AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1997.
FILE NO. 2-74452
===============================================================================
_______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 <checked-box>
PRE-EFFECTIVE AMENDMENT NO. <square>
POST EFFECTIVE AMENDMENT NO. 28 <checked-box>
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 <checked-box>
AMENDMENT NO. 29 <checked-box>
(CHECK APPROPRIATE BOX OR BOXES)
________________________
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<CAPTION>
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
<S> <C>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(NAME AND ADDRESS OF AGENT FOR SERVICE)
________________________
COPIES TO:
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
MERRILL LYNCH ASSET MANAGEMENT, L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
<square> immediately upon filing pursuant to paragraph (b)
<square> on (date) pursuant to paragraph (b)
<checked-box> 60 days after filing pursuant to paragraph (a)(1)
<square> on (date) pursuant to paragraph (a)(1) of Rule 485
<square> 75 days after filing pursuant to paragraph (a)(2)
<square> on (date) pursuant to paragraph (a)(2) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
<square> this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER
THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY
ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT
FISCAL YEAR WAS FILED ON FEBRUARY 22, 1997.
<PAGE>
_______________________________________________________________________________
===============================================================================
EXPLANATORY NOTE
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-
ended management investment company that has a wide range of investment
objectives among its sixteen separate funds (hereinafter referred to as the
"Funds" or individually as a "Fund"). Two separate classes of common stock
("Common Stock"), Class A Common Stock and Class B Common Stock, are offered
for each Fund. This document consists of sixteen prospectuses for the Class B
Common Stock of the Funds (one prospectus for each Fund), and an Appendix and
Annexes which constitute parts of each prospectus. A table of contents may be
found on page 1 of each prospectus.
The prospectuses for the Class A Common Stock of the Company and the
Statement of Additional Information contained in the Post-Effective Amendment
No. 27 to the Registration Statement filed with the Securities and Exchange
Commission (the "SEC") on April 25, 1997 and the prospectuses of the Company
filed with the SEC pursuant to Rule 497 and a supplement thereto filed with the
SEC pursuant to Rule 497 on May 15, 1997 are not superseded by this Post-
Effective Amendment to the Company's Registration Statement and remain
effective.
The investment advisor of each Fund is Merrill Lynch Asset Management,
L.P. (the "Investment Advisor"), a subsidiary of Merrill Lynch & Co., Inc., a
publicly held corporation. The distributor of each Fund is Merrill Lynch Funds
Distributor, Inc. ("MLFD"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc.
Both the Class A and Class B shares of the Funds are sold to separate
accounts ("Separate Accounts") of certain insurance companies to fund benefits
under variable annuity contracts ("Variable Annuity Contracts") and/or variable
life insurance contracts (together with the Variable Annuity Contracts, the
"Contracts") issued by such companies. The Company's Funds are currently sold
to Merrill Lynch Life Insurance Company ("MLLIC"), ML Life Insurance Company of
New York ("ML of New York"), indirect wholly owned subsidiaries of Merrill
Lynch & Co. Inc., Hartford Life Insurance Company ("Hartford"), Annuity
Investors Life Insurance Company ("AILIC") and Family Life Insurance Company
("Family Life" and, together with ML of New York, MLLIC, Hartford and AILIC,
the "Insurance Companies"). The Separate Accounts invest in shares of the
Funds in accordance with instructions received from Contract owners. The
Contracts, other than Contracts issued by AILIC, are offered by agents of
Merrill Lynch Life Agency, Inc. ("MLLA"), an affiliate of the Investment
Adviser. Contracts issued by AILIC are offered by agents associated with that
company. MLLIC and ML of New York are also affiliates of the Investment
Adviser.
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Domestic Money Market Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
_________________________
Merrill Lynch Domestic Money Market Fund (the "Domestic Money Market Fund")
is a diversified fund whose objectives are the preservation of capital,
liquidity and achieving the highest possible current income consistent with the
foregoing objectives by investing in short-term domestic money market
securities. The Domestic Money Market Fund is a separate fund of the Merrill
Lynch Variable Series Funds, Inc. (the "Company"), an open-ended management
investment company that has a wide range of investment objectives among its
sixteen separate funds (hereinafter referred to as the "Funds" or individually
as a "Fund"). Two separate classes of common stock ("Common Stock"), Class A
Common Stock and Class B Common Stock, are issued for each Fund. The Company
is offering shares of its Class B Common Stock for the Domestic Money Market
Fund pursuant to this Prospectus. This Prospectus consists of this five page
document and the attached Appendix. For more information on the Domestic Money
Market Fund's investment objectives and policies, please see page 4 of this
document and the Appendix.
THE DOMESTIC MONEY MARKET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO
SO. AN INVESTMENT IN THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY
THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
PAGE PAGE
---- ----
Financial Highlights..............3 Investment Adviser............. A-8
Yield Information.................4 Portfolio Transactions and
Investment Objectives and Brokerage....................A-11
Policies.......................4 Purchase of Shares.............A-11
Portfolio Restrictions............4 Redemption of Shares...........A-11
Appendix Dividends, Distributions and
The Insurance Companies.........A-1 Taxes........................A-12
Investment Objectives and Performance Data...............A-13
Policies of the Funds.........A-1 Distribution Plan..............A-14
Directors.......................A-7 Additional Information.........A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was
not subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Domestic Money Market Fund
---------------------------------------------------------------------------------------
FOR THE PERIOD
FEBRUARY 20,
FOR THE YEAR ENDED DECEMBER 31, 1992+ TO
------------------------------- DECEMBER 31,
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE: 1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
Net asset value, beginning of year.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- -------- -------- -------- --------
Investment income-net .0504 .0547 .0386 .0302 .0302
Realized and unrealized gain (loss) on
investments-net..................... (.0005) .0012 (.0007) .0005 .0013
--------- -------- -------- -------- --------
Total from investment operations...... .0499 .0559 .0379 .0307 .0315
--------- -------- -------- -------- --------
Less dividends and distributions:
Investment income-net.............. (.0504) (.0547) (.0386) (.0302) (.0302)
Realized gain on investments-net... (.0001) (.0002) -- (.0005) (.0010)
--------- -------- -------- -------- --------
Total dividends and distributions..... (.0505) (.0549) (.0386) (.0307) (.0312)
--------- -------- -------- -------- --------
Net asset value, end of year.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.... 5.13% 5.64% 3.93% 3.10% 3.65%*
========= ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........ .54% .55% .50% .36% .32%*
========= ======== ======== ======== ========
Expenses.............................. .54% .55% .57% .63% .88%*
========= ======== ======== ======== ========
Investment income-net, and realized
gain (loss) on investments-net........ 4.97% 5.50% 4.02% 3.03% 3.48%*
========= ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 274,756 $ 303,912 $ 363,199 $ 170,531 $ 41,128
========= ======== ======== ======== ========
</TABLE>
________________
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
3
<PAGE>
YIELD INFORMATION
Set forth below is yield information for the Class A Shares of the
Domestic Money Market Fund for the seven-day period ended December 31, 1996,
computed to include and exclude realized and unrealized gains and losses, and
information as to the compounded annualized yield, excluding gains and losses,
for the same periods. The yield quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the
separate account level which, if included, would decrease the yield.
Annualized Yield:
Including gains and losses........... 5.05%
Excluding gains and losses........... 5.05%
Compounded Annualized Yield............ 5.18%
Average maturity of portfolio
at end of period..................... 73 days
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Domestic Money Market Fund are to
preserve shareholder capital, to maintain liquidity and to achieve the highest
possible current income consistent with the foregoing objectives by investing
in short-term domestic money market securities. There can be no assurance that
the Domestic Money Market Fund will achieve its investment objectives.
The Domestic Money Market Fund will invest in short-term U.S. Government
securities, U.S. Government agency securities, domestic depository institution
money instruments (including certificates of deposit, bankers' acceptances,
time deposits and bank notes), short-term debt securities (such as commercial
paper), variable amount master demand notes and insurance company funding
agreements, repurchase and reverse repurchase agreements of U.S. issuers and
other money market instruments. As a matter of fundamental policy, which may
be changed only with the approval of a majority of the Domestic Money Market
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the "Act" or the "Investment Company Act"), the Domestic
Money Market Fund may not purchase securities of foreign issuers (including
Eurodollar or Yankeedollar bank obligations). U.S. Government securities may be
purchased on a forward commitment basis. The types of money market securities
in which the Domestic Money Market Fund may invest are described more fully in
Annex A to the Appendix to this Prospectus. The Domestic Money Market Fund will
be subject to portfolio maturity, quality and diversification restrictions
discussed below.
OTHER INVESTMENTS AND RISKS
The Domestic Money Market Fund may purchase certain securities that are
not registered under the Securities Act of 1933, as amended. The Fund may also
invest in securities the potential return of which is based on the change in
particular measurements of value or rate, (i.e. indexed and inverse
securities). The foregoing investments should not be construed as limiting the
Fund's ability to invest in the other types of securities discussed more
generally in this Prospectus. A further discussion of the foregoing
investments and the risks associated with such investments is set forth in the
Appendix to this Prospectus, including Annex B of the Appendix to this
Prospectus, which includes a discussion of certain portfolio strategies
relating to indexed and inverse securities.
PORTFOLIO RESTRICTIONS
For purposes of the investment policy of the Domestic Money Market Fund,
the Company defines short-term money market securities as securities having a
maturity of no more than 762 days (25 months) in the case of U.S. Government
and agency securities and no more than 397 days (13 months) in the case of all
other securities. Management of the Company expects that substantially all the
assets of the Domestic Money Market Fund will be invested in securities
maturing in less than one year, but at times some portion may have maturities
of up to 25 months. For these purposes, the maturity of a variable rate
security is deemed to be the next coupon date on which the interest rate is
4
<PAGE>
adjusted. The dollar-weighted average maturity of this Fund's portfolio assets
will not exceed 90 days.
The Domestic Money Market Fund's investments in short-term debt and
depository institution money instruments will be rated, or will be issued by
issuers who have been rated, in one of the two highest rating categories for
short-term debt obligations by a nationally recognized statistical rating
organization (an "NRSRO") or, if not rated, will be of comparable quality as
determined by the Directors of the Company. The Domestic Money Market Fund's
investments in corporate bonds and debentures (which must have maturities at
the date of purchase of 397 days (13 months) or less) will be in issuers which
have received from an NRSRO a rating, with respect to a class of short-term
debt obligations that is comparable in priority and security with the
investment, in one of the two highest rating categories for short-term
obligations or, if not rated, are of comparable quality as determined by the
Directors of the Company. Currently, there are six NRSROs: Duff & Phelps Inc.,
Fitch Investors Services, Inc., IBCA Limited and its affiliate IBCA Inc.,
Moody's Investor's Service, Inc., Standard & Poor's Ratings Group and Thomson
BankWatch.
A regulation of the Securities and Exchange Commission limits investments
by the Domestic Money Market Fund in securities issued by any one issuer (other
than the U.S. Government, its agencies or instrumentalities) ordinarily to not
more than 5% of its total assets, or in the event that such securities do not
have the highest rating, not more than 1% of its total assets. In addition,
this regulation requires that not more than 5% of the Fund's total assets be
invested in securities that have a rating lower than the highest rating.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Reserve Assets Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
_____________________
Merrill Lynch Reserve Assets Fund (the "Reserve Assets Fund") is a
diversified fund whose objectives are the preservation of capital, liquidity
and achieving the highest possible current income consistent with the foregoing
objectives by investing in short-term money market securities. The Reserve
Assets Fund is a separate fund of the Merrill Lynch Variable Series Funds, Inc.
(the "Company"), an open-ended management investment company that has a wide
range of investment objectives among its sixteen separate funds (hereinafter
referred to as the "Funds" or individually as a "Fund"). Two separate classes
of common stock ("Common Stock"), Class A Common Stock and Class B Common
Stock, are issued for each Fund. The Company is offering shares of its Class B
Common Stock for the Reserve Assets Fund pursuant to this Prospectus. This
Prospectus consists of this five page document and the attached Appendix. For
more information on the Reserve Assets Fund's investment objectives and
policies, please see page 4 of this document and the Appendix .
THE RESERVE ASSET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
AN INVESTMENT IN THE RESERVE ASSET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. ____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights...............3 Investment Adviser................ A-8
Yield Information..................4 Portfolio Transactions and
Investment Objectives and Policies.4 Brokerage........................A-11
Portfolio Restrictions.............4 Purchase of Shares.................A-11
Appendix Redemption of Shares...............A-11
The Insurance Companies..........A-1 Dividends, Distributions and Taxes.A-12
Investment Objectives and Performance Data...................A-13
Policies of the Funds..........A-1 Distribution Plan..................A-14
Directors........................A-7 Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was
not subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
RESERVE ASSETS FUND
---------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Investment income-net................ .0501 .0543 .0371 .0268 .0320 .0546 .0730 .0822 .0661 .0574
Realized and unrealized gain (loss) on (.0005) .0018 (.0009) .0005 .0007 .0014 .0019 .0012 .0002 .0005
investments-net...................... ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations..... .0496 .0561 .0362 .0273 .0327 .0560 .0749 .0834 .0663 .0579
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
Investment income-net........ (.0501) (.0543) (.0362) (.0268) (.0320) (.0546) (.0730) (.0822) (.0661) (.0574)
Realized gain on
investments-net........... (.0001) (.0004) - (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+(.0005)+
------- ------ ------ ------ ------ ------ ------ ------ ------- ------
Total dividends and distributions... (.0502) (.0547) (.0362) (.0273) (.0325) (.0560) (.0749) (.0834) (.0663) (.0579)
------- ------ ------ ------ ------ ------ ------ ------ ------- ------
Net asset value, end of year........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.. 5.13% 5.61% 3.79% 2.77% 3.29% 5.68% 7.65% 8.62% 6.85% 5.96%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................ .61% .61% .65% .70% .79% .79% .97% 1.03% 1.01% 1.04%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Investment income-net, and realized 4.96% 5.47% 3.75% 2.73% 3.36% 5.64% 7.46%+ 8.34%+ 6.65%+ 5.86%+
gain (loss) on investments-net...... ======= ======= ======= ======= ======= ======= ======= ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)....................... $ 22,885 $ 25,550 $ 32,196 $ 30,168 $ 26,767 $ 34,362 $ 35,871 $ 29,311 $ 24,951 $ 23,068
========= ======== ======== ======== ======== ======== ======== ======== ======== ========
___________________
* Total investment returns exclude insurance-related fees and expenses.
+ Includes unrealized gain (loss).
</TABLE>
3
<PAGE>
YIELD INFORMATION
Set forth below is yield information for the Class A Shares of the
Reserve Assets Fund for the seven-day period ended December 31, 1996, computed
to include and exclude realized and unrealized gains and losses, and
information as to the compounded annualized yield, excluding gains and losses,
for the same periods. The yield quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the
separate account level which, if included, would decrease the yield.
Annualized Yield:
Including gains and losses............ 5.01%
Excluding gains and losses............ 5.01%
Compounded Annualized Yield............. 5.14%
Average maturity of portfolio at
end of period......................... 70 days
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Reserve Assets Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in short-
term money market securities. There can be no assurance that the Reserve Assets
Fund will achieve its investment objectives.
The Reserve Assets Fund will invest in short-term U.S. Government
securities, U.S. Government agency securities, depository institution money
instruments (including certificates of deposit, bankers' acceptances, time
deposits and bank notes), short-term debt securities (such as commercial
paper), variable amount master demand notes and insurance company funding
agreements, securities of foreign issuers (including Eurodollar, Yankeedollar
and foreign bank obligations) and repurchase and reverse repurchase agreements.
U.S. Government securities may be purchased on a forward commitment basis. The
types of money market securities in which the Reserve Assets Fund may invest
are described more fully in Annex A to the Appendix to this Prospectus. The
Reserve Assets Fund will be subject to the portfolio maturity, quality and
diversification restrictions discussed below.
OTHER INVESTMENTS AND RISKS
The Reserve Assets Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Reserve Assets
Fund may also invest in securities of foreign issuers and in securities the
potential return of which is based on the change in particular measurements of
value or rate (i.e. indexed and inverse securities). The foregoing investments
should not be construed as limiting the Reserve Assets Fund's ability to invest
in the other types of securities discussed more generally in this Prospectus.
A further discussion of the foregoing investments and the risks associated with
such investments is set forth in the Appendix to this Prospectus, including
Annex B of the Appendix to this Prospectus, which includes a discussion of
certain portfolio strategies relating to indexed and inverse securities.
PORTFOLIO RESTRICTIONS
For purposes of the investment policy of the Reserve Assets Fund, the
Company defines short-term money market securities as securities having a
maturity of no more than 762 days (25 months) in the case of U.S. Government
and agency securities and no more than 397 days (13 months) in the case of all
other securities. Management of the Company expects that substantially all the
assets of the Reserve Assets Fund will be invested in securities maturing in
less than one year, but at times some portion may have maturities of up to 25
months. For these purposes, the maturity of a variable rate security is deemed
to be the next coupon date on which the interest rate is adjusted. The dollar-
weighted average maturity of this Fund's portfolio assets will not exceed 90
days.
4
<PAGE>
The Reserve Asset Fund's investments in short-term debt and depository
institution money instruments will be rated, or will be issued by issuers who
have been rated, in one of the two highest rating categories for short-term
debt obligations by a nationally recognized statistical rating organization (an
"NRSRO") or, if not rated, will be of comparable quality as determined by the
Directors of the Company. The Reserve Assets Fund's investments in corporate
bonds and debentures (which must have maturities at the date of purchase of 397
days (13 months) or less) will be in issuers which have received from an NRSRO
a rating, with respect to a class of short-term debt obligations that is
comparable in priority and security with the investment, in one of the two
highest rating categories for short-term obligations or, if not rated, are of
comparable quality as determined by the Directors of the Company. Currently,
there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services, Inc., IBCA
Limited and its affiliate IBCA Inc., Moody's Investors Service, Inc., Standard
& Poor's Ratings Group and Thomson BankWatch.
A regulation of the Securities and Exchange Commission limits investments
by the Reserve Assets Fund in securities issued by any one issuer (other than
the U.S. Government, its agencies or instrumentalities) ordinarily to not more
than 5% of its total assets, or in the event that such securities do not have
the highest rating, not more than 1% of its total assets. In addition, this
regulation requires that not more than 5% of the Reserve Assets Fund's total
assets be invested in securities that have a rating lower than the highest
rating.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Prime Bond Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
____________________
Merrill Lynch Prime Bond Fund (the "Prime Bond Fund") is a diversified
fund whose objectives are as high a level of current income as is consistent
with prudent investment management, and as a secondary objective, capital
appreciation when consistent with the foregoing objective, by investing
primarily in long-term corporate bonds rated A or better by either Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("Standard & Poor's"). The Prime Bond Fund is a separate fund of the Merrill
Lynch Variable Series Funds, Inc. (the "Company"), an open-ended management
investment company that has a wide range of investment objectives among its
sixteen separate funds (hereinafter referred to as the "Funds" or individually
as a "Fund"). Two separate classes of common stock ("Common Stock"), Class A
Common Stock and Class B Common Stock, are issued for each Fund. The Company
is offering shares of its Class B Common Stock for the Prime Bond Fund pursuant
to this Prospectus. This Prospectus consists of this four page document and
the attached Appendix. For more information on the Prime Bond Fund's
investment objectives and policies, please see page 4 of this document and the
Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was
not subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
PRIME BOND FUND
---------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.... $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Investment income-net................. .80 .82 .77 .70 .79 .90 .88 .90 .87 .87
Realized and unrealized gain (loss) on
investments and foreign currency (.55) 1.34 (1.36) .71 .04 .84 (.12) .48 (.15) (1.00)
translations-net.................... -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations...... .25 2.16 (.59) 1.41 .83 1.74 .76 1.38 .72 (.13)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income-net........... (.79) (.83) (.76) (.70) (.81) (.90) (.87) (.90) (.80) (.87)
Realized gain on investments-net - - - (.11) - - - - - (.15)
In excess of realized gain
on investments-net........... - - (.17) - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions..... (.79) (.83) (.93) (.81) (.81) (.90) (.87) (.90) (.80) (1.02)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.......... $ 11.91 $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.... 2.21% 20.14% (4.80)% 12.02% 7.27% 16.41% 7.13% 13.29% 6.75% (1.10)%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. .49% .50% .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Investment income-net................. 6.67% 7.00% 6.74% 5.86% 6.76% 7.94% 8.01% 8.12% 8.05% 7.66%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)...................... $ 538,394 $ 489,838 $ 391,234 $ 314,091 $ 84,810 $ 39,743 $ 34,655 $ 29,593 $ 22,499 $17,385
========= ========= ========= ========= ======== ======== ======== ======== ======== =======
Portfolio turnover.................... 91.88% 90.12% 139.89% 115.26% 82.74% 152.18% 155.17% 144.52% 225.81% 129.46%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
_______________
* Total investment returns exclude insurance-related fees and expenses.
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Prime Bond Fund is to provide
shareholders with as high a level of current income as is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Prime Bond Fund seeks capital appreciation when
consistent with its principal objective. There can be no assurance that the
Prime Bond Fund will achieve its investment objectives.
The Prime Bond Fund invests primarily in securities rated in the top
three rating categories of either Standard & Poor's (AAA, AA and A) or Moody's
(Aaa, Aa and A). Additional information regarding various bond ratings is set
forth in Annex A to the Appendix to this Prospectus. The financial risk of this
Fund should be minimized by the credit quality of the bonds in which it will
invest, but the long maturities that typically provide the best yield will
subject the Fund to possible substantial price changes resulting from market
yield fluctuations. The market prices of fixed-income securities such as those
purchased by the Prime Bond Fund are affected by changes in interest rates
generally. As interest rates rise, the market value of fixed-income securities
will fall, adversely affecting the net asset value of the Fund.
Fund management strategy will attempt to mitigate adverse price changes
and optimize favorable price changes through active trading that shifts the
maturity and/or quality structure of the Fund within the overall investment
guidelines. The Prime Bond Fund's investments will vary from time to time
depending upon the judgment of management as to prevailing conditions in the
economy and the securities markets and the prospects for interest rate changes
among different categories of fixed-income securities. The Prime Bond Fund
anticipates that under normal circumstances more than 90% of the assets of the
Fund will be invested in fixed-income securities, including convertible and
non-convertible debt securities and preferred stock. The Prime Bond Fund does
not intend to invest in common stock, rights or other equity securities. Under
unusual market or economic conditions, the Prime Bond Fund for defensive or
other purposes may invest up to 100% of its assets in U.S. Government or
Government agency securities, money market or other fixed-income securities
deemed by the Investment Adviser to be consistent with the objectives of the
Fund, or the Fund may hold its assets in cash.
OTHER INVESTMENTS AND RISKS
The Prime Bond Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund may also
invest in securities of foreign issuers and may invest in securities
the potential return of which is based on the change in particular
measurements of value or rate (i.e. indexed and inverse securities). The
foregoing investments should not be construed as limiting the Fund's ability to
invest in the other types of securities discussed more generally in this
Prospectus. A further discussion of the foregoing investments and the risks
associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus, which
includes a discussion of certain portfolio strategies relating to indexed and
inverse securities.
4
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch High Current Income Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
____________________
Merrill Lynch High Current Income Fund (the "High Current Income Fund")
is a diversified fund whose objectives are as high a level of current income as
is consistent with its investment policies and prudent investment management,
and as a secondary objective, capital appreciation when consistent with the
foregoing objective. The Fund invests principally in fixed-income securities
that are rated in the lower rating categories of the established rating
services or in unrated securities of comparable quality. The High Current
Income Fund is a separate fund of the Merrill Lynch Variable Series Funds, Inc.
(the "Company"), an open-ended management investment company that has a wide
range of investment objectives among its sixteen separate funds (hereinafter
referred to as the "Funds" or individually as a "Fund"). Two separate classes
of common stock ("Common Stock"), Class A Common Stock and Class B Common
Stock, are issued for each Fund. The Company is offering shares of its Class B
Common Stock for the High Current Income Fund pursuant to this Prospectus.
This Prospectus consists of this five page document and the attached Appendix.
For more information on the High Current Income Fund's investment objectives
and policies, please see page 4 of this document and this Appendix.
THE HIGH CURRENT INCOME FUND INVESTS OR MAY INVEST IN HIGH YIELD BONDS
(COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT
OBJECTIVES AND POLICIES OF THE FUNDS - RISKS OF HIGH YIELD SECURITIES" IN THE
APPENDIX TO THIS PROSPECTUS.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was
not subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
---------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996+ 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55 $ 11.42
------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Investment income-net.................. 1.08 1.09 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23
Realized and unrealized gain (loss) on .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79)
investments-net...................... ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Total from investment operations....... 1.20 1.74 (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44
------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Less dividends and distributions:
Investment income-net (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23)
Realized gain on investments-net - - - - - - - - - (.08)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Total dividends and distributions (1.06) (1.10) (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Net asset value, end of year $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55
======== ======== ======== ======== ======== ======= ======== ======== ======== =======
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 11.27% 17.21% (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82%
======== ======== ======== ======== ======== ======= ======== ======= ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses .54% .55% .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01%
======== ======== ======== ======== ======== ======= ======== ====== ======== =======
Investment income-net 9.50% 9.92% 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88%
======== ======== ======== ======== ======== ======= ======== ====== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $414,615 $356,352 $255,719 $163,428 $ 26,343 $ 9,649 $ 8,106 $12,942 $13,960 $ 13,075
======== ======== ======== ======== ======== ======= ======== ======= ======= ========
Portfolio turnover 48.92% 41.60% 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07%
======== ======== ======== ======== ======== ======= ======== ======= ======== ========
__________________
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the High Current Income Fund is to
obtain the highest level of current income that is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the High Current Income Fund seeks capital appreciation
when consistent with its primary objective. There can be no assurance that the
High Current Income Fund will achieve its investment objectives.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's
Investors Service Inc. ("Moody's") and BBB or lower by Standard & Poor's
Ratings Group ("Standard & Poor's"), or in unrated securities of comparable
quality. Securities rated below Baa by Moody's and below BBB by Standard &
Poor's are commonly known as "junk bonds." Additional information regarding
various bond ratings is set forth in Annex A to the Appendix to this
Prospectus. The market price of fixed-income securities such as those
purchased by the Fund is affected by changes in interest rates generally. As
interest rates rise, the market value of fixed-income securities will fall,
adversely affecting the net asset value of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the High Current Income Fund may be
subject to greater market fluctuations and risks of loss of income and
principal than lower-yielding, higher-rated fixed-income securities. Such
securities are generally issued by corporations that are not as financially
secure or as creditworthy as issuers of higher-rated securities. There is,
accordingly, a greater risk that the issuers of higher-yielding securities will
not be able to pay principal and interest on such securities, especially
during periods of adverse economic conditions. Because investment in such
high-yield securities entails relatively greater risk of loss of income or
principal, an investment in the High Current Income Fund may not be appropriate
as the exclusive investment to fund the Contracts for all Contract Owners. SEE
"INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS - RISKS OF HIGH YIELD
SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS.
Selection and supervision by the management of the Company regarding
investments in lower-rated fixed-income securities involves continuous analysis
of individual issuers, general business conditions and other factors that may
be too time consuming or too costly for the average investor. The furnishing
of these services does not, of course, guarantee successful results. The
analysis of issuers may include, among other things, historic and current
financial condition, current and anticipated cash flow and borrowing
requirements, value of assets in relation to historical cost, strength of
management, responsiveness to business conditions, credit standing, and current
and anticipated results of operations. Analysis of general business conditions
and other factors may include anticipated changes in economic activity and
interest rates, the availability of new investment opportunities, and the
economic outlook for specific industries. While Merrill Lynch Asset
Management, L.P. (the "Investment Adviser") considers as one factor in its
credit analysis the ratings assigned by the rating services, the Investment
Adviser performs its own independent credit analysis of issuers and
consequently, the High Current Income Fund may invest, without limit, in
unrated securities if such securities offer, in the opinion of the Investment
Adviser, a relatively high yield without undue risk. As a result, the High
Current Income Fund's ability to achieve its investment objective may depend to
a greater extent on the Investment Adviser's own credit analysis than the Funds
which invest in higher-rated securities. Although the High Current Income Fund
will invest primarily in lower-rated securities, it will not invest in
securities rated Ca or lower by Moody's and CC or lower by Standard & Poor's
unless the Investment Adviser believes that the financial condition of the
issuer or the protection afforded to the particular securities is stronger
than would otherwise be indicated by such low ratings. However, securities
purchased by the High Current Income Fund may subsequently be downgraded. Such
securities may continue to be held and will be sold only if, in the judgment
of the Investment Adviser, it is advantageous to do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the High
Current Income Fund may purchase higher-rated securities if the Investment
Adviser believes that the risk of loss of income and principal may be
substantially reduced with only a relatively small reduction in yield.
4
<PAGE>
The securities in the High Current Income Fund will be varied from time
to time depending upon the judgment of management as to prevailing conditions
in the economy and the securities markets and the prospects for interest rate
changes among different categories of fixed-income securities. It is
anticipated that under normal circumstances more than 90% of the High Current
Income Fund's assets will be invested in fixed-income securities, including
convertible and non-convertible debt securities and preferred stock. Although
it is expected that, in general, the Fund will not invest in common stocks,
rights or other equity securities, it will acquire or hold such securities (if
consistent with the objectives of the Fund) when such securities are acquired
in unit offerings with fixed-income securities or in connection with an actual
or proposed conversion or exchange of fixed-income securities. In addition,
under unusual market or economic conditions, the High Current Income Fund for
defensive purposes may invest up to 100% of its assets in U.S. Government or
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or may hold its assets in cash. The yield on such securities may be
lower than the yield on lower-rated fixed-income securities.
The table below shows the average monthly dollar-weighted market value,
by Standard & Poor's rating category, of the securities held by the High
Current Income Fund during the year ended December 31, 1996.
<TABLE>
<CAPTION>
% % MARKET VALUE
NET CORPORATE
RATING* ASSETS BONDS
------- -------- --------------
<S> <C> <C> <C>
BBB............................. 0.7% 0.8%
BB.............................. 29.2 33.8
B............................... 47.5 55.2
CCC............................. 4.2 4.7
NR**............................ 5.0 5.5
-----
100.0%
</TABLE> ======
* A description of corporate bond ratings of Standard & Poor's is set forth
in Annex A of the Appendix to this Prospectus.
** Bonds that are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than
Standard & Poor's, or may not be rated by any other organizations.
OTHER INVESTMENTS AND RISKS
The High Current Income Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund may also
invest in securities of foreign issuers, and may from time to time enter into
standby commitment agreements. The foregoing investments should not be
construed as limiting the Fund's ability to invest in the other types of
securities discussed more generally in this Prospectus. A further discussion
of the foregoing investments and the risks associated with such investments is
set forth in the Appendix to this Prospectus.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Quality Equity Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
_______________________
Merrill Lynch Quality Equity Fund (the "Quality Equity Fund") is a
diversified fund whose objective is the highest total investment return
consistent with prudent risk. The Quality Equity Fund uses a fully managed
investment policy utilizing equity securities, primarily common stocks of
large-capitalization companies, as well as investment grade debt and
convertible securities. The Quality Equity Fund is a separate fund of the
Merrill Lynch Variable Series Funds, Inc. (the "Company"), an open-ended
management investment company that has a wide range of investment objectives
among its sixteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). Two separate classes of common stock ("Common
Stock"), Class A Common Stock and Class B Common Stock, are issued for each
Fund. The Company is offering shares of its Class B Common Stock for the
Quality Equity Fund pursuant to this Prospectus. This Prospectus consists of
this four page document and the attached Appendix. For more information on the
Quality Equity Fund's investment objective and policies, please see page 4 of
this document, and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
QUALITY EQUITY FUND
---------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996+ 1995+ 1994+ 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Investment income-net................. .58 .58 .38 .24 .34 .43 .47 .50 .43 .42
Realized and unrealized gain (loss) on
investments and foreign currency 4.44 5.48 (.74) 3.46 .32 5.75 (.38) 4.96 1.73 (.35)
transactions-net.................... -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Total from investment operations...... 5.02 6.06 (.36) 3.70 .66 6.18 .09 5.46 2.16 .07
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Less dividends and distributions:
Investment income-net.............. (.66) (.45) (.25) (.12) (.58) (.50) (.41) (.52) (.22) (.60)
Realized gain on investments-net... (4.29) (.59) (.67) (.04) (.95) (1.05) (.84) - - (3.62)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Total dividends and distributions..... (4.95) (1.04) (.92) (.16) (1.53) (1.55) (1.25) (.52) (.22) (4.22)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Net asset value, end of year.......... $ 32.83 $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.... 17.90% 22.61% (1.20)% 14.57% 2.69% 30.18% .66% 30.77% 13.54% (.70)%
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. .49% .51% .54% .62% .74% .79% .94% 1.05% 1.02% .93%
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
Investment income-net................. 1.89% 1.94 1.39% 1.07% 1.54% 1.87% 2.36% 2.58% 2.25% 2.31%
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)...................... $ 794,275 $644,551 $464,360 $309,420 $ 87,977 $55,005 $39,470 $31,467 $20,055 $23,986
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
Portfolio turnover.................... 88.30% 140.32% 60.57% 88.25% 62.54% 55.83% 69.05% 44.23% 32.53% 65.58%
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
Average commission rate paid#......... $ .0615 - - - - - - - - -
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
__________________
+ Based on average shares outstanding during the period.
* Total investment returns exclude insurance-related fees and expenses.
# For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the average rate shown.
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Quality Equity Fund seeks to achieve the highest total investment
return, or the aggregate of income and capital value changes, consistent with
prudent risk. To do this, management will shift the emphasis among investment
alternatives for capital growth, capital stability and income as market trends
change. This "fully managed" investment policy distinguishes the Quality Equity
Fund from investment companies which seek either capital growth or income. The
Quality Equity Fund's investment philosophy is based on management's belief
that the structure of the United States economy and its securities markets will
undergo continuous change. The flexibility of the Fund is designed to reduce
overall exposure to risk by achieving below-average volatility in a falling
market and above-average volatility in a rising market. There can be no
assurance that the Quality Equity Fund will achieve its investment objective.
The Quality Equity Fund's fully managed investment approach will make use
of equity, debt and convertible securities. The majority of the Fund's equity
portfolio will be in the common stocks of large-capitalization, "quality"
companies. For this purpose, "large capitalization" companies are considered to
be those companies with market capitalizations in excess of $500 million.
Management of the Company believes that a quality company is one which conforms
closely to the following criteria: good financial resources, strong balance
sheet, satisfactory rate of return on capital, good industry position and
superior management skills. The earnings of quality companies generally tend to
grow consistently. Whenever market or financial conditions warrant, the Quality
Equity Fund may, in order to reduce risk and achieve the highest total
investment return, invest in non-convertible, long-term debt securities,
including "deep discount" corporate debt securities of investment grade or
issues of fixed-income convertible securities which give the owner the option
of a later exchange for common stock. Management expects that over longer
periods the larger portion of the Quality Equity Fund's portfolio will consist
of equity securities. During defensive periods, the Fund may invest in U.S.
Government and Government agency securities, money market securities or other
fixed-income securities deemed by the Merrill Lynch Asset Management L.P. (the
"Investment Adviser") to be consistent with a defensive posture, or cash.
OTHER INVESTMENTS AND RISKS
The Quality Equity Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended, may invest in
securities of foreign issuers, and is authorized to write (i.e., sell) call
options on securities held in its portfolio or securities indices the
performance of which is substantially correlated with securities held in its
portfolio. The Fund may also from time to time be invested in non-dollar-
denominated securities of foreign issuers. 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. Furthermore, the Quality Equity Fund's return on
investments in non-dollar-denominated securities may be reduced or enhanced as
a result of changes in foreign currency rates during the period in which the
Fund holds such investments. The foregoing investments should not be construed
as limiting the Fund's ability to invest in the other types of securities
discussed more generally in this Prospectus. A further discussion of the
foregoing investments and the risks associated with such investments is set
forth in the Appendix to this Prospectus, including Annex B of the Appendix to
this Prospectus, which includes a discussion of certain portfolio strategies
relating to options.
4
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Special Value Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
Merrill Lynch Special Value Focus Fund, formerly the Merrill Lynch Equity
Growth Fund (the "Special Value Focus Fund"), is a diversified fund whose
objective is long-term capital growth by investing primarily in common shares
of small companies and of emerging growth companies regardless of size. The
Special Value Focus Fund is a separate fund of the Merrill Lynch Variable
Series Funds, Inc. (the "Company"), an open-ended management investment company
that has a wide range of investment objectives among its sixteen separate funds
(hereinafter referred to as the "Funds" or individually as a "Fund"). Two
separate classes of common stock ("Common Stock"), Class A Common Stock and
Class B Common Stock, are issued for each Fund. The Company is offering shares
of its Class B Common Stock for the Special Value Focus Fund pursuant to this
Prospectus. This Prospectus consists of this five page document and the
attached Appendix. For more information on the Special Value Focus Fund's
investment objectives and policies, please see page 4 of this document and the
Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
SPECIAL VALUE FOCUS FUND#
---------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47 $ 18.42
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Investment income (loss)-net.......... .13 .17 .05 (.01) .01 .09 .05 (.07) (.10) (.09)
Realized and unrealized gain (loss) on 1.84 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01)
investments-net.....................
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Total from investment operations...... 1.97 8.81 (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Less dividends and distributions:
Investment income-net............ (.14) (.09) - -++ (.07) (.02) - - - (.03)
Realized gain on investments-net...... (3.59) - (.19) - - - - - (.22) (2.82)
-------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Total dividends and distributions..... (3.73) (.09) (.19) - (.07) (.02) - - (.22) (2.85)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.......... $ 26.22 $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.... 8.11% 45.90% (7.27)% 17.78% (.53)% 50.10% (12.55%) 16.60% 4.25% (22.29)%
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. .81% .81% .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24%
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
Investment income (loss)-net.......... .50% .72% .27% (.05)% .04% .51% .14% (.68)% (.56)% (.60)%
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands). $ 453,029 $ 339,921 $ 170,044 $ 98,976 $ 23,167 $ 11,318 $ 6,851 $ 6,811 $ 5,521 $ 6,707
========= ========= ========= ======= ======== ======== ======= ======= ======= ========
Portfolio turnover..................... 80.84% 96.79% 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91%
======== ========= ========= ======= ======== ======== ======= ======= ======= ========
Average Commission rate paid##......... $ .0598 - - - - - - - - -
======== ========= ========= ======= ======== ======== ======= ======= ======= ========
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
++ Amount is less than $.01 per share.
# The name of the Equity Growth Fund was changed to the Special Value Focus Fund.
## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities.
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Special Value Focus Fund is to seek long-
term growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Company believes have special investment value, and of emerging growth
companies regardless of size. There can be no assurance that the Special Value
Focus Fund will achieve its investment objective. Companies are selected by
management on the basis of their long-term potential for expanding their size
and profitability or for gaining increased market recognition for their
securities. Current income is not a factor in the selection of securities. The
Special Value Focus Fund is intended to provide an opportunity for owners
("Contract Owners") of variable annuity contracts and/or variable life
insurance contracts ("Contracts") who are not ordinarily in a position to
perform the specialized type of research or analysis of small and emerging
growth companies.
Management seeks to identify those small emerging growth companies that
can show significant and sustained increases in earnings over an extended
period of time and are in sound financial condition. Management believes that,
while these companies present above-average risks, properly selected companies
of this type also have the potential to increase their earnings at a rate
substantially in excess of the general growth of the economy. The Special Value
Focus Fund attempts to achieve its objective by focusing on the long-range view
of a company's prospects through a fundamental analysis of its management,
financial structure, product development, marketing ability and other relevant
factors. Full development of these companies frequently takes time and, for
this reason, the Special Value Focus Fund should be considered as a long-term
investment and not as a vehicle for seeking short-term profits.
SMALL COMPANIES. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalizations in the $50-$300 million range and generally are
little known to most individual investors, although some may be dominant in
their respective industries. Underlying this strategy is management's belief
that relatively small companies will continue to have the opportunity to
develop into significant business enterprises. Some such companies may be in a
relatively early stage of development; others may manufacture a new product or
perform a new service. Such companies may not be counted upon to develop into
major industrial companies, but management believes that eventual recognition
of their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
EMERGING GROWTH COMPANIES. In selecting investments for the Special Value
Focus Fund, management also seeks emerging growth companies that either occupy
a dominant position in an emerging industry or subindustry or have a
significant and growing market share in a large, fragmented industry.
Management believes that capable and flexible management is one of the most
important criteria of emerging growth companies and that such companies should
employ sound financial and accounting policies and also demonstrate effective
research, successful product development and marketing, efficient service and
pricing flexibility. Emphasis is given to companies with rapid historical
growth rates, above-average returns on equity and strong current balance
sheets, all of which should enable the company to finance its continued growth.
Management of the Company also analyzes and weighs relevant factors beyond the
company itself, such as the level of competition in the industry, the extent of
governmental regulation, the nature of labor conditions and other related
matters.
The Special Value Focus Fund emphasizes investments in companies that do
most of their business in the United States and therefore are free of the
currency exchange problems, foreign tax considerations and potential political
and economic upheavals that many multinational corporations face. Moreover, the
size and kinds of markets that they serve make these companies less susceptible
than larger companies to intervention from the federal government by means of
price controls, regulations or litigation.
While the process of selection and continuous supervision by management
does not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
4
<PAGE>
It should be apparent that an investment in a fund such as the Special
Value Focus Fund involves greater risk than is customarily associated with more
established companies. The securities of smaller or emerging growth companies
may be subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may
have limited product lines, markets or financial resources, or they may be
dependent upon a limited management group. Because of these factors, management
of the Company believes that shares in the Special Value Focus Fund are
suitable for Contract Owners who are in a financial position to assume above-
average investment risk in search of above-average long-term reward. As
indicated, the Special Value Focus Fund is designed for Contract Owners whose
investment objective is growth rather than income. It is definitely not
intended for exclusive funding of Contracts but is designed for Contract Owners
who are prepared to experience above-average fluctuations in net asset value.
The securities in which the Special Value Focus Fund invests will often
be traded only in the over-the-counter market or on a regional securities
exchange and may not be traded every day or in the volume typical of trading on
a national securities exchange. As a result, the disposition by the Fund of
portfolio securities to meet redemptions or otherwise may require the Fund to
sell these securities at a discount from market prices or during periods when
in management's judgment such disposition is not desirable or to make many
small sales over a lengthy period of time.
The investment emphasis of the Special Value Focus Fund is on equities,
primarily common stock and, to a lesser extent, securities convertible into
common stocks and rights to subscribe for common stock, and the Fund will
maintain at least 80% of its net assets invested in equity securities of small
or emerging growth companies except during defensive periods. The Special Value
Focus Fund reserves the right as a defensive measure and to provide for
redemptions to hold other types of securities, including non-convertible
preferred stocks and debt securities, U.S. Government and Government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or cash, in
such proportions as, in the opinion of management, prevailing market or
economic conditions warrant.
OTHER INVESTMENTS AND RISKS
The Special Value Focus Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund may also
invest in securities of foreign issuers and is authorized to write (i.e., sell)
call options on securities held in its portfolio or securities indices the
performance of which is substantially correlated with securities held in its
portfolio. The foregoing investments should not be construed as limiting the
Fund's ability to invest in the other types of securities discussed more
generally in this Prospectus. A further discussion of the foregoing
investments and the risks associated with such investments is set forth in the
Appendix to this Prospectus, including Annex B of the Appendix to this
Prospectus, which includes a discussion of certain portfolio strategies
relating to options.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Natural Resources Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
Merrill Lynch Natural Resources Focus Fund (the "Natural Resources Focus
Fund") is a non-diversified fund whose objectives are achieving long-term
growth of capital and protection of the purchasing power of shareholder's
capital by investing primarily in equity securities of domestic and foreign
companies with substantial natural resource assets. The Natural Resources
Focus Fund is a separate fund of the Merrill Lynch Variable Series Funds, Inc.
(the "Company"), an open-ended management investment company that has a wide
range of investment objectives among its sixteen separate funds (hereinafter
referred to as the "Funds" or individually as a "Fund"). Two separate classes
of common stock ("Common Stock"), Class A Common Stock and Class B Common
Stock, are issued for each Fund. The Company is offering shares of its Class B
Common Stock for the Natural Resources Focus Fund pursuant to this Prospectus.
This Prospectus consists of this six page document and the attached Appendix.
For more information on the Natural Resources Focus Fund's investment
objectives and policies, please see page 4 of this document and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the
Period
June 1, to
FOR THE YEAR ENDED DECEMBER 31, 1988+
-------------------------------------------------------------------------- December 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------- ------- ------- ------- ------- ------ ------------
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 11.95 $ 10.82 $ 10.82 $ 9.84 $ 10.06 $ 10.17 $ 11.09 $ 9.58 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- ----------
Investment income-net.................. .18 .20 .17 .11 .18 .25 .22 .24 .12
Realized and unrealized gain (loss) on 1.40 1.15 (.02) .92 (.05) (.11) (.90) 1.49 (.54)
investments-net and foreign currency ------- ------- ------- ------- ------- ------- ------- ------- ----------
transactions-net.....................
Total from investment operations....... 1.58 1.35 .15 1.03 .13 .14 (.68) 1.73 (.42)
------- ------- ------- ------- ------- ------- ------- ------- ----------
Less dividends and distributions:
Investment income-net............... (.20) (.19) (.15) (.05) (.29) (.25) (.24) (.22) -
Realized gain on investments-net.... (.21) (.03) - - (.06) - - - -
------- ------- ------- ------- ------- ------- ------- ------- ----------
Total dividends and distributions...... (.41) (.22) (.15) (.05) (.35) (.25) (.24) (.22) -
------- ------- ------- ------- ------- ------- ------- ------- ----------
Net asset value, end of period......... $ 13.12 $ 11.95 $ 10.82 $ 10.82 $ 9.84 $ 10.06 $ 10.17 $ 11.09 $ 9.58
======= ======= ======= ======= ======= ======= ======= ======= ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..... 13.52% 12.65% 1.44% 10.47% 1.36% 1.36% (6.21)% 18.23% (4.20)%#
======= ======= ======= ======= ======= ======= ======= ======= ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......... .78% .78% .87% 1.13% 1.25% 1.25% 1.25% 1.25% 1.24%*
======= ======= ======= ======= ======= ======= ======= ======= ==========
Expenses............................... .78% .78% .87% 1.13% 1.27% 1.30% 1.38% 1.74% 1.24%*
======= ======= ======= ======= ======= ======= ======= ======= ==========
Investment income-net.................. 1.43% 1.75% 1.91% 1.34% 2.00% 2.31% 2.26% 2.26% 2.59%*
======= ======= ======= ======= ======= ======= ======= ======= ==========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......................$ 45,197 $ 43,102 $ 39,715 $ 14,778 $ 4,144 $ 3,084 $ 3,247 $ 2,704 $ 2,371
======= ======= ======= ======= ======= ======= ======= ======= ==========
Portfolio turnover..................... 31.11% 30.15% 10.94% 58.44% 22.88% 31.38% 27.61% 93.97% 16.31%
======= ======= ======= ======= ======= ======= ======= ======= ==========
Average commission rate paid##......... $ .0225 - - - - - - - -
======= ======= ======= ======= ======= ======= ======= ======= ==========
___________________
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted into U.S. dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect the average rate shown.
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Natural Resources Focus Fund are to
achieve long-term growth of capital and to protect the purchasing power of
shareholders' capital by investing primarily in a portfolio of equity
securities (e.g., common stocks and securities convertible into common stocks)
of domestic and foreign companies with substantial natural resource assets.
This investment objective is a fundamental policy and may not be changed
without a vote of the majority of outstanding shares of the Natural Resources
Focus Fund. The Natural Resources Focus Fund also may invest in debt, preferred
or convertible securities, the value of which is related to the market value of
some natural resource asset ("asset-based securities"). Management of the
Company will seek to identify companies or asset-based securities it believes
are attractively priced relative to the intrinsic value of the underlying
natural resource assets or are especially well positioned to benefit during
particular portions of inflationary cycles. There can be no assurance that the
Natural Resources Focus Fund will achieve its investment objectives.
IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE
NATURAL RESOURCES FOCUS FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE
COMPANY ANTICIPATES SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY,
SUCH AS HIGH INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY
EXCHANGE MARKETS, TO INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE
FOR, EXTRACT, PROCESS OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO
THE VALUE OF GOLD BULLION. Such a switch in investment strategies could require
the Fund to liquidate portfolio securities and incur transaction costs. The
Company has been advised by counsel that it is uncertain under the current
federal tax law whether the Fund may concentrate its investments in gold and
gold-related securities without adversely affecting the federal tax status of
the variable annuity contracts and/or variable life insurance contracts
("Contracts"). Accordingly, management of the Company has determined that the
Natural Resources Focus Fund will not concentrate its investments in such
securities until counsel has advised the Company that such uncertainty has been
resolved favorably.
Management attempts to achieve the investment objectives of the Natural
Resources Focus Fund by seeking to identify securities of companies which, in
its opinion, are undervalued relative to the value of natural resource holdings
of such companies in light of current and anticipated economic or financial
conditions. Natural resource assets are materials derived from natural sources
which have economic value. Management will consider a company to have
substantial natural resource assets when, in its opinion, the company's
holdings of the assets are of such magnitude, when compared to the
capitalization, revenues or operating profits of the company, that changes in
the economic value of the assets are expected to affect the market price of the
equity securities of such company. Generally, a company has substantial natural
resource assets when at least 50% of the non-current assets, capitalization,
gross revenues or operating profits of the company in the most recent or
current fiscal year are involved in or result from directly or indirectly
through subsidiaries, exploring, mining, refining, processing, fabricating,
dealing in or owning natural resource assets. Examples of natural resource
assets include precious metals (e.g., gold, silver and platinum), ferrous and
nonferrous metals (e.g., iron, steel, aluminum and copper), strategic metals
(e.g., uranium and titanium), hydrocarbons (e.g., coal, oil and natural gas),
timber land, undeveloped real property and agricultural commodities. The Fund
presently does not intend to invest directly in natural resource assets or
contracts related thereto.
Management of the Company believes that, based upon past performance, the
securities of specific companies that hold different types of substantial
natural resource assets may move relatively independently of one another during
different stages of inflationary cycles due to different degrees of demand for,
or market values of, their respective natural resource holdings during
particular portions of such inflationary cycles. The Fund's fully managed
investment approach enables it to switch its emphasis among various industry
groups depending upon management's outlook with respect to prevailing trends
and developments.
The Natural Resources Focus Fund may use derivatives in connection with
certain trading strategies. SEE ANNEX B OF THE APPENDIX TO THIS PROSPECTUS.
4
<PAGE>
The Natural Resources Focus Fund at all times, except during defensive
periods, will maintain at least 65% of its total assets invested in companies
with substantial natural resource assets or in asset-based securities. Current
income from dividends and interest will not be a primary consideration in
selecting securities. The Fund reserves the right as a temporary defensive
measure and to provide for redemptions, to hold short-term U.S. Government and
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant.
As indicated above, under certain circumstances, the Natural Resources
Focus Fund has reserved the right to invest a majority of its assets in gold-
related companies or securities. Based on historic experience, during periods
of economic or financial instability, the securities of such companies may be
subject to extreme price fluctuations, reflecting the high volatility of gold
prices during such periods. In addition, the instability of gold prices may
result in volatile earnings of gold-related companies which, in turn, may
affect adversely the financial condition of such companies. Gold mining
companies also are subject to the risks generally associated with mining
operations.
The major producers of gold include the Republic of South Africa, Russia,
the United States, Australia, Canada, the People's Republic of China and the
Philippines. Sales of gold by Russia and the People's Republic of China are
largely unpredictable and often relate to political and economic considerations
rather than to market forces. Economic, social and political developments
within Russia, the People's Republic of China and the Republic of South Africa
may affect significantly gold production in those countries.
OTHER INVESTMENTS AND RISKS
The Natural Resources Focus Fund may purchase certain securities that are
not registered under the Securities Act of 1933, as amended. The Fund may
engage in transactions for purpose of hedging against the decline in the value
of currencies in which its portfolio holdings are denominated against the US
dollar. The Fund is also authorized to write (i.e., sell) and purchase call
and put options on securities held in its portfolio, on securities indicies the
performance of which is substantially correlated with securities held in its
portfolio or on securities it intends to purchase, may engage in transactions
in futures, and may invest in securities the potential return of which is based
on the change in particular measurements of value or rate (i.e., indexed and
inverse securities).
The Natural Resources Focus Fund may invest in securities of foreign
issuers and may concentrate its investments in one or more countries.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations and risks which are not ordinarily associated
with investing in domestic issuers. These considerations and risks include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, confiscatory taxation, high rates of inflation,
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. In addition, net investment income
earned by the Fund on a foreign security may be subject to withholding and
other taxes imposed by foreign governments which will reduce the Fund's net
investment income. The Natural Resources Focus Fund may also from time to time
be substantially invested in non-dollar-denominated securities of foreign
issuers. 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. Furthermore, the
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. SEE "OTHER PORTFOLIO
STRATEGIES-FOREIGN SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS FOR SPECIAL
CONSIDERATIONS CONCERNING INVESTMENTS IN FOREIGN SECURITIES.
The foregoing investments should not be construed as limiting the Fund's
ability to invest in the other types of securities discussed more generally in
this Prospectus. A further discussion of the foregoing investments and the
risks associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus, which
includes a discussion of certain portfolio strategies relating to indexed and
inverse securities, options, futures and foreign exchange transactions.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch American Balanced Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
_______________________
Merrill Lynch American Balanced Fund (the "American Balanced Fund") is a
diversified fund whose objective is a level of current income and a degree of
stability or principal not normally available from an investment solely in
equity securities and the opportunity for capital appreciation greater than is
normally available from an investment solely in debt securities by investing in
a balanced portfolio of fixed-income and equity securities. The American
Balanced Fund is a separate fund of the Merrill Lynch Variable Series Funds,
Inc. (the "Company"), an open-ended management investment company that has a
wide range of investment objectives among its sixteen separate funds
(hereinafter referred to as the "Funds" or individually as a "Fund"). Two
separate classes of common stock ("Common Stock"), Class A Common Stock and
Class B Common Stock, are issued for each Fund. The Company is offering shares
of its Class B Common Stock for the American Balanced Fund pursuant to this
Prospectus. This Prospectus consists of this four page document and the
attached Appendix. For more information on the American Balanced Fund's
investment objective and policies, please see page 4 of this document and the
Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
American Balanced Fund
--------------------------------------------------------------------------------------------------
FOR THE
PERIOD
JUNE 1,
1988+ TO
DECEMBER
For the Year Ended December 31,
DECEMBER
------------------------------------------------------------------------------------ 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.........................$ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82 $ 11.26 $ $11.74 $ 10.41 $ 10.00
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Investment income-net............ .53 .59 .48 .32 .31 .47 .47 .44 .29
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Realized and unrealized gain (loss)
on investment and foreign
currency transactions-net...... .89 2.06 (1.06) 1.37 .37 1.76 (.35) 1.40 .12
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Total from investment operations. 1.42 2.65 (.58) 1.69 .68 2.23 .12 1.84 --
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Less dividends and distributions
Investment income-net.......... (.56) (.56) (.37) (.34) (.37) (.49) (.46) (.50) --
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Realized gain on investments
-net........................... (.02) -- -- (.12) (.28) (.18) (.14) (.01) --
-------- -------- -------- -------- -------- -------- --------- -------- ------------
In excess of realized gain on
investments-net................ -- -- (.05) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Total dividends and distributions (.58) (.56) (.42) (.46) (.65) (.67) (.60) (.51) --
-------- -------- -------- -------- -------- -------- --------- -------- ------------
Net asset value, end of period...$ 16.01 $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82 $ 11.26 $ 11.74 $ 10.41
======== ======== ======== ======== ======== ======== ========= ======== ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................... 9.73% 20.81% (4.19%) 13.49% 5.72% 20.65% 1.22% 18.11% 4.10%#
======== ======== ======== ======== ======== ======== ========= ======== ============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... .60% .61% .63% .70% .97% 1.20% 1.25% 1.25% 1.25%*
======== ======== ======== ======== ======== ======== ========= ======== ============
Expenses......................... .60% .61% .63% .70% .97% 1.20% 1.50% 2.29% 1.25%*
======== ======== ======== ======== ======== ======== ========= ======== ============
Investment income-net............ 3.39% 4.22% 3.95% 3.20% 3.71% 4.16% 4.71% 4.71% 5.13%*
======== ======== ======== ======== ======== ======== ========= ======== ============
SUPPLEMENTAL DATA:
Net Assets, end of period (in
thousands).....................$ 212,047 $ 212,912 $ 158,951 $ 115,420 $ 24,918 $ 7,937 $ 5,675 $ 3,854 $ 2,276
======== ======== ======== ======== ======== ======== ========= ======== ============
Portfolio turnover............... 236.50% 38.40% 35.36% 12.55% 36.34% 50.82% 23.52% 37.60% 2.04%
======== ======== ======== ======== ======== ======== ========= ======== ============
Average commission rate paid##...$ .0610 -- -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ========= ======== ============
_________________________________
* Annualized.
** Total Investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the American Balanced Fund is to seek a level
of current income and a degree of stability of principal not normally available
from an investment solely in equity securities and the opportunity for capital
appreciation greater than is normally available from an investment solely in
debt securities by investing in a balanced portfolio of fixed income and equity
securities. This investment objective is a fundamental policy and may not be
changed without a vote of the majority of the outstanding shares of the
American Balanced Fund. The American Balanced Fund will seek current income by
investing a portion of its assets in a portfolio of intermediate to long-term
debt, convertible debt, non-convertible and convertible term preferred stock
and money market securities. The American Balanced Fund will seek capital
appreciation primarily by investing a portion of its assets in equity
securities, including perpetual preferred and convertible perpetual preferred
stock. At all times the Fund will maintain at least 25% of its net assets in
senior fixed income securities. As a non-fundamental policy, the Fund is
not permitted to invest in securities of foreign issuers. There can be
no assurance that the American Balanced Fund will achieve its investment
objective.
The Fund will normally limit its allocation of assets to equity
securities to no more than 65% of its net assets. To the extent its equity
position exceeds this limitation, because of changes in the value of portfolio
securities or otherwise, the Fund will seek to reduce its equity position to
less than 65% of net assets by selling such securities at such times and in
such amounts as management of the Company deems appropriate in light of market
conditions and other pertinent factors. SEE "DIVIDENDS, DISTRIBUTIONS AND
TAXES-TAX TREATMENT OF THE COMPANY" IN THE APPENDIX TO THIS PROSPECTUS.
The American Balanced Fund will generally emphasize investment in common
stocks of larger-capitalization issuers and in investment-grade debt
obligations. The Fund may also seek to enhance the return on its common stock
portfolio by writing covered call options listed on United States securities
exchanges. Under unusual market or economic conditions, the Fund for defensive
purposes may invest up to 100% of its assets in short-term U.S. Government or
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash.
OTHER INVESTMENTS AND RISKS
The American Balanced Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund is also
permitted to invest in securities issued by foreign issuers and is authorized
to write (i.e., sell) call options on securities held in its portfolio or
securities indices the performance of which is substantially correlated with
securities held in its portfolio. The foregoing investments should not be
construed as limiting the Fund's ability to invest in the other types of
securities discussed more generally in this Prospectus. A further discussion
of the foregoing investments and the risks associated with such investments is
set forth in the Appendix to this Prospectus, including Annex B of the Appendix
to this Prospectus, which includes a discussion of certain portfolio strategies
relating to options.
4
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Global Strategy Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
Merrill Lynch Global Strategy Focus Fund (the "Global Strategy Focus
Fund") is a non-diversified fund whose objective is high total investment
return by investing primarily in a portfolio of equity and fixed income
securities of U.S. and foreign issuers. The Global Strategy Focus Fund is a
separate fund of the Merrill Lynch Variable Series Funds, Inc. (the "Company"),
an open-ended management investment company that has a wide range of investment
objectives among its sixteen separate funds (hereinafter referred to as the
"Funds" or individually as a "Fund"). Two separate classes of common stock
("Common Stock"), Class A Common Stock and Class B Common Stock, are issued for
each Fund. The Company is offering shares of its Class B Common Stock for the
Global Strategy Focus Fund pursuant to this Prospectus. This Prospectus
consists of this five page document and the attached Appendix. For more
information on the Global Strategy Focus Fund's investment objective and
policies, please see page 4 of this document and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Global Strategy Focus Fund#
---------------------------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED FEBRUARY 28,
DECEMBER 31, 1992+ TO
--------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
--------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00
--------- -------- --------- -------- ------------
Investment income-net............. .28 .39 .30 .16 .13
Realized and unrealized gain
(loss) on investments and foreign
currency transactions-net......... 1.33 .82 (.48) 1.96 .13
--------- -------- --------- -------- ------------
Total from investment operations.. 1.61 1.21 (.18) 2.12 .26
--------- -------- --------- -------- ------------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income-net............. (.29) (.39) (.21) (.17) (.04)
Realized gain on investments-net.. -- -- (.04) -- --
In excess of realized gain on
investments-net................... -- -- ++ (.01) -- --
--------- -------- --------- --------- ------------
Total dividends and distributions. (.29) (.39) (.26) (.17) (.04)
--------- -------- --------- -------- ------------
Net asset value, end of year...... $ 13.87 $ 12.55 $ 11.73 $ 12.17 $ 10.22
========= ======== ========= ======== ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 13.17% 10.60% (1.46)% 21.03% 2.62%##
========= ======== ========= ======== ============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.... .71% .72% .77% .88% 1.25%*
========= ======== ========= ======== ============
Expenses.......................... .71% .72% .77% .88% 1.35%*
========= ======== ========= ======== ============
Investment income-net............. 2.68% 3.33% 2.85% 2.41% 2.66%*
========= ======== ========= ======== ============
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................ $ 870,203 $ 540,242 $ 515,407 $ 269,627 $ 15,527
========= ======== ========= ========= ============
Portfolio turnover................ 173.44% 27.23% 21.03% 17.07% 14.47%
========= ======== ========= ======== ============
Average commission rate paid***... $ .0143 -- -- -- --
========= ======== ========= ======== ============
</TABLE>
______________
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for
purchases and sales of equity securities. The "Average Commission Rate
Paid" includes commissions paid in foreign currencies, which have been
converted into U.S. dollars using the prevailing exchange rate on the
date of the transaction. Such conversions may significantly affect the
average rate shown.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# On December 6, 1996, the Global Strategy Focus Fund acquired
substantially all of the assets and assumed substantially all the
liabilities of the Flexible Strategy Fund, a separate Fund of the
Company.
## Aggregate total investment return.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
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. There can be no assurance that the Global Strategy Focus
Fund will achieve its investment objective. Investing on an international basis
involves special considerations. SEE "OTHER INVESTMENTS AND RISKS" BELOW.
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, the Far East and Latin America. 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
Merrill Lynch Asset Management L.P. (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.
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be rated BBB or better by Standard and Poor's
Ratings Group ("Standard & Poor's") or Baa or better by Moody's Investors
Service, Inc. ("Moody's") or, in the opinion of the Investment Adviser, 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, money market securities or
other fixed income securities deemed by the Investment Adviser to be consistent
with a defensive posture, or may hold its assets in cash.
The Global Strategy Focus Fund may use derivatives in connection with
certain trading strategies. SEE ANNEX B OF THE APPENDIX TO THIS PROSPECTUS.
OTHER INVESTMENTS AND RISKS
The Global Strategy Focus Fund may purchase certain securities that are
not registered under the Securities Act of 1933, as amended. The Global
Strategy Focus Fund may invest in securities of foreign issuers and may
concentrate its investments in one or more countries. Investments in
foreign securities, particularly those of non-governmental issuers, involve
considerations and risks that 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, confiscatory taxation, high rates of inflation, 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. In addition, net investment income earned
by the Fund on a foreign security may be subject to withholding and other
taxes imposed by foreign governments, which will reduce the Fund's net
investment income. The Fund may also from time to time be substantially
invested in non-dollar-denominated securities of foreign issuers. 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. Furthermore, the 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. For additional information concerning
the risks of investing in foreign securities, SEE "OTHER PORTFOLIO
STRATEGIES-FOREIGN SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS.
4
<PAGE>
The Global Strategy Focus Fund may engage in transactions, such as
currency swaps and purchasing and selling options on currencies, for purposes
of hedging against the decline in the value of currencies in which its
portfolio holdings are denominated against the US dollar. The Fund is also
authorized to write (i.e., sell) call and put options on securities held in its
portfolio, securities indices the performance of which is substantially
correlated with securities held in its portfolio or on securities it intends to
purchase and to purchase put options on securities held in its portfolio and
may also invest in futures and in securities the potential return of which is
based on the change in particular measurements of value of rate (i.e. indexed
and inverse securities).
The foregoing investments should not be construed as limiting the Global
Strategy Focus Fund's ability to invest in the other types of securities
discussed more generally in this Prospectus. A further discussion of the
foregoing investments and the risks associated with such investments is set
forth in the Appendix to this Prospectus, including Annex B of the Appendix to
this Prospectus, which includes a discussion of certain portfolio strategies
relating to indexed and inverse securities, options, futures and foreign
exchange transactions.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Basic Value Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
__________________________
Merrill Lynch Basic Value Focus Fund (the "Basic Value Focus Fund") is a
diversified fund whose objectives are capital appreciation and, secondarily,
income by investing in securities, primarily equities, that management of the
Fund believes are undervalued and therefore represent basic investment value.
The Basic Value Focus Fund is a separate fund of the Merrill Lynch Variable
Series Funds, Inc. (the "Company"), an open-ended management investment company
that has a wide range of investment objectives among its sixteen separate funds
(hereinafter referred to as the "Funds" or individually as a "Fund"). Two
separate classes of common stock ("Common Stock"), Class A Common Stock and
Class B Common Stock, are issued for each Fund. The Company is offering shares
of its Class B Common Stock for the Basic Value Focus Fund pursuant to this
Prospectus. This Prospectus consists of this four page document and the
attached Appendix. For more information on the Basic Value Focus Fund's
investment objectives and policies, please see page 4 of this document and the
Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, the Class B Common Stock will be
subject to a distribution fee to which the Class A Common Stock was not subject
at an annual rate of 0.15% of the Fund's average daily net assets attributable
to Class B Common Stock. Further information about the performance of the
Company is contained in the Company's most recent annual report to
shareholders, which may be obtained, without charge, by calling or by writing
the Company at the telephone number or address on the front cover of this
Prospectus.
<TABLE>
<CAPTION>
Basic Value Focus Fund
---------------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED JULY 1,
DECEMBER 31, 1993+ TO
---------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 13.10 $ 11.10 $ 10.95 $ 10.00
----------- ---------- ---------- ------------
Investment income-net....................... .17 .18 .17 .04
Realized and unrealized gain on
investments-net............................. 2.37 2.49 .08 .91
----------- ---------- ---------- ------------
Total from investment operations............ 2.54 2.67 .25 .95
----------- ---------- ---------- ------------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income-net....................... (.18) (.19) (.10) --
Realized gain on investments-net............ (.72) (.48) -- --
----------- ---------- ---------- ------------
Total dividends and distributions........... (.90) (.67) (.10) --
----------- ---------- ---------- ------------
Net asset value, end of year................ $ 14.74 $ 13.10 $ 11.10 $ 10.95
=========== ========== ========== ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 20.69% 25.49% 2.36% 9.50%#
=========== ========== ========== ============
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .66% .66% .72% .86%
=========== ========== ========== ============
Investment income-net....................... 1.37% 1.68% 2.08% 1.69%*
=========== ========== ========== ============
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)...... $ 524,930 $ 306,463 $ 164,307 $ 47,207
=========== ========== ========== ============
Portfolio turnover.......................... 68.41% 74.10% 60.55% 30.86%
=========== ========== ========== ============
Average commission rate paid##.............. $ .0549 -- -- --
=========== ========== ========== ============
</TABLE>
_______________
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for
purchases and sales of equity securities.
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Basic Value Focus Fund are to seek
capital appreciation and, secondarily, income by investing in securities,
primarily equities, that management of the Fund believes are undervalued and
therefore represent basic investment value. There can be no assurance that the
Basic Value Focus Fund will achieve its investment objectives. The Fund seeks
special opportunities in securities that are selling at a discount, either from
book value or historical price-earnings ratios, or seem capable of recovering
from temporarily out of favor considerations. Particular emphasis is placed on
securities that provide an above-average dividend return and sell at a below-
average price-earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the
belief that the pricing mechanism of the securities market lacks total
efficiency and has a tendency to inflate prices of securities in favorable
market climates and depress prices of securities in unfavorable climates. Based
on this premise, management believes that favorable changes in market prices
are more likely to begin when securities are out of favor, earnings are
depressed, price-earnings ratios are relatively low, investment expectations
are limited, and there is no real general interest in the particular security
or industry involved. On the other hand, management believes that negative
developments are more likely to occur when investment expectations are
generally high, stock prices are advancing or have advanced rapidly, price-
earnings ratios have been inflated, and the industry or issue continues to gain
new investment acceptance on an accelerated basis. In other words, management
believes that market prices of securities with relatively high price-earnings
ratios are more susceptible to unexpected adverse developments while securities
with relatively low price-earnings ratios are more favorably positioned to
benefit from favorable, but generally unanticipated, events. This investment
policy departs from traditional philosophy. Management of the Fund believes
that the market risk involved in this policy is moderated somewhat by an
emphasis on securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation
of the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a
lesser extent, securities convertible into common stocks. THE BASIC VALUE FOCUS
FUND ALSO MAY INVEST IN PREFERRED STOCKS AND NON-CONVERTIBLE DEBT SECURITIES
RATED INVESTMENT GRADE AND UTILIZE COVERED CALL OPTIONS WITH RESPECT TO
PORTFOLIO SECURITIES AS DESCRIBED IN ANNEX B TO THE APPENDIX OF THIS
PROSPECTUS. The Fund reserves the right as a defensive measure to hold other
types of securities, including U.S. Government and Government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or cash, in
such proportions as, in the opinion of management, prevailing market or
economic conditions warrant. The Fund may invest up to 10% of its total assets,
taken at market value at the time of acquisition, in the securities of foreign
issuers.
OTHER INVESTMENTS AND RISKS
The Basic Value Focus Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund is also
authorized to write (i.e., sell) call options on securities held in its
portfolio or securities indices the performance of which is substantially
correlated with securities held in its portfolio. The foregoing investments
should not be construed as limiting the Fund's ability to invest in the other
types of securities discussed more generally in this Prospectus. A further
discussion of the foregoing investments and the risks associated with such
investments is set forth in the Appendix to this Prospectus, including Annex B
of the Appendix to this Prospectus, which includes a discussion of certain
portfolio strategies relating to options.
4
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Global Bond Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
________________________
Merrill Lynch Global Bond Focus Fund, formerly, the Merrill Lynch World
Income Focus Fund, (the "Global Bond Focus Fund") is a non-diversified fund
whose objective is high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multinational currency units. The Global Bond Focus Fund is a
separate fund of the Merrill Lynch Variable Series Funds, Inc. (the "Company"),
an open-ended management investment company that has a wide range of investment
objectives among its sixteen separate funds (hereinafter referred to as the
"Funds" or individually as a "Fund"). Two separate classes of common stock
("Common Stock"), Class A Common Stock and Class B Common Stock for the Global
Bond Focus are issued for each Fund. The Company is offering shares of its
Class B Common Stock pursuant to this Prospectus. This Prospectus consists of
this six page document and the attached Appendix. For more information on the
Global Bond Focus Fund's investment objective and policies, please see page 4
of this document and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Global Bond Focus Fund#
-----------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED JULY 1,
DECEMBER 31, 1993+ TO
-------------------------------------------------- DECEMBER 31,
1996++ 1995++ 1994 1993
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............... $ 9.79 $ 9.17 $ 10.38 $ 10.00
----------- ----------- ----------- ------------
Investment income-net............................ .78 .85 .76 .25
Realized and unrealized gain (loss) on investments
and foreign currency transactions-net............ (.03) .61 (1.19) .33
----------- ----------- ----------- ------------
Total from investment operations................. .75 1.46 (.43) .58
----------- ----------- ----------- ------------
Less dividends and distributions:
Investment income-net........................ (.78) (.84) (.76) (.20)
In excess of realized gain on investments-net -- -- (.02) --
----------- ----------- ----------- ------------
Total dividends and distributions................ (.78) (.84) (.78) (.20)
----------- ----------- ----------- ------------
Net asset value, end of year..................... $ 9.76 $ 9.79 $ 9.17 $ 10.38
----------- ----------- ----------- ------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 8.02% 16.69% (4.21)% 5.90%##
=========== =========== =========== ============
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................... .69% .68% .75% .94%*
=========== =========== =========== ============
Investment income-net............................ 7.95% 8.99% 8.01% 6.20%*
=========== =========== =========== ============
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)........... $ 93,790 $ 81,845 $ 75,150 $ 50,737
=========== =========== =========== ============
Portfolio turnover............................... 267.13% 132.57% 117.58% 54.80%
=========== =========== =========== ============
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# In connection with its reorganization on December 6, 1996, the Global
Bond Focus Fund (i) acquired substantially all of the assets and
assumed substantially all the liabilities of the International Bond
Fund, a separate Fund of the Company, (ii) implemented a change in its
investment objective and policies from seeking high current income from
a global portfolio of fixed income securities, including non-investment
grade securities, to seeking a high total investment return by
investing in a global portfolio of investment grade fixed income
securities and (iii) changed its name from the World Income Focus Fund
to its current name. For the period from the commencement of the
Fund's operations through its reorganization on December 6, 1996, the
portfolio of the Fund included debt securities rated below investment
grade (I.E., junk bonds).
## Aggregate total investment return.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Global Bond Focus Fund is to seek to
provide shareholders a high total investment return by investing in a global
portfolio of fixed income securities denominated in various currencies,
including multi-national currency units. The Fund will, under normal
conditions, invest at least 90% of its total assets in such fixed income
securities. In pursuing its investment objective, the Global Bond Focus Fund
will allocate its investments among different types of fixed income securities
denominated in various currencies based upon Merrill Lynch Asset Management
L.P.'s (the "Investment Adviser") analysis of the yield, maturity, potential
appreciation and currency considerations affecting such securities. There can
be no assurance that the Global Bond Focus Fund will achieve its investment
objective. INVESTING ON AN INTERNATIONAL BASIS INVOLVES SPECIAL
CONSIDERATIONS. SEE "OTHER INVESTMENTS AND RISKS" BELOW. The Fund should be
considered as a long-term investment and a vehicle for diversification and not
as a balanced investment program.
The Global Bond Focus Fund may invest in United States and foreign
government and corporate fixed income securities that have a credit rating of A
or better by Standard & Poor's Rating Group ("Standard & Poor's") or by Moody's
Investors Service, Inc. ("Moody's") or commercial paper rated A-1 by Standard &
Poor's or Prime-1 by Moody's or obligations that the Investment Adviser has
determined to be of similar creditworthiness. The Fund may purchase fixed
income securities issued by United States or foreign corporations or financial
institutions, including debt securities of all types and maturities,
convertible securities and preferred stocks. The Fund also may purchase
securities issued or guaranteed by United States or foreign governments
(including foreign states, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities") or issued or guaranteed by
international organizations designated or supported by multiple governmental
entities to promote economic reconstruction or development ("supranational
entities").
INTERNATIONAL INVESTING. The Global Bond Focus Fund may invest in fixed
income securities denominated in any currency or multinational currency unit.
An illustration of a multinational currency unit is the European Currency Unit
("ECU"), which is a "basket" consisting of specified amounts of the currencies
of certain of the twelve member states of the European Community, a Western
European economic cooperative association including France, Germany, the
Netherlands and the United Kingdom. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Community to reflect changes in relative values of the underlying currencies.
The Investment Adviser does not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranational entities (described further below), in
particular, issue ECU-denominated obligations. The Fund may invest in
securities denominated in the currency of one nation although issued by a
governmental entity, corporation or financial institution of another nation.
For example, the Fund may invest in a British pound sterling-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated. SEE "OTHER INVESTMENTS AND
RISKS" BELOW.
It is anticipated that under current conditions the Global Bond Focus
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 Global
Bond Focus Fund will invest in foreign government securities of issuers
considered stable by the Investment Adviser. While investments in foreign
government debt securities may involve special risks, 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. SEE "OTHER PORTFOLIO STRATEGIES - FOREIGN SECURITIES" IN THE
APPENDIX TO THIS PROSPECTUS.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The government
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
ALLOCATION OF INVESTMENTS. In seeking to meet its investment objective,
high current income will only be one of the factors that the Investment Adviser
will consider in selecting portfolio securities for the Global Bond Focus Fund.
As a general matter, in evaluating investments for the Fund, the Investment
Adviser will consider, among other factors, the relative levels of interest
rates prevailing in various countries, the potential appreciation of such
investments in their denominated currencies and, for debt instruments not
denominated in U.S. dollars, the potential movement in the value of such
currencies compared to the U.S. dollar. Additionally, the Fund, in seeking
capital appreciation, may invest in relatively low yielding instruments in
expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
The average maturity of the Global Bond Focus Fund's portfolio securities
will vary based upon the Investment Adviser's assessment of economic and market
conditions. As with all fixed income securities, changes in market yields will
affect the Fund's asset value as the prices of portfolio securities generally
increase when interest rates decline and decrease when interest rates rise.
Prices of longer-term securities generally fluctuate more in response to
interest rate changes than do shorter-term securities. The Global Bond Focus
Fund does not expect the average maturity of its portfolio to exceed ten years.
4
<PAGE>
OTHER INVESTMENTS AND RISKS
The Global Bond Focus Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund may invest
in securities of foreign issuers. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations and
risks that 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, confiscatory
taxation, high rates of inflation, 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. In addition, net
investment income earned by the Fund on a foreign security may be subject to
withholding and other taxes imposed by foreign governments, which will reduce
the Fund's net investment income. The Global Bond Focus Fund may also from
time to time be substantially invested in non-dollar-denominated securities of
foreign issuers. The value of the Global Bond Focus Fund's holdings
denominated in currencies other than the U.S. dollar and the unrealized
appreciation or depreciation of those investments insofar as United States
investors are concerned will be affected by changes in the value of such
currencies relative to the U.S. dollar. Furthermore, the 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. Such currency fluctuations may have a substantial
impact on the value of the Fund's holdings. The Fund may engage in
transactions, such as currency swaps and purchasing and selling options on
currencies, for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the US
dollar. Although such instruments will be used with the intention of hedging
against adverse currency movements, transactions in such instruments involve
the risk that anticipated currency movements will not be accurately predicted
and that the Fund's hedging strategies will be ineffective and may cause the
Fund to realize losses. The Global Bond Focus Fund may also invest in debt
securities issued by foreign governments. SEE "OTHER PORTFOLIO STRATEGIES -
FOREIGN SECURITIES" IN THE APPENDIX AND ANNEX B OF THE APPENDIX TO THIS
PROSPECTUS.
The Global Bond Focus Fund is authorized to write (i.e., sell) call and
put options on securities held in its portfolio or securities indices the
performance of which is substantially correlated with securities held in its
portfolio and may engage in transactions in futures.
The foregoing investments should not be construed as limiting the Fund's
ability to invest in the other types of securities discussed more generally in
this Prospectus. A further discussion of the foregoing investments and the
risks associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus, which
includes a discussion of certain portfolio strategies relating to options and
futures.
5
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Global Utility Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
_______________________
Merrill Lynch Global Utility Focus Fund, (the "Global Utility Focus
Fund") is a diversified fund whose objective is capital appreciation and
current income through investment of at least 65% of its total assets in equity
and debt securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser (defined below), primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. The Global Utility Focus Fund
is a separate fund of the Merrill Lynch Variable Series Funds, Inc. (the
"Company"), an open-ended management investment company that has a wide range
of investment objectives among its sixteen separate funds (hereinafter referred
to as the "Funds" or individually as a "Fund"). Two separate classes of common
stock ("Common Stock"), Class A Common Stock and Class B Common Stock, are
issued for each Fund. The Company is offering shares of its Class B Common
Stock for the Global Utility Focus Fund pursuant to this Prospectus. This
Prospectus consists of this eight page document and the attached Appendix. For
more information on the Global Utility Focus Fund's investment objective and
policies, please see page 4 of this document and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Global Utility Focus Fund
---------------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED JULY 1,
DECEMBER 31, 1993+ TO
----------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.30 $ 9.45 $ 10.66 $ 10.00
----------- ------------ ----------- -------------
Investment income-net......................... .46 .45 .35 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions-net............................ .95 1.79 (1.25) .64
----------- ------------ ----------- -------------
Total from investment operations.............. 1.41 2.24 (.90) .68
----------- ------------ ----------- -------------
LESS DIVIDENDS:
Investment income-net......................... (.52) (.39) (.29) (.02)
In excess of realized gain on investments-net. -- -- (.02) --
----------- ------------ ----------- -------------
Total dividends............................... (.52) (.39) (.31) (.02)
----------- ------------ ----------- -------------
Net asset value, end of year.................. $ 12.19 $ 11.30 $ 9.45 $ 10.66
=========== ============ =========== =============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ 12.96% 24.33% (8.51)% 6.85%#
=========== ============ =========== =============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................ .66% .66% .73% .89%*
=========== ============ =========== =============
Expenses...................................... .66% .66% .73% .89%*
=========== ============ =========== =============
Investment income-net......................... 3.90% 4.44% 3.68% 2.84%*
=========== ============ =========== =============
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)........ $ 142,438 $ 148,225 $ 126,243 $ 104,517
=========== ============ =========== =============
Portfolio turnover............................ 11.39% 11.05% 9.52% 1.72%
=========== ============ =========== =============
Average commission rate paid***............... $ .0522 -- -- --
=========== ============ =========== =============
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for
purchases and sales of equity securities. The "Average Commission Rate
Paid" includes commissions paid in foreign currencies, which have been
converted into U.S. dollars using the prevailing exchange rate on the
date of the transaction. Such conversions may significantly affect the
average rate shown.
+ Commencement of Operations.
# Aggregate total investment return.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of Merrill Lynch Asset Management, L.P.
(the "Investment Adviser"), primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. There can be no assurance that the Global
Utility Focus Fund will achieve its investment objective. The Fund may employ
a variety of instruments and techniques to enhance income and to hedge against
market and currency risk, as described in Annex B to the Appendix to this
Prospectus. INVESTING ON AN INTERNATIONAL BASIS INVOLVES SPECIAL
CONSIDERATIONS. SEE "OTHER INVESTMENTS AND RISKS" BELOW.
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a temporary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash
in such proportions as, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. Except during temporary defensive
periods, such securities or cash will not exceed 20% of its total assets. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
issuers domiciled in at least three countries, one of which may be the United
States, although the Investment Adviser expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at
times the Fund may have 65% or more of its total assets invested in foreign
securities.
The Global Utility Focus Fund will invest in common stocks (including
preferred or debt securities convertible into common stocks), preferred stocks
and debt securities. The relative weightings among common stocks, debt
securities and preferred stocks will vary from time to time based upon the
Investment Adviser's judgment of the extent to which investments in each
category will contribute to meeting the Fund's investment objective. Fixed
income securities in which the Fund will invest generally will be limited to
those rated investment grade, that is, rated in one of the four highest rating
categories by Standard & Poor's Ratings Group ("Standard & Poor's") or Moody's
Investors Service, Inc. ("Moody's") (i.e., securities rated at least BBB by
Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in
the judgment of the Investment Adviser. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to
Standard & Poor's, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal. The Fund's commercial paper investments at the time of
purchase will be rated "A-1" or "A-2" by Standard & Poor's or "Prime-1" or
"Prime-2" by Moody's or, if not rated, will be of comparable quality as
determined by the Investment Adviser. The Fund may also invest up to 5% of its
total assets at the time of purchase in fixed income securities having a
minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The
Fund may, but need not, dispose of any security if it is subsequently
downgraded. For a description of ratings of debt securities, see Annex A to
the Appendix to this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. Generally, ADRs, which are
issued in registered form, are designated for use in the United States
securities markets, and EDRs, which are issued in bearer form, are designed for
use in European securities markets. The Fund may invest in ADRs and EDRs
through both sponsored and unsponsored arrangements. In a sponsored ADR or EDR
arrangement, the foreign issuer assumes the obligation to pay some or all of
the depository's transaction fees, whereas in an unsponsored arrangement the
foreign issuer assumes no obligations and the depository's transaction fees are
4
<PAGE>
paid by the ADR or EDR holders. Foreign issuers in respect of whose securities
unsponsored ADRs or EDRs have been issued are not necessarily obligated to
disclose material information in the markets in which the unsponsored ADRs or
EDRs are traded and, therefore, there may not be a correlation between such
information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
UTILITY INDUSTRIES-DESCRIPTION AND RISKS. Under normal circumstances, the
Global Utility Focus Fund will invest at least 65% of its total assets in
common stocks (including preferred or debt securities convertible into common
stocks), debt securities and preferred stocks of domestic and/or foreign
companies in the utility industries. To meet its objective of current income,
the Fund may invest in domestic utility companies that pay higher than average
dividends, but have a lesser potential for capital appreciation. The average
dividend yields of common stocks issued by domestic utility companies
historically have significantly exceeded those of industrial companies' common
stocks, while the prices of domestic utility stocks have tended to be less
volatile than stocks of industrial companies. The Investment Adviser believes
that the average dividend yields of common stocks issued by foreign utility
companies have also historically exceeded those of foreign industrial
companies' common stocks. To pursue its objective of capital appreciation, the
Fund may invest in foreign utility companies that pay lower than average
dividends, but have a greater potential for capital appreciation.
The utility companies in which the Fund will invest include companies
that are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Investments in utility industries bear certain risks, including
difficulty in obtaining an adequate return on invested capital, difficulty in
financing large construction programs during an inflationary period,
restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation, difficulty in raising capital in
adequate amounts on reasonable terms in periods of high inflation and
unsettled capital markets, technological innovations which may render existing
plants, equipment or products obsolete, the potential impact of natural or man-
made disasters, increased costs and reduced availability of certain types of
fuel, occasionally reduced availability and high costs of natural gas for
resale, the effects of energy conservation, the effects of a national energy
policy and lengthy delays and greatly increased costs and other problems
associated with design, construction, licensing, regulation and operation of
nuclear facilities for electric generation, including, among other
considerations, the problems associated with the use of radioactive materials
and the disposal of radioactive wastes. There are substantial differences
between the regulatory practices and policies of various jurisdictions, and any
given regulatory agency may make major shifts in policy from time to time.
There is no assurance that regulatory authorities will, in the future, grant
rate increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Additionally, existing and possible future
regulatory legislation may make it even more difficult for these utilities to
obtain adequate relief. Certain of the issuers of securities in the portfolio
may own or operate nuclear generating facilities. Governmental authorities may
from time to time review existing policies, and impose additional requirements
governing the licensing, construction and operation of nuclear power plants.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in
foreign countries with the intention of protecting the public while ensuring
that the rate of return earned by utility companies is sufficient to allow them
to attract capital in order to grow and continue to provide appropriate
services. There can be no assurance that such pricing policies or rates of
return will continue in the future. The nature of regulation of the utility
industries is evolving both in the United States and in foreign countries.
Changes in regulation in the United States increasingly allow utility
companies to provide services and products outside their traditional geographic
areas and lines of business, creating new areas of competition within the
industries. In some instances, utility companies are operating on an
unregulated basis. Because of trends toward deregulation and the evolution of
independent power producers as well as new entrants to the field of
telecommunications, non-regulated providers of utility services have become a
significant part of their respective industries. The Investment Adviser
believes that the emergence of competition and deregulation will result in
certain utility companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
businesses from increased competition and may be less profitable. The
Investment Adviser seeks to take advantage of favorable investment
opportunities that are expected to arise from these structural changes. Of
course, there can be no assurance that favorable developments will occur in the
future.
5
<PAGE>
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The principal sectors of the global utility industries are discussed
below.
ELECTRIC. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies, in general, recently have been favorably affected
by lower fuel and financing costs and the full or near completion of major
construction programs. In addition, certain of these companies generate cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates
have declined, many utilities have refinanced high cost debt and in doing so
have improved their fixed charges coverage. Regulators, however, have lowered
allowed rates of return as interest rates have declined and thereby caused the
benefits of the rate declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of,
the Nuclear Regulatory Commission and state agencies having comparable
jurisdiction. Increased scrutiny might result in higher operating costs and
higher capital expenditures, with the risk that the regulators may disallow
inclusion of these costs in rate authorizations or the risk that a company may
not be permitted to operate or complete construction of a facility. In
addition, operators of nuclear power plants may be subject to significant costs
for disposal of nuclear fuel and for decommissioning of such plants.
In October 1993, Standard & Poor's stiffened its debt-ratings formula for
the electric utility industry, stating that the industry is in long-term
decline. In addition, Moody's stated that it expected a drop in the next three
years in its average credit ratings for the industry. Reasons set forth for
these outlooks included slowing demand and increasing cost pressures as a
result of competition from rival providers.
TELECOMMUNICATIONS. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access
to the telephone networks comprise the greatest portion of this segment.
Telephone companies in the United States are still experiencing the effects of
the breakup of American Telephone & Telegraph Company, which occurred in 1984.
Since 1984, companies engaged in telephone communication services have expanded
their non-regulated activities into other businesses, including cellular
telephone services, data processing, equipment retailing, computer software and
hardware services, and financial services. This expansion has provided
significant opportunities for certain telephone companies to increase their
earnings and dividends at faster rates than had been allowed in traditional
regulated businesses. Increasing competition, technological innovations and
other structural changes, however, could adversely affect the profitability of
such utilities. Technological breakthroughs and the merger of
telecommunications with video and entertainment is now associated with the
expansion of the role of cable companies as providers of utility services in
the telecommunications industry and the competitive response of traditional
telephone companies. Given mergers and certain marketing tests currently
underway, it is likely that both traditional telephone companies and cable
companies will soon provide a greatly expanded range of utility services,
including two-way video and informational services.
6
<PAGE>
GAS. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decades, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition.
WATER. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth.
INVESTMENT OUTSIDE THE UTILITY INDUSTRIES. The Global Utility Focus Fund
is permitted to invest up to 35% of its assets in securities of issuers that
are outside the utility industries. Such investments may include common stocks,
debt securities or preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies. Some of these
issuers may be in industries related to utility industries and, therefore, may
be subject to similar risks. Securities that are issued by foreign companies or
are denominated in foreign currencies are subject to certain risks. SEE "OTHER
INVESTMENTS AND RISKS" BELOW.
The Global Utility Focus Fund is also permitted to invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and in securities issued or guaranteed by foreign governments. Foreign
government securities are typically denominated in foreign currencies and are
subject to the currency fluctuation and other risks of foreign securities
investments. The foreign government securities in which the Fund intends to
invest generally will consist of obligations supported by national, state or
local governments or similar political subdivisions. Foreign government
securities also include debt obligations of supranational entities, including
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank.
Foreign government securities also include debt securities of "quasi-
governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by
entities owned by either a national or local government or are obligations of a
political unit that is not backed by the national government's full faith and
credit and general taxing powers. Foreign government securities will not be
considered government securities for purposes of determining the Fund's
compliance with diversification and concentration policies.
7
<PAGE>
OTHER INVESTMENTS AND RISKS
The Global Utility Focus Fund may purchase certain securities that are
not registered under the Securities Act of 1933, as amended. The Global
Utility Focus Fund may invest in securities of foreign issuers. Investments
in foreign securities, particularly those of non- governmental issuers,
involve considerations and risks that 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, confiscatory taxation, high rates of inflation, 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. In addition, net investment income
earned by the Fund on a foreign security may be subject to withholding and
other taxes imposed by foreign governments which will reduce the Fund's net
investment income. The Global Utility Focus Fund may from time to time be
substantially invested in non-dollar-denominated securities of foreign issuers.
Changes in the 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. Furthermore, the
Fund's return on investments in non-dollar-denominated securities may be
reduced or enhanced as a result of changes in foreign currency rates during the
period in which the Fund holds such investments. The Global Utility Focus Fund
may also engage in transactions, such as currency swaps and purchasing and
selling options on currencies, for purposes of hedging against the decline in
the value of currencies in which its portfolio holdings are denominated against
the US dollar. Although such instruments will be used with the intention of
hedging against adverse currency movements, transactions in such instruments
involve the risk that anticipated currency movements will not be accurately
predicted and that the Fund's hedging strategies will be ineffective and may
cause the Fund to realize losses. SEE "OTHER PORTFOLIO STRATEGIES - FOREIGN
SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS.
The Global Utility Focus Fund may from time to time enter into standby
commitment agreements, engage in transactions in futures, invest in securities
the potential return of which is based on the change in particular measurements
of value or rate (i.e. indexed and inverse securities), and, is authorized to
write (i.e., sell) call and put options on securities held in its portfolio or
securities indices the performance of which is substantially correlated with
securities held in its portfolio, and to purchase put options on securities
held in its portfolio.
The foregoing investments should not be construed as limiting the Fund's
ability to invest in the other types of securities discussed more generally in
this Prospectus. A further discussion of the foregoing investments and the
risks associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus, which
includes a discussion of certain portfolio strategies relating to indexed and
inverse securities, options, futures and foreign exchange transactions.
8
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch International Equity Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
__________________________
Merrill Lynch International Equity Focus Fund, (the "International Equity
Focus Fund") is a diversified fund whose objectives are capital appreciation
and, secondarily, income, through investment in securities, principally
equities, of issuers in countries other than the United States. The
International Equity Focus Fund is a separate fund of the Merrill Lynch
Variable Series Funds, Inc. (the "Company"), an open-ended management
investment company that has a wide range of investment objectives among its
sixteen separate funds (hereinafter referred to as the "Funds" or individually
as a "Fund"). Two separate classes of common stock ("Common Stock"), Class A
Common Stock and Class B Common Stock, are issued for each Fund. The Company
is offering shares of its Class B Common Stock for the International Equity
Focus Fund pursuant to this Prospectus. This Prospectus consists of this six
page document and the attached Appendix. For more information on the
International Equity Focus Fund's investment objectives and policies, please
see page 4 of this documents and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
International Equity Focus Fund
------------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED JULY 1,
DECEMBER 31, 1993+ TO
----------------------------------------------- DECEMBER 31,
1996++ 1995 1994 1993
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.06 $ 10.90 $ 11.03 $ 10.00
--------- --------- --------- ------------
Investment income-net............................. .23 .20 .19 .01
Realized and unrealized gain (loss) on investments
and foreign currency transactions-net............. .49 .37 (.13) 1.02
--------- --------- --------- ------------
Total from investment operations.................. .72 .57 .06 1.03
--------- --------- --------- ------------
Less dividends and distributions:
Investment income-net......................... (.15) (.01) (.18) --
Realized gain on investments-net.............. -- (.17) (.01) --
In excess of realized gain on investments-net. -- (.23) -- --
--------- --------- --------- ------------
Total dividends and distributions................ (.15) (.41) (.19) --
Net asset value, end of period................... $ 11.63 $ 11.06 $ 10.90 $ 11.03
========= ========= ========= ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 6.62% 5.48% .55% 10.30%#
========= ========= ========= ============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................... .89% .89% .97% 1.14%*
========= ========= ========= ============
Expenses......................................... .89% .89% .97% 1.14%*
========= ========= ========= ============
Investment income-net............................ 1.96% 1.95% 1.09% .30%*
========= ========= ========= ============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $ 349,080 $ 265,602 $ 247,884 $ 76,906
========= ========= ========= ============
Portfolio turnover............................... 49.87% 100.02% 58.84% 17.39%
========= ========= ========= ============
Average commission rate paid***.................. $ .0004 -- -- --
========= ========= ========= ============
</TABLE>
_____________
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
*** For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for
purchases and sales of equity securities. The "Average Commission Rate
Paid" includes commissions paid in foreign currencies, which have been
converted into U.S. dollars using the prevailing exchange rate on the
date of the transaction. Such conversions may significantly affect the
average rate shown.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the International Equity Focus Fund are to
seek capital appreciation and, secondarily, income by investing in a
diversified portfolio of equity securities of issuers located in countries
other than the United States. Under normal conditions, at least 65% of the
Fund's net assets will be invested in such equity securities and at least 65%
of the Fund's total assets will be invested in the securities of issuers from
at least three different foreign countries. 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
International Equity Focus Fund will achieve its investment objectives. The
Fund may employ a variety of investments and techniques to hedge against market
and currency risk. See Annex B of the Appendix to this Prospectus. INVESTING
ON AN INTERNATIONAL BASIS INVOLVES SPECIAL CONSIDERATIONS. INVESTING IN SMALLER
CAPITAL MARKETS ENTAILS THE RISK OF SIGNIFICANT VOLATILITY IN THE FUND'S
SECURITY PRICES. The Fund is designed for investors seeking to complement
their U.S. holdings through foreign investments. The International Equity Focus
Fund should be considered as a long-term investment and a vehicle for
diversification and not as a balanced investment program.
The International Equity Focus Fund will invest in an international
portfolio of securities of foreign companies located throughout the world.
While there are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. For the reasons stated below, management of the Fund will give special
attention to investment opportunities in the developing countries of the world,
including, but not limited to Latin America, the Far East and Eastern Europe.
It is anticipated that a significant portion of the Fund's assets may be
invested in such developing countries.
The allocation of the International Equity Focus Fund's assets among the
various foreign securities markets will be determined by Merrill Lynch Asset
Management, L.P. (the "Investment Adviser") based primarily on its assessment
of the relative condition and growth potential of the various economies and
securities markets, currency and taxation considerations and other pertinent
financial, social, national and political factors. Within such allocations,
the Investment Adviser will seek to identify equity investments in each market
that are expected to provide a total return that equals or exceeds the return
of such market as a whole.
A significant portion of the International Equity Focus Fund's assets may
be invested in developing countries. This allocation of the Fund's assets
reflects the belief that attractive investment opportunities may result from an
evolving long-term international trend favoring more market-oriented economies,
a trend that may especially benefit certain developing countries with smaller
capital markets. This trend may be facilitated by local or international
political, economic or financial developments that could benefit the capital
markets of such countries. Certain such countries, particularly so-called
4
<PAGE>
"emerging" countries (such as Malaysia, Mexico and Thailand), which may be in
the process of developing more market-oriented economies, may experience
relatively high rates of economic growth. Because of the general illiquidity of
the capital markets in certain developing countries, the Fund may invest in a
relatively small number of leading or relatively actively traded companies in
the capital markets of such a country in the expectation that the investment
experience of the securities of such companies will substantially represent the
investment experience of that country's capital markets as a whole.
While the International Equity Focus Fund will primarily emphasize
investments in common stock, the Fund may also invest in preferred stocks,
convertible debt securities and other instruments the return on which is linked
to the performance of a common stock or a basket or index of common stocks
(collectively, "equity securities"). The Fund may also invest in non-equity
securities, including debt securities, cash or cash equivalents denominated in
U.S. dollars or foreign currencies and short-term securities, including money
market instruments. Under certain adverse investment conditions, for defensive
purposes, the Fund may restrict the markets in which its assets will be
invested and may increase the proportion of assets invested in short-term
obligations of U.S. issuers. Investments made for defensive purposes will be
maintained only during periods in which the Investment Adviser determines that
economic or financial conditions are adverse for holding or being fully
invested in equity securities of foreign issuers.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, typically issued by an American bank or trust
company, that evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe that evidence a similar
ownership arrangement. GDRs are receipts issued throughout the world that
evidence a similar ownership arrangement. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets, and EDRs, in bearer form,
are designed for use in European securities markets. GDRs are tradeable both in
the U.S. and Europe and are designed for use throughout the world.
The International Equity Focus Fund also may invest up to 35% of its net
assets in longer-term, non-convertible debt securities emphasizing debt
securities which offer the opportunity for capital appreciation. Capital
appreciation in debt securities may arise as a result of a favorable change in
relative foreign exchange rates, in relative interest rate levels, or in the
creditworthiness of issuers. In accordance with its investment objective, the
Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The Fund may, from time to time, invest in debt
securities with relatively high yields (as compared to other debt securities
meeting the Fund's investment criteria), notwithstanding that the Fund may not
anticipate that such securities will experience substantial capital
appreciation. Such income can be used, however, to offset the operating
expenses of the Fund.
5
<PAGE>
The International Equity Focus Fund may invest in debt securities issued
or guaranteed by foreign governments (including foreign states, provinces and
municipalities) or their agencies and instrumentalities ("governmental
entities"), issued or guaranteed by international organizations designated or
supported by multiple foreign governmental entities (which are not obligations
of foreign governments) to promote economic reconstruction or development
("supranational entities"), or issued by foreign corporations or financial
institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
OTHER INVESTMENTS AND RISKS
The International Equity Focus Fund may purchase certain securities that
are not registered under the Securities Act of 1933, as amended.
The International Equity Focus Fund has established no rating criteria
for the debt securities in which it may invest, and such securities may not be
rated at all for creditworthiness. Securities rated in the medium to lower
rating categories of nationally recognized statistical rating organizations and
unrated securities of comparable quality are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of the security and generally involve a greater volatility of price
than securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The Investment
Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default or that the Investment Adviser believes will be in default. SEE "RISKS
OF HIGH YIELD SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS.
The Fund may invest in securities of foreign issuers. Investments in
foreign securities, particularly those of non-governmental issuers, involve
considerations and risks that 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,
confiscatory taxation, high rates of inflation, 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. In addition, net investment income earned by the Fund on a foreign
security may be subject to withholding and other taxes imposed by foreign
governments, which will reduce the Fund's net investment income. The Fund may
from time to time be substantially invested in non-dollar-denominated
securities of foreign issuers. 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. Furthermore, the 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. SEE "OTHER PORTFOLIO STRATEGIES - FOREIGN SECURITIES" IN THE
APPENDIX TO THIS PROSPECTUS.
The International Equity Focus Fund may engage in transactions, such as
currency swaps and purchasing and selling options on currencies, for purposes
of hedging against the decline in the value of currencies in which its
portfolio holdings are denominated against the US dollar. Although such
instruments will be used with the intention of hedging against adverse currency
movements, transactions in such instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the International
Equity Focus Fund's hedging strategies will be ineffective and may cause the
Fund to realize losses.
The International Equity Focus Fund may also invest a significant portion
of its assets in securities of foreign issuers in smaller capital markets.
Foreign investments involve risks that are often heightened for investments in
smaller capital markets. 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. Furthermore, smaller capital markets have substantially less
volume than United States markets so securities in many smaller capital markets
are less liquid and their prices may be more volatile than securities of
comparable United States companies. As a result, traditional investment
measurements, such as price/earnings ratios, as used in the United States, may
not be applicable in certain capital markets. SEE "OTHER PORTFOLIO STRATEGIES
- - FOREIGN SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS.
The International Equity Focus Fund is also authorized to write (i.e.,
sell) and purchase call and put options on securities held in its portfolio or
securities indices the performance of which is substantially correlated with
securities held in its portfolio, engage in transactions in futures and options
thereon, and may invest in securities the potential return of which is based on
the change in particular measurements of value or rate (i.e. indexed and
inverse securities).
The foregoing investments should not be construed as limiting the Fund's
ability to invest in the other types of securities discussed more generally in
this Prospectus. A further discussion of the foregoing investments and the
risks associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus, which
includes a discussion of certain portfolio strategies relating to indexed and
inverse securities, options, futures and foreign exchange transactions.
6
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Developing Capital Markets Focus Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
_______________________
Merrill Lynch Developing Capital Markets Focus Fund, (the "Developing
Capital Markets Focus Fund") is a non-diversified fund whose objective is long-
term capital appreciation by investing in securities, principally equities, of
issuers in countries having smaller capital markets.The Developing Capital
Markets Focus Fund is a separate fund of the Merrill Lynch Variable Series
Funds, Inc. (the "Company"), an open-ended management investment company that
has a wide range of investment objectives among its sixteen separate funds
(hereinafter referred to as the "Funds" or individually as a "Fund"). Two
separate classes of common stock ("Common Stock"), Class A Common Stock and
Class B Common Stock, are issued for each Fund. The Company is offering shares
of its Class B Common Stock for the Developing Capital Markets Focus Fund
pursuant to this Prospectus. This Prospectus consists of this six page
document and the attached Appendix. For more information on the Developing
Capital Markets Focus Fund's investment objective and policies, please see page
4 of this document and the Appendix.
THE DEVELOPING CAPITAL MARKETS FOCUS FUND INVESTS OR MAY INVEST IN HIGH
YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE
"INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS - RISKS OF HIGH YIELD
SECURITIES." IN THE APPENDIX TO THIS PROSPECTUS.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
BEGIN
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Developing Capital Markets
Focus Fund
---------------------------------------------------------------------
FOR THE
FOR THE YEAR ENDED PERIOD MAY 2,
DECEMBER 31, 1994+ TO
-------------------------------------------- DECEMBER 31,
1996 1995 1994
------------ ------------ --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.............. $ 9.32 $ 9.51 $ 10.00
------------ ------------ --------------
Investment income-net........................... .20 .20 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions-net.............................. .76 (.30) (.58)
------------ ------------ --------------
Total from investment operations................ .96 (.10) (.49)
------------ ------------ --------------
LESS DIVIDENDS:
Investment income-net........................... (.23) (.09) --
------------ ------------ --------------
Total dividends................................. (.23) (.09) --
------------ ------------ --------------
Net asset value, end of year.................... $ 10.05 $ 9.32 $ 9.51
============ ============ ==============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. 10.59% (1.08)% (4.90)%#
============ ============ ==============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................. 1.25% 1.25% 1.29%*
============ ============ ==============
Expenses........................................ 1.31% 1.36% 1.35%*
============ ============ ==============
Investment income-net........................... 2.42% 2.73% 2.18%*
============ ============ ==============
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).......... $ 95,599 $ 55,209 $ 36,676
============ ============ ==============
Portfolio turnover.............................. 87.33% 62.53% 29.79%
============ ============ ==============
Average commission rate paid***................. $ .0003 -- --
============ ============ ==============
</TABLE>
________________
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
*** For fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose its average commission rate per share for
purchases and sales of equity securities. The "Average Commission
Rate Paid" include currencies, which have been converted into U.S.
dollars. Such conversions may significantly affect the average rate
shown.
+ Commencement of Operations.
# Aggregate total investment return.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Developing Capital Markets Focus Fund is
to seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental policy
and may not be changed without approval of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund will achieve its investment
objective. The Developing Capital Markets Focus Fund may employ a variety of
investments and techniques to hedge against market and currency risk. See Annex
B to the Appendix to this Prospectus. INVESTING ON AN INTERNATIONAL BASIS
INVOLVES SPECIAL CONSIDERATIONS. INVESTING IN SMALLER CAPITAL MARKETS ENTAILS
THE RISK OF SIGNIFICANT VOLATILITY IN THE FUND'S SECURITY PRICES. SEE "OTHER
INVESTMENTS AND RISKS" BELOW. The Developing Capital Markets Focus Fund is
designed for investors seeking to complement their U.S. holdings through
foreign investments. The Developing Capital Markets Focus Fund should be
considered as a long-term investment and a vehicle for diversification and not
as a balanced investment program.
For purposes of its investment objective, the Developing Capital Markets
Focus Fund considers countries having smaller capital markets to be all
countries other than the four countries having the largest equity market
capitalizations. Currently, these four countries are Japan, the United Kingdom,
the United States and Germany. At December 31, 1996, those countries' equity
market capitalizations totalled approximately 69.84% of the world's equity
market capitalization according to data provided by Morgan Stanley Capital
International. The Fund will at all times, except during defensive periods,
maintain investments in at least three countries having smaller capital
markets.
The Developing Capital Markets Focus Fund seeks to benefit from economic
and other developments in smaller capital markets. The investment objective of
the Fund reflects the belief that investment opportunities may result from an
evolving long-term international trend favoring more market-oriented economies,
a trend that may especially benefit certain countries having smaller capital
markets. This trend may be facilitated by local or international political,
economic or financial developments that could benefit the capital markets of
such countries. Certain such countries, particularly so-called "emerging"
countries (such as Malaysia, Mexico and Thailand) which may be in the process
of developing more market-oriented economies, may experience relatively high
rates of economic growth. Other countries (such as France, the Netherlands and
Spain), although having relatively mature smaller capital markets, may also be
in a position to benefit from local or international developments encouraging
greater market orientation and diminishing governmental intervention in
economic affairs.
Many investors, particularly individuals, lack the information,
capability or inclination to invest in countries having smaller capital
markets. It also may not be permissible for such investors to invest directly
in certain such markets. Unlike many intermediary investment vehicles, such as
closed-end investment companies that invest in a single country, the Fund
intends to diversify investment risk among the capital markets of a number of
countries. The Fund will not necessarily seek to diversify investments on a
geographical basis or on the basis of the level of economic development of any
particular country.
4
<PAGE>
In its investment decision-making, Merrill Lynch Asset Management, L.P.
(the "Investment Adviser") will emphasize the allocation of assets among
certain countries' capital markets, rather than the selection of particular
industries or issuers. Because of the general illiquidity of the capital
markets in some countries, the Fund may invest in a relatively small number of
leading or actively traded companies in a country's capital markets in the
expectation that the investment experience of the securities of such companies
will substantially represent the investment experience of the country's capital
markets as a whole.
The Developing Capital Markets Focus Fund also may invest in debt
securities of issuers in countries having smaller capital markets. Capital
appreciation in debt securities may arise as a result of a favorable change in
relative foreign exchange rates, in relative interest rate levels, or in the
creditworthiness of issuers. In accordance with its investment objective, the
Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The Fund may, from time to time, invest in debt
securities with relatively high yields (as compared to other debt securities
meeting the Fund's investment criteria), notwithstanding that the Fund may not
anticipate that such securities will experience substantial capital
appreciation. SEE "OTHER INVESTMENTS AND RISKS" BELOW. Such income can be used,
however, to offset the operating expenses of the Fund.
The Developing Capital Markets Focus Fund may invest in debt securities
issued or guaranteed by foreign governments (including foreign states,
provinces and municipalities) or their agencies and instrumentalities
("governmental entities"), issued or guaranteed by international organizations
designated or supported by multiple foreign governmental entities (which are
not obligations of foreign governments) to promote economic reconstruction or
development ("supranational entities"), or issued by foreign corporations or
financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
For purposes of the Developing Capital Markets Focus Fund's investment
objective, an issuer ordinarily will be considered to be located in the country
where the primary trading market of its securities is located. The Fund,
however, may consider a company to be located in countries having smaller
capital markets, without reference to its domicile or to the primary trading
market of its securities, when at least 50% of its non-current assets,
capitalization, gross revenues or profits in any one of the two most recent
fiscal years represents (directly or indirectly through subsidiaries) assets or
activities located in such countries. The Fund also may consider closed-end
investment companies to be located in the country or countries in which they
primarily make their portfolio investments.
The Developing Capital Markets Focus Fund may invest a significant
portion of its assets in securities of foreign issuers in smaller capital
markets. Foreign investments involve risks, which are often heightened for
investments in smaller capital markets, including fluctuations in foreign
exchange rates, future political and economic developments, different legal
systems and the existence or possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. 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. SEE "OTHER INVESTMENTS AND RISKS" BELOW.
5
<PAGE>
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Furthermore, smaller capital markets have substantially less volume than United
States markets so securities in many smaller capital markets are less liquid
and their prices may be more volatile than securities of comparable United
States companies. SEE "OTHER PORTFOLIO STRATEGIES - FOREIGN SECURITIES" IN THE
APPENDIX TO THIS PROSPECTUS.
The Fund reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in countries having
smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or
foreign currencies) and short-term securities, including money market
securities. The Fund may invest in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") or other securities convertible
into securities of foreign issuers. The Fund may invest in unsponsored ADRs.
The issuers of unsponsored ADRs are not obligated to disclose material
information in the United States, and therefore there may not be a correlation
between such information and the market value of such ADRs.
OTHER INVESTMENTS AND RISKS
The Fund may purchase certain securities that are not registered under
the Securities Act of 1933, as amended.
The Developing Capital Markets Focus Fund has established no rating
criteria for the debt securities in which it may invest, and such securities
may not be rated at all for creditworthiness. Securities rated in the medium to
lower rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality are predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. In purchasing
such securities, the Fund will rely on the Investment Adviser's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of
such securities. The Investment Adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Fund does not intend to purchase debt
securities that are in default or which the Investment Adviser believes will be
in default. SEE "RISKS OF HIGH YIELD SECURITIES" IN THE APPENDIX TO THIS
PROSPECTUS.
The Developing Capital Markets Focus Fund may invest in securities of
foreign issuers. Investments in foreign securities, particularly those of non-
governmental issuers, involve considerations and risks that 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, confiscatory taxation, high rates of inflation,
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. In addition, net investment income
earned by the Fund on a foreign security may be subject to withholding and
other taxes imposed by foreign governments, which will reduce the Fund's net
investment income. The Fund may from time to time be substantially invested in
non-dollar-denominated securities of foreign issuers. 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. Furthermore, the 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. SEE "OTHER PORTFOLIO STRATEGIES -FOREIGN
SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS.
The Developing Capital Markets Focus Fund may engage in transactions,
such as currency swaps and purchasing and selling options on currencies, for
purposes of hedging against the decline in the value of currencies in which its
portfolio holdings are denominated against the US dollar. Although such
instruments will be used with the intention of hedging against adverse currency
movements, transactions in such instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective and may cause the Fund to realize losses.
The Developing Capital Markets Focus Fund may from time to time enter
into standby commitment agreements and is authorized to write (i.e., sell) and
purchase call and put options on securities held in its portfolio or securities
indices the performance of which is substantially correlated with securities
held in its portfolio, and may engage in transactions in futures.
The foregoing investments should not be construed as limiting the Fund's
ability to invest in the other types of securities discussed more generally in
this Prospectus. A further discussion of the foregoing investments and the
risks associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus, which
includes a discussion of certain portfolio strategies relating to options,
futures and foreign exchange transactions.
6
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Government Bond Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
Merrill Lynch Government Bond Fund, formerly, Merrill Lynch Intermediate
Government Bond Fund (the "Government Bond Fund") is a diversified fund whose
objective is the highest possible current income consistent with the protection
of capital afforded by investing in debt securities issued or guaranteed by the
United States Government, its agencies or instrumentalities. The Government
Bond Fund is a separate fund of the Merrill Lynch Variable Series Funds, Inc.
(the "Company"), an open-ended management investment company that has a wide
range of investment objectives among its sixteen separate funds (hereinafter
referred to as the "Funds" or individually as a "Fund"). Two separate classes
of common stock ("Common Stock"), Class A Common Stock and Class B Common
Stock, are issued for each Fund. The Company is offering shares of its Class B
Common Stock for the Government Bond Fund pursuant to this Prospectus. This
Prospectus consists of this four page document and the attached Appendix. For
more information on the Government Bond Fund's investment objective and
policies, please see page 4 of this document and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with annual audits of the financial statements of each of the
Company's Funds by Deloitte & Touche LLP, independent auditors. Financial
Statements and the independent auditors' report thereon for the fiscal year
ended December 31, 1996 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Company's audited financial statements. Because no
Shares of Class B Common Stock were in issue as of or prior to December 31,
1996, the information included in the table below relates to the Class A Common
Stock only. The information in the table below regarding the Fund's Class A
Common Stock should not be considered indicative of the results that the Fund's
Class B Common Stock would have achieved had the Class B Common Stock been
outstanding during the period shown below, because the Class B Common Stock
will be subject to a distribution fee to which the Class A Common Stock was not
subject at an annual rate of 0.15% of the Fund's average daily net assets
attributable to Class B Common Stock. Further information about the
performance of the Company is contained in the Company's most recent annual
report to shareholders, which may be obtained, without charge, by calling or by
writing the Company at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Government Bond Fund#
--------------------------------------------------------------
FOR THE
FOR THE PERIOD
YEAR MAY 2,
ENDED 1994+ TO
DECEMBER 31, DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 10.79 $ 9.97 $ 10.00
------------ ------------ -------------
Investment income-net................................ .65 .62 .25
Realized and unrealized gain (loss) on investments and
foreign currency transactions-net.................... (.36) .81 (.07)
------------ ------------ -------------
Total from investment operations..................... .29 1.43 .18
------------ ------------ -------------
Less dividends and distributions:
Investment income-net........................ (.64) (.61) (.21)
Realized gain on investments-net............. (.04) -- --
In excess of realized gain on investments-net -- -- --
------------ ------------ -------------
Total dividends and distributions.................... (.68) (.61) (.21)
------------ ------------ -------------
Net asset value, end of period....................... $ 10.40 $ 10.79 $ 9.97
============ ============ =============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 2.86% 14.83% 1.79%##
============ ============ =============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....................... .15% .00% .00%*
============ ============ =============
Expenses............................................. .59% .66% .80%*
============ ============ =============
Investment income-net................................ 6.39% 6.28% 4.66%*
============ ============ =============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $ 89,581 $ 40,996 $ 17,811
============ ============ =============
Portfolio turnover................................... 21.23% 45.39% 103.03%
============ ============ =============
</TABLE>
_______________
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# On December 6, 1996, the Government Bond Fund (i) implemented a change
in its investment objective so that the Fund may invest in any debt
securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities without regard to remaining maturity and
(ii) changed its name from the Intermediate Government Bond Fund to
its current name. For the period from the commencement of the Fund's
operations through December 6, 1996, the portfolio of the Fund
consisted primarily of intermediate-term debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
with a maximum maturity not to exceed fifteen years.
## Aggregate total investment return.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Government Bond Fund is to seek the
highest possible current income consistent with the protection of capital
afforded by investing in debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Under normal circumstances, all
or substantially all of the Fund's assets will be invested in such securities.
Depending on market conditions, an average maturity of six to fifteen years is
anticipated. When, in the opinion of management, prevailing market or economic
conditions warrant, a portion of the Fund may be invested in money market
securities or a liquid asset fund to effectively utilize cash reserves. There
can be no assurance that the Government Bond Fund will achieve its investment
objective.
Certain of the securities in which the Government Bond Fund invests are
supported by the full faith and credit of the U.S. Government, such as U.S.
Treasury obligations. Other of the securities in which the Fund invests are
not supported by the full faith and credit of the U.S. Government but are
issued by U.S. Government agencies, instrumentalities or government-sponsored
enterprises. Such securities are generally supported only by the credit of the
agency, instrumentality or enterprise issuing the security and are generally
considered to have a low principal risk. However, because of the longer-term
maturities of the securities in which the Fund will invest, interest rate
fluctuations may adversely affect the market value of such securities. As
interest rates rise, the value of fixed-income securities will fall, adversely
affecting the net asset value of the Fund.
The U.S. Treasury Department has enacted regulations prescribing
diversification standards to be met by investment company portfolios to which
the investment base for any variable annuity policy has been allocated as a
condition to such policies being treated as variable annuity contracts under
the Internal Revenue Code of 1986, as amended. The regulations limit the
percentage of the total assets of any investment company portfolio which may be
invested in securities of any five or fewer issuers, including a requirement
that no more than 55% of a portfolio's total assets be invested in the
securities of any one issuer. Direct obligations of the U.S. Treasury are not
excepted from the diversification requirements. Each government agency or
instrumentality issuing, guaranteeing or insuring securities will be treated as
a separate issuer for purposes of the diversification standards.
OTHER INVESTMENTS AND RISKS
The Government Bond Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended. The Fund may also
invest in securities the potential return of which is based on the change in
particular measurements of value or rate (i.e., indexed and inverse
securities). The foregoing investments should not be construed as limiting the
Fund's ability to invest in the other types of securities discussed more
generally in this Prospectus. A further discussion of the foregoing
investments and the risks associated with such investments is set forth in the
Appendix to this Prospectus, including Annex B of the Appendix to this
Prospectus, which includes a discussion of certain portfolio strategies
relating to indexed and inverse securities.
4
<PAGE>
PROSPECTUS
- ----------
August 29, 1997
Merrill Lynch Index 500 Fund
of Merrill Lynch Variable Series Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
<circle> Phone No. (609) 282-2800
Merrill Lynch Index 500 Fund (the "Index 500 Fund") is a non-diversified
fund whose objective is investment results that, before expenses, correspond to
the aggregate price and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). The Index 500 Fund is a
separate fund of the Merrill Lynch Variable Series Funds, Inc. (the "Company"),
an open-ended management investment company that has a wide range of investment
objectives among its sixteen separate funds (hereinafter referred to as the
"Funds" or individually as a "Fund"). Two separate classes of common stock
("Common Stock"), Class A Common Stock and Class B Common Stock, are issued for
each Fund. The Company is offering shares of its Class B Common Stock for the
Index 500 Fund pursuant to this Prospectus. This Prospectus consists of this
five page document and the attached Appendix. For more information on the
Index 500 Fund's investment objective and policies, please see page 4 of this
document and the Appendix.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
____________________
THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE
COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE
COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 25, 1997, AND IS AVAILABLE ON REQUEST AND WITHOUT
CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER
SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE PAGE
---- ----
Financial Highlights................3 Investment Adviser................ A-8
Investments Objectives and Policies.4 Portfolio Transactions and
Appendix Brokerage........................A-11
The Insurance Companies...........A-1 Purchase of Shares.................A-11
Investment Objectives and Redemption of Shares...............A-11
Policies of the Funds...........A-1 Dividends, Distributions and Taxes.A-12
Directors.........................A-7 Performance Data...................A-13
Distribution Plan..................A-14
Additional Information.............A-14
</TABLE>
____________________
MERRILL LYNCH ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below, with the exception of the
three month period ending March 31, 1997, has been audited in conjunction with
annual audits of the financial statements of each of the Company's Funds by
Deloitte & Touche LLP, independent auditors. Financial Statements and the
independent auditors' report thereon for the fiscal year ended December 31,
1996 are included in the Statement of Additional Information. The following
per share data and ratios, with the exception of the three month period ending
March 31, 1997, have been derived from information provided in the Company's
audited financial statements. Because no Shares of Class B Common Stock were
in issue as of or prior to December 31, 1996, the information included in the
table below relates to the Class A Common Stock only. The information in the
table below regarding the Fund's Class A Common Stock should not be considered
indicative of the results that the Fund's Class B Common Stock would have
achieved had the Class B Common Stock been outstanding during the period shown
below, because the Class B Common Stock will be subject to a distribution fee
to which the Class A Common Stock was not subject at an annual rate of 0.15% of
the Fund's average daily net assets attributable to Class B Common Stock.
Further information about the performance of the Company is contained in the
Company's most recent annual report to shareholders, which may be obtained,
without charge, by calling or by writing the Company at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
Index 500
Fund
---------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
JANUARY 1, DEC. 13,
1997 TO 1996+ TO
MARCH 31, DEC. 31,
1997 1996
---------------- --------------
(Unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 10.17 $ 10.00
---------------- --------------
Investment income-net........................................... .05 .02
---------------- --------------
Realized and unrealized gain on investments-net................. .19 .15
---------------- --------------
Total from investment operations................................ .24 .17
---------------- --------------
Less dividends and distributions:
Investment income-net................................. (0.02) --
Realized gain on investments-net...................... --## --
---------------- --------------
Total dividends and distributions............................... (0.02) --
---------------- --------------
Net asset value, end of period.................................. $ 10.39 $ 10.17
================ ==============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............................. 2.37%# 1.70%#
RATIOS TO AVERAGE NET ASSETS:
================ ==============
Expenses, net of reimbursement.................................. .08%* .00%*
================ ==============
Expenses........................................................ .39%* .60%*
================ ==============
Investment income-net........................................... 2.96%* 3.08%*
================ ==============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................ $ 98,751 $ 10,752
================ ==============
Portfolio turnover.............................................. .15% .04%
================ ==============
Average commission rate paid.................................... $ .0161 $ .0120
================ ==============
</TABLE>
_______________
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## Amount is less than $.01 per share.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Index 500 Fund is to seek to provide
investment results that, before expenses, correspond to the aggregate price and
yield performance of the S&P 500 Index. There can be no assurance that the
Fund will achieve its investment objective.
The S&P 500 Index is a market-weighted index composed of 500 common
stocks issued by companies in a wide range of businesses and which collectively
represent a substantial portion of all common stocks publicly traded in the
U.S. The composition of the S&P 500 Index is determined by Standard & Poor's
Rating Group ("Standard & Poor's"), a division of the McGraw-Hill Companies,
Inc. Standard & Poor's criteria for selecting common stocks to include in the
S&P 500 Index is based on factors such as market capitalization, trading
activity and the adequacy of representation of particular industries, and
favors U.S.-traded stocks of large companies that are among the most dominant
in their industries. The S&P 500 Index is generally considered broadly
representative of the performance of large-capitalization publicly traded
common stocks in the U.S. The inclusion of a stock in the S&P 500 Index does
not imply that Standard & Poor's believes the stock to be an attractive
investment.
The Index 500 Fund will not attempt to buy or sell securities based on
Merrill Lynch Asset Management, L.P.'s (the "Investment Adviser") economic,
financial or market analysis, but will instead employ a "passive" approach that
attempts to remain invested at all times in a portfolio of assets the
performance of which is expected to be strongly correlated with that of the S&P
500 Index. The Index 500 Fund may invest in all 500 stocks in the S&P 500
Index in approximately the same proportions as their weightings in the S&P 500
Index, or may invest in a statistically selected sample of the 500 stocks which
comprise the S&P 500 Index designed, based on market capitalizations, industry
weightings and financial attributes, to have aggregate investment
characteristics similar to those of the S&P 500 Index as a whole. The Index
500 Fund may also (i) purchase common stocks not included in the S&P 500 Index
as a proxy for certain common stocks included in the S&P 500 Index when the
Investment Adviser believes it is an efficient means of replicating the
performance of that index to do so, and (ii) invest in options and future
contracts linked to the performance of the S&P 500 Index or of common stocks
represented in the index.
Under normal circumstances, it is expected that the Index 500 Fund will
invest at least 90% (65% if the Index 500 Fund's assets are below $20 million)
of its assets in common stocks represented in the S&P 500 Index and related
options and futures contracts. The Index 500 Fund may invest a substantial
portion of its assets in options and futures contracts in order to gain market
exposure efficiently in the event of subscriptions, to maintain liquidity in
the event of redemptions and to minimize trading costs. The Index 500 Fund may
also invest in short-term fixed income instruments as cash reserves. The Index
500 Fund will not invest in short-term fixed income instruments, options or
futures contracts for the purpose of implementing a defensive market strategy
by lowering the Fund's exposure to common stocks to protect against a potential
stock market decline, but instead will attempt to remain fully invested without
regard to the Investment Adviser's market analysis. The Fund may, however,
hold short-term fixed income instruments for temporary cash management
purposes.
The foregoing investment techniques are expected to be an effective means
of substantially duplicating the aggregate price and yield performance of the
S&P 500 Index at such times when the Index 500 Fund is not fully invested in
all 500 stocks in the S&P 500 Index in approximately the same proportions as
their weightings in that index. To the extent the Index 500 Fund utilizes the
foregoing investment techniques, the Fund may not track the S&P 500 Index with
the same degree of accuracy as the Fund would if it were fully invested in all
500 stocks in the S&P 500 Index in approximately the same proportions as their
weightings in that index. However, the principal advantage of the foregoing
investment techniques is to provide an efficient means to invest in the
universe of stocks of the S&P 500 Index. The Fund is expected to provide broad
diversification, and will seek to operate at low costs due to its "passive"
approach to portfolio management and anticipated low portfolio turnover rate.
4
<PAGE>
OTHER INVESTMENTS AND RISKS
The Index 500 Fund may purchase certain securities that are not
registered under the Securities Act of 1933, as amended.
The Index 500 Fund may invest in securities of foreign issuers to the
extent such issuers are included in the S&P 500 Index. SEE "OTHER PORTFOLIO
STRATEGIES-FOREIGN SECURITIES" IN THE APPENDIX TO THIS PROSPECTUS. The Fund is
also authorized to write (i.e., sell) and purchase call and put options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio and may
engage in transactions in futures and may invest in securities the potential
return of which is based on the change in particular measurements of value or
rate (i.e., indexed and inverse securities).
The foregoing investments should not be construed as limiting the Fund's
ability to invest in the other types of securities discussed more generally in
this Prospectus. A further discussion of the foregoing investments and the
risks associated with such investments is set forth in the Appendix to this
Prospectus, including Annex B of the Appendix to this Prospectus which includes
a discussion of certain portfolio strategies relating to indexed and inverse
securities, options, futures and foreign exchange transactions.
5
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
APPENDIX
This Appendix constitutes part of the Prospectus of Merrill Lynch
Domestic Money Market Fund, Merrill Lynch Reserve Assets Fund, Merrill Lynch
Prime Bond Fund, Merrill Lynch High Current Income Fund, Merrill Lynch Quality
Equity Fund, Merrill Lynch Special Value Focus Fund, Merrill Lynch Natural
Resources Focus Fund, Merrill Lynch American Balanced Fund, Merrill Lynch
Global Strategy Focus Fund, Merrill Lynch Basic Value Focus Fund, Merrill Lynch
Global Bond Focus Fund, Merrill Lynch Global Utility Focus Fund, Merrill Lynch
International Equity Focus Fund, Merrill Lynch Developing Capital Markets Focus
Fund, Merrill Lynch Government Bond Fund, and Merrill Lynch Index 500 Fund
(hereinafter referred to as the "Funds" or individually as a "Fund").
TABLE OF CONTENTS
THE INSURANCE COMPANIES ...................................................A-1
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS ...........................A-1
DIRECTORS .................................................................A-7
INVESTMENT ADVISER ........................................................A-8
PORTFOLIO TRANSACTIONS AND BROKERAGE .....................................A-11
PURCHASE OF SHARES .......................................................A-11
REDEMPTION OF SHARES .....................................................A-11
DIVIDENDS, DISTRIBUTIONS AND TAXES .......................................A-12
PERFORMANCE DATA .........................................................A-13
DISTRIBUTION PLAN ........................................................A-14
ADDITIONAL INFORMATION ...................................................A-14
<PAGE>
APPENDIX
THE INSURANCE COMPANIES
The Company was organized to fund benefits under contracts issued by
Family Life Insurance Company ("Family Life"), formerly a wholly owned
subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). On June 12, 1991, Family
Life was sold to a non-affiliated corporation and most (although not all) of
its contracts were transferred to Merrill Lynch Life Insurance Company
("MLLIC") and ML Life Insurance Company of New York ("ML of New York"). Shares
of the Funds currently are sold to separate accounts ("Separate Accounts") of
Family Life, MLLIC and ML of New York as well as other insurance companies not
affiliated with Family Life, MLLIC or ML of New York (together with MLLIC, ML
of New York and Family Life, "Insurance Companies") to fund certain variable
life insurance contracts and/or variable annuities (together, "Contracts")
issued by such companies.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the prospectus for each Contract.
That prospectus describes the relationship between increases or decreases in
the net asset value of shares of a Fund, and any distributions on such shares,
and the benefits provided under a Contract. The prospectus for the Contracts
also describes various fees payable to the Insurance Companies and charges to
the Separate Accounts made by the Insurance Companies with respect to the
Contracts. Since shares of the Funds will be sold only to the Insurance
Companies for the Separate Accounts, the terms "shareholder" and "shareholders"
in this Prospectus refer to the Insurance Companies. MLLIC and ML of New York
are wholly owned subsidiaries of ML&Co., as is the Investment Adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described in the Fund's
Prospectus (of which this Appendix is a part). The differences in objectives
and policies among the Funds can be expected to affect the return of each Fund
and the degree of market and financial risk to which each Fund is subject. Each
Fund is classified as "diversified," as defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act" or the "Act") except for the
Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the Global
Strategy Focus Fund, the Index 500 Fund and the Natural Resources Focus Fund,
each of which is classified as "non-diversified." The investment objectives and
classification of each Fund may not be changed without the approval of the
holders of a majority of the outstanding shares of each Fund affected.
FIXED INCOME SECURITY RATINGS. No Fund other than the Developing Capital
Markets Focus Fund, the High Current Income Fund and the International Equity
Focus Fund invests in fixed-income securities rated below investment grade
(i.e., securities rated Ba or below by Moody's Investors Service, Inc.
("Moody's") or BB or below by Standard & Poor's Ratings Group ("Standard &
Poor's")). However, securities purchased by a Fund may subsequently be
downgraded. Such securities may continue to be held and will be sold only if,
in the judgment of the Investment Adviser, it is advantageous to do so.
Securities in the lowest category of investment grade debt securities may have
speculative characteristics which may lead to weakened capacity to pay interest
and principal during periods of adverse economic conditions. See Annex A of
this Appendix for a fuller description of corporate bond ratings.
A-1
<PAGE>
NON-DIVERSIFIED FUNDS
The Developing Capital Markets Focus, Global Bond Focus, Global Strategy
Focus, Index 500, and Natural Resources Focus Funds are classified as non-
diversified investment companies under the Investment Company Act. 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 of 1986, as amended (the "Code" or the "Internal
Revenue Code"). To qualify as a regulated investment company, a Fund, at the
close of each fiscal quarter, may not have more than 25% of its total assets
invested in the securities (except obligations of the U.S. Government, its
agencies or instrumentalities) of any one issuer and with respect to 50% of its
assets, (i) may not have more than 5% of its total assets invested in the
securities of any one issuer and (ii) may not own more than 10% of the
outstanding voting securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each
Fund). Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
OTHER PORTFOLIO STRATEGIES
RESTRICTED SECURITIES. Each of the Funds is subject to limitations on the
amount of illiquid securities it may purchase; however, each Fund may purchase
without regard to that limitation certain securities that are not registered
under the Securities Act of 1933, as amended (the "Securities Act"), including
(a) commercial paper exempt from registration under Section 4(2) of the
Securities Act, and (b) securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Company's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Investment Adviser the daily
function of determining and monitoring liquidity of restricted securities. The
Board has determined that securities sold under Rule 144A that 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.
FOREIGN SECURITIES. The Basic Value Focus, Developing Capital Markets
Focus, Special Value Focus, Global Strategy Focus, Global Bond Focus, Global
Utility Focus, High Current Income, International Equity Focus, Natural
Resources Focus, Prime Bond, Quality Equity and Reserve Assets Funds may invest
in securities of foreign issuers. The Index 500 Fund may also invest in
securities of foreign issuers to the extent such issuers are included in the
Standard & Poor's 500 Composite Stock Price Index (the "S&P Index").
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations and risks which are not ordinarily associated
with investing in domestic issuers. These considerations and risks include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. If it should
become necessary, a Fund could encounter greater difficulties in invoking legal
processes abroad than would be the case in the United States. Transaction
costs in foreign securities may be higher. The operating expense ratio of a
Fund investing in foreign securities can be expected to be higher than that of
an investment company investing exclusively in United States securities because
A-2
<PAGE>
the expenses of the Fund, such as custodial costs, are higher. In addition, net
investment income earned by a Fund on a foreign security may be subject to
withholding and other taxes imposed by foreign governments which will reduce a
Fund's net investment income. The Investment Adviser will consider these and
other factors before investing in foreign securities, and will not make such
investments unless, in its opinion, such investments will meet the standards
and objectives of a particular Fund. No Fund that may invest in foreign
securities, other than the Natural Resources Focus and Global Strategy Focus
Funds, will concentrate its investments in any particular country. The
Developing Capital Markets Focus, Global Bond Focus, Global Strategy Focus,
Global Utility Focus, International Equity Focus and Natural Resources Focus
Funds may from time to time be substantially invested in non-dollar-denominated
securities of foreign issuers. For a Fund that invests in foreign securities
denominated or quoted in currencies other than the United States dollar,
changes in foreign currency exchange rates may affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as United States investors are concerned, and 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. 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. Each Fund of the Company other than the
Developing Capital Markets Focus, Global Bond Focus, Global Strategy Focus,
Global Utility Focus, International Equity Focus, Natural Resources Focus and
Quality Equity Funds will purchase only securities issued in dollar
denominations.
Each of the International Equity Focus Fund and Developing Capital
Markets Focus Fund may invest a significant portion of its assets in securities
of foreign issuers in smaller capital markets, while each of the other Funds
which is permitted to invest in foreign securities may from time to time invest
in securities of such foreign issuers. Foreign investments involve risks,
including fluctuations in foreign exchange rates, future political and economic
developments, different legal systems, the existence or possible imposition of
exchange controls, or other foreign or United States governmental laws or
restrictions, that are often heightened for investments in smaller capital
markets.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in a Fund which invests in these markets incurring
additional costs and delays in transporting and custodying such securities
A-3
<PAGE>
outside such countries. Delays in settlement could result in temporary periods
when assets of such a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund that invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience. Due to its emphasis on
securities of issuers located in smaller capital markets, each of the
Developing Capital Markets Focus Fund and the International Equity Focus Fund
should be considered as a vehicle for diversification and not as a balanced
investment program.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to which
a government debtor may be subject. Government debtors may default on their
debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt, including the
Fund, may be requested to participate in the rescheduling of such debt and to
extend further loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing
and emerging market countries are among the world's largest debtors to
commercial banks, other governments, international financial organizations and
other financial institutions. The issuers of the government debt securities in
which a Fund may invest have in the past experienced substantial difficulties
in servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements.
The Developing Capital Markets Focus and International Equity Focus Funds
intend to invest in securities of foreign issuers in smaller capital markets.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms than securities
of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act, the Developing Capital Markets Focus and International
Equity Focus Funds each may invest up to 10% of its total assets in securities
of such closed-end investment companies. This restriction on investments in
securities of closed-end investment companies may limit opportunities for the
Fund to invest indirectly in certain smaller capital markets. Shares of certain
A-4
<PAGE>
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If a Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies. A
Fund also may seek, at its own cost, to create its own investment entities
under the laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a Fund's
investments in any equity security of an issuer which, in its most recent
fiscal year, derived more than 15% of its revenues from "securities related
activities," as defined by the rules thereunder. These provisions may also
restrict a Fund's investments in certain foreign banks and other financial
institutions.
LENDING OF PORTFOLIO SECURITIES. Each Fund of the Company may from time
to time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive collateral
in cash or securities issued or guaranteed by the U.S. Government which, while
the loan is outstanding, will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities plus accrued
interest. Such cash collateral will be invested in short-term securities, the
income from which will increase the return to the Fund.
FORWARD COMMITMENTS. Each of the Funds may purchase securities on a
when-issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be
more or less than its purchase price. A Fund entering into such transactions
will maintain a segregated account with its custodian of cash or liquid
securities in an aggregate amount equal to the amount of its commitments in
connection with such delayed delivery and purchase transactions.
STANDBY COMMITMENT AGREEMENTS. The Developing Capital Markets Focus,
Global Utility Focus and High Current Income Funds may from time to time enter
into standby commitment agreements. Such agreements commit the respective
Fund, for a stated period of time, to purchase a stated amount of a fixed
income security which may be issued and sold to the Fund at the option of the
issuer. The price and coupon of the security is fixed at the time of the
commitment. At the time of entering into the agreement the Fund is paid a
commitment fee which is typically approximately 0.5% of the aggregate purchase
price of the security which the Fund has committed to purchase. The Fund will
at all times maintain a segregated account with its custodian of cash or liquid
securities in an amount equal to the purchase price of the securities
underlying the commitment. There can be no assurance that the securities
subject to a standby commitment will be issued, and the value of the security,
if issued, on the delivery date may be more or less than its purchase price.
PORTFOLIO STRATEGIES INVOLVING INDEXED AND INVERSE SECURITIES, OPTIONS,
FUTURES AND FOREIGN EXCHANGE TRANSACTIONS. Certain Funds may use derivative
instruments, including indexed and inverse securities, options and futures and
purchase and sell foreign exchange. Transactions involving such instruments
expose these Funds to certain risks. Each Fund's use of these instruments and
the associated risks are described in detail in Annex B of the Appendix
attached to this Prospectus.
RISKS OF HIGH YIELD SECURITIES
The Developing Capital Markets Focus Fund, High Current Income Fund and
International Equity Focus Fund may invest a substantial portion of their
assets in high yield, high risk securities or junk bonds, which are regarded as
being predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial
risk. Issuers of junk bonds may be highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risks associated
with acquiring the securities of such issuers generally are greater than is the
A-5
<PAGE>
case with higher-rated securities. For example, during an economic downturn or
a sustained period of rising interest rates, issuers of high yield securities
may be more likely to experience financial stress, especially if such issuers
are highly leveraged. During recessionary periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the Developing Capital Markets Focus Fund, High Current Income Fund
and International Equity Focus Fund may invest normally do not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after a Fund purchases a particular security, in which case a Fund may
experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the
Developing Capital Markets Focus Fund, High Current Income Fund and
International Equity Focus Fund each will diversify its holdings among many
issuers. However, there can be no assurance that diversification will protect a
Fund from widespread defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated fixed-
income securities, so that adverse economic events may have a greater impact on
their prices and yields than on higher-rated fixed-income securities. Zero
coupon bonds and bonds which pay interest and/or principal in additional bonds
rather than in cash are especially volatile. Like higher-rated fixed-income
securities, junk bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts. However, there are
fewer dealers in this market, which may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions
(whether or not based on economic fundamentals) may impair the liquidity of
this market, and may cause the prices the Developing Capital Markets Focus
Fund, High Current Income Fund and International Equity Focus Fund receive for
their junk bonds to be reduced, or a Fund may experience difficulty in
liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgement may play a greater role in valuing certain of each Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the Developing Capital Markets Focus Fund, High Current Income Fund and
International Equity Focus Fund. In addition, each Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on a
portfolio holding or to participate in the restructuring of the obligation.
SOVEREIGN DEBT. The junk bonds in which the Developing Capital Markets
Focus Fund, High Current Income Fund and International Equity Focus Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay
the principal and/or interest when due in accordance with the terms of such
debt. A governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity's
policy towards the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
A-6
<PAGE>
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to timely service its debts. Consequently, governmental
entities may default on their sovereign debt.
Holders of sovereign debt, including the Developing Capital Markets Focus
Fund, High Current Income Fund and International Equity Focus Fund may be
requested to participate in the rescheduling of such debt and to extend further
loans to governmental entities. In the event of a default by a governmental
entity, there may be few or no effective legal remedies available to a Fund and
there can be no assurance a Fund will be able to collect on defaulted sovereign
debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund
to limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." The Investment
Adviser believes that compliance with this standard will not have any negative
impact on the performance of any of the Funds.
OTHER CONSIDERATIONS
The Investment Adviser will use its best efforts to assure that each Fund
of the Company complies with certain investment limitations of the Internal
Revenue Service to assure favorable income tax treatment for the Contracts. It
is not expected that such investment limitations will materially affect the
ability of any Fund to achieve its investment objective.
DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not "interested persons" of the Company as defined in the Investment Company
Act of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as
follows:
ARTHUR ZEIKEL{1}-President of the Investment Adviser and its affiliate,
Fund Asset Management, L.P. ("FAM"); President and Director of Princeton
Services, Inc. ("Princeton Services"); Executive Vice President of ML&Co.; and
Director of the Merrill Lynch Funds Distributor, Inc. (the "Distributor").
JOE GRILLS-Member of the Committee on Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's
Executive Committee; and Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund and the Howard Hughes Medical
Institute; Director, Duke Management Company, LaSalle Street Fund and Kimco
Realty Corporation.
WALTER MINTZ-Special Limited Partner of Cumberland Partners (investment
partnership).
___________________
1 Interested person, as defined in the Investment Company Act of 1940,
of the Company.
A-7
<PAGE>
ROBERT S. SALOMON, JR.-Principal of STI Management (investment adviser).
MELVIN R. SEIDEN-Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN R. SWENSRUD-Chairman of Fernwood Associates (financial
consultants).
INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. ("MLAM"), an indirect wholly owned
subsidiary of Merrill Lynch & Co., Inc., is the investment adviser (the
"Investment Adviser") for the Fund. The general partner of the Investment
Adviser is Princeton Services, Inc., a wholly owned subsidiary of Merrill Lynch
& Co., Inc. The principal address of the Investment Adviser is 800 Scudders
Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton,
New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset
Management, L.P. ("FAM"), acts as the investment adviser for over 130 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. In
the aggregate, as of March 31, 1997, MLAM and FAM had a total of approximately
$247.2 billion in investment company and other portfolio assets under
management including assets of certain affiliates.
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, 1996, the advisory
fees expense incurred by the Company totaled $24,131,430 of which $118,827
related to the Reserve Assets Fund (representing .50% of its average net
assets), $2,160,063 related to the Prime Bond Fund (representing .44% of its
A-8
<PAGE>
average net assets), $1,881,541 related to the High Current Income Fund
(representing .49% of its average net assets), $3,136,852 related to the
Quality Equity Fund (representing .44% of its average net assets), $3,010,613
related to the Special Value Focus Fund (representing .75% of its average net
assets), $1,638 related to the Index 500 Fund (representing .30% of its average
net assets) all of which was voluntarily waived by MLAM, $297,742 related to
the Natural Resources Focus Fund (representing .65% of its average net assets),
$1,186,936 related to the American Balanced Fund (representing .55% of its
average net assets), $1,386,726 related to the Domestic Money Market Fund
(representing .50% of its average net assets), $3,715,122 related to the Global
Strategy Focus Fund (representing .65% of its average net assets), $2,414,605
related to the Basic Value Focus Fund (representing .60% of its average net
assets), $518,022 related to the Global Bond Focus Fund (representing .60% of
its average net assets), $880,959 related to the Global Utility Focus Fund
(representing .60% of its average net assets), $2,358,140 related to the
International Equity Focus Fund (representing .75% of its average net assets),
$765,718 related to the Developing Capital Markets Focus Fund (representing
1.00% of its average net assets) of which $52,388 was voluntarily waived by
MLAM, $297,926 related to the Government Bond Focus Fund (representing .50% of
its average net assets) of which $264,214 was voluntarily waived by MLAM.
During the Company's fiscal year ended December 31, 1996, the total
operating expenses of the Company's Funds (including the advisory fees paid to
the Investment Adviser), before any fee waiver or reimbursement of a portion of
such expenses were as follows: $144,685 related to the Reserve Assets Fund
(representing .61% of its average net assets), $2,418,846 related to the Prime
Bond Fund (representing .49% of its average net assets), $2,096,102 related to
the High Current Income Fund (representing .54% of its average net assets),
$3,495,231 related to Quality Equity Fund (representing .49% of its average net
assets), $3,240,858 related to the Special Value Focus Fund (representing .81%
of its average net assets), $3,289 related to the Index 500 Fund (representing
.60% of its average net assets), $358,882 related to the Natural Resources
Focus Fund (representing .78% of its average net assets), $1,300,476 related to
the American Balanced Fund (representing .60% of its average net assets),
$1,507,384 related to the Domestic Money Market Fund (representing .54% of its
average net assets), $4,077,255 related to the Global Strategy Focus Fund
(representing .71% of its average net assets), $2,657,872 related to the Basic
Value Focus Fund (representing .66% of its average net assets), $593,766
related to the Global Bond Focus Fund (representing .69% of its average net
assets), $970,696 related to the Global Utility Focus Fund (representing .66%
of its average net assets), $2,802,938 related to the International Equity
Focus Fund (representing .89% of its average net assets), $1,009,535 related to
the Developing Capital Markets Focus Fund (representing 1.31% of its average
net assets), $353,780 related to the Government Bond Fund (representing .59% of
its average net assets).
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K., an indirect wholly owned subsidiary
of ML & Co., and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Funds in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Funds pursuant to the Investment Advisory Agreement.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have
entered into 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"). The Reimbursement Agreement provides 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.
The Investment Adviser has entered into administrative services
agreements with certain Insurance Companies, including MLLIC and ML of New
York, pursuant to which the Investment Adviser compensates such companies for
administrative responsibilities relating to the Company which are performed by
such Insurance Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear
any personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
A-9
<PAGE>
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for
each of the Company's Funds.
THOMAS R. ROBINSON has served as the Portfolio Manager of the American
Balanced Fund, Global Strategy Focus Fund and Quality Equity Fund since
November 1995, and is primarily responsible for each such Fund's day-to-day
management. He has served as a Senior Portfolio Manager of MLAM since November
1995. From 1989 to 1995, he served as Manager of International Strategy for
Merrill Lynch & Co. Global Securities Research & Economics Group.
KEVIN RENDINO has served as the Basic Value Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
DANIEL V. SZEMIS has served as the Portfolio Manager of the Special Value
Focus Fund (formerly, the Equity Growth Fund) since May 1997 and is primarily
responsible for the day-to-day management of the Special Value Focus Fund. Mr.
Szemis has served as Vice President of MLAM since 1996. From 1990 to 1996, Mr.
Szemis was a portfolio manager with Prudential Mutual Fund Investment
Management Advisors.
WALTER ROGERS has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1987.
ALDONA SCHWARTZ has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-day
management. She has served as Vice President of MLAM since 1991 and employee of
the Investment Adviser since 1986.
ANDREW BASCAND has served as the International Equity Focus Fund's Co-
Portfolio Manager since July 1993 and became sole Portfolio Manager in March
1997. He is primarily responsible for the Fund's day-to-day management. He has
been the director of MLAM, U.K. and Vice President of Merrill Lynch Global
Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P.
Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief
Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior
Research Officer of the Bank of England's International Department from 1986 to
1987.
PETER LEHMAN has served as the Natural Resources Focus Fund's Portfolio
Manager since January 1994, and is primarily responsible for the Fund's day-to-
day management. He has served as Vice President of MLAM since 1994; Senior Fund
Analyst for an international fund managed by the Investment Adviser from 1992
to 1994; Director and Senior Portfolio Manager for Prudential Insurance Company
of America from 1989 to 1991.
JAY HARBECK has served as the Prime Bond Fund's and the Government Bond
Fund's Portfolio Manager since July 1992 and May 1994 respectively, and is
primarily responsible for the Funds day-to-day management. He has served as
Vice President of MLAM since 1986.
JACQUELINE ROGERS has served as the Portfolio Manager of the Domestic
Money Market Fund and the Reserve Assets Fund since October 1996, and is
primarily responsible for each such Fund's day-to-day management. She has
served as Vice President of MLAM since January 1986.
ROBERT PARISH has served as the Co-Portfolio Manager of Global Bond Focus
Fund (formerly, the World Income Focus Fund) since July 1993 and, together with
Sean Casey, is primarily responsible for the Fund's day-to-day management. He
has served as Vice President of MLAM since 1991 and was the Vice President and
Senior Portfolio Manager for Templeton International from 1987 to 1991.
A-10
<PAGE>
GRACE PINEDA has served as the Developing Capital Markets Focus Fund's
Portfolio Manager since May 1994, and is primarily responsible for the Fund's
day-to-day management. She has served as Vice President of MLAM since 1989.
ERIC MITOFSKY has served as the Index 500 Fund's Portfolio Manager since
the Fund commenced operations in December 1996. He has served as a Vice
President of MLAM since 1992, and was an employee of Merrill Lynch's Equity
Trading Group from 1983 to 1992.
SEAN CASEY has served as the Co-Portfolio Manager of the Global Bond
Focus Fund (formerly, the World Income Focus Fund) since October 1995 and,
together with Robert Parish, is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since 1995; Chief
Investment Officer, Chase Asset Management from 1990 to 1995.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commission, if any, size of the transactions and difficulty of execution. While
the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in over-
the-counter transactions conducted on an agency basis. The Securities and
Exchange Commission has issued an order permitting the Company to conduct
certain principal transactions with respect to the Domestic Money Market and
Reserve Assets Funds with Merrill Lynch Government Securities Inc. and Merrill
Lynch Money Markets Inc. in U.S. Government and Government agency securities,
and certain other money market securities, subject to certain terms and
conditions. During the year ended December 31, 1996, the Company engaged in 16
transactions pursuant to such order involving approximately $64.9 million of
securities. For the year ended December 31, 1996, the Company paid brokerage
commissions of $6,656,814, of which $266,405 was paid to Merrill Lynch.
PURCHASE OF SHARES
The Company will offer shares of Class B Common Stock in each of
its Funds to the Insurance Companies at the per share price of the Class A
Common Stock of the corresponding Fund until such time as a share of Class B
Common Stock is purchased, and thereafter, the Company will continuously
offer shares of Class B Common Stock at prices equal to the respective
per share net asset value of the Class B Common Stock of the Funds.
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), 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.
A-11
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Company's Domestic Money Market and Reserve
Assets Funds, will consist of all payments of dividends or interest received by
such Fund less the estimated expenses of such Fund (including fees payable to
the Investment Adviser). Net investment income of the Domestic Money Market and
Reserve Assets Funds (from the time of the immediate preceding determination
thereof) consists of (i) interest accrued and/or discount earned (including
both original issue and market discount), (ii) plus or minus all realized and
unrealized gains (other than realized long-term capital gains) and losses on
its portfolio securities, (iii) less the estimated expenses of the respective
Fund (including the fees payable to the Investment Adviser) applicable to that
dividend period. Dividends on the Domestic Money Market and Reserve Assets
Funds are declared daily and reinvested monthly in additional full and
fractional shares of such Fund. Dividends from net investment income of the
Global Bond Focus, Government Bond, High Current Income and Prime Bond Funds
are declared and reinvested monthly in additional full and fractional shares of
the respective Funds at net asset value. Dividends from net investment income
of the Global Utility Focus Fund are declared and reinvested quarterly in
additional full and fractional shares of the Fund. Dividends from net
investment income of the American Balanced, Basic Value Focus, Developing
Capital Markets Focus, Special Value Focus, Global Strategy Focus, Index 500,
International Equity Focus, National Resources Focus and Quality Equity Funds
are declared and reinvested at least annually in additional full and fractional
shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, other than short-term capital gains of the Domestic Money Market and
Reserve Assets Funds, are declared and distributed annually after the close of
the Company's fiscal year to the shareholders of the Fund or Funds to which
such gains are attributable. Short-term capital gains are taxable as ordinary
income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment
company under certain provisions of the Internal Revenue Code. Under such
provisions, a Fund will not be subject to federal income tax on such part of
its net ordinary income and net realized capital gains which it distributes to
shareholders. One of the requirements to qualify for treatment as a regulated
investment company under the Code is that a Fund, among other things, derive
less than 30% of its gross income in each taxable year from gains (without
deduction of losses) from the sale or other disposition of stocks, securities
and certain options, futures or forward contracts held for less than three
months. This requirement may limit the ability of certain Funds to dispose of
certain securities at times when management of the Company might otherwise deem
such disposition appropriate or desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions
of the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
A-12
<PAGE>
represents dividends on common or preferred stock, rather than interest income,
its distributions to the Insurance Companies will be eligible for the present
70% dividends received deduction applicable in the case of a life insurance
company as provided in the Code. See the Prospectus for the Contracts for a
description of the respective Insurance Company's tax status and the charges
which may be made to cover any taxes attributable to the Separate Account. Not
later than 60 days after the end of each calendar year, the Company will send
to the Insurance Companies a written notice required by the Code designating
the amount and character of any distributions made during such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or
more of the Company's Funds for various specified time periods may be included
in advertisements or information furnished by the Insurance Companies to
present or prospective Contract owners. Average annual total return and yield
are computed in accordance with formulas specified by the Securities and
Exchange Commission. In connection with its reorganization on December 6, 1996,
the Global Bond Focus Fund (i) acquired substantially all of the assets and
assumed substantially all the liabilities of the International Bond Fund, a
separate Fund of the Company, (ii) implemented a change in its investment
objective and policies from seeking high current income from a global portfolio
of fixed income securities, including non-investment grade securities, to
seeking a high total investment return by investing in a global portfolio of
investment grade fixed income securities and (iii) changed its name from the
World Income Focus Fund to its current name. For the period from the
commencement of the World Income Focus Fund's operations through its
reorganization on December 6, 1996, the portfolio of the Fund included debt
securities rated below investment grade (i.e., junk bonds). On December 6,
1996, the Government Bond Fund (i) implemented a change in its investment
objective so that the Fund may invest in any debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities without
regard to remaining maturity and (ii) changed its name from the Intermediate
Government Bond Fund to its current name. For the period from the commencement
of the Fund's operations through December 6, 1996, the portfolio of the
Intermediate Government Bond Fund consisted primarily of intermediate-term debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities with a maximum maturity not to exceed fifteen years. As a
result of the foregoing changes in the investment objective of each of the
Global Bond Focus Fund and the Government Bond Fund, the performance
information set forth herein and in the Statement of Additional Information for
the fiscal year ended December 31, 1996 may not be indicative of such Fund's
future performance.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield to maturity of each security earned
during the period by (b) the average daily number of shares outstanding during
the period that were entitled to receive dividends multiplied by the offering
price per share on the last day of the period. Because no Shares of Class B
Common Stock were in issue prior to December 31, 1996, the yield information
below relates to Class A Common Stock only. The yield for the 30-day period
ending December 31, 1996 was 6.23% for the Prime Bond Fund, 9.30% for the High
Current Income Fund, 6.42% for the Global Bond Focus Fund and 5.88% for the
Government Bond Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount
of realized and unrealized net capital gains or losses during the period. The
value of an investment in the Fund will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost. The yield
and total return quotations may be of limited use for comparative purposes
because they do not reflect charges imposed at the Separate Account level
which, if included, would decrease the yield.
A-13
<PAGE>
On occasion, one or more of the Company's Funds may compare its
performance to that of the S&P 500 Index, the Value Line Composite Index, the
Dow Jones Industrial Average, or performance data published by Lipper
Analytical Services, Inc., or Variable Annuity Research Data Service or
contained in publications such as Morningstar Publications, Inc., Chase
Investment Performance Digest, Money Magazine, U.S. News & World Report,
Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street
Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business
Daily and Ibbotson Associates. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act. The Plan permits the Company to pay to
each Insurance Company that enters into an agreement with the Company to
provide distribution related services to Contract owners, a fee, at the end of
each month, of up to 0.15% of the net asset value of the Class B Common Stock
of each Fund held by such Insurance Company. Such services include, but are not
limited to, (a) the printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports for
existing and prospective Contract owners, (b) services relating to the
development, preparation, printing and mailing of Company advertisements, sales
literature and other promotional materials describing and/or relating to the
Company and including materials intended for use within the Insurance Company,
(c) holding seminars and sales meetings designed to promote the distribution of
the Class B Shares of the Funds, (d) obtaining information and providing
explanations to Contract owners regarding the investment objectives and
policies and other information about the Company and its Funds, including the
performance of the Funds, (e) training sales personnel regarding the Company
and the Funds, (f) compensating sales personnel in connection with the
allocation of cash values and premiums of the Separate Accounts of the
Insurance Company, (g) providing personal services and/or maintenance of the
Separate Accounts with respect to Class B Shares of the Funds attributable to
such accounts, and (h) financing any other activity that the Company's Board of
Directors determines is primarily intended to result in the sale of Class B
Shares.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of each class of 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 class of shares of a Fund other than the Domestic
Money Market and Reserve Assets Funds is computed by dividing the sum of
the value of the securities plus any cash or other assets (including
interest and dividends accrued) held by such Fund and attributable
to such class minus all liabilities (including accrued expenses)
attributable to such class by the total number of shares of such class
outstanding of that Fund at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees payable to the Investment
Adviser, are accrued daily. Since the net investment income of the Domestic
Money Market and Reserve Assets Funds (including realized and unrealized gains
and losses on their portfolio securities) are declared as a dividend each time
the net income of the Funds are determined (see "Dividends, Distributions and
Taxes"), the net asset value per share of the Funds normally remains at $1.00
per share immediately after each such determination and dividend declaration.
Except with respect to securities held by the Domestic Money Market and
Reserve Assets Funds having a remaining maturity of 60 days or less, securities
held by each Fund will be valued as follows: Portfolio securities that are
traded on stock exchanges are valued at the last sale price (regular way) as of
A-14
<PAGE>
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 ("OTC") market are valued at the last available bid price in the OTC
market prior to the time of valuation, provided however that the Index 500 Fund
will value its portfolio holdings which trade on the NASDAQ national market
system at the last sale price prior to the time of valuation. Portfolio
securities that are traded both in the OTC 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 OTC market. When
a Fund writes an option, the amount of the premium received is recorded on the
books as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in
the case of options being traded in the OTC 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 OTC market, the last
bid price. Futures contracts are valued at settlement price at the close of the
applicable exchange. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Company. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. Securities held by the Domestic
Money Market and Reserve Assets Funds with a remaining maturity of 60 days or
less are valued on an amortized cost basis, unless particular circumstances
dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
Pricing<trademark> Service ("MLSPS"), to value securities held by the High
Current Income and Prime Bond Funds and to value bonds held by other of the
Company's Funds. The Board of Directors of the Company has examined the methods
used by the pricing services in estimating the value of securities held by the
Funds and believes that such methods will reasonably and fairly approximate the
price at which those securities may be sold and result in a good faith
determination of the fair value of such securities; however, there is no
assurance that securities can be sold at the prices at which they are valued.
During the fiscal year ended December 31, 1996, American Balanced Fund, Global
Strategy Focus Fund, Global Utility Focus Fund, High Current Income Fund,
Government Bond Fund, Prime Bond Fund and Global Bond Focus Fund paid MLSPS
$278, $175, $77, $7,269, $822, $5,884 and $3,020, respectively.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981, and operations of its
Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime
Bond, High Current Income, Quality Equity and Special Value Focus Funds
commenced on April 20, 1982. The Natural Resources Focus Fund and the American
Balanced Fund commenced operations on June 1, 1988 and June 1, 1988,
respectively. The Domestic Money Market Fund and the Global Strategy Focus Fund
commenced operations on February 20 and February 28, 1992, respectively. The
Basic Value Focus, Global Bond Focus, Global Utility Focus and International
Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital
Markets Focus Fund and Government Bond Fund commenced operations on May 2,
1994. The Index 500 Fund commenced operations on December 13, 1996. The
authorized capital stock of the Company consists of 3,400,000,000 shares of
Class A Common Stock, par value $0.10 per share, and 3,400,000,000 shares of
Class B Common Stock, par value $0.10 per share. The shares of Class A and
Class B Common Stock are each divided into sixteen classes designated Merrill
Lynch American Balanced Fund Common Stock, Merrill Lynch Basic Value Focus Fund
Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock,
Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Special
Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus Fund Common
Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch
Global Utility Focus Fund Common Stock, Merrill Lynch Government Bond Fund
Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill
A-15
<PAGE>
Lynch Index 500 Common Stock, Merrill Lynch International Equity Focus Fund
Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill
Lynch Prime Bond Fund Common Stock, Merrill Lynch Quality Equity Fund Common
Stock and Merrill Lynch Reserve Assets 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 Class A shares and 100,000,000 Class B shares
except for Domestic Money Market Fund Common Stock which consists of
1,300,000,000 Class A shares and 1,300,000,000 Class B shares, Reserve Assets
Fund Common Stock which consists of 500,000,000 Class A shares and 500,000,000
Class B shares and Global Bond Focus Fund Common Stock and Global Strategy
Focus Fund Common Stock, each of which consists of 200,000,000 Class A shares
and 200,000,000 Class B shares. All shares of Common Stock have equal voting
rights, except that only shares of the respective classes are entitled to vote
on matters concerning only that class. Pursuant to the Investment Company Act
of 1940 and the rules and regulations thereunder, certain matters approved by a
vote of all shareholders of the Company may not be binding on a class whose
shareholders have not approved such matter. Each issued and outstanding share
of a class is entitled to one vote and to participate equally in dividends and
distributions declared with respect to such class and in net assets of such
class upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of each class, when issued, will be fully
paid and nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable. Holders of shares of any class
are entitled to redeem their shares as set forth under "Redemption of Shares."
Shares do not have cumulative voting rights and the holders of more than 50% of
the shares of the Company voting for the election of directors can elect all of
the directors of the Company if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any directors. The
Company does not intend to hold meetings of shareholders unless under the
Investment Company Act of 1940 shareholders are required to act on any of the
following matters: (i) election of directors; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of the selection of independent accountants.
Family Life purchased $1,000 worth of shares of each of the Natural
Resources Focus Fund and the American Balanced Fund on April 29, 1988 and
$1,999,000 worth of shares of each such Fund on May 27, 1988. Family Life also
provided the initial capitalization for each of the Company's other Funds other
than the Funds named below for which MLLIC provided the initial capitalization.
MLLIC purchased $100 worth of shares of each of the Domestic Money Market and
Global Strategy Focus Funds on February 6, 1992, $2,000,000 worth of shares of
the Domestic Money Market Fund on February 20, 1992, $2,000,000 worth of shares
of the Global Strategy Focus Fund on February 28, 1992 and $100 worth of shares
of each of the Basic Value Focus, Global Bond Focus, Global Utility Focus and
International Equity Focus Funds on June 28, 1993. MLLIC purchased, on July 1,
1993, $8,000,000 worth of shares of each of the Global Bond Focus Fund and
International Equity Focus Fund and $2,000,000 worth of shares of each of the
Basic Value Focus Fund and the Global Utility Focus Fund. MLLIC purchased, on
May 2, 1994, $8,000,000 worth of shares of the Developing Capital Markets Focus
Fund and, on May 16, 1994, $2,000,000 worth of shares of the Government Bond
Fund. On December 13, 1996, MLLIC purchased $10,000,000 worth of shares of the
Index 500 Fund. The organizational expenses of each of the Company's Funds are
paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC
for all such expenses over a five-year period.
In connection with a reorganization on December 6, 1996 conducted by the
Company with respect to certain of its Funds, the Company, with the approval of
the affected shareholders of the Funds, caused (i) Global Bond Focus Fund (a)
to acquire substantially all of the assets and assume substantially all the
liabilities of the International Bond Fund, a separate Fund of the Company, (b)
to implement a change in its investment objective and policies from seeking
high current income from a global portfolio of fixed income securities,
including non-investment grade securities, to seeking a high total investment
return by investing in a global portfolio of investment grade fixed income
securities and (c) to change its name from the World Income Focus Fund to its
current name; (ii) the Government Bond Fund (x) to implement a change in its
investment objective so that the Fund may invest in any debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities without
regard to remaining maturity and (y) to change its name from the Intermediate
A-16
<PAGE>
Government Bond Fund to its current name; and (iii) the Global Strategy Focus
Fund to acquire substantially all of the assets and assume substantially all
the liabilities of the Flexible Strategy Fund, a separate Fund of the Company.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
CUSTODIAN
The Bank of New York ("BONY"), 110 Washington Street, New York, New York
10286, acts as Custodian of the Company's assets, except that Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, acts as Custodian
for assets of the Company's Developing Capital Markets Focus Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's Transfer
Agent and is responsible for the issuance, transfer and redemption of shares
and the opening and maintenance of shareholder accounts. MLFDS will receive an
annual fee of $5,000 per Fund and will be entitled to reimbursement of out-of-
pocket expenses.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The
Company will send to its shareholders at least semi-annually reports showing
the Funds' portfolio securities and other information. An annual report
containing financial statements, audited by independent auditors, will be sent
to shareholders each year.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission.
The Statement of Additional Information, dated April 25, 1997, which
forms a part of the Registration Statement, is incorporated by reference into
this Prospectus. The Statement of Additional Information may be obtained
without charge as provided on the cover page of this Prospectus. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
A-17
ANNEX A
U.S. GOVERNMENT SECURITIES
The Domestic Money Market Fund, Reserve Assets Fund and the Government
Bond Fund (and, for temporary or defensive purposes, each other Fund) may
invest in the various types of marketable securities issued by or guaranteed as
to principal and interest by the U.S. Government and supported by the full
faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly
in the length of their maturity. Treasury bills, the most frequently issued
marketable government security, have a maturity of up to one year and are
issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
The Domestic Money Market Fund, Reserve Assets Fund and the Government
Bond Fund (and, for temporary or defensive purposes, each other Fund) may
invest in government agency securities, which are debt securities issued by
government sponsored enterprises, federal agencies and international
institutions. Such securities are not direct obligations of the Treasury but
involve government sponsorship or guarantees by government agencies or
enterprises. The Funds may invest in all types of government agency securities
currently outstanding or to be issued in the future.
DEPOSITARY INSTITUTIONS MONEY INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for
temporary or defensive purposes, each other Fund) may invest in depositary
institutions money instruments, such as certificates of deposit, including
variable rate certificates of deposit, bankers' acceptances, time deposits and
bank notes. Certificates of deposit are generally short-term, interest-bearing
negotiable certificates issued by commercial banks, savings banks or savings
and loan associations against funds deposited in the issuing institution.
Variable rate certificates of deposit are certificates of deposit on which the
interest rate is periodically adjusted prior to their stated maturity, usually
at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market
rate. As a result of these adjustments, the interest rate on these obligations
may be increased or decreased periodically. Often, dealers selling variable
rate certificates of deposit to the Funds agree to repurchase such instruments,
at the Funds' option, at par on the coupon dates. The dealers' obligations to
repurchase these instruments are subject to conditions imposed by the various
dealers; such conditions typically are the continued credit standing of the
issuer and the existence of reasonably orderly market conditions. The Funds are
also able to sell variable rate certificates of deposit in the secondary
market. Variable rate certificates of deposit normally carry a higher interest
rate than comparable fixed rate certificates of deposit because variable rate
certificates of deposit generally have a longer stated maturity than comparable
fixed rate certificates of deposit. As a matter of policy, the Domestic Money
Market Fund will invest only in these types of instruments issued by U.S.
issuers.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing
Annex A-1
<PAGE>
Capital Markets Focus Fund and the Quality Equity Fund) may invest in
certificates of deposit and bankers' acceptances issued by foreign branches or
subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S. branches or
subsidiaries of foreign banks ("Yankeedollar" obligations). The Fund may
invest only in Eurodollar obligations which by their terms are general
obligations of the U.S. parent bank and meet the other criteria discussed
below. Yankeedollar obligations in which the Fund may invest must be issued by
U.S. branches or subsidiaries of foreign banks which are subject to state or
federal banking regulations in the U.S. and by their terms must be general
obligations of the foreign parent. In addition, the Fund will limit its
investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing
Capital Markets Focus Fund and the Quality Equity Fund) may also invest in U.S.
dollar-denominated obligations of foreign depository institutions and their
foreign branches and subsidiaries, such as certificates of deposit, bankers'
acceptances, time deposits and deposit notes. The obligations of such foreign
branches and subsidiaries may be the general obligation of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of the specific
obligation or by government regulation. Such investments will only be made if
determined to be of comparable quality to other investments permissible for the
Reserve Assets Fund. The Reserve Assets Fund will not invest more than 25% of
its total assets (taken at market value at the time of each investment) in
these obligations.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United States,
has total assets of at least $1 billion and its deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets
of a Fund (taken at market value at the time of each investment) in
certificates of deposit issued by banks and savings and loan associations with
assets of less than $1 billion if the principal amount of each such certificate
of deposit is fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for
temporary or defensive purposes, each other Fund) may invest in commercial
paper (including variable amount master demand notes and insurance company
funding agreements), which refers to short-term, unsecured promissory notes
issued by corporations, partnerships, trusts and other entities to finance
short-term credit needs and by trusts issuing asset-backed commercial paper.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. Variable amount master demand notes
are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer
and a commercial bank acting as agent for the payees of such notes, whereby
both parties have the right to vary the amount of the outstanding indebtedness
on the notes. Because variable amount master notes are direct lending
arrangements between the lender and borrower, it is not generally contemplated
that such instruments will be traded and there is no secondary market for the
notes. Typically, agreements relating to such notes provide that the lender may
not sell or otherwise transfer the note without the borrower's consent. Such
notes provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis, in accordance with a stated short-
term interest rate benchmark. Because the interest rate of a variable amount
master note is adjusted no less often than every 60 days and since repayment of
the note may be demanded at any time, the Investment Adviser values such a note
in accordance with the amortized cost basis described under "Determination of
Net Asset Value" in the Statement of Additional Information.
The Domestic Money Market Fund and Reserve Assets Fund may also invest in
nonconvertible debt securities issued by entities or asset-backed
nonconvertible debt securities issued by trusts (e.g., bonds and debentures)
with no more than 397 days (13 months) remaining to maturity at date of
settlement. Short-term debt securities with a remaining maturity of less than
one year tend to become extremely liquid and are traded as money market
securities. For a discussion of the ratings requirements of the Funds'
portfolio securities, SEE "PORTFOLIO RESTRICTIONS" IN THE PROSPECTUSES TO THE
DOMESTIC MONEY MARKET FUND AND RESERVE ASSETS FUND.
Annex A-2
<PAGE>
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund and Developing
Capital Markets Focus Fund) may also invest in U.S. dollar-denominated
commercial paper and other short-term obligations issued by foreign entities.
Such investments are subject to quality standards similar to those applicable
to investments in comparable obligations of domestic issuers. Investments in
foreign entities in general involve the same risks as those described in the
Statement of Additional Information in connection with investments in
Eurodollar, Yankeedollar and foreign bank obligations.
REPURCHASE AGREEMENTS
REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. If the seller
were to default on its obligation to repurchase a security under a repurchase
agreement or purchase and sale contract and the market value of the underlying
security at such time was less than the Fund had paid to the seller, the Fund
would realize a loss. Repurchase agreements maturing in more than seven days
will be considered "illiquid securities." The Domestic Money Markets and
Reserve Assets Funds will not enter into repurchase agreements maturing in more
than 30 days.
REVERSE REPURCHASE AGREEMENTS. The Domestic Money Market and Reserve
Assets Funds may enter into reverse repurchase agreements, which involve the
sale of money market securities held by the Funds, with an agreement to
repurchase the securities at an agreed upon price, date, and interest payment.
The Funds will use the proceeds of the reverse repurchase agreements to
purchase other money market securities either maturing, or under an agreement
to resell, at a date simultaneous with or prior to the expiration of the
reverse repurchase agreement. The Funds will utilize reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the reverse
repurchase transaction. A separate account of the applicable Fund will be
established with the Custodian consisting of cash or liquid securities having a
market value at all times at least equal in value to the proceeds received on
any sale subject to repurchase plus accrued interest.
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc. ("Moody's"):
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
Annex A-3
<PAGE>
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade
obligations, I.E., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded both during good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca-Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other market shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Ratings Services ("Standard & Poor's"):
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.
Annex A-4
<PAGE>
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.
Annex A-5
<PAGE>
ANNEX B
Certain Funds of the Company are authorized to use derivative
instruments, including indexed and inverse securities, options, and futures,
and to purchase and sell foreign exchange, as described below. Such instruments
are referred to collectively herein as "Strategic Instruments."
INDEXED AND INVERSE SECURITIES
The Domestic Money Market Fund, the Global Bond Focus Fund, the Global
Strategy Focus Fund, the Global Utility Focus Fund, the Government Bond Fund,
the Index 500 Fund, the International Equity Focus Fund, the Natural Resources
Focus Fund, the Prime Bond Fund and the Reserve Assets Fund may invest in
securities the potential return of which is based on the change in particular
measurements of value or rate (an "index"). As an illustration, a Fund may
invest in a debt security that pays interest and returns principal based on the
change in the value of an interest rate index (such as the prime rate or
federal funds rate), a securities index (such as the Standard & Poor's 500
Composite Index (the "S&P 500") or a more narrowly-focused index such as the
AMEX Oil & Gas Index) or a basket of securities, or based on the relative
changes of two indices. In addition, the Developing Capital Markets Focus Fund,
the Global Strategy Focus Fund, the International Equity Focus Fund and the
Natural Resources Focus Fund may invest in securities the potential return of
which is based inversely on the change in an index. For example, these Funds
may invest in securities that pay a higher rate of interest when a particular
index decreases and pay a lower rate of interest (or do not fully return
principal) when the value of the index increases. If the Fund invests in such
securities, it may be subject to reduced or eliminated interest payments or
loss of principal in the event of an adverse movement in the relevant index or
indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Company believes that indexed and inverse securities may provide portfolio
management flexibility that permits Funds to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING OPTIONS. The Developing Capital Markets Focus Fund, the Global
Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus Fund,
the Index 500 Fund, the International Equity Focus Fund and the Natural
Resources Focus Fund are each authorized to purchase put options on securities
held in its portfolio or securities indices the performance of which is
substantially correlated with securities held in its portfolio. When a Fund
purchases a put option, in consideration for an upfront payment (the "option
premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Fund will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.
Annex B-1
<PAGE>
The Developing Capital Markets Focus Fund, the Global Bond Focus Fund,
the Global Strategy Focus Fund, the Index 500 Fund, the International Equity
Focus Fund and the Natural Resources Focus Fund are each authorized to purchase
call options on securities it intends to purchase or securities indices the
performance of which are substantially correlated with the performance of the
types of securities it intends to purchase. When a Fund purchases a call
option, in consideration for the option premium the Fund acquires a right to
purchase from another party specified securities at the exercise price on or
before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified securities
index increases beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The purchase of a call option may
protect the Fund from having to pay more for a security as a consequence of
increases in the market value for the security during a period when the Fund is
contemplating its purchase, in the case of an option on a security, or
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive, in the case of an option on an index (an
"anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium.
Each Fund is also authorized to purchase put or call options in
connection with closing out put or call options it has previously sold.
WRITING OPTIONS. The American Balanced Fund, the Basic Value Focus Fund,
the Developing Capital Markets Focus Fund, the Special Value Focus Fund, the
Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility
Focus Fund, the Index 500 Fund, the International Equity Focus Fund, the
Natural Resources Focus Fund and the Quality Equity Fund are each authorized to
write (i.e., sell) call options on securities held in its portfolio or
securities indices the performance of which is substantially correlated with
securities held in its portfolio. When a Fund writes a call option, in return
for an option premium the Fund gives another party the right to buy specified
securities owned by the Fund at the exercise price on or before the expiration
date, in the case of an option on securities, or agrees to pay to another party
an amount based on any gain in a specified securities index beyond a specified
level on or before the expiration date, in the case of an option on a
securities index. The Fund may write call options to earn income, through the
receipt of option premiums. In the event the party to which the Fund has
written an option fails to exercise its rights under the option because the
value of the underlying securities is less than the exercise price, the Fund
will partially offset any decline in the value of the underlying securities
through the receipt of the option premium. By writing a call option, however,
the Fund limits its ability to sell the underlying securities, and gives up the
opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains outstanding.
The Developing Capital Markets Focus Fund, the Global Bond Focus Fund,
the Global Strategy Focus Fund, the Global Utility Focus Fund, the Index 500
Fund, the International Equity Focus Fund and the Natural Resources Focus Fund
each may also write put options on securities or securities indices. When the
Fund writes a put option, in return for an option premium the Fund gives
another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event
the party to which the Fund has written an option fails to exercise its rights
under the option because the value of the underlying securities is greater than
the exercise price, the Fund will profit by the amount of the option premium.
By writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase
the security at the exercise price for investment purposes (in the case of an
option on a security) or is writing the put in connection with trading
strategies involving combinations of options - for example, the sale and
purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread").
Annex B-2
<PAGE>
Each Fund is also authorized to sell call or put options in connection
with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, a Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures, and Currency
Instruments" below. A call option will also be considered covered if a Fund
owns the securities it would be required to deliver upon exercise of the option
(or, in the case of option on a securities index, securities which are
substantially correlated with the performance of such index) or owns a call
option, warrant or convertible instrument which is immediately exercisable for,
or convertible into, such security.
TYPES OF OPTIONS. A Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. SEE
"ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS" BELOW.
FUTURES
The Developing Capital Markets Focus Fund, the Global Bond Focus Fund,
the Global Strategy Focus Fund, the Global Utility Focus Fund, the Index 500
Fund, the International Equity Focus Fund and the Natural Resources Focus Fund
may each engage in transactions in futures and options thereon. Futures are
standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing
any loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract limits a Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect a Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
A Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). Each Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Annex B-3
<PAGE>
FOREIGN EXCHANGE TRANSACTIONS
The Developing Capital Markets Focus Fund, the Global Bond Focus Fund,
the Global Strategy Focus Fund, the Global Utility Focus Fund, the
International Equity Focus Fund, the Natural Resources Focus Fund and the
Quality Equity Fund may engage in spot and forward foreign exchange
transactions and currency swaps, purchase and sell options on currencies and
purchase and sell currency futures and related options thereon (collectively,
"Currency Instruments") for purposes of hedging against the decline in the
value of currencies in which its portfolio holdings are denominated against the
US dollar.
Forward foreign exchange transactions are OTC contracts to purchase or
sell a specified amount of a specified currency or multinational currency unit
at a price and future date set at the time of the contract. Spot foreign
exchange transactions are similar but require current, rather than future,
settlement. A Fund will enter into foreign exchange transactions only for
purposes of hedging either a specific transaction or a portfolio position. A
Fund may enter into a foreign exchange transaction for purposes of hedging a
specific transaction by, for example, purchasing a currency needed to settle a
security transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. A Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future. A Fund may also hedge portfolio
positions through currency swaps, which are transactions in which one currency
is simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis.
The Funds authorized to engage in Currency Instrument transactions may
also hedge against the decline in the value of a currency against the US dollar
through use of currency futures or options thereon. Currency futures are
similar to forward foreign exchange transactions except that futures are
standardized exchange-traded contracts. SEE "FUTURES" ABOVE.
The Funds authorized to engage in Currency Instrument transactions may
also hedge against the decline in the value of a currency against the US dollar
through the use of currency options. Currency options are similar to options on
securities, but in consideration for an option premium the writer of a currency
option is obligated to sell (in the case of a call option) or purchase (in the
case of a put option) a specified amount of a specified currency on or before
the expiration date for a specified amount of another currency. The Fund may
engage in transactions in options on currencies either on exchanges or OTC
markets. SEE "TYPES OF OPTIONS" ABOVE AND "ADDITIONAL RISK FACTORS OF OTC
TRANSACTIONS" BELOW.
No Fund will speculate in Currency Instruments. Accordingly, a Fund will
not hedge a currency in excess of the aggregate market value of the securities
which it owns (including receivables for unsettled securities sales), or has
committed to or anticipates purchasing, which are denominated in such currency.
A Fund may, however, hedge a currency by entering into a transaction in a
Currency Instrument denominated in a currency other than the currency being
hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the
Investment Adviser believes that (i) there is a demonstrable high correlation
between the currency in which the cross-hedge is denominated and the currency
being hedged, and (ii) executing a cross-hedge through the currency in which
the cross-hedge is denominated will be significantly more cost-effective or
provide substantially greater liquidity than executing a similar hedging
transaction by means of the currency being hedged.
RISK FACTORS IN HEDGING FOREIGN CURRENCY RISKS. While a Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that a Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Annex B-4
<PAGE>
Furthermore, a Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for a Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that (i) the currency exchange rate movement is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective price,
or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency
hedging.
RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments a Fund
will experience a gain or loss which will not be completely offset by movements
in the value of the hedged instruments.
Each Fund intends to enter into transactions involving Strategic
Instruments only if there appears to be a liquid secondary market for such
instruments or, in the case of illiquid instruments traded in OTC transactions,
such instruments satisfy the criteria set forth below under "Additional Risk
Factors of OTC Transactions." However, there can be no assurance that, at any
specific time, either a liquid secondary market will exist for a Strategic
Instrument or the Fund will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in a
Strategic Instrument without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose a
Fund to potential losses which exceed the amount originally invested by the
Fund in such instruments. When a Fund engages in such a transaction, the Fund
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including indexed
securities and OTC options, may be substantially less liquid than other
instruments in which a Fund may invest. The absence of liquidity may make it
difficult or impossible for the Fund to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Fund to ascertain a market value for such instruments. A Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Investment Adviser
anticipates the Fund can receive on each business day at least two independent
bids or offers, unless a quotation from only one dealer is available, in which
case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets underlying written OTC
options are illiquid securities. Each Fund has therefore adopted an investment
policy pursuant to which it will not purchase or sell OTC options (including
OTC options on futures contracts) if, as a result of such transactions, the sum
of the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable. However, if an OTC option is
sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
Annex B-5
<PAGE>
margin to the extent that a Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty, the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations. A
Fund will attempt to minimize the risk that a counterparty will become bankrupt
or otherwise fail to honor its obligations by engaging in transactions in
Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a third-
party guaranty or other credit enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
No Fund may use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited by its investment restrictions from
purchasing directly, except that the Natural Resources Focus Fund may acquire
securities indexed to a precious metal or other natural resource index.
Annex B-6
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights:
American Balanced Fund for each of the years in the eight-year period
ended December 31, 1996 and for the period June 1, 1988 (commencement of
operations) to December 31, 1988.
Basic Value Focus Fund for each of the years in the three-year period
ended December 31, 1996 and for the period July 1, 1993 (commencement of
operations) to December 31, 1993.
Developing Capital Markets Focus Fund for each of the years in the two-
year period ended December 31, 1996 and for the period May 2, 1994
(commencement of operations) to December 31, 1994.
Domestic Money Market Fund for each of the years in the four-year period
ended December 31, 1996 and for the period February 20, 1992
(commencement of operations) to December 31, 1992.
Special Value Focus Fund for each of the years in the ten-year period
ended December 31, 1996.
Global Strategy Focus Fund for each of the years in the four-year period
ended December 31, 1996 and for the period February 28, 1992
(commencement of operations) to December 31, 1992.
Global Utility Focus Fund for each of the years in the three-year period
ended December 31, 1996 and for the period July 1, 1993 (commencement of
operations) to December 31, 1993.
Government Bond Fund for each of the years in the two-year period ended
December 31, 1996 and for the period May 2, 1994 (commencement of
operations) to December 31, 1994.
High Current Income Fund for each of the years in the ten-year period
ended December 31, 1996.
Index 500 Fund for the period December 13, 1996 (commencement of
operations) to December 31, 1996 (audited), and for the period January 1,
1997 to March 31, 1997 (unaudited).
International Equity Focus Fund for each of the years in the three-year
period ended December 31, 1996 and for the period July 1, 1993
(commencement of operations) to December 31, 1993.
Natural Resources Focus Fund for each of the years in the eight-year
period ended December 31, 1996 and for the period June 1, 1988
(commencement of operations) to December 31, 1988.
Prime Bond Fund for each of the years in the ten-year period ended
December 31, 1996.
Quality Equity Fund for each of the years in the ten-year period ended
December 31, 1996.
Reserve Assets Fund for each of the years in the ten-year period ended
December 31, 1996.
Global Bond Focus Fund for each of the years in the three-year period
ended December 31, 1996 and for the period July 1, 1993 (commencement of
operations) to December 31, 1993.
Contained in Part B:#
C-1
<PAGE>
Schedules of Investments as of December 31, 1996.
Statements of Assets and Liabilities as of December 31, 1996.
Statements of Operations for the periods ended December 31, 1996.
Statements of Changes in Net Assets for each of the periods in the two-year
period ended December 31, 1996.
Index 500 Fund (Unaudited):
Schedule of Investments as of March 31, 1997.
Statement of Assets and Liabilities as of March 31, 1997
Statement of Operations for the period January 1, 1997 to March 31, 1997.
Statement of Changes for the period January 1, 1997 to March 31, 1997.
Financial Highlights:
American Balanced Fund for each of the years in the five-year period
ended December 31, 1996.
Basic Value Focus Fund for each of the years in the three-year period
ended December 31, 1996, and for the period July 1, 1993 (commencement of
operations) to December 31, 1993.
Developing Capital Markets Focus Fund for each of the years in the two-
year period ended December 31, 1996 and for the period May 2, 1994
(commencement of operations) to December 31, 1994.
Domestic Money Market Fund for each of the years in the four-year period
ended December 31, 1996 and for the period February 20, 1992
(commencement of operations) to December 31, 1992.
Special Value Focus Fund for each of the years in the five-year period
ended December 31, 1996.
Global Strategy Focus Fund for each of the years in the four-year period
ended December 31, 1996 and for the period February 28, 1992
(commencement of operations) to December 31, 1992.
Global Utility Focus Fund for each of the years in the three-year period
ended December 31, 1996 and for the period July 1, 1993 (commencement of
operations) to December 31, 1993.
Government Bond Fund for each of the years in the two-year period ended
December 31, 1996 and for the period May 2, 1994 (commencement of
operations) to December 31, 1994.
High Current Income Fund for each of the years in the five-year period
ended December 31, 1996.
Index 500 Fund for the period December 13, 1996 (commencement of
operations) to December 31, 1996 and for the period January 1, 1997 to
March 31, 1997 (unaudited).
International Equity Focus Fund for each of the years in the three-year
period ended December 31, 1996 and for the period July 1, 1993
(commencement of operations) to December 31, 1993.
Natural Resources Focus Fund for each of the years in the five-year
period ended December 31, 1996.
Prime Bond Fund for each of the years in the five-year period ended
December 31, 1996.
C-2
<PAGE>
Quality Equity Fund for each of the years in the five-year period ended
December 31, 1996.
Reserve Assets Fund for each of the years in the five-year period ended
December 31, 1996.
Global Bond Focus Fund for each of the years in the three-year period
ended December 31, 1996 and the period July 1, 1993 (commencement of
operations) to December 31, 1993.
# Incorporated by reference to the Statement of Additional Information to
Post-Effective Amendment No. 27 to the Registration Statement.
(B) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
________ ___________
1(a) - Articles of Incorporation of Registrant (a)
1(b) - Form of Articles Supplementary of Registrant (b)
1(c) - Form of Articles of Amendment of Registrant (c)
1(d) - Form of Articles Supplementary of Registrant (d)
1(e) - Form of Articles Supplementary of Registrant (e)
1(f) - Form of Articles Supplementary of Registrant (f)
1(g) - Articles Supplementary to Registrant's Articles of Incorporation
relating to the redesignation of shares of common stock as Merrill
Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World Income
Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common
Stock and Merrill Lynch International Equity Focus Fund Common Stock
(s)
1(h) - Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of shares of common stock as Merrill Lynch
Developing Capital Markets Focus Fund Common Stock, Merrill Lynch
International Bond Fund Common Stock and Merrill Lynch Intermediate
Government Bond Fund Common Stock (u)
1(i) - Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of 1(i) shares of common stock as Merrill
Lynch Index 500 Fund Common Stock (w)
1(j) - Form of Articles of Amendment to Registrant's Articles of Incorporation
relating to the reclassification of the Merrill Lynch Flexible Strategy
Fund Common Stock as Merrill Lynch Global Strategy Focus Fund Common
Stock, the reclassification of the Merrill Lynch International Bond
Fund Common Stock as Merrill Lynch World Income Focus Fund Common
Stock, the change in name of the class of shares of common stock
designated as Merrill Lynch Intermediate Government Bond Fund to
Merrill Lynch Government Bond Fund, and the change in the name of the
class of shares of common stock designated as Merrill Lynch World
Income Focus Fund to Merrill Lynch Global Bond Focus Fund (x)
1(k) - Form of Articles of Amendment to Registrant's Articles of Incorporation
relating to designation 1(k) of Class A and Class B shares (z)
1(l) - Form of Articles of Amendment redesignating the Class A and Class B
Shares of the Equity Growth Fund as Class A and Class B Shares of the
Special Value Focus Fund{*}
C-3
<PAGE>
2 - By-Laws of Registrant, as amended (g)
3 - None
4 - Specimen certificate for shares of common stock of Registrant (h)
5(a) - Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund (i)
5(b) - Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund,
Merrill Lynch High Current Income Fund, Merrill Lynch Quality Equity
Fund and Merrill Lynch Special Value Focus Fund (j)
5(c) - Form of Investment Advisory Agreement for Merrill Lynch Index 500 Fund
(y)
5(d) - Form of Investment Advisory Agreement for Merrill Lynch Natural
Resources Focus Fund and Merrill Lynch American Balanced Fund (l)
5(e) - Form of Investment Advisory Agreement for Merrill Lynch Domestic Money
Market Fund and Merrill Lynch Global Strategy Focus Fund (m)
5(f) - Form of Investment Advisory Agreement for Merrill Lynch Basic Value
Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill Lynch Global
Utility Focus Fund and Merrill Lynch International Equity Focus Fund
5(g) - Form of Investment Advisory Agreement for Merrill Lynch Developing
Capital Markets Focus Fund and Merrill Lynch Government Bond Fund (u)
(h) - Form of Sub-Advisory Agreement between Merrill Lynch Asset Management
L.P. and Merrill Lynch Asset Management U.K. Limited
6(a) - Form of Distribution Agreement (n)
6(b) - Form of Distribution Agreement relating to the Class B shares (aa)
7 - None
8(a) - Form of Custodian Agreement (o)
8(b) - Form of Custodian Agreement with Brown Brothers Harriman & Co. (bb)
9(a) - Form of Transfer Agency, and Dividend Disbursing Agreement (p)
9(b) - Form of Agreement relating to the use of the "Merrill Lynch" name (q)
9(c) - Form of Participation Agreement (k)
10 - Opinion of Counsel (filed with Rule 24f-2 Notice on February 29, 1997)
11 - Consent of Deloitte & Touche LLP*
12 - None
13 - None
14 - None
C-4
<PAGE>
15 - Form of Distribution Plan relating to Class B shares (cc)
16 - Calculation of Performance Data (r)
24 - Power of Attorney for Robert S. Salomon, Jr. (v)
27 - Financial Data Schedules (dd)
- ----------
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form N-1 (the "Registration Statement").
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1
to the Registration Statement.
(c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 7
to the Registration Statement.
(d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No.
10 to the Registration Statement.
(e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No.
12 to the Registration Statement.
(f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No.
16 to the Registration Statement ("Post-Effective Amendment No. 16").
(g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11
to the Registration Statement ("Post-Effective Amendment No. 11").
(h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4 to
the Registration Statement ("Post-Effective Amendment No. 4").
(i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No. 8
to the Registration Statement ("Post-Effective Amendment No. 8").
(j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No.
8.
(k) Incorporated by reference to Exhibit 9(c) to Post-Effective Amendment No.
24 to Registrant's Registration Statement ("Post-Effective Amendment No.
24").
(l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No.
11.
(m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No.
16.
(n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to
Registrant's Registration Statement ("Amendment No. 1").
(o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4 to
the Registration Statement.
(p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 4
to the Registration Statement.
(q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1 to the
Registration Statement.
(r) Incorporated by reference to Exhibit 16 to Post-Effective Amendment No. 13
to the Registration Statement.
(s) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No.
20 to the Registration Statement.
C-5
<PAGE>
(t) Incorporated by reference to Exhibit 5(f) to Post-Effective Amendment No.
20 to the Registration Statement.
(u) Incorporated by reference to Exhibit 5(g) to Post-Effective Amendment No.
21 to the Registration Statement.
(v) Incorporated by reference to Exhibit 24 to Post-Effective Amendment No. 24.
(w) Incorporated by reference to Exhibit 1(i) to Post-Effective Amendment No.
27 to the Registrant's Registration Statement ("Post-Effective Amendment
No. 27").
(x) Incorporated by reference to Exhibit 1(j) to Post-Effective Amendment No.
27.
(y) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No.
27.
(z) Incorporated by reference to Exhibit 1(k) to Post-Effective Amendment No.
27.
(aa) Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment No.
27.
(bb) Incorporated by reference to Exhibit 8(b) to Post-Effective Amendment No.
27.
(cc) Incorporated by reference to Exhibit 15 to Post-Effective Amendment No.
27.
(dd) Incorporated by reference to Exhibit 27 to Post-Effective Amendment No.
27.
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant does not control any other person. Except that substantially all
of Registrant's issued and outstanding shares are and will be held by Merrill
Lynch Life Insurance Company, ML Life Insurance Company of New York and Family
Life Insurance Company for their Separate Accounts, the Registrant is not under
common control with any other person.
ITEM 26. NUMBERS OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS OF
CLASS A
SHARES AS OF
DECEMBER 31,
TITLE OF CLASS 1996
______________ _____________
<S> <C>
Common stock, par value $0.10 per share, Merrill Lynch Domestic Money Market Fund Class............... 3
Common stock, par value $0.10 per share, Merrill Lynch Reserve Assets Fund Class.................... 8
Common stock, par value $0.10 per share, Merrill Lynch Prime Bond Fund Class............................. 4
Common stock, par value $0.10 per share, Merrill Lynch High Current Income Fund Class.................... 10
Common stock, par value $0.10 per share, Merrill Lynch Quality Equity Fund Class.................... 9
Common stock, par value $0.10 per share, Merrill Lynch Special Value Focus Fund Class.................... 13
Common stock, par value $0.10 per share, Merrill Lynch Natural Resources Focus Fund Class............... 8
Common stock, par value $0.10 per share, Merrill Lynch American Balanced Fund Class.................... 9
Common stock, par value $0.10 per share, Merrill Lynch Global Strategy Focus Fund Class............... 12
Common stock, par value $0.10 per share, Merrill Lynch Basic Value Focus Fund Class.................... 8
Common stock, par value $0.10 per share, Merrill Lynch Global Bond Focus Fund Class.................... 14
Common stock, par value $0.10 per share, Merrill Lynch Global Utility Focus Fund Class............... 7
Common stock, par value $0.10 per share, Merrill Lynch International Equity Focus Fund Class......... 7
Common stock, par value $0.10 per share, Merrill Lynch Developing Capital Markets Focus Fund Class.. 7
Common stock, par value $0.10 per share, Merrill Lynch Government Bond Fund Class.................... 3
Common stock, par value $0.10 per share, Merrill Lynch Index 500 Fund Class.............................. 1
</TABLE>
C-6
<PAGE>
No shares of Class B Common Stock are issued and outstanding
as of the date of this Post-Effective Amendment to the Registration
Statement. The number of holders shown above includes holders of
record plus beneficial owners, whose shares are held of record by
Merrill Lynch, Pierce, Fenner and Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgements, fines and amounts paid in settlement actually and 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 each Distribution
Agreement, the Registrant has agreed to indemnify the Distributor against any
loss, liability, claim, damage or expense arising out of any untrue statement
of a material fact, or an omission to state a material fact, in any
registration statement, prospectus or report to shareholders of the Registrant.
Reference is made to Article VI of Registrant's Certificate of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of each Distribution Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to Directors, officers and
controlling persons of the Registrant and the principal underwriter pursuant to
the foregoing provisions or otherwise, the Registrant 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 Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
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 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
(a) Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as
the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
C-7
<PAGE>
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.; and the following
closed-end registered investment companies: Convertible Holdings, Inc., Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc. Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Puerto Rico Tax-Exempt Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund
II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc., and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series is One Financial Center, 15th Floor, Boston, Massachusetts
02111-2646. The address of the Manager and FAM is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
December 1, 1994 for his, her own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President, and Mr. Richard is Treasurer of all or substantially
all of the investment companies described in the first two paragraphs of this
Item 28, and Messrs. Giordano, Harvey, Kirstein and Monagle are directors or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
____ __________________ __________________________________
<S> <C> <C>
ML&Co Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services General Partner General Partner of FAM
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
____ __________________ __________________________________
<S> <C> <C>
Arthur Zeikel President President of FAM; President and Director of
Princeton Services; Director of Merrill Lynch
Funds Distributors, Inc. ("MLFD");
Executive Vice President of ML& Co.
Terry K. Glenn Executive Vice Executive Vice President of FAM; President and
President Director of MLFD; Executive Vice President and
Director of Princeton Services; President of
Princeton Administrations, L.P.; Director of
MLFDS
Vincent R. Giordano Senior Vice President Executive Vice President of FAM; Senior Vice
President of Princeton Services.
Elizabeth Griffin Senior Vice President Senior Vice President of FAM
Norman R. Harvey Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Michael J. Hennewinkel Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein Senior Vice President, Senior Vice President, General Counsel and
General Counsel, Secretary of FAM; Senior Vice President, General
Director and Counsel, Director and Secretary of Princeton
Secretary Services; Director of MLFD.
Ronald M. Kloss Senior Vice President Senior Vice President and Controller of FAM;
and Controller Senior Vice President and Controller of Princeton
Services.
Stephen M. M. Miller Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Michael L. Quinn Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch
from 1989 to 1995.
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of FAM; Senior
and Treasurer Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of MLFD.
Ronald Welburn Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies; Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund and Merrill Lynch
Short-Term Global Income Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
C-9
<PAGE>
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business profession, vocation or employment of a substantial
nature in which each such person had been engaged since December 1, 1995, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and
Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
C-10
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
____ __________________ ___________________________________
<S> <C> <C>
Arthur Zeikel Director and Chairman President of the Manager and FAM; President
and Director of Princeton Services, Director
of MLFD; Executive Vice President of ML & Co.
Alan J. Albert Senior Managing Director Vice President of the Manager
Terry K. Glenn Director Executive Vice President of the Manager and
FAM; Executive Vice President and
Director of Princeton Services; President
and Director of MLFD; Director of
MLFDS; President of Princeton
Administrators, L.P.
Adrian Holmes Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand Director Director of Merrill Lynch Global Asset
Management
Edward Gobora Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride Director Managing Director of Merrill Lynch Global
Asset Management
Robert M. Ryan Director Vice President, Institutional Marketing Debt
and Equity Group, Merrill Lynch Capital
Markets from 1989 to 1994.
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President
and Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Stephen J. Yardley Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham Company Secretary None
Debra Anne Scarle Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the registered investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund., The Corporate Fund Accumulation Program, Inc., and MLFD also acts as
principal underwriter for the following closed-end funds: Merrill Lynch High
Income Municipal Bond fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Brady, Breen, Fatseas and Wasel, is One Financial Center, Boston,
Massachusetts 02111-2646.
C-11
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
____ ______________________ ________________________
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur K. Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Michael Clark Vice President None
Mark A. DeSario Vice President None
James T. Faseas Vice President None
Debra W. Landsman-Yros Vice President None
Michelle T. Lau Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Sal Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 as amended and the Rules thereunder
will be maintained at the offices of the Registrant, its Investment Adviser,
its Custodian, and its Transfer Agent.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "Directors" and "Investment Adviser"
in the Prospectus constituting Part A of the Registration Statement and under
the captions "Management of the Company" and "Investment Advisory Arrangements"
in the Statement of Additional Information constituting Part B of the
Registration Statement, the Registrant is not a party to any management-related
service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request, and without charge.
The Company hereby undertakes to comply with the restrictions on
indemnification set forth in Investment Company Act Release No. IC-11330,
September 2, 1980.
C-12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO ITS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE
14TH DAY OF JULY, 1997.
Merrill Lynch Variable Series Fund, Inc.
(Registrant)
/s/ GERALD M. RICHARD
By:_____________________________________
(Gerald M. Richard, Treasurer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
_________ _____ ____
<S> <C> <C>
* President and Director July 14, 1997
______________________________ Principal Executive Officer
(Arthur Zeikel)
/S/ GERALD M. RICHARD Treasurer (Principal
_____________________________ Financial and Accounting Officer
(Gerald M. Richard)
* Director
_____________________________
(Walter Mintz)
* Director
_____________________________
(Melvin R. Seiden)
* Director
_____________________________
(Stephen B. Swensrud)
* Director
_____________________________
(Joe Grills)
* Director
_____________________________
(Robert S. Salomon, Jr.)
*By: /S/ GERALD M. RICHARD
_____________________________
(Gerald M. Richard)
ATTORNEY-IN-FACT
</TABLE>
C-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
_______ ___________ __________
<S> <C> <C>
1(l) Form of Articles of Amendment redesignating the Class A and
Class B Shares of the Equity Growth Fund as Class A and Class
B Shares of the Special Value Focus Fund{*}
11 Consent of Deloitte & Touche LLP{*}
</TABLE>
__________________
* Filed herewith.
C-14
<PAGE>
Exhibit 1(L)
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FORM OF ARTICLES OF AMENDMENT
Merrill Lynch Variable Series Funds, Inc. a Maryland corporation,
having its principle 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 Corporation is registered as an open-ended company under the
Investment Company Act of 1940.
SECOND: The Corporation desires to amend its Charter as currently in
effect.
THIRD: The following provisions are all of the provisions of the Charter
as amended:
(a) Article II of the Charter be and hereby is amended as
follows: The Board of Directors of the Corporation, acting in accordance
with Section 2-605(a)(4) of the General Corporation Law of the State of
Maryland, hereby redesignates all issued and unissued Class A and Class B
shares of Common Stock of Merrill Lynch Equity Growth Fund as Class A and
Class B shares of Common Stock of Merrill Lynch Special Value Focus Fund.
(b) All of the shares of Merrill Lynch Special Value Focus Fund,
as classified and designated, continue to have preferences, conversions and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption as set forth in
Article V of the Articles of Incorporation of the Corporation.
FOURTH: (a) Before giving effect to this Amendment, the Corporation has
the authority to issue 6,800,000,000 shares of stock as follows:
<TABLE>
<CAPTION>
Number of
Authorized
FUNDS SHARES
_____ __________
<S> <C>
Merrill Lynch American Balanced Fund Common Stock -- Class A 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock -- Class A 100,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common Stock - 100,000,000
- - Class A
<PAGE>
Merrill Lynch Domestic Money Market Fund Common Stock -- Class A 1,300,000,000
Merrill Lynch Equity Growth Fund Common Stock -- Class A 100,000,000
Merrill Lynch Global Bond Focus Fund Common Stock -- Class A 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock - 200,000,000
- - Class A
Merrill Lynch Global Utility Focus Fund Common Stock -- Class A 100,000,000
Merrill Lynch Government Bond Fund Common Stock -- Class A 100,000,000
Merrill Lynch High Current Income Fund Common Stock -- 100,000,000
Class A
Merrill Lynch Index 500 Fund Common Stock -- Class A 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock -- 100,000,000
Class A
Merrill Lynch Natural Resources Focus Fund Common Stock - 100,000,000
- - Class A
Merrill Lynch Prime Bond Fund Common Stock -- Class A 100,000,000
Merrill Lynch Quality Equity Fund Common Stock -- Class A 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock -- Class A 500,000,000
Merrill Lynch American Balanced Fund Common Stock -- Class B 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock -- Class B 100,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common Stock - 100,000,000
- - Class B
Merrill Lynch Domestic Money Market Fund Common Stock -- Class B 1,300,000,000
Merrill Lynch Equity Growth Fund Common Stock -- Class B 100,000,000
Merrill Lynch Global Bond Focus Fund Common Stock -- Class B 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock - 200,000,000
- - Class B
Merrill Lynch Global Utility Focus Fund Common Stock -- Class B 100,000,000
Merrill Lynch Government Bond Fund Common Stock -- Class B 100,000,000
Merrill Lynch High Current Income Fund Common Stock -- 100,000,000
Class B
Merrill Lynch Index 500 Fund Common Stock -- Class B 100,000,000
<PAGE>
Merrill Lynch International Equity Focus Fund Common Stock -- 100,000,000
Class B
Merrill Lynch Natural Resources Focus Fund Common Stock - 100,000,000
- - Class B
Merrill Lynch Prime Bond Fund Common Stock -- Class B 100,000,000
Merrill Lynch Quality Equity Fund Common Stock -- Class B 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock -- Class B 500,000,000
</TABLE>
(b) All shares of Class A and Class B Common Stock have a par
value of $0.10 per share. The aggregate par value of all the shares of all
classes of the Corporation's capital stock is currently Three Hundred Forty
Million Dollars ($680,000,000).
(c) After the redesignation of the Corporation's issued and
unissued Class A and Class B shares of Common Stock contemplated in
Article THIRD(a) hereof, the Corporation will have authority to issue
6,800,000,000 shares of the Corporation as follows:
<TABLE>
<CAPTION>
Number of
Authorized
FUNDS SHARES
_____ __________
<S> <C>
Merrill Lynch American Balanced Fund Common Stock -- Class A 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock -- Class A 100,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common Stock - 100,000,000
- - Class A
Merrill Lynch Domestic Money Market Fund Common Stock -- Class A 1,300,000,000
Merrill Lynch Global Bond Focus Fund Common Stock -- Class A 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock - 200,000,000
- - Class A
Merrill Lynch Global Utility Focus Fund Common Stock -- Class A 100,000,000
Merrill Lynch Government Bond Fund Common Stock -- Class A 100,000,000
Merrill Lynch High Current Income Fund Common Stock -- 100,000,000
Class A
Merrill Lynch Index 500 Fund Common Stock -- Class A 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock -- 100,000,000
Class A
Merrill Lynch Natural Resources Focus Fund Common Stock - 100,000,000
- - Class A
Merrill Lynch Prime Bond Fund Common Stock -- Class A 100,000,000
Merrill Lynch Quality Equity Fund Common Stock -- Class A 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock -- Class A 500,000,000
Merrill Lynch Special Value Focus Fund Common Stock -- Class A 100,000,000
Merrill Lynch American Balanced Fund Common Stock -- Class B 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock -- Class B 100,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common Stock - 100,000,000
- - Class B
Merrill Lynch Domestic Money Market Fund Common Stock -- Class B 1,300,000,000
Merrill Lynch Global Bond Focus Fund Common Stock -- Class B 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock - 200,000,000
- - Class B
Merrill Lynch Global Utility Focus Fund Common Stock -- Class B 100,000,000
Merrill Lynch Government Bond Fund Common Stock -- Class B 100,000,000
Merrill Lynch High Current Income Fund Common Stock -- 100,000,000
Class B
Merrill Lynch Index 500 Fund Common Stock -- Class B 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock -- 100,000,000
Class B
Merrill Lynch Natural Resources Focus Fund Common Stock - 100,000,000
- - Class B
Merrill Lynch Prime Bond Fund Common Stock -- Class B 100,000,000
Merrill Lynch Quality Equity Fund Common Stock -- Class B 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock -- Class B 500,000,000
Merrill Lynch Special Value Focus Fund Common Stock -- Class B 100,000,000
</TABLE>
<PAGE>
FIFTH: All of the shares of Class A and Class B Common Stock shall have
a par value of $0.10 per share. After the redesignation contemplated in
Article THIRD(a) hereof, the aggregate par value of all the shares of all
classes of the Corporation's capital stock will be Six Hundred Eighty
Million Dollars ($680,000,000).
SIXTH: The foregoing amendment to the charter of the Corporation set
forth in Article THIRD (a) hereof are limited to changes expressly
permitted by Section 2-605(a)(4) of the Maryland General Corporation Law.
<PAGE>
IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has
caused these present to be signed in its name and on its behalf by its
President and witnesses by its Secretary on , 1997.
WITNESS MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
____________________ ____________________
Name: Jennifer Sawin 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 penalties of
perjury.
_____________
PRESIDENT
C-15
<PAGE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Variable Series Funds, Inc.:
We consent to the use in Post-Effective Amendment No. 28 to Registration
Statement No. 2-74452 of our report dated February 21, 1997 appearing in the
Statement of Additional Information, which incorporated by reference into such
Registration Statement, and to the reference to us under the caption "Financial
Highlights" appearing in each Prospectus, which is also a part of such
Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
July 11, 1997
<PAGE>
