due 11/15/2005
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 647,163 656,634 0.7
the Netherlands
- ----------------------------------------------------------------------------------------------------------------------------------
Spain Foreign Government Government of Spain:
Obligations Pta 50,000,000 7.40% due 7/30/1999 333,061 390,062 0.4
775,000,000 12.25% due 3/25/2000 6,468,254 7,018,144 7.1
190,000,000 10.50% due 10/30/2003 1,505,519 1,640,503 1.6
50,000,000 10.15% due 1/31/2006 386,365 420,247 0.4
Y 65,000,000 Kingdom of Spain, 5.75% due 753,715 742,300 0.8
3/23/2002
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 9,446,914 10,211,256 10.3
Spain
- ----------------------------------------------------------------------------------------------------------------------------------
Sweden Foreign Government Skr 10,500,000 Government in Sweden, 11.00% due 1,627,156 1,702,758 1.7
Obligations - 1/21/1999
Regional & Agency
-----------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 1,627,156 1,702,758 1.7
Sweden
- ----------------------------------------------------------------------------------------------------------------------------------
18<PAGE>
<PAGE>
SHARES HELD/ PRESENT OF
WESTERN EUROPE INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
United Kingdom Foreign Government United Kingdom Treasury Gilt:
Obligations L 1,880,00 8.50% due 12/07/2005 3,038,054 3,138,806 3.1%
320,000 9.00% due 8/06/2012 548,620 556,507 0.6
---------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in 3,586,674 3,695,313 3.7
United Kingdom
---------------------------------------------------------------------------------------------------------------
Total Investments in Western 37,668,335 39,375,658 39.9
European Securities
</TABLE>
19<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM INDUSTRY FACE AMOUNT ISSUE COST PERCENT OF
SECURITIES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper** US$4,089,000 General Electric Capital Corp., $ 4,086,990 $ 4,086,990 4.1%
5.90% due 1/02/1996
2,000,000 Preferred Receivables Funding 1,991,767 1,991,767 2.0
Corp., 5.70% due 1/25/1996 --------- --------- ----
6,078,757 6,078,757 6.1
---------------------------------------------------------------------------------------------------------------
US Government & 555,000 Federal Home Loan Bank, 553,519 553,519 0.6
Agency Obligations** 5.65% due 1/16/1996
400,000 Federal Home Loan Mortgage Corp., 399,686 399,686 0.4
5.65% due 1/04/1996 --------- --------- ----
953,205 953,205 1.0
---------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term 7,031,962 7,031,962 7.0
Securities
---------------------------------------------------------------------------------------------------------------
Total Investments $96,680,580 96,907,413 98.1
===========
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (5,151) 0.0
Other Assets Less Liabilities 1,856,978 1.9
--------- ----
Net Assets $98,759,240 100.0%
=========== ======
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Each $1,000 face amount contains one non-detachable share of Taj Mahal Holding Corp.'s Class B redeemable Common Stock.
(b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of
shares are subject to adjustments under certain conditions until the expiration date.
(c) Represents a pay-in-kind security which may pay interest/dividends in additional face/shares.
* Represents a zero coupon or step bond; the interest rate shown is the effective yield at the time of purchase by the Fund.
** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
*** Forward foreign exchange contracts as of December 31, 1995 were as follows:
</TABLE>
20<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Unrealized
Foreign Appreication
Currency Purchased Expiration Date (Depreciation)
- ---------------------------------------------------------------------------
<S> <C> <C>
DM 2,000,000 January 1996 $ 9,657
- ---------------------------------------------------------------------------
Total US$ Commitment-$1,388,600 $ 9,657
========
- ---------------------------------------------------------------------------
Foreign
Currency Sold
- ---------------------------------------------------------------------------
LIT 2,229,100,000 January 1996 (14,808)
- ---------------------------------------------------------------------------
Total US$ Commitment $1,388,600 $(14,808)
- ------------------------------- =========
- ---------------------------------------------------------------------------
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts-Net $(5,151)
========
+Restricted securities as to resale. The value of the
Fund's investment in restricted securities was
approximately $1,690,000, representing 1.7% of net
assets.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Issue Acquisition Cost
Date Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumberland Farms, 10.50% due 10/01/2003 3/10/1994 $ 476,651 $ 448,040
HMC Acquisition Properties,
9.00% due 12/15/2007 12/21/1995 500,000 505,000
Tucson Electric Power Co.,
10.732% due 1/01/2013 8/19/1993 223,464 234,865
UNIBANCO-Uniao de Bancos Brasilerios
S.A., 10.25% due 6/12/1997 6/12/1995 498,750 502,500
- ------------------------------------------------------------------------------------------------
Total $1,698,865 $1,690,405
========== ==========
- ------------------------------------------------------------------------------------------------
++Separate Trading of Registered Interest and Principal of Securities (STRIPS).
</TABLE>
21<PAGE>
<PAGE>
<TABLE>
COMBINED SCHEDULE - GLOBAL STRATEGY FOCUS FUND AND FLEXIBLE STRATEGY FUND AS OF DECEMBER 31, 1995
==================================================================================================================================
<CAPTION>
Percent of
Industries Shares US STOCK & WARRANTS Cost Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE 90,000 Boeing Company $ 5,972,248 $ 7,053,750 0.9%
121,500 United Technologies Corp. 8,609,004 11,527,312 1.4
---------- ---------- -------
14,581,252 18,581,062 2.3
- ----------------------------------------------------------------------------------------------------------------------------------
ALUMINUM 105,000 Aluminum Co. of America 5,943,466 5,551,875 0.7
- ----------------------------------------------------------------------------------------------------------------------------------
APPLIANCES 120,000 Whirlpool Corporation 6,759,398 6,390,000 0.8
- ----------------------------------------------------------------------------------------------------------------------------------
AUTO & TRUCK 270,000 Ford Motor Co. 7,671,879 7,830,000 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
BANKING 165,000 Bank of New York, Inc. 5,972,388 8,043,750 1.0
40,000 Bank of New York, Inc.
(Warrants) (b) 300,937 1,445,000 0.2
--------- --------- -------
6,273,325 9,488,750 1.2
- ----------------------------------------------------------------------------------------------------------------------------------
CHEMICALS 107,050 Eastman Chemical Co. 5,409,683 6,704,006 0.8
- ----------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 20,000 ADC Telecommunication Inc. 599,662 725,000 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 160,000 General Motors Corp. (Class E) 7,053,053 8,320,000 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
ELECTRIC/INSTRUMENTS 153,600 Corning Inc. 4,240,713 4,915,200 0.6
75,000 Texas Instruments 5,016,256 3,881,250 0.5
--------- --------- ---
9,256,969 8,796,450 1.1
- ----------------------------------------------------------------------------------------------------------------------------------
ENERGY RELATED 17,400 +California Energy Co., Inc. 279,096 339,300 0.0
- ----------------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL 611,800 Wheelabrator Technologies, 10,399,359 10,247,650 1.2
Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
HARDWARE PRODUCTS 118,800 Stanley Works Co. (The) 5,082,873 6,118,200 0.7
- ----------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE 310,000 +Humana Inc. 6,963,532 8,486,250 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
INSURANCE 95,000 Aetna Life & Casualty Co. 6,061,914 6,578,750 0.8
135,000 Allstate Corp. 4,845,422 5,551,875 0.7
81,100 National Re Corp. 2,483,488 3,081,800 0.4
---------- --------- ---
13,390,824 15,212,425 1.9
- ----------------------------------------------------------------------------------------------------------------------------------
22<PAGE>
<PAGE>
==================================================================================================================================
Percent of
Industries Shares US STOCK & WARRANTS Cost Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
NATURAL GAS 62,000 Enron Corp. $ 2,343,766 $2,363,750 0.3%
- ----------------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 292,900 Dresser Industries, Inc. 6,442,797 7,139,438 0.9
- ----------------------------------------------------------------------------------------------------------------------------------
PETROLEUM 68,800 Pennzoil Co 2,719,382 2,906,800 0.4
- ----------------------------------------------------------------------------------------------------------------------------------
PETROLEUM & SERVICE EQUIPMENT 50,200 Schlumberger Ltd. 2,972,633 3,476,350 0.4
- ----------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 190,000 Abbott Laboratories 6,346,854 7,932,500 0.9
160,000 Merck & Co., Inc. 6,847,145 10,520,000 1.3
--------- ---------- ---
13,193,999 18,452,500 2.2
- ----------------------------------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 162,200 Eastman Kodak Co. 8,157,324 10,867,400 1.3
- ----------------------------------------------------------------------------------------------------------------------------------
RETAIL 126,000 Sears, Roebuck & Co. 4,625,577 4,914,000 0.6
- ----------------------------------------------------------------------------------------------------------------------------------
SCIENTIFIC EQUIPMENT 151,900 Fisher Scientific International Inc. 4,825,933 5,069,662 0.6
- ----------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 120,100 AT&T Corp. 7,005,930 7,776,475 0.9
70,300 Bell Atlantic Corp. 3,816,168 4,701,312 0.6
---------- ---------- ---
10,822,098 12,477,787 1.5
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL US STOCKS & WARRANTS 155,767,880 180,458,655 22.0
- ----------------------------------------------------------------------------------------------------------------------------------
Country Foreign Stocks++++
- ----------------------------------------------------------------------------------------------------------------------------------
ARGENTINA 150,473 Banco de Galicia S.A. (ADR)(a)(20) 2,868,834 3,084,696 0.4
134,550 Banco Frances del Rio de la Plata S.A.
(Class A)(ADR)(a)(2) 3,272,016 3,616,031 0.4
100,000 Yacimientos Petroliferos Fiscales S.A.
(Sponsored)(ADR)(a)(4) 2,345,882 2,162,500 0.3
--------- --------- ---
8,486,732 8,863,227 1.1
- ----------------------------------------------------------------------------------------------------------------------------------
CANADA 172,100 Canadian Pacific Ltd.(3) 2,710,067 3,119,312 0.4
35,000 Magna International Inc.
(Class A)(6) 1,374,340 1,513,750 0.2
77,400 Northern Telecommunications, Ltd (5) 2,137,422 3,328,200 0.4
--------- --------- ---
6,221,829 7,961,262 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
CHILE 18,400 Cristalerias de Chile S.A.
(ADR)(a)(7) 335,560 409,400 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
23<PAGE>
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------------
GERMANY 10,250 Mannesmann AG (21) 2,195,390 3,270,119 0.4
9,750 Preussag AG (3) 2,569,641 2,731,226 0.3
6,150 Siemens AG (8) 2,507,770 3,372,511 0.4
--------- --------- ---
7,272,801 9,373,856 1.1
- ----------------------------------------------------------------------------------------------------------------------------------
HONG KONG 2,600,000 Hong Kong Telecommunications
Ltd. (ADR)(a)(5) 4,614,276 4,640,455 0.6
- ----------------------------------------------------------------------------------------------------------------------------------
INDONESIA 66,380 P.T. Indonesian Satellite Corp.
(ADR)(a)(5) 2,559,233 2,422,870 0.3
- ----------------------------------------------------------------------------------------------------------------------------------
ITALY 680,000 Danieli & Co. (21) 2,451,794 1,844,795 0.2
800,000 Societa Finanziara Telefonica
S.p.A. (STET)(5) 2,442,272 2,266,246 0.3
--------- --------- ---
4,894,066 4,111,041 0.5
- ----------------------------------------------------------------------------------------------------------------------------------
JAPAN 245,000 Canon, Inc. (9) 3,783,188 4,437,718 0.5
165,000 Dai Nippon Printing Co., Ltd. (13) 2,681,206 2,796,881 0.3
455,000 Hitachi Cable, Ltd. (14) 3,313,228 3,221,668 0.4
57,000 Ito-Yokado Co., Ltd. (15) 2,773,666 3,511,430 0.4
381,000 Kamigumi Co., Ltd. (16) 4,232,708 3,657,216 0.5
242,000 Maeda Corp. (17) 2,444,979 2,367,493 0.3
166,000 Matsushita Electric Industries,
Ltd. (8) 2,324,955 2,701,279 0.3
430,000 Mitsubishi Electric Co. (19) 2,778,342 3,094,634 0.4
486,000 Mitsubishi Heavy Industry, Ltd. (14) 3,075,981 3,874,254 0.5
180,000 Mitsubishi Trust & Banking Corp. (20) 3,089,062 2,998,838 0.4
310,000 Nomura Securities Co., Ltd.
(ADR)(a)(8) 6,244,910 6,756,103 0.8
310,000 Okumura Corp. (17) 2,626,893 2,822,549 0.3
60,000 Rohm Company Ltd. (8) 3,105,057 3,388,222 0.4
60,000 SMC Corp. (21) 3,085,930 4,341,341 0.5
130,000 Sanwa Bank, Ltd. (20) 2,639,823 2,644,324 0.3
285,000 Sumitomo Corp. (22) 2,414,459 2,898,586 0.4
425,000 Tokio Marine & Fire Insurance
Co. (ADR)(a)(2) 5,279,663 5,557,439 0.7
555,000 Toray Industries Ltd. (23) 3,773,274 3,622,627 0.4
--------- --------- ---
59,667,324 64,692,602 7.8
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of
Country Shares Foreign Stocks Cost Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MEXICO 146,400 + Grupo Carso, S.A. de C.V. $ 1,702,240 $ 1,482,300 0.2%
(ADR)(a)(3)++
- ----------------------------------------------------------------------------------------------------------------------------------
NETHERLANDS 466 ABN-AMRO Holdings N.V. (Preferred)(20) 15,383 20,019 0.0
49,000 Royal Dutch Petroleum Co. N.V.
(ADR)(a)(4) 5,679,094 6,915,125 0.8
230,000 Singer Co. N.V. (d) (1) 6,971,629 6,411,250 0.8
--------- --------- ---
12,666,106 13,346,394 1.6
- ----------------------------------------------------------------------------------------------------------------------------------
PHILIPPINES 40,000 Philippine Long Distance Telephone
Co. (ADR)(a)(5) 2,829,796 2,165,000 0.3
- ----------------------------------------------------------------------------------------------------------------------------------
SPAIN 137,400 Repsol S.A. (ADR) (a) (4) 4,186,234 4,517,025 0.5
- ----------------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 3,300 BBC Brown Boveri & Cie AG (14) 2,297,018 3,842,878 0.5
4,600 Sandoz A.G. (10) 3,993,544 4,221,430 0.5
--------- --------- ---
6,290,562 8,064,308 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 294,000 GKN PLC (24) 2,318,167 3,554,942 0.4
585,000 General Electric Co. PLC (19) 2,809,289 3,223,531 0.4
207,000 Imperial Chemical Industries PLC (25) 2,402,001 2,449,954 0.3
--------- --------- ---
7,529,457 9,228,427 1.1
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS 129,256,216 141,278,167 17.2
- ----------------------------------------------------------------------------------------------------------------------------------
Face
Amount* Corporate & Foreign Bonds
- ----------------------------------------------------------------------------------------------------------------------------------
FOREIGN-CANADA C$ 15,800,000 Government of Canada, 7.25%
due 6/01/2003 (26) 11,839,689 11,791,527 1.4
5,000,000 Hydro-Electric Quebec, 6.35%
due 1/15/2002 (12) 5,000,000 5,065,500 0.6
--------- --------- ---
16,839,689 16,857,027 2.0
- ----------------------------------------------------------------------------------------------------------------------------------
FOREIGN-ITALY 500,000 Republic of Italy, 8.75% due
2/08/2001 (1) 537,305 558,282 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
FOREIGN-UNITED KINGDOM UK Treasury Gilt (26):
L 8,190,000 7.25% due 3/30/1998 12,651,800 12,946,911 1.6
75,000 9.75% due 8/27/2002 149,409 132,277 0.0
3,000,000 8.00% due 6/10/2003 4,822,692 4,867,605 0.6
---------- ---------- ---
17,623,901 17,946,793 2.2
- ----------------------------------------------------------------------------------------------------------------------------------
US-FINANCIAL SERVICES 1,000,000 Ford Motor Credit Co., 7.125%
due 12/01/1997 995,000 1,025,420 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
25<PAGE>
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------------
US-INDUSTRIAL 1,000,000 International Business
Machines Corp., 6.375% due 1,000,000 1,024,700 0.1
6/15/2000
- ----------------------------------------------------------------------------------------------------------------------------------
US-TELECOMMUNICATIONS 5,000,000 Chesapeake & Potomac Telecom
Co., 6.125% due 7/15/2005 4,503,300 5,032,350 0.6
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE & FOREIGN BONDS 41,499,195 42,444,572 5.1
- ----------------------------------------------------------------------------------------------------------------------------------
FEDERAL AGENCY Federal National Mortgage
OBLIGATIONS Association:
5,000,000 7.85% due 9/10/2004 4,992,969 5,317,950 0.7
4,726,069 8.00% due 11/01/2024 (c) 4,512,658 4,894,412 0.6
2,000,000 Series 93D, 5.85% due
2/25/2006 1,996,250 1,999,360 0.2
--------- --------- ---
11,501,877 12,211,722 1.5
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Face Percent of
Industries Amount US Government & Agency Obligations Cost Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS US Treasury Notes:
$ 1,000,000 8.625% due 8/15/1997 $ 1,027,344 $ 1,052,500 0.1%
6,000,000 7.50% due 11/15/2001 6,143,336 6,608,460 0.8
5,000,000 6.25% due 2/15/2003 4,990,469 5,216,400 0.7
14,000,000 5.75% due 8/15/2003 14,037,891 14,168,420 1.7
29,000,000 7.25% due 8/15/2004 29,290,000 32,248,870 3.9
40,000,000 7.875% due 11/15/2004 39,980,781 46,300,000 5.6
10,000,000 6.5% due 8/15/2005 9,966,406 10,653,100 1.3
3,000,000 US Treasury STRIPS+++, 7.77%(e) due
5/15/2000 2,283,715 2,382,120 0.3
----------- ----------- ----
107,719,942 118,629,870 14.4
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED Government National Mortgage
SECURITIES Association (c):
982,310 9.00% due 11/15/2019 973,397 1,046,465 0.1
444,482 9.00% due 11/15/2019 441,427 473,512 0.1
--------- --------- ---
1,414,824 1,519,977 0.2
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT &
AGENCY OBLIGATIONS 120,636,643 132,361,569 16.1
- ----------------------------------------------------------------------------------------------------------------------------------
Short-Term Securities
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper** 10,000,000 ABN-AMRO North America
Finance, Inc., 5.54% due 1/26/1996 9,958,450 9,958,450 1.2
Ciesco L.P.:
10,000,000 5.72% due 1/31/1996 9,949,156 9,949,156 1.2
10,000,000 5.53% due 2/20/1996 9,920,122 9,920,122 1.2
Corporate Asset Funding Co. Inc.:
20,000,000 5.72% due 1/04/1996 19,984,111 19,984,111 2.4
10,000,000 5.67% due 1/09/1996 9,984,250 9,984,250 1.2
37,806,000 General Electric Capital
Corp., 5.90% due 1/02/1996 37,787,412 37,787,412 4.6
12,000,000 Monsanto Company, 5.72% due
1/23/1996 11,954,240 11,954,240 1.5
12,000,000 Morgan Stanley Group,
Inc., 5.65% due
1/17/1996 11,966,100 11,966,100 1.5
15,000,000 National Australia Funding
(Delaware) Inc., 5.73% due
1/12/1996 14,968,963 14,968,963 1.8
15,000,000 National Fleet Funding Corp.,
27<PAGE>
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------------
Face Percent of
Amount Short-Term Securities Cost Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
5.75% due 1/12/1996 $ 14,968,854 $ 14,968,854 1.8%
$ 10,000,000 Preferred Receivable Funding
Corp., 5.78% due 1/02/1996 9,995,183 9,995,183 1.2
12,000,000 Sandoz Corporation, 5.75%
due 1/29/1996 11,942,500 11,942,500 1.5
10,000,000 USAA Capital Corp., 5.70% due
1/29/1996 9,952,500 9,952,500 1.2
12,000,000 Xerox Corp., 5.69% due
1/18/1996 11,963,963 11,963,963 1.5
----------- ----------- ----
195,295,804 195,295,804 23.8
- ----------------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY US$ 43,495,000 Federal Home Loan Bank, 5.58%
OBLIGATIONS** due 1/19/1996 43,360,166 43,360,166 5.3
Federal National Mortgage
Association:
15,000,000 5.67% due 1/08/1996 14,978,738 14,978,738 1.8
20,000,000 5.65% due 1/12/1996 19,959,195 19,959,195 2.4
10,000,000 5.67% due 1/17/1996 9,971,650 9,971,650 1.2
20,000,000 5.59% due 1/18/1996 19,940,994 19,940,994 2.4
30,000,000 5.67% due 1/18/1996 29,910,225 29,910,225 3.6
7,000,000 5.50% due 1/19/1996 6,978,611 6,978,611 0.9
12,000,000 5.67% due 1/19/1996 11,962,200 11,962,200 1.5
----------- ----------- ----
157,061,779 157,061,779 19.1
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 352,357,583 352,357,583 42.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments $ 799,517,517 848,900,546 103.3
=============
Unrealized Appreciation on Forward Foreign
Exchange Contracts+++++ 9,681,629 1.2
Liabilities in Excess of Other Assets (37,306,285) (4.5)
------------- -----
Net Assets $ 821,275,890 100.0%
============= =====
- ----------------------------------------------------------------------------------------------------------------------------------
(a) American Depositary Receipts (ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of
shares are subject to adjustment under certain conditions until the expiration date.
(c) US Government Agency Mortgage-Backed Obligations are subject to principal paydowns as a result of prepayments or refinancings
of the underlying mortgage investments. As a result, the average life may be substantially less than the original maturity.
(d) Consistent with general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for
determination of foreign issuer status may be (I) the country under whose laws the issuer is organized, (ii) the country in
which the issuer's securities are principally traded, or (iii) the country in which the issuer derives a significant proportion
(at least 50%) of its revenue or profits from goods produced or sold, investment made, or services performed in the country, or
in which at least 50% of the assets of the issuers are situated.
(e) Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Fund.
* Denominated in US dollars unless otherwise indicated.
** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
28<PAGE>
<PAGE>
++ Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $1,482,000
representing 0.5% of net assets.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Acquisition
Issue Dates Cost Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Grupo Carso, S.A. de
C.V. (ADR) 1/24/1992-1/31/1995
$1,702,240 $1,482,300
- ------------------------------------------------------------------------------------------------
Total $1,702,240 $1,482,300
---------- ----------
- ------------------------------------------------------------------------------------------------
</TABLE>
+++ Separate Trading of Registered Interest and Principal of Securities
(STRIPS).
++++ Corresponding industry groups for foreign securities:
(1) Government Entities (14) Capital Goods
(2) Insurance (15) Retail Stores
(3) Multi-Industry (16) Shipping
(4) Petroleum (17) Building & Construction
(5) Telecommunications (18) Electronics
(6) Auto Parts - Original (19) Electrical Equipment
(7) Containers (20) Banking
(8) Financial (21) Machinery
(9) Photography (22) Trading
(10) Pharmaceuticals (23) Textiles
(11) Appliances (24) Business & Public Services
(12) Public Utilities (25) Chemicals
(13) Printing & Publishing (26) Government (Bonds)
+++++ Forward foreign exchange contracts as of December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY SOLD UNREALIZED
EXPIRATION DATE APPRECIATION
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Y 4,819,200,000 January 1996 $9,681,629
- --------------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS (US$ COMMITMENT--$56,457,357) $9,681,629
----------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
29<PAGE>
<PAGE>
<PAGE>
<PAGE>
PART C - OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines and amounts paid in settlement actually and reasonably
incurred by the corporate representative in connection with the proceeding, if:
(i) he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Registrant; and (ii) with respect to
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the
Maryland General Corporation Law to indemnify a corporate representative under
certain circumstances against expenses incurred in connection with the defense
of a suit or action by or in the right of the Registrant. Under the
Distribution Agreement between the Registrant and MLFD, the Registrant has
agreed to indemnify MLFD against any loss, liability, claim, damage or expense
arising out of any untrue statement of a material fact, or an omission to state
a material fact, in any registration statement, prospectus or report to
stockholders of the Registrant. Reference is made to Article VI of
Registrant's Certificate of Incorporation, Article VI of Registrant's By-Laws,
Section 2-418 of the Maryland General Corporation Law and Section 9 of the
Distribution Agreement.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be provided to directors, officers and
controlling persons of the Company, pursuant to the foregoing provisions or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Fund in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS
(1)(a) - Articles of Incorporation of Registrant (a)
(b) - Form of Articles Supplementary of Registrant (b)
(c) - Form of Articles of Amendment of Registrant (c)
(d) - Form of Articles Supplementary of Registrant (d)
(e) - Form of Articles Supplementary of Registrant (e)
(f) - Form of Articles Supplementary of Registrant (f)
(g) - Articles Supplementary to Registrant's Articles of
Incorporation relating to the redesignation of shares of
common stock as Merrill Lynch Basic Value Focus Fund Common
Stock, Merrill Lynch World Income Focus Fund Common Stock,
Merrill Lynch Global Utility Focus Fund Common Stock and
Merrill Lynch International Equity Focus Fund Common Stock
(s)
(h) - Articles Supplementary to Registrant's Articles of
Incorporation relating to the designation of shares of
common stock as Merrill Lynch Developing Capital Markets
Part C-1<PAGE>
<PAGE>
Focus Fund Common Stock, Merrill Lynch International Bond
Fund Common Stock and Merrill Lynch Intermediate Government
Bond Fund Common Stock (u)
(2) - By-Laws, as amended (g)
(3) - Not applicable
(4) - Form of Agreement and Plan of Reorganization (Included in
the Proxy Statement--Prospectus as Appendix B)
(5) - Specimen certificate for Common Stock, par value $.10 per
share (h)
(6)(a) - Investment Advisory Agreement for Merrill Lynch Reserve
Assets Fund (i)
(b) - Investment Advisory Agreement for the Merrill Lynch Prime
Bond Fund, Merrill Lynch High Current Income Fund, Merrill
Lynch Quality Equity Fund and Merrill Lynch Equity Growth
Fund (j)
(c) - Investment Advisory Agreement for Merrill Lynch Flexible
Strategy Fund (k)
(d) - Form of Investment Advisory Agreement for Merrill Lynch
Natural Resources Focus Fund and Merrill Lynch American
Balanced Fund (l)
(e) - Form of Investment Advisory Agreement for Merrill Lynch
Domestic Money Market Fund and Merrill Lynch Global Strategy
Focus Fund (m)
(f) - Form of Investment Advisory Agreement for Merrill Lynch
Basic Value Focus Fund, Merrill Lynch World Income Focus
Fund, Merrill Lynch Global Utility Focus Fund and Merrill
Lynch International Equity Focus Fund (t)
(g) - Form of Investment Advisory Agreement for Merrill Lynch
Development Capital Markets Focus Fund, Merrill Lynch
International Bond Fund and Merrill Lynch Intermediate
Government Bond Fund (u)
(7) - Form of Distribution Agreement (n)
(8) - Not applicable
(9) - Form of Custodian Agreement (o)
(10) - Not applicable
(11) - Opinion and consent of Rogers & Wells*
(12) - Tax opinion and consent of Rogers & Wells*
(13)(a) - Form of Transfer Agency, and Dividend Disbursing
Agreement (p)
(b) - Form of Agreement relating to the use of the "Merrill
Lynch" name (q)
(c) - Form of Participation Agreement (r)
(14) - Consent of Deloitte & Touche LLP, independent accountants
for the Fund*
(15) - Not applicable
(16) - Not applicable
(17)(a) - Declaration under Rule 24f-2*
(b) - Statement of Additional Information of the Company, dated
April 26, 1996*
- --------------------
* To be filed by Amendment.
(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.
Part C-2<PAGE>
<PAGE>
(d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No.
10 to the Registration Statement.
(e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No.
12 to the Registration Statement.
(f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No.
16 to the Registration Statement ("Post-Effective Amendment No. 16").
(g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11
to the Registration Statement ("Post-Effective Amendment No. 11").
(h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4
to the Registration Statement ("Post-Effective Amendment No. 4").
(i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No.
8 to the Registration Statement ("Post-Effective Amendment No. 8").
(j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No.
8.
(k) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No.
9 to Registrant's Registration Statement.
(l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No.
11.
(m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No.
16.
(n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to
Registrant's Registration Statement ("Amendment No. 1").
(o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4.
(p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No.
4.
(q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1.
(r) Incorporated by reference to Exhibit 9(c) to Post-Effective Amendment No.
24 to the Registration Statement.
(s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No.
20 to the Registration Statement.
(t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment No.
20 to the Registration Statement.
(u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment No.
21 to the Registration Statement.
Part C-3<PAGE>
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The Registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial BONA FIDE offering of them.
Part C-4<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 10th
day of July, 1996.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
By: /S/ ARTHUR ZEIKEL
---------------------------------------
(Arthur Zeikel, President)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES IRA P.
SHAPIRO, GERALD M. RICHARD AND TERRY K. GLENN OR ANY OF THEM, AS ATTORNEY-IN-
FACT, TO SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW,
ANY AMENDMENTS TO THIS REGISTRATION STATEMENT (INCLUDING POST-EFFECTIVE
AMENDMENTS) AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, WITH THE
SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS TO THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ ARTHUR ZEIKEL President and Director July 10, 1996
- -------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
/S/ JOE GRILLS Director July 10, 1996
- --------------------------------
(Joe Grills)
/S/ WALTER MINTZ Director July 10, 1996
- --------------------------------
(Walter Mintz)
/S/ MELVIN R. SEIDEN Director July 10, 1996
- --------------------------------
(Melvin R. Seiden)
/S/ ROBERT S. SALOMON, JR. Director July 10, 1996
- --------------------------------
(Robert S. Salomon, Jr.)
/S/ STEPHEN B. SWENSRUD Director July 10, 1996
- --------------------------------
(Stephen B. Swensrud)
/S/ GERALD M. RICHARD Treasurer (Principal Financial
- -------------------------------- and Accounting Officer) July 10, 1996
(Gerald M. Richard)
</TABLE>
