<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997.
FILE NO. 2-74452
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 27
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 28
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ.
MERRILL LYNCH ASSET MANAGEMENT, L.P. ROGERS & WELLS
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X]immediately upon filing pursuant to paragraph (b)
[_]on (date) pursuant to paragraph (b)
[_]60 days after filing pursuant to paragraph (a)(1)
[_]on (date) pursuant to paragraph (a)(1) of Rule 485
[_]75 days after filing pursuant to paragraph (a)(2)
[_]on (date) pursuant to paragraph (a)(2) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_]this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
---------------- (continued on next page)
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>
(Continued from previous page)
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
OF SHARES OFFERING AGGREGATE
TITLE OF SECURITIES BEING PRICE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE PRICE* REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(1) Shares of Domestic Money
Market Fund Stock, par value
$.10 per share.............. 29,045,210 $1.00 $47,142
- --------------------------------------------------------------------------------
(2) Shares of Reserve Assets
Fund Common Stock, par value
$.10 per share.............. 2,697,439 $1.00 $47,142
- --------------------------------------------------------------------------------
(3) Shares of Natural Resources
Focus Fund Common Stock, par
value $.10 per share........ 168,556 $11.72 $47,138
- --------------------------------------------------------------------------------
(4) Shares of American Balanced
Fund Common Stock, par value
$.10 per share.............. 791,945 $13.97 $47,149 $100
- --------------------------------------------------------------------------------
(5) Shares of Global Bond Focus
Fund Common Stock, par value
$.10 per share.............. 573,932 $ 8.99 $47,144
- --------------------------------------------------------------------------------
(6) Shares of Global Strategy
Focus Fund Common Stock, par
value $.10 per share........ 23,422,992 $13.42 $47,145
- --------------------------------------------------------------------------------
(7) Shares of Global Utility
Focus Fund Common Stock, par
value $.10 per share........ 1,430,494 $12.09 $47,139
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* Calculated as of April 21, 1997.
(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of Domestic Money Market Fund Common Stock redeemed or repurchased during
Registrant's previous fiscal year was 146,504,203 shares. Of such amount
117,506,135 shares have been used for reductions pursuant to Rule 24e-2(a)
or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 28,998,068 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement.
(2) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of Reserve Assets Fund Common Stock redeemed or repurchased during
Registrant's previous fiscal year was 10,800,490 shares. Of such amount
8,150,193 shares have been used for reductions pursuant to Rule 24e-2(a)
or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 2,650,297 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement.
(3) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of Natural Resources Focus Fund Common Stock redeemed or repurchased
during Registrant's previous fiscal year was 737,357 shares. Of such
amount 572,823 shares have been used for reductions pursuant to Rule 24e-
2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 164,534 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement.
(4) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of American Balanced Fund Common Stock redeemed or repurchased during
Registrant's previous fiscal year was 1,921,234 shares. Of such amount
1,132,664 shares have been used for reductions pursuant to Rule 24e-2(a)
or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 788,570 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement.
(5) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of Global Bond Focus Fund Common Stock redeemed or repurchased during
Registrant's previous fiscal year was 2,825,267 shares. Of such amount
2,256,579 shares have been used for reductions pursuant to Rule 24e-2(a)
or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 568,688 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement. The foregoing number of shares includes those
shares redeemed or sold by the International Bond Fund prior to its merger
with and into the Global Bond Focus Fund as of December 6, 1996.
(6) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of Global Strategy Focus Fund Common Stock redeemed or repurchased during
Registrant's previous fiscal year was 29,750,613 shares. Of such amount
6,331,134 shares have been used for reductions pursuant to Rule 24e-2(a)
or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 23,419,479 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement. The foregoing number of shares includes those
shares redeemed or sold by the Flexible Strategy Fund prior to its merger
with and into the Global Strategy Focus Fund as of December 6, 1996.
(7) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940. The total amount
of Global Utility Focus Fund Common Stock redeemed or repurchased during
Registrant's previous fiscal year was 2,881,155 shares. Of such amount
1,454,560 shares have been used for reductions pursuant to Rule 24e-2(a)
or Rule 24f-2(c) under the Investment Company Act of 1940 in previous
filings during Registrant's current fiscal year. 1,426,595 of the shares
redeemed during the Registrant's previous fiscal year are being used for
the reduction of the registration fee in this post effective amendment to
the Registration Statement.
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM
FORM N1-A LOCATION
--------- --------
<C> <S> <C>
PART A
1. Cover Page................. Cover Page
2. Synopsis................... *
3. Financial Highlights....... Financial Highlights; Performance Data
4. General Description of Investment Objectives and Policies of
Registrant................ the Funds; Additional Information
5. Management of the Fund..... Investment Adviser; Directors; Portfolio
Transactions and Brokerage; Additional
Information
5A. Management Discussion of
Fund Performance.......... *
6. Capital Stock and Other Cover Page; Dividends, Distributions and
Securities................ Taxes; Additional Information
7. Purchase of Securities Purchase of Shares; Additional
Being Offered............. Information
8. Redemption or Repurchase... Redemption of Shares
9. Pending Legal Proceedings.. *
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION
CAPTION
-----------------------------------
<C> <S> <C>
PART B
10. Cover Page................. Cover Page
11. Table of Contents.......... Table of Contents
12. General Information and Additional Information
History...................
13. Investment Objectives and Investment Objectives and Policies;
Policies.................. Investment Restrictions; Portfolio
Transactions and Brokerage
14. Management of the Management of the Company
Registrant................
15. Control Persons and
Principal Holders of Management of the Company; Additional
Securities................ Information
16. Investment Advisory and Management of the Company
Other Services............
17. Brokerage Allocation and Portfolio Transactions and Brokerage
Other Practices...........
18. Capital Stock and Other *
Securities................
19. Purchase, Redemption and
Pricing of Securities Determination of Net Asset Value;
Being Offered............. Redemption of Shares
20. Tax Status................. Dividends, Distributions and Taxes
21. Underwriters............... Distribution Arrangements
22. Calculation of Performance Performance Data
Data......................
23. Financial Statements....... Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration
Statement.
</TABLE>
- --------
* Item inapplicable or answer negative.
<PAGE>
EXPLANATORY NOTE
This registration statement contains four forms of prospectus: the first
prospectus to be found herein is to be used in connection with the sale of
Class A shares of the Funds to fund variable annuity contracts and/or variable
life insurance contracts issued by insurance companies including Merrill Lynch
Life Insurance Company ("MLLIC") or ML Life Insurance Company of New York ("ML
of New York"); the second prospectus to be found herein is to be used in
connection with the sale of Class A shares of the Funds to fund benefits under
variable life insurance contracts issued by MLLIC or ML of New York; the third
and fourth prospectuses to be found herein are to be used in connection with
the sale of Class A shares of certain Funds to certain insurance companies,
including insurance companies owned by Merrill Lynch & Co., Inc., for certain
separate accounts to fund benefits under variable life insurance contracts
and/or variable annuities contracts issued by the insurance companies.
<PAGE>
PROSPECTUS
APRIL 25, 1997
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
----------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its sixteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock ("Common Stock")
is issued for each Fund. The Company is offering shares of its Class A Common
Stock pursuant to this Prospectus.
The shares of the Funds are sold to separate accounts ("Separate Accounts")
of certain insurance companies (the "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 Insurance Companies
will redeem shares to the extent necessary to provide benefits under the
respective Contracts or for such other purposes as may be consistent with the
respective Contracts. Certain Insurance Companies are wholly owned
subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment
adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The
investment objectives of the Funds and certain investment policies, each of
whose name is preceded by "Merrill Lynch," are as follows:
DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the
highest possible current income consistent with the foregoing objectives by
investing in short-term domestic money market securities.
RESERVE ASSETS FUND. Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing objectives by
investing in short-term money market securities.
PRIME BOND FUND. As high a level of current income as is consistent with
prudent investment management, and 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").
HIGH CURRENT INCOME FUND. 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.
(continued on next page)
THE RESERVE ASSETS FUND AND THE DOMESTIC MONEY MARKET FUND ATTEMPT TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO DO SO. AN INVESTMENT IN THE RESERVE ASSETS
FUND OR THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND AND DEVELOPING CAPITAL
MARKETS FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS
"JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT OBJECTIVES AND
POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(continuation of cover page)
QUALITY EQUITY FUND. Highest total investment return consistent with
prudent risk. The 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.
EQUITY GROWTH FUND. Long-term capital growth by investing primarily in
common shares, of small companies and of emerging growth companies
regardless of size.
NATURAL RESOURCES FOCUS FUND. Long-term growth of capital and protection
of the purchasing power of shareholders' capital by investing primarily in
equity securities of domestic and foreign companies with substantial
natural resource assets.
AMERICAN BALANCED FUND. A level of current income and a degree of
stability of principal not normally available from an investment solely in
equity securities and the opportunity for capital appreciation greater than
is normally available from an investment solely in debt securities by
investing in a balanced portfolio of fixed income and equity securities.
GLOBAL STRATEGY FOCUS FUND. High total investment return by investing
primarily in a portfolio of equity and fixed income securities of U.S. and
foreign issuers.
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND). High
total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational
currency units.
GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation and, secondarily,
income, through investment in securities, principally equities, of issuers
in countries other than the United States.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by
investing in securities, principally equities, of issuers in countries
having smaller capital markets.
GOVERNMENT BOND FUND (FORMERLY, THE INTERMEDIATE GOVERNMENT BOND
FUND). Highest possible current income consistent with the protection of
capital afforded by investing in debt securities issued or guaranteed by
the United States Government, its agencies or instrumentalities.
INDEX 500 FUND. Investment results that, before expenses, correspond to
the aggregate price and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index").
For more information on the Funds' investment objectives and policies,
please see "Investment Objectives and Policies of the Funds," page 17.
2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights...................................................... 4
The Insurance Companies................................................... 18
Reserve Assets Fund and Domestic Money Market Fund Yield Information...... 18
Investment Objectives and Policies of the Funds........................... 19
Directors................................................................. 43
Investment Adviser........................................................ 45
Portfolio Transactions and Brokerage...................................... 47
Purchase of Shares........................................................ 48
Redemption of Shares...................................................... 48
Dividends, Distributions and Taxes........................................ 48
Performance Data.......................................................... 49
Additional Information.................................................... 50
Appendix A................................................................ A-1
Appendix B................................................................ B-1
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below with the exception of the
three month period ending March 31, 1997 for the Index 500 Fund, 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 for the Index 500
Fund, have been derived from information provided in the Company's audited
financial statements. 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,
FOR THE YEAR ENDED DECEMBER 31, 1988+ TO
------------------------------------------------------------------------ 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
investments 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 -- -- -- -- -- -- -- --
======== ======== ======== ======== ======= ====== ====== ====== ======
</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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DEVELOPING CAPITAL MARKETS
BASIC VALUE FOCUS FUND FOCUS FUND
--------------------------------------------- ---------------------------------
FOR THE YEAR FOR THE
FOR THE YEAR ENDED FOR THE PERIOD ENDED PERIOD MAY 2,
DECEMBER 31, JULY 1, 1993+ DECEMBER 31, 1994+ TO
---------------------------- TO DECEMBER 31, ------------------ DECEMBER 31,
1996 1995 1994 1993 1996 1995 1994
-------- -------- -------- --------------- ------- ------- -------------
<S> <C> <C> <C> <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 $ 9.32 $ 9.51 $ 10.00
-------- -------- -------- ------- ------- ------- -------
Investment income--net.. .17 .18 .17 .04 .20 .20 .09
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 2.37 2.49 .08 .91 .76 (.30) (.58)
-------- -------- -------- ------- ------- ------- -------
Total from investment
operations............. 2.54 2.67 .25 .95 .96 (.10) (.49)
-------- -------- -------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. (.18) (.19) (.10) -- (.23) (.09) --
Realized gain on
investments--net....... (.72) (.48) -- -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Total dividends and
distributions.......... (.90) (.67) (.10) -- (.23) (.09) --
-------- -------- -------- ------- ------- ------- -------
Net asset value, end of
year................... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.05 $ 9.32 $ 9.51
======== ======== ======== ======= ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 20.69% 25.49% 2.36% 9.50%# 10.59% (1.08)% (4.90)%#
======== ======== ======== ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... .66% .66% .72% .86%* 1.25% 1.25% 1.29%*
======== ======== ======== ======= ======= ======= =======
Expenses................ .66% .66% .72% .86%* 1.31% 1.36% 1.35%*
======== ======== ======== ======= ======= ======= =======
Investment income--net.. 1.37% 1.68% 2.08% 1.69%* 2.42% 2.73% 2.18%*
======== ======== ======== ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $524,930 $306,463 $164,307 $47,207 $95,599 $55,209 $36,676
======== ======== ======== ======= ======= ======= =======
Portfolio turnover...... 68.41% 74.10% 60.55% 30.86% 87.33% 62.53% 29.79%
======== ======== ======== ======= ======= ======= =======
Average commission rate
paid##................. $ .0549 -- -- -- $ .0003### -- --
======== ======== ======== ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
### The "Average Commission Rate Paid" 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
-------------------------------------------------------
FOR THE PERIOD
FEBRUARY 20,
FOR THE YEAR ENDED 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...... $ 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY GROWTH 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
investments--net....... 1.84 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01)
-------- -------- -------- ------- ------- ------- ------ ------- ------ ------
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 -- -- -- -- -- -- -- -- --
======== ======== ======== ======= ======= ======= ====== ======= ====== ======
</TABLE>
- --------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
++ Amount is less than $.01 per share.
# For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND# GLOBAL UTILITY FOCUS FUND
------------------------------------------------------ --------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED FEBRUARY 28, FOR THE YEAR ENDED JULY 1,
DECEMBER 31, 1992+ TO DECEMBER 31, 1993+ TO
---------------------------------------- DECEMBER 31, ---------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 1996 1995 1994 1993
-------- -------- -------- -------- ------------ -------- -------- -------- ------------
<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 year...... $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 10.00 $ 11.30 $ 9.45 $ 10.66 $ 10.00
-------- -------- -------- -------- ------- -------- -------- -------- --------
Investment income--net.. .28 .39 .30 .16 .13 .46 .45 .35 .04
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 1.33 .82 (.48) 1.96 .13 .95 1.79 (1.25) .64
-------- -------- -------- -------- ------- -------- -------- -------- --------
Total from investment
operations............. 1.61 1.21 (.18) 2.12 .26 1.41 2.24 (.90) .68
-------- -------- -------- -------- ------- -------- -------- -------- --------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment income--net.. (.29) (.39) (.21) (.17) (.04) (.52) (.39) (.29) (.02)
Realized gain on
investments-- net...... -- -- (.04) -- -- -- -- -- --
In excess of realized
gain on investments--
net.................... -- --++ (.01) -- -- -- -- (.02) --
-------- -------- -------- -------- ------- -------- -------- -------- --------
Total dividends and
distributions.......... (.29) (.39) (.26) (.17) (.04) (.52) (.39) (.31) (.02)
-------- -------- -------- -------- ------- -------- -------- -------- --------
Net asset value, end of
year................... $ 13.87 $ 12.55 $ 11.73 $ 12.17 $ 10.22 $ 12.19 $ 11.30 $ 9.45 $ 10.66
======== ======== ======== ======== ======= ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 13.17% 10.60% (1.46)% 21.03% 2.62%## 12.96% 24.33% (8.51)% 6.85%##
======== ======== ======== ======== ======= ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... .71% .72% .77% .88% 1.25%* .66% .66% .73% .89%*
======== ======== ======== ======== ======= ======== ======== ======== ========
Expenses................ .71% .72% .77% .88% 1.35%* .66% .66% .73% .89%*
======== ======== ======== ======== ======= ======== ======== ======== ========
Investment income--net.. 2.68% 3.33% 2.85% 2.41% 2.66%* 3.90% 4.44% 3.68% 2.84%*
======== ======== ======== ======== ======= ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $870,203 $540,242 $515,407 $269,627 $15,527 $142,438 $148,225 $126,243 $104,517
======== ======== ======== ======== ======= ======== ======== ======== ========
Portfolio turnover...... 173.44% 27.23% 21.03% 17.07% 14.47% 11.39% 11.05% 9.52% 1.72%
======== ======== ======== ======== ======= ======== ======== ======== ========
Average commission rate
paid***................ $ .0143 -- -- -- -- $ .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.
++ 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.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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
investments--net....... .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79)
-------- -------- -------- -------- ------- ------ ------ ------- ------- -------
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 RE-
TURN:*
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%
======== ======== ======== ======== ======= ====== ====== ======= ======= =======
</TABLE>
- --------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND#
-------------------------------
FOR THE FOR THE
YEAR PERIOD
ENDED 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 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.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND
---------------------------------------------------------------------------------
FOR THE
PERIOD
JUNE 1,
FOR THE YEAR ENDED DECEMBER 31, 1988+ TO
------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 11.95 $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 $10.00
------- ------- ------- ------- ------ ------ ------ ------ ------
Investment income--net.. .18 .20 .17 .11 .18 .25 .22 .24 .12
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 1.40 1.15 (.02) .92 (.05) (.11) (.90) 1.49 (.54)
------- ------- ------- ------- ------ ------ ------ ------ ------
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 -- -- -- -- -- -- -- --
======= ======= ======= ======= ====== ====== ====== ====== ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" 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.
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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 transactions--
net.................... (.55) 1.34 (1.36) .71 .04 .84 (.12) .48 (.15) (1.00)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
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%
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
- --------
*Total investment returns exclude insurance-related fees and expenses.
15
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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 transactions--
net.................... 4.44 5.48 (.74) 3.46 .32 5.75 (.38) 4.96 1.73 (.35)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
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 -- -- -- -- -- -- -- -- --
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
- --------
+ 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.
16
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<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 PER-
FORMANCE:
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
investments--net....... (.0005) .0018 (.0009) .0005 .0007 .0014 .0019 .0012 .0002 .0005
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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 RE-
TURN:*
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 gain
(loss) on investments--
net.................... 4.96% 5.47% 3.75% 2.73% 3.36% 5.64% 7.46%+ 8.34%+ 6.65%+ 5.86%+
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
*Total investment returns exclude insurance-related fees and expenses.
+Includes unrealized gain (loss)
17
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under Contracts issued by Family
Life Insurance Company ("Family Life"), formerly a wholly owned subsidiary of
Merrill Lynch & Co., Inc. ("ML&Co."). On June 12, 1991, Family Life was sold
to a non-affiliated corporation and most (although not all) of its Contracts
were transferred to 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 of Family Life, MLLIC and ML of New
York as well as other insurance companies not affiliated with Family Life,
MLLIC or ML of New York (together with MLLIC, ML of New York and Family Life,
"Insurance Companies") to fund certain variable life insurance contracts
and/or variable annuities issued by such companies.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the Prospectus for each
Contract. That Prospectus describes the relationship between increases or
decreases in the net asset value of shares of a Fund, and any distributions on
such shares, and the benefits provided under a Contract. The Prospectus for
the Contracts also describes various fees payable to the Insurance Companies
and charges to the Separate Accounts made by the Insurance Companies with
respect to the Contracts. Since shares of the Funds will be sold only to the
Insurance Companies for the Separate Accounts, the terms "shareholder" and
"shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and
ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment
Adviser.
RESERVE ASSETS FUND AND DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Reserve Assets Fund and the
Domestic Money Market Fund for the seven-day period ended December 31, 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.
<TABLE>
<CAPTION>
RESERVE
ASSETS DOMESTIC MONEY
FUND MARKET FUND
------- --------------
<S> <C> <C>
Annualized Yield:
Including gains and losses.............................. 5.01% 5.05%
Excluding gains and losses.............................. 5.01% 5.05%
Compounded Annualized Yield.............................. 5.14% 5.18%
Average maturity of portfolio at end of period........... 70 days 73 days
</TABLE>
18
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described below. The
differences in objectives and policies among the Funds can be expected to
affect the return of each Fund and the degree of market and financial risk to
which each Fund is subject. Each Fund is classified as "diversified," as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act" or the "Act") except for the Natural Resources Focus Fund, the
Global Strategy Focus Fund, the Global Bond Focus Fund, the Index 500 Fund and
the Developing Capital Markets Focus Fund, each of which is classified as
"non-diversified." The investment objectives and classification of each Fund
may not be changed without the approval of the holders of a majority of the
outstanding shares of each Fund affected. The investment objectives and
policies of each Fund are discussed below. There can be no assurance that any
Fund will achieve its investment objective.
Fixed Income Security Ratings. No Fund other than the High Current Income
Fund, International Equity Focus Fund and Developing Capital Markets Focus
Fund invests in fixed-income securities which are rated below investment grade
(i.e., securities rated Ba or below by Moody's or BB or below by Standard &
Poor's). However, securities purchased by a Fund may subsequently be
downgraded. Such securities may continue to be held and will be sold only if,
in the judgement of the Investment Adviser, it is advantageous to do so.
Securities in the lowest category of investment grade debt securities may have
speculative characteristics which may lead to weakened capacity to pay
interest and principal during periods of adverse economic conditions. See
Appendix A for a fuller description of corporate bond ratings.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in short-
term domestic money market securities. The Fund will invest in short-term U.S.
Government securities, U.S. Government agency securities, domestic depository
institution money instruments (including certificates of deposit, bankers'
acceptances, time deposits and bank notes), short-term debt securities (such
as commercial paper), 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, the Fund may not purchase securities of
foreign issuers (including Eurodollar or Yankeedollar bank obligations). U.S.
Government securities may be purchased on a forward commitment basis. The
types of money market securities in which the Domestic Money Market Fund may
invest are described more fully in Appendix A to this Prospectus. The Domestic
Money Market Fund will be subject to portfolio maturity, quality and
diversification restrictions discussed below under "Money Market Fund
Portfolio Restrictions."
RESERVE ASSETS FUND
The investment objectives of the Reserve Assets Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in short-
term money market securities. The Fund will invest in short-term U.S.
Government securities, U.S. Government agency securities, depository
institution money instruments (including certificates of deposit, bankers'
acceptances, time deposits and bank notes), short-term debt securities (such
as commercial paper), 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 Appendix A to the
Prospectus. The Reserve Assets Fund will be subject to the portfolio maturity,
quality and diversification restrictions discussed below under "Money Market
Fund Portfolio Restrictions."
19
<PAGE>
PRIME BOND FUND
The principal investment objective of the Prime Bond Fund is to provide
shareholders with as high a level of current income as is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its principal objective. There can be no assurance that the Fund's investment
objectives will be achieved.
The Prime Bond Fund invests primarily in securities rated in the top three
rating categories of either Standard & Poor's (AAA, AA and A) or Moody's (Aaa,
Aa and A). Additional information regarding various bond ratings is set forth
in Appendix A to the Prospectus. The financial risk of the Fund should be
minimized by the credit quality of the bonds in which it will invest, but the
long maturities that typically provide the best yield will subject the Fund to
possible substantial price changes resulting from market yield fluctuations.
The market prices of fixed-income securities such as those purchased by the
Fund are affected by changes in interest rates generally. As interest rates
rise, the market value of fixed-income securities will fall, adversely
affecting the net asset value of the Fund.
Fund management strategy will attempt to mitigate adverse price changes and
optimize favorable price changes through active trading that shifts the
maturity and/or quality structure of the Fund within the overall investment
guidelines. The Fund's investments will vary from time to time depending upon
the judgement of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. The Fund anticipates that under normal
circumstances more than 90% of the assets of the Fund will be invested in
fixed-income securities, including convertible and non-convertible debt
securities and preferred stock. The Fund does not intend to invest in common
stock, rights or other equity securities. Under unusual market or economic
conditions, the Fund for defensive or other purposes may invest up to 100% of
its assets in U.S. government or government agency securities, money market or
other fixed-income securities deemed by the Investment Adviser to be
consistent with the objectives of the Fund, or the Fund may hold its assets in
cash.
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund, like the
Prime Bond Fund, is to obtain the highest level of current income that is
consistent with the investment policies of the Fund and with prudent
investment management. As a secondary objective, the Fund seeks capital
appreciation when consistent with its primary objective. There can be no
assurance that the Fund's investment objectives will be achieved.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard & Poor's), or in unrated securities of comparable
quality. Securities rated below Baa by Moody's and below BBB by Standard &
Poor's are commonly known as "junk bonds." Additional information regarding
various bond ratings is set forth in Appendix A to the Prospectus. The market
price of fixed-income securities such as those purchased by the Fund is
affected by changes in interest rates generally. As interest rates rise, the
market value of fixed-income securities will fall, adversely affecting the net
asset value of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater
market fluctuations and risks of loss of income and principal than lower-
yielding, higher-rated fixed-income securities. Such securities are generally
issued by corporations which are not as financially secure or as creditworthy
as issuers of higher-rated securities. There is, accordingly, a greater risk
that the issuers of higher-yielding securities will not be able to pay
principal and interest on such securities, especially during periods of
adverse economic conditions. Because investment in such high-yield securities
entails relatively greater risk of loss of income or principal, an investment
in the High Current Income Fund may not be appropriate as the exclusive
investment to fund the Contracts for all Contract Owners. See "Risks of High
Yield Securities."
Selection and supervision by the management of the Company of investments in
lower-rated fixed-income securities involves continuous analysis of individual
issuers, general business conditions and other factors which
20
<PAGE>
may be too time consuming or too costly for the average investor. The
furnishing of these services does not, of course, guarantee successful
results. The analysis of issuers may include, among other things, historic and
current financial condition, current and anticipated cash flow and borrowing
requirements, value of assets in relation to historical cost, strength of
management, responsiveness to business conditions, credit standing, and
current and anticipated results of operations. Analysis of general business
conditions and other factors may include anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. While the Investment Adviser
considers as one factor in its credit analysis the ratings assigned by the
rating services, the Investment Adviser performs its own independent credit
analysis of issuers and consequently, the Fund may invest, without limit, in
unrated securities if such securities offer, in the opinion of the Investment
Adviser, a relatively high yield without undue risk. As a result, the High
Current Income Fund's ability to achieve its investment objective may depend
to a greater extent on the Investment Adviser's own credit analysis than the
Funds which invest in higher-rated securities. Although the High Current
Income Fund will invest primarily in lower-rated securities, it will not
invest in securities rated Ca or lower by Moody's and CC or lower by Standard
& Poor's unless the Investment Adviser believes that the financial condition
of the issuer or the protection afforded to the particular securities is
stronger than would otherwise be indicated by such low ratings. However,
securities purchased by the Fund may subsequently be downgraded. Such
securities may continue to be held and will be sold only if, in the judgement
of the Investment Adviser, it is advantageous to do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that
the risk of loss of income and principal may be substantially reduced with
only a relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending upon
the judgement of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. It is anticipated that under normal
circumstances more than 90% of the Fund's assets will be invested in fixed-
income securities, including convertible and non-convertible debt securities
and preferred stock. Although it is expected that, in general, the Fund will
not invest in common stocks, rights or other equity securities, it will
acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in connection with an actual or proposed conversion or exchange
of fixed-income securities. In addition, under unusual market or economic
conditions, the High Current Income Fund for defensive purposes may invest up
to 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 Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard
& Poor's, or may not be rated by any other organizations.
21
<PAGE>
QUALITY EQUITY FUND
The Quality Equity Fund seeks to achieve the highest total investment
return, or the aggregate of income and capital value changes, consistent with
prudent risk. To do this, management will shift the emphasis among investment
alternatives for capital growth, capital stability and income as market trends
change. This "fully managed" investment policy distinguishes the Fund from
investment companies which seek either capital growth or income. The Fund's
investment philosophy is based on management's belief that the structure of
the United States economy and its securities markets will undergo continuous
change. The flexibility of the Fund is designed to reduce overall exposure to
risk by achieving below-average volatility in a falling market and above-
average volatility in a rising market. There can be no assurance that the
Fund's investment objective will be achieved.
The Quality Equity Fund's fully managed investment approach will make use of
equity, debt and convertible securities. The majority of the Fund's equity
portfolio will be in the common stocks of large-capitalization, "quality"
companies. For this purpose, "large capitalization" companies are considered
to be those companies with market capitalizations in excess of $500 million.
Management of the Company believes that a quality company is one which
conforms closely to the following criteria: good financial resources, strong
balance sheet, satisfactory rate of return on capital, good industry position
and superior management skills. The earnings of quality companies generally
tend to grow consistently. Whenever market or financial conditions warrant,
the Fund may, in order to reduce risk and achieve the highest total investment
return, invest in non-convertible, long-term debt securities, including "deep
discount" corporate debt securities of investment grade or issues of fixed-
income convertible securities which give the owner the option of a later
exchange for common stock. Management expects that over longer periods the
larger portion of the Fund's portfolio will consist of equity securities.
During defensive periods, the Fund may invest in U.S. Government and
Government agency, money-market securities or other fixed-income securities
deemed by the Investment Adviser to be consistent with a defensive posture, or
cash.
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Company believes have special investment value, and of emerging growth
companies regardless of size. There can be no assurance that the Fund's
investment objective will be achieved. Companies are selected by management on
the basis of their long-term potential for expanding their size and
profitability or for gaining increased market recognition for their
securities. Current income is not a factor in the selection of securities. The
Fund is intended to provide an opportunity for Contract Owners who are not
ordinarily in a position to perform the specialized type of research or
analysis of small and emerging growth companies.
Management seeks to identify those small emerging growth companies which can
show significant and sustained increases in earnings over an extended period
of time and are in sound financial condition. Management believes that, while
these companies present above-average risks, properly selected companies of
this type also have the potential to increase their earnings at a rate
substantially in excess of the general growth of the economy. The Fund
attempts to achieve its objective by focusing on the long-range view of a
company's prospects through a fundamental analysis of its management,
financial structure, product development, marketing ability and other relevant
factors. Full development of these companies frequently takes time and, for
this reason, the Fund should be considered as a long-term investment and not
as a vehicle for seeking short-term profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace
when compared with similar, but larger, enterprises. These companies typically
have total market capitalizations in the $50-$300 million range and generally
are little known to most individual investors, although some may be dominant
in their respective industries. Underlying this strategy is management's
belief that relatively small companies will continue to have the opportunity
to develop into significant business enterprises. Some such companies may be
in a relatively early stage of development; others may manufacture a new
product or perform a new service. Such companies may not be counted upon to
develop into major industrial companies, but management believes that eventual
recognition of their special value characteristics by the investment community
can provide above-average long-term growth to the portfolio.
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Emerging growth companies. In selecting investments for the Equity Growth
Fund, management also seeks emerging growth companies that either occupy a
dominant position in an emerging industry or subindustry or have a significant
and growing market share in a large, fragmented industry. Management believes
that capable and flexible management is one of the most important criteria of
emerging growth companies and that such companies should employ sound
financial and accounting policies and also demonstrate effective research,
successful product development and marketing, efficient service and pricing
flexibility. Emphasis is given to companies with rapid historical growth
rates, above-average returns on equity and strong current balance sheets, all
of which should enable the company to finance its continued growth. Management
of the Company also analyzes and weighs relevant factors beyond the company
itself, such as the level of competition in the industry, the extent of
governmental regulation, the nature of labor conditions and other related
matters.
The Equity Growth Fund emphasizes investments in companies that do most of
their business in the United States and therefore are free of the currency
exchange problems, foreign tax considerations and potential political and
economic upheavals that many multinational corporations face. Moreover, the
size and kinds of markets that they serve make these companies less
susceptible than larger companies to intervention from the federal government
by means of price controls, regulations or litigation.
While the process of selection and continuous supervision by management does
not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients
necessary to prosper.
It should be apparent that an investment in a fund such as the Equity Growth
Fund involves greater risk than is customarily associated with more
established companies. The securities of smaller or emerging growth companies
may be subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may
have limited product lines, markets or financial resources, or they may be
dependent upon a limited management group. Because of these factors,
management of the Company believes that shares in the Equity Growth Fund are
suitable for Contract Owners who are in a financial position to assume above-
average investment risk in search of above-average long-term reward. As
indicated, the Fund is designed for Contract Owners whose investment objective
is growth rather than income. It is definitely not intended for exclusive
funding of Contracts but is designed for Contract Owners who are prepared to
experience above-average fluctuations in net asset value.
The securities in which the Equity Growth Fund invests will often be traded
only in the over-the-counter market or on a regional securities exchange and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Fund or portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when in
management's judgement such disposition is not desirable or to make many small
sales over a lengthy period of time.
The investment emphasis of the Equity Growth Fund is on equities, primarily
common stock and, to a lesser extent, securities convertible into common
stocks and rights to subscribe for common stock, and the Fund will maintain at
least 80% of its net assets invested in equity securities of small or emerging
growth companies except during defensive periods. The Fund reserves the right
as a defensive measure and to provide for redemptions to hold other types of
securities, including non-convertible preferred stocks and debt securities,
U.S. Government and Government agency securities, money market securities or
other fixed-income securities deemed by the Investment Adviser to be
consistent with a defensive posture, or cash, in such proportions as, in the
opinion of management, prevailing market or economic conditions warrant.
NATURAL RESOURCES FOCUS FUND
The investment objectives of the Natural Resources Focus Fund are to achieve
long-term growth of capital and to protect the purchasing power of
shareholders' capital by investing primarily in a portfolio of equity
securities (e.g., common stocks and securities convertible into common stocks)
of domestic and foreign companies with substantial natural resource assets.
This investment objective is a fundamental policy and may
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not be changed without a vote of the majority of outstanding shares of the
Fund. The Fund also may invest in debt, preferred or convertible securities,
the value of which is related to the market value of some natural resource
asset ("asset-based securities"). See "Asset-Based Securities" below.
Management of the Company will seek to identify companies or asset-based
securities it believes are attractively priced relative to the intrinsic value
of the underlying natural resource assets or are especially well positioned to
benefit during particular portions of inflationary cycles. There can be no
assurance that the Fund's investment objectives will be achieved.
IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE
FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE COMPANY ANTICIPATES
SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY, SUCH AS HIGH
INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY EXCHANGE MARKETS,
TO INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE FOR, EXTRACT,
PROCESS OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO THE VALUE OF
GOLD BULLION. Such a switch in investment strategies could require the Fund to
liquidate portfolio securities and incur transaction costs. The Company has
been advised by counsel that it is uncertain under the current federal tax law
whether the Fund may concentrate its investments in gold and gold-related
securities without adversely affecting the federal tax status of the
Contracts. Accordingly, management of the Company has determined that the Fund
will not concentrate its investments in such securities until counsel has
advised the Company that such uncertainty has been resolved favorably.
Management attempts to achieve the investment objectives of the Fund by
seeking to identify securities of companies which, in its opinion, are
undervalued relative to the value of natural resource holdings of such
companies in light of current and anticipated economic or financial
conditions. Natural resource assets are materials derived from natural sources
which have economic value. Management will consider a company to have
substantial natural resource assets when, in its opinion, the company's
holdings of the assets are of such magnitude, when compared to the
capitalization, revenues or operating profits of the company, that changes in
the economic value of the assets 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 Appendix B.
The Fund at all times, except during defensive periods, will maintain at
least 65% of its total assets invested in companies with substantial natural
resource assets or in asset-based securities. Current income from dividends
and interest will not be a primary consideration in selecting securities. The
Fund reserves the right as a temporary defensive measure and to provide for
redemptions, to hold short-term U.S. Government and Government agency
securities, money market securities or other fixed-income securities deemed by
the Investment Adviser to be consistent with a defensive posture, or cash, in
such proportions as, in the opinion of management, prevailing market or
economic conditions warrant.
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Risk Factors. As indicated above, under certain circumstances, the Fund has
reserved the right to invest a majority of its assets in gold-related
companies or securities. Based on historic experience, during periods of
economic or financial instability, the securities of such companies may be
subject to extreme price fluctuations, reflecting the high volatility of gold
prices during such periods. In addition, the instability of gold prices may
result in volatile earnings of gold-related companies which, in turn, may
affect adversely the financial condition of such companies. Gold mining
companies also are subject to the risks generally associated with mining
operations.
The major producers of gold include the Republic of South Africa, Russia,
the United States, Australia, Canada, the People's Republic of China and the
Philippines. Sales of gold by Russia and the People's Republic of China are
largely unpredictable and often relate to political and economic
considerations rather than to market forces. Economic, social and political
developments within Russia, the People's Republic of China and the Republic of
South Africa may affect significantly gold production in those countries.
See "Other Portfolio Strategies--Foreign Securities" for special
considerations concerning investments in foreign securities.
AMERICAN BALANCED FUND
The investment objective of the American Balanced Fund is to seek a level of
current income and a degree of stability of principal not normally available
from an investment solely in equity securities and the opportunity for capital
appreciation greater than is normally available from an investment solely in
debt securities by investing in a balanced portfolio of fixed income and
equity securities. This investment objective is a fundamental policy and may
not be changed without a vote of the majority of the outstanding shares of the
Fund. The Fund will seek current income by investing a portion of its assets
in a portfolio of intermediate to long-term debt, convertible debt, non-
convertible and convertible term preferred stock and money market securities.
The 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 Fund's investment objective will be achieved.
The Fund will normally seek to maintain the allocation of its assets between
debt securities and equity securities at approximately equal percentages of
the Fund's net asset value. However, the prices of debt and equity securities
will not generally move in the same direction or to the same extent, and,
consequently, the relative percentages of the Fund's debt and equity
investments will vary. The Fund will seek to reduce such variations by
investing its available cash in securities of the appropriate type. However,
except as discussed below, the Fund is not obligated to sell portfolio
securities, including money market securities, in order to reduce such
discrepancies.
The Fund will normally limit its allocation of assets to equity securities
to no more than 50% of its net assets. To the extent its equity position
exceeds this limitation, because of changes in the value of portfolio
securities or otherwise, the Fund will seek to reduce its equity position to
less than 50% of net assets by selling such securities at such times and in
such amounts as management of the Company deems appropriate in light of market
conditions and other pertinent factors. See "Dividends, Distributions and
Taxes--Tax Treatment of the Company."
The Fund will generally emphasize investment in common stocks of larger-
capitalization issuers and in investment-grade debt obligations. The Fund may
also seek to enhance the return on its common stock portfolio by writing
covered call options listed on United States securities exchanges. Under
unusual market or economic conditions, the Fund for defensive purposes may
invest up to 100% of its assets in short-term U.S. Government or Government
agency securities, money market securities or other fixed-income securities
deemed by the Investment Adviser to be consistent with a defensive posture, or
cash.
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GLOBAL STRATEGY FOCUS FUND
The investment objective of the Global Strategy Focus Fund is to seek high
total investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of U.S. and foreign
issuers. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of non-dollar
denominated securities and other assets and liabilities resulting from
currency fluctuations. There can be no assurance that the Fund's investment
objective will be achieved. Investing on an international basis involves
special considerations. See "Other Portfolio Strategies--Foreign Securities."
The Global Strategy Focus Fund seeks to achieve its objective by investing
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 judgement of the
Investment Adviser, economic or market conditions warrant, the Fund reserves
the right to concentrate its investments in one or more capital markets,
including the United States. For additional information concerning the risks
of investing in foreign securities, see "Other Portfolio Strategies--Foreign
Securities."
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be rated BBB or better by Standard and Poor's
or Baa or better by 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 issued or guaranteed by the United
States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Investment Adviser
to be consistent with a defensive posture, or may hold its assets in cash.
The Global Strategy Focus Fund may use derivatives in connection with
certain trading strategies. See "Appendix B."
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund seeks special opportunities
in securities that are selling at a discount, either from book value or
historical price-earnings ratios, or seem capable of recovering from
temporarily out of favor considerations. Particular emphasis is placed on
securities which provide an above-average dividend return and sell at a below-
average price-earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates
and depress prices of securities in unfavorable climates. Based on this
premise, management believes that favorable changes in market prices are more
likely to begin when securities are out of favor, earnings are depressed,
price-earnings ratios are relatively low, investment expectations are limited,
and there is no real general interest in the particular security or industry
involved. On the other hand, management believes that negative developments
are more likely to occur when investment expectations are generally high,
stock prices are advancing or have advanced rapidly, price-earnings ratios
have been inflated, and the industry or issue
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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 Appendix B. It reserves the right as a defensive
measure to hold other types of securities, including U.S. Government and
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant. The Fund may invest up to
10% of its total assets, taken at market value at the time of acquisition, in
the securities of foreign issuers.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND)
The investment objective of the Fund is to seek to provide shareholders a
high total investment return by investing in a global portfolio of fixed
income securities denominated in various currencies, including 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 Fund will allocate its investments among different types of
fixed income securities denominated in various currencies based upon the
Investment Adviser's analysis of the yield, maturity, potential appreciation
and currency considerations affecting such securities. There can be no
assurance that the Fund's investment objective will be achieved. Investing on
an international basis involves special considerations. See "Other Portfolio
Strategies--Foreign Securities." The Fund should be considered as a long-term
investment and a vehicle for diversification and not as a balanced investment
program.
The Fund may invest in United States and foreign government and corporate
fixed income securities which have a credit rating of A or better by Standard
& Poor's or by Moody's or commercial paper rated A-1 by Standard & Poor's or
Prime-1 by Moody's or obligations that the Investment Adviser has determined
to be of similar creditworthiness. The Fund may purchase fixed income
securities issued by United States or foreign corporations or financial
institutions, including debt securities of all types and maturities,
convertible securities and preferred stocks. The Fund also may purchase
securities issued or guaranteed by United States or foreign governments
(including foreign states, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities") or issued or guaranteed by
international organizations designated or supported by multiple governmental
entities to promote economic reconstruction or development ("supranational
entities").
International Investing. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of
a multinational currency unit is the European Currency Unit ("ECU") which is a
"basket" consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community, a Western European economic
cooperative association including France, Germany, the Netherlands and the
United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment
Adviser does not believe that such adjustments will adversely affect holders
of ECU-denominated obligations or the marketability of such securities.
European supranational entities (described further below), in particular,
issue ECU-denominated obligations. The Fund may invest in securities
denominated in the currency of one nation although issued by a governmental
entity, corporation or financial institution of another nation. For example,
the Fund may invest in a British pound sterling-denominated
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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 Portfolio
Strategies--Foreign Securities".
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well
as in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at
least three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States dollar-
denominated obligations only for temporary defensive purposes.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Fund's Investment Adviser. The Investment Adviser does not believe that the
credit risk inherent in the obligations of stable foreign governments is
significantly greater than that of U.S. Government securities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The government
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings.
Allocation of Investments. In seeking to meet its investment objective, high
current income will only be one of the factors that the Investment Adviser
will consider in selecting portfolio securities for the Global Bond Focus
Fund. As a general matter, in evaluating investments for the Fund, the
Investment Adviser will consider, among other factors, the relative levels of
interest rates prevailing in various countries, the potential appreciation of
such investments in their denominated currencies and, for debt instruments not
denominated in U.S. dollars, the potential movement in the value of such
currencies compared to the U.S. dollar. Additionally, the Fund, in seeking
capital appreciation, may invest in relatively low yielding instruments in
expectation of favorable 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 Fund
does not expect the average maturity of its portfolio to exceed ten years.
The value of the Global Bond Focus Fund's holdings denominated in currencies
other than the U.S. dollar will also be affected by changes in the value of
such currencies relative to the U.S. dollar. Such currency fluctuations may
have a substantial impact on the value of the Fund's holdings. The Fund may
seek to limit the effect of currency fluctuations on the value of portfolio
holdings through currency hedging, but there is no guarantee that such
efforts, if undertaken, will be successful. See Appendix B.
GLOBAL UTILITY FOCUS FUND
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and
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foreign companies which are, in the opinion of the Investment Adviser,
primarily engaged in the ownership or operation of facilities used to
generate, transmit or distribute electricity, telecommunications, gas or
water. There can be no assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of instruments and techniques to
enhance income and to hedge against market and currency risk, as described in
Appendix B. Investing on an international basis involves special
considerations. See "Other Portfolio Strategies--Foreign Securities."
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a temporary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash
in such proportions as, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. Except during temporary defensive
periods, such securities or cash will not exceed 20% of its total assets.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three countries, one of which may be
the United States, although the Investment Adviser expects the Fund's
portfolio to be more geographically diversified. Under normal conditions, it
is anticipated that the percentage of assets invested in U.S. securities will
be higher than that invested in securities of any other single country. It is
possible that at times the Fund may have 65% or more of its total assets
invested in foreign securities.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
preferred stocks will vary from time to time based upon the Investment
Adviser's judgement of the extent to which investments in each category will
contribute to meeting the Fund's investment objective. Fixed income securities
in which the Fund will invest generally will be limited to those rated
investment grade, that is, rated in one of the four highest rating categories
by Standard & Poor's or Moody's (i.e., securities rated at least BBB by
Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in
the judgement of the Investment Adviser. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to
Standard & Poor's, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal. The Fund's commercial paper investments at the time of
purchase will be rated "A-1" or "A-2" by Standard & Poor's or "Prime-1" or
"Prime-2" by Moody's or, if not rated, will be of comparable quality as
determined by the Investment Adviser. The Fund may also invest up to 5% of its
total assets at the time of purchase in fixed income securities having a
minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The
Fund may, but need not, dispose of any security if it is subsequently
downgraded. For a description of ratings of debt securities, see Appendix A to
this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs")
or other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. Generally,
ADRs, which are issued in registered form, are designated for use in the
United States securities markets, and EDRs, which are issued in bearer form,
are designed for use in European securities markets. The Fund may invest in
ADRs and EDRs through both sponsored and unsponsored arrangements. In a
sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to
pay some or all of the depository's transaction fees, whereas in an
unsponsored arrangement the foreign issuer assumes no obligations and the
depository's transaction fees are paid by the ADR or EDR holders. Foreign
issuers in respect of whose securities unsponsored ADRs or EDRs have been
issued are not necessarily obligated to disclose material information in the
markets in which the unsponsored ADRs or EDRs are traded and, therefore, there
may not be a correlation between such information and the market value of such
securities.
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A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of
common stocks issued by domestic utility companies historically have
significantly exceeded those of industrial companies' common stocks, while the
prices of domestic utility stocks have tended to be less volatile than stocks
of industrial companies. The Investment Adviser believes that the average
dividend yields of common stocks issued by foreign utility companies have also
historically exceeded those of foreign industrial companies' common stocks. To
meet its objective of capital appreciation, the Fund may invest in foreign
utility companies which pay lower than average dividends, but have a greater
potential for capital appreciation.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
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
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others may be forced to defend their core businesses from increased
competition and may be less profitable. The Investment Adviser seeks to take
advantage of favorable investment opportunities that are expected to arise
from these structural changes. Of course, there can be no assurance that
favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective
governments than utilities in the United States and, as in the U.S., generally
are required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The 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
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and cable companies will soon provide a greatly expanded range of utility
services, including two-way video and informational services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decades, gas utility companies have been
adversely affected by disruptions in the oil industry and have also been
affected by increased concentration and competition.
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 Portfolio Strategies--Foreign Securities."
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.
INTERNATIONAL EQUITY FOCUS FUND
The investment objective of the International Equity Focus Fund is to seek
capital appreciation and, secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal conditions, at least 65% of the Fund's net assets
will be invested in such equity securities 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 Fund's
investment objectives will be achieved. The Fund may employ a variety of
investments and techniques to hedge against market and currency risk. See
Appendix B. Investing on an international basis involves special
considerations. Investing in smaller capital markets entails the risk of
significant volatility in the Fund's security prices. See "Other Portfolio
Strategies--Foreign Securities." The Fund is designed for investors seeking to
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complement their U.S. holdings through foreign investments. The Fund should be
considered as a long-term investment and a vehicle for diversification and not
as a balanced investment program.
The International Equity Focus Fund will invest in an international
portfolio of securities of foreign companies located throughout the world.
While there are no prescribed limits on the geographic allocation of the
Fund's investments, management of the Fund anticipates that a substantial
portion of its assets will be invested in the developed countries of Europe
and the Far East. For the reasons stated below, management of the Fund will
give special attention to investment opportunities in the developing countries
of the world, including, but not limited to Latin America, the Far East and
Eastern Europe. It is anticipated that a significant portion of the Fund's
assets may be invested in such developing countries.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser based primarily on its
assessment of the relative condition and growth potential of the various
economies and securities markets, currency and taxation considerations and
other pertinent financial, social, national and political factors. Within such
allocations, the Investment Adviser will seek to identify equity investments
in each market which are expected to provide a total return which equals or
exceeds the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such
countries. Certain such countries, particularly so-called "emerging" countries
(such as Malaysia, Mexico and Thailand), which may be in the process of
developing more market-oriented economies, may experience relatively high
rates of economic growth. Because of the general illiquidity of the capital
markets in certain developing countries, the Fund may invest in a relatively
small number of leading or relatively actively traded companies in 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 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 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
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levels, or in the creditworthiness of issuers. In accordance with its
investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. Such income can be used, however, to offset
the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgement, analysis and experience
in evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield
Securities" below.
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental
policy and may not be changed without approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may employ a variety of investments and
techniques to hedge against market and currency risk. See Appendix B.
Investing on an international basis involves special considerations. Investing
in smaller capital markets entails the risk of significant volatility in the
Fund's security prices. See "Other Portfolio Strategies--Foreign Securities."
The Fund is designed for investors seeking to complement their U.S. holdings
through foreign investments. The Fund should be considered as a long-term
investment and a vehicle for diversification and not as a balanced investment
program.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four
countries having the largest equity market capitalizations. Currently, these
four countries are Japan, the United Kingdom, the United States and Germany.
At 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 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
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long-term international trend favoring more market-oriented economies, a trend
that may especially benefit certain countries having smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such
countries. Certain such countries, particularly so-called "emerging" countries
(such as Malaysia, Mexico and Thailand) which may be in the process of
developing more market-oriented economies, may experience relatively high
rates of economic growth. Other countries (such as France, the Netherlands and
Spain), although having relatively mature smaller capital markets, may also be
in a position to benefit from local or international developments encouraging
greater market orientation and diminishing governmental intervention in
economic affairs.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in countries having smaller capital markets. It also
may not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Investment Adviser will emphasize the
allocation of assets among certain countries' capital markets, rather than the
selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as
a result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance
with its investment objective, the Fund will not seek to benefit from
anticipated short-term fluctuations in currency exchange rates. The Fund may,
from time to time, invest in debt securities with relatively high yields (as
compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. See "Risks of High Yield
Securities" below. Such income can be used, however, to offset the operating
expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgement, analysis and experience
in evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield
Securities" below.
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For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market of
its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues or profits in any
one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in such countries. The Fund
also may consider closed-end investment companies to be located in the country
or countries in which they primarily make their portfolio investments.
Foreign investments in smaller capital markets involve risks not involved in
domestic investment, including fluctuations in foreign exchange rates, future
political and economic developments, different legal systems and the existence
or possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. These risks
are often heightened for investments in small capital markets. With respect to
certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social
instability or diplomatic developments which could affect investment in those
countries. In addition, certain foreign investments may be subject to foreign
withholding taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As
a result, traditional investment measurements, such as price/earnings ratios,
as used in the United States, may not be applicable in certain capital
markets.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
GOVERNMENT BOND FUND
The investment objective of the Government Bond Fund is to seek the highest
possible current income consistent with the protection of capital afforded by
investing in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Under normal circumstances, all or
substantially all of the Fund's assets will be invested in such securities.
Depending on market conditions, an average maturity of six to fifteen years is
anticipated. When, in the opinion of management, prevailing market or economic
conditions warrant, a portion of the Fund may be invested in money market
securities or a liquid asset fund to effectively utilize cash reserves. There
can be no assurance that the Fund's investment objective will be achieved.
Certain of the securities in which the Fund invests are supported by the
full faith and credit of the U.S. Government, such as U.S. Treasury
obligations. Other of the securities in which the Fund invests are not
supported by the full faith and credit of the U.S. Government but are issued
by U.S. Government agencies, instrumentalities or government-sponsored
enterprises. Such securities are generally supported only by the credit of the
agency, instrumentality or enterprise issuing the security and are generally
considered to have a low principal risk. However, because of the longer-term
maturities of the securities in which the Fund will invest, interest rate
fluctuations may adversely affect the market value of such securities. As
interest rates rise, the value of fixed-income securities will fall, adversely
affecting the net asset value of the Fund.
The U.S. Treasury Department has enacted regulations prescribing
diversification standards to be met by investment company portfolios to which
the investment base for any variable annuity policy has been allocated as a
condition to such policies being treated as variable annuity contracts under
the Internal Revenue Code of 1986, as amended (the "Code"). The regulations
limit the percentage of the total assets of any investment
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company portfolio which may be invested in securities of any five or fewer
issuers, including a requirement that no more than 55% of a portfolio's total
assets be invested in the securities of any one issuer. Direct obligations of
the U.S. Treasury are not excepted from the diversification requirements. Each
government agency or instrumentality issuing, guaranteeing or insuring
securities will be treated as a separate issuer for purposes of the
diversification standards.
INDEX 500 FUND
The investment objective of the Index 500 Fund is to seek to provide
investment results that, before expenses, correspond to the aggregate price
and yield performance of the S&P 500 Index. There can be no assurance that the
Fund's investment objective will be achieved.
The S&P 500 Index is a market-weighted index composed of 500 common stocks
issued by companies in a wide range of businesses and which collectively
represent a substantial portion of all common stocks publicly traded in the
U.S. The composition of the S&P 500 Index is determined by Standard & Poor's,
a division of the McGraw-Hill Companies, Inc. Standard & Poor's criteria for
selecting common stocks to include in the S&P 500 Index is based on factors
such as market capitalization, trading activity and the adequacy of
representation of particular industries, and favors U.S.-traded stocks of
large companies that are among the most dominant in their industries. The S&P
500 Index is generally considered broadly representative of the performance of
large-capitalization publicly traded common stocks in the U.S. The inclusion
of a stock in the S&P 500 Index does not imply that Standard & Poor's believes
the stock to be an attractive investment.
The Index 500 Fund will not attempt to buy or sell securities based on the
Investment Adviser's economic, financial or market analysis, but will instead
employ a "passive" approach that attempts to remain invested at all times in a
portfolio of assets the performance of which is expected to be strongly
correlated with that of the S&P 500 Index. The Index 500 Fund may invest in
all 500 stocks in the S&P 500 Index in approximately the same proportions as
their weightings in the S&P 500 Index, or may invest in a statistically
selected sample of the 500 stocks which comprise the S&P 500 Index designed,
based on market capitalizations, industry weightings and financial attributes,
to have aggregate investment characteristics similar to those of the S&P 500
Index as a whole. The Index 500 Fund may also (i) purchase common stocks not
included in the S&P 500 Index as a proxy for certain common stocks included in
the S&P 500 Index when the Investment Adviser believes it is an efficient
means of replicating the performance of that index to do so, and (ii) invest
in options and future contracts linked to the performance of the S&P 500 Index
or of common stocks represented in the index.
Under normal circumstances, it is expected that the Index 500 Fund will
invest at least 90% (65% if the Index 500 Fund's assets are below $20 million)
of its assets in common stocks represented in the S&P 500 Index and related
options and futures contracts. The Index 500 Fund may invest a substantial
portion of its assets in options and futures contracts in order to gain market
exposure efficiently in the event of subscriptions, to maintain liquidity in
the event of redemptions and to minimize trading costs. The Index 500 Fund may
also invest in short-term fixed income instruments as cash reserves. The Index
500 Fund will not invest in short-term fixed income instruments, options or
futures contracts for the purpose of implementing a defensive market strategy
by lowering the Fund's exposure to common stocks to protect against a
potential stock market decline, but 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 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.
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NON-DIVERSIFIED FUNDS
The Natural Resources Focus, Global Strategy Focus, Global Bond Focus, Index
500 and Developing Capital Markets Focus Funds are classified as non-
diversified investment companies under the Investment Company Act. However,
each Fund will have to limit its investments to the extent required by the
diversification requirements applicable to regulated investment companies
under the Internal Revenue Code. To qualify as a regulated investment company,
a Fund, at the close of each fiscal quarter, may not have more than 25% of its
total assets invested in the securities (except obligations of the U.S.
Government, its agencies or instrumentalities) of any one issuer and with
respect to 50% of its assets, (i) may not have more than 5% of its total
assets invested in the securities of any one issuer and (ii) may not own more
than 10% of the outstanding voting securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each
Fund). Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
MONEY MARKET FUND PORTFOLIO RESTRICTIONS
For purposes of the investment policies of the Domestic Money Market and
Reserve Assets Funds, the Company defines short-term money market securities
as securities having a maturity of no more than 762 days (25 months) in the
case of U.S. Government and agency securities and no more than 397 days (13
months) in the case of all other securities. Management of the Company expects
that substantially all the assets of the Domestic Money Market and Reserve
Assets Funds will be invested in securities maturing in less than one year,
but at times some portion may have maturities of up to 25 months. For these
purposes, the maturity of a variable rate security is deemed to be the next
coupon date on which the interest rate is adjusted. The dollar-weighted
average maturity of each Fund's portfolio assets will not exceed 90 days.
The Domestic Money Market and Reserve Asset Funds' investments in short-term
debt and depository institution money instruments will be rated, or will be
issued by issuers who have been rated, in one of the two highest rating
categories for short-term debt obligations by a nationally recognized
statistical rating organization (an "NRSRO") or, if not rated, will be of
comparable quality as determined by the Directors of the Company. Each Fund's
investments in corporate bonds and debentures (which must have maturities at
the date of purchase of 397 days (13 months) or less) will be in issuers which
have received from an NRSRO a rating, with respect to a class of short-term
debt obligations that is comparable in priority and security with the
investment, in one of the two highest rating categories for short-term
obligations or, if not rated, are of comparable quality as determined by the
Directors of the Company. Currently, there are six NRSROs: Duff & Phelps Inc.,
Fitch Investors Services, Inc., IBCA Limited and its affiliate IBCA Inc.,
Moody's, Standard & Poor's and Thomson BankWatch.
A regulation of the Securities and Exchange Commission limits investments by
the Domestic Money Market and Reserve Assets Funds in securities issued by any
one issuer (other than the U.S. Government, its agencies or instrumentalities)
ordinarily to not more than 5% of its total assets, or in the event that such
securities do not have the highest rating, not more than 1% of its total
assets. In addition, this regulation requires that not more than 5% of each
Fund's total assets be invested in securities that have a rating lower than
the highest rating.
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,
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that it is liquid. The Board of Directors may adopt guidelines and delegate to
the Investment Adviser the daily function of determining and monitoring
liquidity of restricted securities. The Board has determined that securities
sold under Rule 144A which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity
and availability of information. This investment practice could have the
effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Foreign Securities. The Reserve Assets, Prime Bond, High Current Income,
Quality Equity, Equity Growth, Natural Resources Focus, Global Strategy Focus,
Basic Value Focus, Global Bond Focus, Global Utility Focus, International
Equity Focus and Developing Capital Markets Focus Funds may invest in
securities of foreign issuers. The Index 500 Fund may also invest in
securities of foreign issuers to the extent such issuers are included in the
S&P 500 Index. Investments in foreign securities, particularly those of non-
governmental issuers, involve considerations and risks which are not
ordinarily associated with investing in domestic issuers. These considerations
and risks include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of financial
information or the difficulty of interpreting financial information prepared
under foreign accounting standards, less liquidity and more volatility in
foreign securities markets, the impact of political, social or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. If it should become necessary, a Fund could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs in foreign securities may be higher. The
operating expense ratio of a Fund investing in foreign securities can be
expected to be higher than that of an investment company investing exclusively
in United States securities because the expenses of the Fund, such as
custodial costs, are higher. In addition, net investment income earned by a
Fund on a foreign security may be subject to withholding and other taxes
imposed by foreign governments which will reduce a Fund's net investment
income. The Investment Adviser will consider these and other factors before
investing in foreign securities, and will not make such investments unless, in
its opinion, such investments will meet the standards and objectives of a
particular Fund. No Fund which may invest in foreign securities, other than
the Natural Resources Focus and Global Strategy Focus Funds, will concentrate
its investments in any particular country. The Natural Resources Focus, Global
Strategy Focus, Global Bond Focus, Global Utility Focus, International Equity
Focus and Developing Capital Markets Focus Funds may from time to time be
substantially invested in non-dollar-denominated securities of foreign
issuers. 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 Natural Resources Focus,
Global Strategy Focus, Basic Value Focus, Global Bond Focus, Global Utility
Focus, International Equity Focus and Developing Capital Markets Focus Funds
will purchase only securities issued in dollar denominations.
Each of the International Equity Focus Fund and Developing Capital Markets
Focus Fund may invest a significant portion of its assets in securities of
foreign issuers in smaller capital markets, while each of the other Funds
which is permitted to invest in foreign securities may from time to time
invest in securities of such foreign issuers. Foreign investments 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, which are often heightened for investments
in smaller capital markets.
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There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As
a result, traditional investment measurements, such as price/earnings ratios,
as used in the United States, may not be applicable in certain capital
markets.
Smaller capital markets, while often growing in trading volume, have
substantially less volume than United States markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable United States companies. Brokerage commissions,
custodial services, and other costs relating to investment in smaller capital
markets are generally more expensive than in the United States. Such markets
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in a Fund which invests in these markets incurring
additional costs and delays in transporting and custodying such securities
outside such countries. Delays in settlement could result in temporary periods
when assets of such a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the
United States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it
may not be practicable or appropriate to invest in a particular country. A
Fund may invest in countries in which foreign investors, including management
of the Fund, have had no or limited prior experience. Due to its emphasis on
securities of issuers located in smaller capital markets, 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
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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 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 High Current Income, Global Utility Focus
and Developing Capital Markets Focus Funds may from time to time enter into
standby commitment agreements. Such agreements commit the respective Fund, for
a stated period of time, to purchase a stated amount of a fixed income
security which may be issued and sold to the Fund at the option of the issuer.
The price and coupon of the security is fixed at the time of the commitment.
At the time of entering into the agreement the Fund is paid a commitment fee
which is typically approximately 0.5% of the aggregate purchase price of the
security which the Fund has committed to purchase. The Fund will at all times
maintain a segregated account with its custodian of cash or liquid 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.
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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 Appendix B attached to this
Prospectus.
RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund, International Equity Focus Fund and Developing
Capital Markets Focus Fund may invest a substantial portion of their assets in
high yield, high risk securities or junk bonds, which are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial
risk. Issuers of junk bonds may be highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risks associated
with acquiring the securities of such issuers generally are greater than is
the case with higher-rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During recessionary periods, such issuers
may not have sufficient revenues to meet their interest payment obligations.
The issuer's ability to service its debt obligations also may be adversely
affected by specific issuer developments, or the issuer's inability to meet
specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of junk bonds because such securities may be unsecured
and may be subordinated to other creditors of the issuer. While the high yield
securities in which the High Current Income Fund, International Equity Focus
Fund or Developing Capital Markets Focus Fund may invest normally do not
include securities which, at the time of investment, are in default or the
issuers of which are in bankruptcy, there can be no assurance that such events
will not occur after a Fund purchases a particular security, in which case a
Fund may experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund each will diversify its holdings among many issuers.
However, there can be no assurance that diversification will protect a Fund
from widespread defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated fixed-
income securities, so that adverse economic events may have a greater impact
on their prices and yields than on higher-rated fixed-income securities. Zero
coupon bonds and bonds which pay interest and/or principal in additional bonds
rather than in cash are especially volatile. Like higher-rated fixed-income
securities, junk bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts. However, there are
fewer dealers in this market, which may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions
(whether or not based on economic fundamentals) may impair the liquidity of
this market, and may cause the prices the High Current Income Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund
receive for their junk bonds to be reduced, or a Fund may experience
difficulty in liquidating a portion of its portfolio when necessary to meet
the Fund's liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. Under such conditions,
judgement may play a greater role in valuing certain of each Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund, International Equity Focus Fund and Developing
Capital Markets Focus Fund. In addition, each Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on
a portfolio holding or to participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the High Current Income Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund may
invest include junk bonds issued by sovereign entities.
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Investment in such sovereign debt involves a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the High Current Income Fund,
International Equity Focus Fund and Developing Capital Markets Focus Fund, may
be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. In the event of a default by a
governmental entity, there may be few or no effective legal remedies available
to a Fund and there can be no assurance a Fund will be able to collect on
defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund
to limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." 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*--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").
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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).
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).
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* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. ("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 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
Equity Growth 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 Equity Growth 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
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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 two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"). The reimbursement agreements, dated April 30,
1985 and February 11, 1992, provide that any expenses in excess of 1.25% of
average daily net assets will be reimbursed to the Fund by the Investment
Adviser which, in turn, will be reimbursed by MLLA.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for each
of the Company's Funds.
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.
Thomas D'Auria has served as the Portfolio Manager of the Equity Growth Fund
since March 1997 and will be responsible for the day-to-day management of the
Equity Growth Fund. Mr. D'Auria was previously the principal analyst for the
Equity Growth Fund; Senior Securities Analyst for Midlantic Bank from 1992 to
1994; Securities Analyst for Dreman Value Management from 1986 to 1992.
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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.
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 July 1993 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net
results, taking into account various factors, including price, dealer spread
or commission, if any, size of the transactions and difficulty of execution.
While the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
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Under the Investment Company Act 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 continuously offers shares of Class A Common Stock in each of
its Funds to the Insurance Companies at prices equal to the respective per
share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a
wholly owned subsidiary of the Investment Adviser, acts as the distributor of
the shares. Net asset value is determined in the manner set forth below under
"Additional Information--Determination of Net Asset Value."
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market and Reserve Assets
Funds, will consist of all payments of dividends or interest received by such
Fund less the estimated expenses of such Fund (including fees payable to the
Investment Adviser). Net investment income of the Domestic Money Market and
Reserve Assets Funds (from the time of the immediate preceding determination
thereof) consists of (i) interest accrued and/or discount earned (including
both original issue and market discount), (ii) plus or minus all realized and
unrealized gains (other than realized long-term capital gains) and losses on
its portfolio securities, (iii) less the estimated expenses of the respective
Fund (including the fees payable to the Investment Adviser) applicable to that
dividend period.
Dividends on the Domestic Money Market and Reserve Assets Funds are declared
daily and reinvested monthly in additional full and fractional shares of such
Fund. Dividends from net investment income of the Prime Bond, High Current
Income, Global Bond Focus and Government Bond Funds are declared and
reinvested monthly in additional full and fractional shares of the respective
Funds at net asset value. Dividends from net investment income of the Global
Utility Focus Fund are declared and reinvested quarterly in additional full
and fractional shares of the Fund. Dividends from net investment income of the
Quality Equity, Equity Growth, Index 500, National Resources Focus, American
Balanced, Global Strategy Focus, International Equity Focus, Basic Value Focus
and Developing Capital Markets Focus Funds are declared and reinvested at
least annually in additional full and fractional shares of the respective
Funds.
All net realized long-term or short-term capital gains of the Company, if
any, other than short-term capital gains of the Domestic Money Market and
Reserve Assets Funds, are declared and distributed annually after the close of
the Company's fiscal year to the shareholders of the Fund or Funds to which
such gains are attributable. Short-term capital gains are taxable as ordinary
income.
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TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, a Fund will not be subject to federal income
tax on such part of its net ordinary income and net realized capital gains
which it distributes to shareholders. One of the requirements to qualify for
treatment as a regulated investment company under the Code is that a Fund,
among other things, derive less than 30% of its gross income in each taxable
year from gains (without deduction of losses) from the sale or other
disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. This requirement may limit the
ability of certain Funds to dispose of certain securities at times when
management of the Company might otherwise deem such disposition appropriate or
desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest
income, its distributions to the Insurance Companies will be eligible for the
present 70% dividends received deduction applicable in the case of a life
insurance company as provided in the Code. See the Prospectus for the
Contracts for a description of the respective Insurance Company's tax status
and the charges which may be made to cover any taxes attributable to the
Separate Account. Not later than 60 days after the end of each calendar year,
the Company will send to the Insurance Companies a written notice required by
the Code designating the amount and character of any distributions made during
such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present
or prospective Contract owners. Average annual total return and yield are
computed in accordance with formulas specified by the Securities and Exchange
Commission. In connection with its reorganization on December 6, 1996, the
Global Bond Focus Fund (i) acquired substantially all of the assets and
assumed substantially all the liabilities of the International Bond Fund, a
separate Fund of the Company, (ii) implemented a change in its investment
objective and policies from seeking high current income from a global
portfolio of fixed income securities, including non-investment grade
securities, to seeking a high total investment return by investing in a global
portfolio of investment grade fixed income securities and (iii) changed its
name from the World Income Focus Fund to its current name. For the period from
the commencement of the World Income Focus Fund's operations through its
reorganization on December 6, 1996, the portfolio of the Fund included debt
securities rated below investment grade (i.e., junk bonds). On December 6,
1996, the 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
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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. 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.
On occasion, one or more of the Company's Funds may compare its performance
to that of the S&P 500 Index, the Value Line Composite Index, the Dow Jones
Industrial Average, or performance data published by Lipper Analytical
Services, Inc., or Variable Annuity Research Data Service or contained in
publications such as Morningstar Publications, Inc., Chase Investment
Performance Digest, Money Magazine, U.S. News & World Report, Business Week,
Financial Services Weekly, Kiplinger Personal Finances, CDA Investment
Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA
Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and
Ibbotson Associates. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market and Reserve Assets
Funds is computed by dividing the sum of the value of the securities held by
that Fund plus any cash or other assets (including interest and dividends
accrued) minus all liabilities (including accrued expenses) by the total
number of shares outstanding of that Fund at such time, rounded to the nearest
cent. Expenses, including the investment advisory fees payable to the
Investment Adviser, are accrued daily. Since the net investment income of the
Domestic Money Market and Reserve Assets Funds (including realized and
unrealized gains and losses on their portfolio securities) are declared as a
dividend each time the net income of the Funds are determined (see "Dividends,
Distributions and Taxes"), the net asset value per share of the Funds normally
remains at $1.00 per share immediately after each such determination and
dividend declaration.
Except with respect to securities held by the Domestic Money Market and
Reserve Assets Funds having a remaining maturity of 60 days or less,
securities held by each Fund will be valued as follows: Portfolio securities
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that are traded on stock exchanges are valued at the last sale price (regular
way) as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. Securities traded in
the over-the-counter ("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 Portfolio 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(TM) Service ("MLSPS"), to value securities held by the High Current
Income and Prime Bond Funds and to value bonds held by other of the Company's
Funds. The Board of Directors of the Company has examined the methods used by
the pricing services in estimating the value of securities held by the Funds
and believes that such methods will reasonably and fairly approximate the
price at which those securities may be sold and result in a good faith
determination of the fair value of such securities; however, there is no
assurance that securities can be sold at the prices at which they are valued.
During the 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 Equity Growth Funds commenced on
April 20, 1982. The Natural Resources Focus Fund and the American Balanced
Fund commenced operations on June 1, 1988 and June 1, 1988, respectively. The
Domestic Money Market Fund and the Global Strategy Focus Fund commenced
operations on February 20 and February 28, 1992, respectively. The Basic Value
Focus, Global Bond Focus, Global Utility Focus and International Equity Focus
Funds commenced operations on July 1, 1993. The Developing Capital Markets
Focus Fund and Government Bond Fund commenced operations on May 2, 1994. The
Index 500 Fund commenced operations on 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
Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock,
Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality
Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock,
Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch
American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund
Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill
Lynch Basic Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus
Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock,
Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch
Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Government
Bond Fund Common Stock and Merrill Lynch Index 500 Common Stock, respectively.
The Company may, from time to time, at the sole discretion of its Board of
Directors and without the need to obtain the approval of its shareholders or
of Contract Owners, offer and sell shares of one or more of such classes. Each
class consists of 100,000,000 Class A shares and 100,000,000
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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.
The Board of Directors of the Company has authorized the issuance of shares
of Class B Common Stock with respect to each of the Company's Funds, with the
existing shares of Common Stock of each Fund to be designated Class A Common
Stock of such Fund. The Board of Directors have also authorized the Company to
enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
under which the Company would pay distribution fees in respect of the shares
of its Class B Common Stock. No shares of Class B Common Stock have been
issued; however, the Company may commence issuing shares of Class B Common
Stock later in 1997 pursuant to a separate or amended Prospectus.
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
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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.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in the various types of
marketable securities issued by or guaranteed as to principal and interest by
the U.S. Government and supported by the full faith and credit of the U.S.
Treasury. U.S. Treasury obligations differ mainly in the length of their
maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount
basis.
GOVERNMENT AGENCY SECURITIES
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in government agency
securities, which are debt securities issued by government sponsored
enterprises, federal agencies and international institutions. Such securities
are not direct obligations of the Treasury but involve government sponsorship
or guarantees by government agencies or enterprises. The Funds may invest in
all types of government agency securities currently outstanding or to be
issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in depositary institutions
money instruments, such as certificates of deposit, including variable rate
certificates of deposit, bankers' acceptances, time deposits and bank notes.
Certificates of deposit are generally short-term, interest-bearing negotiable
certificates issued by commercial banks, savings banks or savings and loan
associations against funds deposited in the issuing institution. Variable rate
certificates of deposit are certificates of deposit on which the interest rate
is periodically adjusted prior to their stated maturity, usually at 30, 90 or
180 day intervals ("coupon dates"), based upon a specified market rate. As a
result of these adjustments, the interest rate on these obligations may be
increased or decreased periodically. Often, dealers selling variable rate
certificates of deposit to the Funds agree to repurchase such instruments, at
the Funds' option, at par on the coupon dates. The dealers' obligations to
repurchase these instruments are subject to conditions imposed by the various
dealers; such conditions typically are the continued credit standing of the
issuer and the existence of reasonably orderly market conditions. The Funds
are also able to sell variable rate certificates of deposit in the secondary
market. Variable rate certificates of deposit normally carry a higher interest
rate than comparable fixed rate certificates of deposit because variable rate
certificates of deposit generally have a longer stated maturity than
comparable fixed rate certificates of deposit. As a matter of policy, the
Domestic Money Market Fund will invest only in these types of instruments
issued by U.S. issuers.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund, and
Developing Capital Markets Focus Fund) may invest in certificates of deposit
and bankers' acceptances issued by foreign branches or subsidiaries of U.S.
banks ("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign
banks ("Yankeedollar" obligations). The Fund may invest only in Eurodollar
obligations which by their terms are general obligations of the U.S. parent
bank and meet the other criteria discussed below. Yankeedollar obligations in
which the Fund may invest must be issued by U.S. branches or subsidiaries of
foreign banks which are subject to state or federal banking regulations in the
U.S. and by their terms must be general obligations of the foreign parent. In
addition, the Fund will limit its investments in Yankeedollar obligations to
obligations issued by banking institutions with more than $1 billion in
assets.
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
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Fund and Developing Capital Markets Focus Fund) may also invest in U.S.
dollar-denominated obligations of foreign depository institutions and their
foreign branches and subsidiaries, such as certificates of deposit, bankers'
acceptances, time deposits and deposit notes. The obligations of such foreign
branches and subsidiaries may be the general obligation of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of the
specific obligation or by government regulation. Such investments will only be
made if determined to be of comparable quality to other investments
permissible for the Reserve Assets Fund. The Reserve Assets Fund will not
invest more than 25% of its total assets (taken at market value at the time of
each investment) in these obligations.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United
States, has total assets of at least $1 billion and its deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets
of a Fund (taken at market value at the time of each investment) in
certificates of deposit issued by banks and savings and loan associations with
assets of less than $1 billion if the principal amount of each such
certificate of deposit is fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary
or defensive purposes, each other Fund) may invest in commercial paper
(including variable amount master demand notes and insurance company funding
agreements), which refers to short-term, unsecured promissory notes issued by
corporations, partnerships, trusts and other entities to finance short-term
credit needs and by trusts issuing asset-backed commercial paper. Commercial
paper is usually sold on a discount basis and has a maturity at the time of
issuance not exceeding nine months. Variable amount master demand notes are
demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer
and a commercial bank acting as agent for the payees of such notes, whereby
both parties have the right to vary the amount of the outstanding indebtedness
on the notes. Because variable amount master notes are direct lending
arrangements between the lender and borrower, it is not generally contemplated
that such instruments will be traded and there is no secondary market for the
notes. Typically, agreements relating to such notes provide that the lender
may not sell or otherwise transfer the note without the borrower's consent.
Such notes provide that the interest rate on the amount outstanding is
adjusted periodically, typically on a daily basis, in accordance with a stated
short-term interest rate benchmark. Because the interest rate of a variable
amount master note is adjusted no less often than every 60 days and since
repayment of the note may be demanded at any time, the Investment Adviser
values such a note in accordance with the amortized cost basis described under
"Determination of Net Asset Value" in the Statement of Additional Information.
The Domestic Money Market Fund and Reserve Assets Fund may also invest in
nonconvertible debt securities issued by entities or asset-backed
nonconvertible debt securities issued by trusts (e.g., bonds and debentures)
with no more than 397 days (13 months) remaining to maturity at date of
settlement. Short-term debt securities with a remaining maturity of less than
one year tend to become extremely liquid and are traded as money market
securities. For a discussion of the ratings requirements of the Funds'
portfolio securities, see "Investment Objectives and Policies of the Funds--
Money Market Fund Portfolio Restrictions" and "Investment Objectives and
Policies of the Funds--Domestic Money Market Fund" in the Prospectus.
The Reserve Assets Fund (and, for temporary or defensive purposes, the
Natural Resources Focus Fund, Global Strategy Focus Fund, Global Bond Focus
Fund, Global Utility Focus Fund, International Equity Focus Fund and
Developing Capital Markets Focus Fund) may also invest in U.S. dollar-
denominated commercial paper and other short-term obligations issued by
foreign entities. Such investments are subject to quality standards 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.
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REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed yield for the Fund insulated from fluctuations in the
market value of the underlying security during such period, although, to the
extent the repurchase agreement is not denominated in U.S. dollars, the Fund's
return may be affected by currency fluctuations. Repurchase agreements may be
entered into only with a member bank of the Federal Reserve System, a primary
dealer in U.S. government securities or an affiliate thereof. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the underlying
security to the purchaser during the term of the agreement and generally do
not require the seller to provide additional securities in the event of a
decline in the market value of the purchased security during the term of the
agreement. 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.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate
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and thereby not well safeguarded both during good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
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APPENDIX 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 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.
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.
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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 Equity Growth 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").
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
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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.
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 and the Natural Resources Focus 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
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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. 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.
B-4
<PAGE>
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
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.
B-5
<PAGE>
PROSPECTUS
APRIL 25, 1997
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
----------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its sixteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock ("Common Stock")
is issued for each Fund. The Company is offering shares of its Class A Common
Stock pursuant to this Prospectus.
The shares of the Funds are sold to separate accounts ("Separate Accounts")
of certain insurance companies (the "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 Insurance Companies
will redeem shares to the extent necessary to provide benefits under the
respective Contracts or for such other purposes as may be consistent with the
respective Contracts. Certain insurance companies are wholly owned
subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment
adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The
investment objectives of the Funds and certain investment policies, each of
whose name is preceded by "Merrill Lynch," are as follows:
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by
investing in securities, principally equities, of issuers in countries
having smaller capital markets.
EQUITY GROWTH FUND. Long-term capital growth by investing primarily in
common shares of small companies and of emerging growth companies
regardless of size.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND). High
total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational
currency units.
GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
INDEX 500 FUND. Investment results that, before expenses, correspond to
the aggregate price and yield performance of the Standard & Poor's
Composite Stock Price Index (the "S&P Index").
INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation and, secondarily,
income, through investment in securities, principally equities, of issuers
in countries other than the United States.
THE DEVELOPING CAPITAL MARKETS FOCUS FUND MAY INVEST IN HIGH YIELD BONDS
(COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT
OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................... 3
The Insurance Companies.................................................... 9
Investment Objectives and Policies of the Funds............................ 9
Directors.................................................................. 27
Investment Adviser......................................................... 28
Portfolio Transactions and Brokerage....................................... 30
Purchase of Shares......................................................... 30
Redemption of Shares....................................................... 30
Dividends, Distributions and Taxes......................................... 30
Performance Data........................................................... 31
Additional Information..................................................... 32
Appendix A................................................................. A-1
Appendix B................................................................. B-1
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below with the exception of the
three month period ending March 31, 1997 for the Index 500 Fund, 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 for the Index 500
Fund, have been derived from information provided in the Company's audited
financial statements. 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
BASIC VALUE FOCUS FUND FOCUS FUND
-------------------------------------------- ------------------------------------
FOR THE FOR THE YEAR FOR THE
FOR THE YEAR ENDED PERIOD JULY 1, ENDED PERIOD MAY 2,
DECEMBER 31, 1993+ TO DECEMBER 31, 1994+ TO
---------------------------- DECEMBER 31, -------------------- DECEMBER 31,
1996 1995 1994 1993 1996 1995 1994
-------- -------- -------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of year...... $ 13.10 $ 11.10 $ 10.95 $ 10.00 $ 9.32 $ 9.51 $ 10.00
-------- -------- -------- -------- -------- -------- -------
Investment income--net.. .17 .18 .17 .04 .20 .20 .09
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 2.37 2.49 .08 .91 .76 (.30) (.58)
-------- -------- -------- -------- -------- -------- -------
Total from investment
operations............. 2.54 2.67 .25 .95 .96 (.10) (.49)
-------- -------- -------- -------- -------- -------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment income--
net................... (.18) (.19) (.10) -- (.23) (.09) --
Realized gain on
investments--net...... (.72) (.48) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------
Total dividends and
distributions.......... (.90) (.67) (.10) -- (.23) (.09) --
-------- -------- -------- -------- -------- -------- -------
Net asset value, end of
year................... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.05 $ 9.32 $ 9.51
======== ======== ======== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 20.69% 25.49% 2.36% 9.50%# 10.59% (1.08)% (4.90)%#
======== ======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... .66% .66% .72% .86%* 1.25% 1.25% 1.29%*
======== ======== ======== ======== ======== ======== =======
Expenses................ .66% .66% .72% .86%* 1.31% 1.36% 1.35%*
======== ======== ======== ======== ======== ======== =======
Investment income--net.. 1.37% 1.68% 2.08% 1.69%* 2.42% 2.73% 2.18%*
======== ======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $524,930 $306,463 $164,307 $ 47,207 $ 95,599 $ 55,209 $36,676
======== ======== ======== ======== ======== ======== =======
Portfolio turnover...... 68.41% 74.10% 60.55% 30.86% 87.33% 62.53% 29.79%
======== ======== ======== ======== ======== ======== ======= ===
Average commission rate
paid##................. $ .0549 -- -- -- $ 0.0003### -- --
======== ======== ======== ======== ======== ======== ======= ===
</TABLE>
- --------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
### The "Average Commission Rate Paid" 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY GROWTH 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
investments--net....... 1.84 8.64 (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01)
-------- -------- -------- ------- ------- ------- ------- ------ ------ -------
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, net of
reimbursement.......... .81% .81% .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25% 1.24%
======== ======== ======== ======= ======= ======= ======= ====== ====== =======
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 -- -- -- -- -- -- -- -- --
======== ======== ======== ======= ======= ======= ======= ====== ====== =======
</TABLE>
- --------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average number of shares outstanding during the period.
++ Amount is less than $.01 per share.
# 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<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 in-
vestments--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 thou-
sands)............................. $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). As a result, the financial information
in the financial highlights table for operations of the Fund prior to its
reorganization may not be indicative of its performance following its
reorganization.
## Aggregate total investment return.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND
------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD
---------------------------- JULY 1, 1993+ TO
1996 1995 1994 DECEMBER 31, 1993
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
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 and
distributions:
Investment income--net....... (.52) (.39) (.29) (.02)
Realized gain on
investments--net............ -- -- --
In excess of realized gain on
investments--net............ -- -- (.02) --
-------- -------- -------- --------
Total dividends and
distributions................ (.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...................... .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.
+ 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INDEX 500 FUND
------------------------------------
FOR THE PERIOD
JANUARY 1, 1997 TO FOR THE PERIOD
MARCH 31, 1997 DEC. 13, 1996+ TO
(UNAUDITED) DEC. 31, 1996
------------------ -----------------
<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 invest-
ments--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 asset, 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<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 year.. $ 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 year........ $ 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............................ .89% .89% .97% 1.14%*
======== ======== ======== =======
Investment income net............... 1.96% 1.95% 1.09% .30%*
======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of year (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.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. 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.
8
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THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in seven Funds to certain separate
accounts (the "Separate Accounts") to fund benefits under Variable Life
Contracts. Those seven Funds are: the Basic Value Focus Fund, Global Bond
Focus Fund, Global Utility Focus Fund, Index 500 Fund, International Equity
Focus Fund, Developing Capital Markets Focus Fund and the Equity Growth Fund.
Through a separate Prospectus, the Company offers shares in all of its funds
to certain other separate accounts of the Insurance Companies to fund benefits
under variable annuity contracts issued by them.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the Prospectus for each
Contract. That Prospectus describes the relationship between increases or
decreases in the net asset value of shares of a Fund, and any distributions on
such shares, and the benefits provided under a Contract. The Prospectus for
the Contracts also describes various fees payable to the Insurance Companies
and charges to the Separate Accounts made by the Insurance Companies with
respect to the Contracts. Since shares of the Funds will be sold only to the
Insurance Companies for the Separate Accounts, the terms "shareholder" and
"shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and
ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment
Adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described below. The
differences in objectives and policies among the Funds can be expected to
affect the return of each Fund and the degree of market and financial risk to
which each Fund is subject. Each Fund is classified as "diversified," as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act" or the "Act") except for the Global Bond Focus Fund, the Index
500 Fund and the Developing Capital Markets Focus Fund, each of which is
classified as "non-diversified." The investment objectives and classification
of each Fund may not be changed without the approval of the holders of a
majority of the outstanding shares of each Fund affected. The investment
objectives and policies of each Fund are discussed below. There can be no
assurance that any Fund will achieve its investment objective.
Fixed Income Security Ratings. No Fund other than the International Equity
Focus Fund and Developing Capital Markets Focus Fund invests in fixed-income
securities which are rated below investment grade (i.e., securities rated Ba
or below by Moody's Investors Service, Inc. ("Moody's") or BB or below by
Standard & Poor's Rating Group ("Standard & Poor's"). However, securities
purchased by a Fund may subsequently be downgraded. Such securities may
continue to be held and will be sold only if, in the judgement of the
Investment Adviser, it is advantageous to do so. Securities in the lowest
category of investment grade debt securities may have speculative
characteristics which may lead to weakened capacity to pay interest and
principal during periods of adverse economic conditions. See Appendix A for a
fuller description of corporate bond ratings.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund seeks special opportunities
in securities that are selling at a discount, either from book value or
historical price-earnings ratios, or seem capable of recovering from
temporarily out of favor considerations. Particular emphasis is placed on
securities which provide an above average dividend return and sell at a below-
average price-earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates
and depress prices of securities in unfavorable climates. Based on this
premise, management believes
9
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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 Appendix B. It reserves the right as a defensive
measure to hold other types of securities, including U.S. Government and
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant. The Fund may invest up to
10% of its total assets, taken at market value at the time of acquisition, in
the securities of foreign issuers.
GLOBAL BOND FOCUS FUND (FORMERLY, THE WORLD INCOME FOCUS FUND)
The investment objective of the Global Bond Focus Fund is to seek to provide
shareholders a high total investment return by investing in a global portfolio
of fixed income securities denominated in various currencies, including
multinational currency units. The Fund will, under normal conditions, invest
at least 90% of its total assets in such fixed income securities. In pursuing
its investment objective, the Fund will allocate its investments among
different types of fixed income securities denominated in various currencies
based upon the Investment Adviser's analysis of the yield, maturity, potential
appreciation and currency considerations affecting such securities. There can
be no assurance that the Fund's investment objective will be achieved.
Investing on an international basis involves special considerations. See
"Other Portfolio Strategies--Foreign Securities." The Fund should be
considered as a long-term investment and a vehicle for diversification and not
as a balanced investment program.
The Fund may invest in United States and foreign government and corporate
fixed income securities which have a credit rating of A or better by Standard
& Poor's or by Moody's or commercial paper rated A-1 by Standard & Poor's or
Prime-1 by Moody's or obligations that the Advisor has determined to be of
similar creditworthiness. The Fund may purchase fixed income securities issued
by United States or foreign corporations or financial institutions, including
debt securities of all types and maturities, convertible securities and
preferred stocks. The Fund also may purchase securities issued or guaranteed
by United States or foreign governments (including foreign states, provinces
and municipalities) or their agencies and instrumentalities ("governmental
entities") or issued or guaranteed by international organizations designated
or supported by multiple governmental entities to promote economic
reconstruction or development ("supranational entities").
International Investing. The Fund may invest in fixed income securities
denominated in any currency or multinational currency unit. An illustration of
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
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<PAGE>
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 Portfolio
Strategies--Foreign Securities."
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well
as in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at
least three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States dollar-
denominated obligations only for temporary defensive purposes.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Fund's Investment Adviser. The Investment Adviser does not believe that the
credit risk inherent in the obligations of stable foreign governments is
significantly greater than that of U.S. Government securities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The government
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings.
Allocation of Investments. In seeking to meet its investment objective, high
current income will only be one of the factors that the Investment Adviser
will consider in selecting portfolio securities for the Global Bond Focus
Fund. As a general matter, in evaluating investments for the Fund, the
Investment Advisor will consider, among other factors, the relative levels of
interest rates prevailing in various countries, the potential appreciation of
such investments in their denominated currencies and, for debt instruments not
denominated in U.S. dollars, the potential movement in the value of such
currencies compared to the U.S. dollar. Additionally, the Fund, in seeking
capital appreciation, may invest in relatively low yielding instruments in
expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
The average maturity of the Global Bond Focus Fund's portfolio securities
will vary based upon the Investment Adviser's assessment of economic and
market conditions. As with all fixed income securities, changes in market
yields will affect the Fund's asset value as the prices of portfolio
securities generally increase when interest rates decline and decrease when
interest rates rise. Prices of longer-term securities generally fluctuate more
in response to interest rate changes than do shorter-term securities. The Fund
does not expect the average maturity of its portfolio to exceed ten years.
The value of the Global Bond Focus Fund's holdings denominated in currencies
other than the U.S. Dollar will also be affected by changes in the value of
such currencies relative to the U.S. dollar. Such currency fluctuations may
have a substantial impact on the value of the Fund's holdings. The Fund may
seek to limit the
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<PAGE>
effect of currency fluctuations on the value of portfolio holdings through
currency hedging but there is no guarantee that such efforts, if undertaken,
will be successful. See Appendix B.
GLOBAL UTILITY FOCUS FUND
The investment objective of the Global Utility Focus Fund is to seek both
capital appreciation and current income through investment of at least 65% of
its total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of the Investment Adviser, primarily
engaged in the ownership or operation of facilities used to generate, transmit
or distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk, as described in Appendix B. Investing on an
international basis involves special considerations. See "Other Portfolio
Strategies--Foreign Securities."
The Global Utility Focus Fund at all times, except during temporary
defensive periods, will maintain at least 65% of its total assets invested in
equity and debt securities issued by domestic and foreign companies in the
utilities industries. The Fund reserves the right to hold, as a temporary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash
in such proportions as, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. Except during temporary defensive
periods, such securities or cash will not exceed 20% of its total assets.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three countries, one of which may be
the United States, although the Investment Adviser expects the Fund's
portfolio to be more geographically diversified. Under normal conditions, it
is anticipated that the percentage of assets invested in U.S. securities will
be higher than that invested in securities of any other single country. It is
possible that at times the Fund may have 65% or more of its total assets
invested in foreign securities.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
preferred stocks will vary from time to time based upon the Investment
Adviser's judgement of the extent to which investments in each category will
contribute to meeting the Fund's investment objective. Fixed income securities
in which the Fund will invest generally will be limited to those rated
investment grade, that is, rated in one of the four highest rating categories
by Standard & Poor's or Moody's (i.e., securities rated at least BBB by
Standard & Poor's or Baa by Moody's), or deemed to be of equivalent quality in
the judgement of the Investment Adviser. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to
Standard & Poor's, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal. The Fund's commercial paper investments at the time of
purchase will be rated "A-1" or "A-2" by Standard & Poor's or "Prime-1" or
"Prime-2" by Moody's or, if not rated, will be of comparable quality as
determined by the Investment Adviser. The Fund may also invest up to 5% of its
total assets at the time of purchase in fixed income securities having a
minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The
Fund may, but need not, dispose of any security if it is subsequently
downgraded. For a description of ratings of debt securities, see Appendix A to
this Prospectus.
The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs")
or other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. Generally,
ADRs, which are issued in registered form, are designated for use in the
United States securities markets, and EDRs, which are issued in bearer form,
are designed for use in European securities markets. The Fund may invest in
ADRs and EDRs through both sponsored and unsponsored arrangements. In a
sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to
pay some or all of the depository's transaction fees, whereas in an
unsponsored arrangement the foreign issuer assumes no obligations and the
depository's transaction fees are paid by the ADR or EDR holders. Foreign
issuers in respect of whose securities unsponsored ADRs or EDRs have been
issued are not
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<PAGE>
necessarily obligated to disclose material information in the markets in which
the unsponsored ADRs or EDRs are traded and, therefore, there may not be a
correlation between such information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
Utility Industries--Description and Risks. Under normal circumstances, the
Fund will invest at least 65% of its total assets in common stocks (including
preferred or debt securities convertible into common stocks), debt securities
and preferred stocks of domestic and/or foreign companies in the utility
industries. To meet its objective of current income, the Fund may invest in
domestic utility companies that pay higher than average dividends, but have a
lesser potential for capital appreciation. The average dividend yields of
common stocks issued by domestic utility companies historically have
significantly exceeded those of industrial companies' common stocks, while the
prices of domestic utility stocks have tended to be less volatile than stocks
of industrial companies. The Investment Adviser believes that the average
dividend yields of common stocks issued by foreign utility companies have also
historically exceeded those of foreign industrial companies' common stocks. To
meet its objective of capital appreciation, the Fund may invest in foreign
utility companies which pay lower than average dividends, but have a greater
potential for capital appreciation.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Investment Adviser, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
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
13
<PAGE>
deregulation and the evolution of independent power producers as well as new
entrants to the field of telecommunications, non-regulated providers of
utility services have become a significant part of their respective
industries. The Investment Adviser believes that the emergence of competition
and deregulation will result in certain utility companies being able to earn
more than their traditional regulated rates of return, while others may be
forced to defend their core businesses from increased competition and may be
less profitable. The Investment Adviser seeks to take advantage of favorable
investment opportunities that are expected to arise from these structural
changes. Of course, there can be no assurance that favorable developments will
occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective
governments than utilities in the United States and, as in the U.S., generally
are required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The 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
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<PAGE>
entertainment is now associated with the expansion of the role of cable
companies as providers of utility services in the telecommunications industry
and the competitive response of traditional telephone companies. Given mergers
and certain marketing tests currently underway, it is likely that both
traditional telephone companies and cable companies will soon provide a
greatly expanded range of utility services, including two-way video and
informational services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decades, gas utility companies have been
adversely affected by disruptions in the oil industry and have also been
affected by increased concentration and competition.
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 Portfolio Strategies--Foreign Securities."
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.
INTERNATIONAL EQUITY FOCUS FUND
The investment objective of the International Equity Focus Fund is to seek
capital appreciation and, secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal conditions, at least 65% of the Fund's net assets
will be invested in such equity securities 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
15
<PAGE>
be changed without approval of a majority of the Fund's outstanding shares.
There can be no assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. See Appendix B. Investing on an international
basis involves special considerations. Investing in smaller capital markets
entails the risk of significant volatility in the Fund's security prices. See
"Other Portfolio Strategies--Foreign Securities." The Fund is designed for
investors seeking to complement their U.S. holdings through foreign
investments. The Fund should be considered as a long-term investment and a
vehicle for diversification and not as a balanced investment program.
The International Equity Focus Fund will invest in an international portfolio
of securities of foreign companies located throughout the world. While there
are no prescribed limits on the geographic allocation of the Fund's
investments, management of the Fund anticipates that a substantial portion of
its assets will be invested in the developed countries of Europe and the Far
East. For the reasons stated below, management of the Fund will give special
attention to investment opportunities in the developing countries of the world,
including, but not limited to Latin America, the Far East and Eastern Europe.
It is anticipated that a significant portion of the Fund's assets may be
invested in such developing countries.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser based primarily on its
assessment of the relative condition and growth potential of the various
economies and securities markets, currency and taxation considerations and
other pertinent financial, social, national and political factors. Within such
allocations, the Investment Adviser will seek to identify equity investments in
each market which are expected to provide a total return which equals or
exceeds the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such
countries. Certain such countries, particularly so-called "emerging" countries
(such as Malaysia, Mexico and Thailand), which may be in the process of
developing more market-oriented economies, may experience relatively high rates
of economic growth. Because of the general illiquidity of the capital markets
in certain developing countries, the Fund may invest in a relatively small
number of leading or relatively actively traded companies in 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 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
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designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradeable both in the
U.S. and Europe and are designed for use throughout the world.
The Fund also may invest up to 35% of its net assets in longer-term, non-
convertible debt securities emphasizing debt securities which offer the
opportunity for capital appreciation. Capital appreciation in debt securities
may arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels, or in the creditworthiness of issuers. In
accordance with its investment objective, the Fund will not seek to benefit
from anticipated short-term fluctuations in currency exchange rates. The Fund
may, from time to time, invest in debt securities with relatively high yields
(as compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. Such income can be used, however,
to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the Fund
will rely on the Investment Adviser's judgement, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The Investment
Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default or which the Investment Adviser believes will be in default. See "Other
Portfolio Strategies--Foreign Securities" and "Risk of High Yield Securities"
below.
DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental policy
and may not be changed without approval of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. See Appendix B. Investing on an international
basis involves special considerations. Investing in smaller capital markets
entails the risk of significant volatility in the Fund's security prices. See
"Other Portfolio Strategies--Foreign Securities." The Fund is designed for
investors seeking to complement their U.S. holdings through foreign
investments. The Fund should be considered as a long-term investment and a
vehicle for diversification and not as a balanced investment program.
For purposes of its investment objective, the Fund considers countries having
smaller capital markets to be all countries other than the four countries
having the largest equity market capitalizations. Currently, these four
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countries are Japan, the United Kingdom, the United States and Germany. At
September 30, 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 Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called "emerging" countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more market-
oriented economies, may experience relatively high rates of economic growth.
Other countries (such as France, the Netherlands and Spain), although having
relatively mature smaller capital markets, may also be in a position to benefit
from local or international developments encouraging greater market orientation
and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability or
inclination to invest in countries having smaller capital markets. It also may
not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Investment Adviser will emphasize the
allocation of assets among certain countries' capital markets, rather than the
selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. See "Risks of High Yield Securities" below.
Such income can be used, however, to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
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nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the Fund
will rely on the Investment Adviser's judgement, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The Investment
Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default or which the Investment Adviser believes will be in default. See "Other
Portfolio Strategies--Foreign Securities" and "Risks of High Yield Securities"
below.
For purposes of the Fund's investment objective, an issuer ordinarily will be
considered to be located in the country where the primary trading market of its
securities is located. The Fund, however, may consider a company to be located
in countries having smaller capital markets, without reference to its domicile
or to the primary trading market of its securities, when at least 50% of its
non-current assets, capitalization, gross revenues or profits in any one of the
two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such countries. The Fund also may
consider closed-end investment companies to be located in the country or
countries in which they primarily make their portfolio investments.
Foreign investments in smaller capital markets involve risks not involved in
domestic investment, including fluctuations in foreign exchange rates, future
political and economic developments, different legal systems and the existence
or possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. These risks
are often heightened for investments in small capital markets. With respect to
certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries. In
addition, certain foreign investments may be subject to foreign withholding
taxes.
There may be less publicly available information about an issuer in a smaller
capital market than would be available about a United States company, and it
may not be subject to accounting, auditing and financial reporting standards
and requirements comparable to those of United States companies. As a result,
traditional investment measurements, such as price/earnings ratios, as used in
the United States, may not be applicable in certain capital markets.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Company believes have special investment value, and of emerging growth
companies regardless of size. There can be no assurance that the Fund's
investment objective will be achieved. Companies are selected by management on
the basis of their long-term potential for expanding their size and
profitability or for gaining increased market recognition for their securities.
Current income is not a factor in the selection of securities. The Fund is
intended to provide an opportunity for Contract Owners who are not ordinarily
in a position to perform the specialized type of research or analysis of small
and emerging growth companies.
Management seeks to identify those small emerging growth companies which can
show significant and sustained increases in earnings over an extended period of
time and are in sound financial condition. Management
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believes that, while these companies present above-average risks, properly
selected companies of this type also have the potential to increase their
earnings at a rate substantially in excess of the general growth of the
economy. The Fund attempts to achieve its objective by focusing on the long-
range view of a company's prospects through a fundamental analysis of its
management, financial structure, product development, marketing ability and
other relevant factors. Full development of these companies frequently takes
time and, for this reason, the Fund should be considered as a long-term
investment and not as a vehicle for seeking short-term profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability, or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalizations in the $50-$300 million range and generally are
little known to most individual investors, although some may be dominant in
their respective industries. Underlying this strategy is management's belief
that relatively small companies will continue to have the opportunity to
develop into significant business enterprises. Some such companies may be in a
relatively early stage of development; others may manufacture a new product or
perform a new service. Such companies may not be counted upon to develop into
major industrial companies, but management believes that eventual recognition
of their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Emerging growth companies. In selecting investments for the Equity Growth
Fund, management also seeks emerging growth companies that either occupy a
dominant position in an emerging industry or subindustry or have a significant
and growing market share in a large, fragmented industry. Management believes
that capable and flexible management is one of the most important criteria of
emerging growth companies and that such companies should employ sound financial
and accounting policies and also demonstrate effective research, successful
product development and marketing, efficient service and pricing flexibility.
Emphasis is given to companies with rapid historical growth rates, above-
average returns on equity and strong current balance sheets, all of which
should enable the company to finance its continued growth. Management of the
Company also analyzes and weighs relevant factors beyond the company itself,
such as the level of competition in the industry, the extent of governmental
regulation, the nature of labor conditions and other related matters.
The Equity Growth Fund emphasizes investments in companies that do most of
their business in the United States and therefore are free of the currency
exchange problems, foreign tax considerations and potential political and
economic upheavals that many multinational corporations face. Moreover, the
size and kinds of markets that they serve make these companies less susceptible
than larger companies to intervention from the federal government by means of
price controls, regulations or litigation.
While the process of selection and continuous supervision by management does
not, of course, guarantee successful investment results, it does provide
ingredients not available to the average individual due to the time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
It should be apparent that an investment in a fund such as the Equity Growth
Fund involves greater risk than is customarily associated with more established
companies. The securities of smaller or emerging growth companies may be
subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. These companies may
have limited product lines, markets or financial resources, or they may be
dependent upon a limited management group. Because of these factors, management
of the Company believes that shares in the Equity Growth Fund are suitable for
Contract Owners who are in a financial position to assume above-average
investment risk in search of above-average long-term reward. As indicated, the
Fund is designed for Contract Owners whose investment objective is growth
rather than income. It is definitely not intended for exclusive funding of
Contracts but is designed for Contract Owners who are prepared to experience
above-average fluctuations in net asset value.
The securities in which the Equity Growth Fund invests will often be traded
only in the over-the-counter market or on a regional securities exchange and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, the disposition by the Fund or portfolio
securities to meet
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redemptions or otherwise may require the Fund to sell these securities at a
discount from market prices or during periods when in management's judgement
such disposition is not desirable or to make many small sales over a lengthy
period of time.
The investment emphasis of the Equity Growth Fund is on equities, primarily
common stock and, to a lesser extent, securities convertible into common stocks
and rights to subscribe for common stock, and the Fund will maintain at least
80% of its net assets invested in equity securities of small or emerging growth
companies except during defensive periods. The Fund reserves the right as a
defensive measure and to provide for redemptions to hold other types of
securities, including non-convertible preferred stocks and debt securities,
U.S. Government and Government agency securities, money market securities or
other fixed-income securities deemed by the Investment Adviser to be consistent
with a defensive posture, or cash, in such proportions as, in the opinion of
management, prevailing market or economic conditions warrant.
INDEX 500 FUND
The investment objective of the Index 500 Fund is to seek to provide
investment results that, before expenses, correspond to the aggregate price and
yield performance of the S&P 500 Index. There can be no assurance that the
Fund's investment objective can be achieved.
The S&P 500 Index is a market-weighted index composed of 500 common stocks
issued by companies in a wide range of businesses and which collectively
represent a substantial portion of all common stocks publicly traded in the
U.S. The composition of the S&P 500 Index is determined by Standard & Poor's, a
division of the McGraw-Hill Companies, Inc. Standard & Poor's criteria for
selecting common stocks to include in the S&P 500 Index is based on factors
such as market capitalization, trading activity and the adequacy of
representation of particular industries, and favors U.S.-traded stocks of large
companies that are among the most dominant in their industries. The S&P 500
Index is generally considered broadly representative of the performance of
large-capitalization publicly traded common stocks in the U.S. The inclusion of
a stock in the S&P 500 Index does not imply that Standard & Poor's believes the
stock to be an attractive investment.
The Index 500 Fund will not attempt to buy or sell securities based on the
Investment Adviser's economic, financial or market analysis, but will instead
employ a "passive" approach that attempts to remain invested at all times in a
portfolio of assets the performance of which is expected to be strongly
correlated with that of the S&P 500 Index. The Index 500 Fund may invest in all
500 stocks in the S&P 500 Index in approximately the same proportions as their
weightings in the S&P 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
Index at such times when the Fund is not fully invested in all
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500 stocks in the S&P 500 Index in approximately the same proportions as their
weightings in that index. To the extent the Index 500 Fund utilizes the
foregoing investment techniques, the Fund may not track the S&P 500 Index with
the same degree of accuracy as the Fund would if it were fully invested in all
500 stocks in the S&P 500 Index in approximately the same proportions as their
weightings in that index. However, the principal advantage of the foregoing
investment techniques is to provide an efficient means to invest in the
universe of stocks of the S&P 500 Index. The Fund is expected to provide broad
diversification, and will seek to operate at low costs due to its "passive"
approach to portfolio management and anticipated low portfolio turnover rate.
NON-DIVERSIFIED FUNDS
The Global Bond Focus, Developing Capital Markets Focus and the Index 500
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. 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 which are freely
tradeable in their primary market offshore should be deemed liquid. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Funds' investments in these securities,
focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Company believes that indexed and inverse securities may provide portfolio
management flexibility that permits a Fund to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Foreign Securities. The Basic Value Focus, Global Bond Focus, Global Utility
Focus, International Equity Focus, Developing Capital Markets Focus and Equity
Growth Funds may invest in securities of foreign issuers.
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The Index 500 Fund may also invest in securities of foreign issuers to the
extent such issuers are included in the S&P 500 Index. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations and risks which are not ordinarily associated with investing in
domestic issuers. These considerations and risks include changes in currency
rates, currency exchange control regulations, the possibility of expropriation,
the unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. If it should become necessary, a Fund
could encounter greater difficulties in invoking legal processes abroad than
would be the case in the United States. Transaction costs in foreign securities
may be higher. The operating expense ratio of a Fund investing in foreign
securities can be expected to be higher than that of an investment company
investing exclusively in United States securities because the expenses of the
Fund, such as custodial costs, are higher. In addition, net investment income
earned by a Fund on a foreign security may be subject to withholding and other
taxes imposed by foreign governments which will reduce a Fund's net investment
income. The Investment Adviser will consider these and other factors before
investing in foreign securities, and will not make such investments unless, in
its opinion, such investments will meet the standards and objectives of a
particular Fund. No Fund which may invest in foreign securities will
concentrate its investments in any particular country. The Global Bond Focus,
Global Utility Focus, International Equity Focus and Developing Capital Markets
Focus Funds may from time to time be substantially invested in non-dollar-
denominated securities of foreign issuers. 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 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, which 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
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
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problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the United
States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience. Due to its emphasis on
securities of issuers located in smaller capital markets, 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
closed-end investment companies may at times be
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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 Global Utility Focus and Developing
Capital Markets Focus Funds may from time to time enter into standby commitment
agreements. Such agreements commit the respective Fund, for a stated period of
time, to purchase a stated amount of a fixed income security which may be
issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee which is typically
approximately 0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will at all times maintain a
segregated account with its custodian of cash or liquid securities an amount
equal to the purchase price of the securities underlying the commitment. There
can be no assurance that the securities subject to a standby commitment will be
issued, and the value of the security, if issued, on the delivery date may be
more or less than its purchase price.
Portfolio Strategies Involving 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 Appendix B attached to this
Prospectus.
RISKS OF HIGH YIELD SECURITIES
The International Equity Focus Fund and Developing Capital Markets Focus Fund
may invest a substantial portion of their assets in high yield, high risk
securities or junk bonds, which are regarded as being predominantly speculative
as to the issuer's ability to make payments of principal and interest.
Investment in such securities involves substantial risk. Issuers of junk bonds
may be highly leveraged and may not have available to them more traditional
methods of financing. Therefore, the risks associated with acquiring the
securities of such issuers generally are greater than is the case with higher-
rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, issuers of high yield securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During recessionary periods, such issuers may
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not have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the International Equity Focus Fund or Developing Capital Markets
Focus Fund may invest normally do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after a Fund purchases a
particular security, in which case a Fund may experience losses and incur
costs.
In an effort to minimize the risk of issuer default or bankruptcy, the
International Equity Focus Fund and Developing Capital Markets Focus Fund each
will diversify its holdings among many issuers. However, there can be no
assurance that diversification will protect a Fund from widespread defaults
brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated fixed-income
securities, so that adverse economic events may have a greater impact on their
prices and yields than on higher-rated fixed-income securities. Zero coupon
bonds and bonds which pay interest and/or principal in additional bonds rather
than in cash are especially volatile. Like higher-rated fixed-income
securities, junk bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts. However, there are
fewer dealers in this market, which may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions
(whether or not based on economic fundamentals) may impair the liquidity of
this market, and may cause the prices the International Equity Focus Fund and
Developing Capital Markets Focus Fund receive for their junk bonds to be
reduced, or a Fund may experience difficulty in liquidating a portion of its
portfolio when necessary to meet the Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Under such conditions, judgement may play a greater role in valuing
certain of each Fund's portfolio securities than in the case of securities
trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the International Equity Focus Fund and Developing Capital Markets Focus Fund.
In addition, each Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the International Equity Focus Fund
and Developing Capital Markets Focus Fund may invest include junk bonds issued
by sovereign entities. Investment in such sovereign debt involves a high degree
of risk. The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
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Holders of sovereign debt, including the International Equity Focus Fund and
Developing Capital Markets Focus Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
In the event of a default by a governmental entity, there may be few or no
effective legal remedies available to a Fund and there can be no assurance a
Fund will be able to collect on defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments for
the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." 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*--President of the Investment Adviser and its affiliate,
Fund Asset Management, L.P. ("FAM"); President and Director of Princeton
Services, Inc. ("Princeton Services"); Executive Vice President of ML&Co.;
and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
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).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
Stephen B. Swensrud--Chairman of Fernwood Associates (financial
consultants).
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* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. ("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, the Investment Adviser
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 totalled $24,131,430 of which $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 (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, $3,010,613 related to the Equity Growth Fund (representing .75% of its
average net assets) and $1,638 related to the Index 500 Fund (representing
.30% of its net assets) all of which 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: $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 1.33% of its average net
assets), $3,240,858 related to the Equity Growth Fund (representing .81% of
its average net assets) and $3,289 related to the Index 500 Fund (representing
.60% 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 two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets
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<PAGE>
(the "Reimbursement Agreements"). The reimbursement agreements, dated April
30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25%
of average daily net assets will be reimbursed to the Fund by the Investment
Adviser which, in turn, will be reimbursed by MLLA.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for each
of the Company's Funds.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993;
Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to
1990.
Walter Rogers has served as the Global Utility Focus Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-
day management. He has served as Vice President of MLAM since 1987.
Andrew Bascand 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.
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.
Sean Casey has served as the Co-Portfolio Manager of the Global Bond Focus
Fund (formerly, the World Income Focus Fund) since July 1993 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.
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<PAGE>
Robert Parish has served as the 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
served as Vice President of MLAM since 1991, and was Vice President and Senior
Portfolio Manager for Templeton International from 1987 to 1991.
Thomas D'Auria has served as the Portfolio Manager of the Equity Growth Fund
since March 1997 and will be responsible for the day-to-day management of the
Equity Growth Fund. Mr. D'Auria was previously the principal analyst for the
Equity Growth Fund. From 1989 to 1995, he served as Manager of International
Strategy for Merrill Lynch & Co., Global Securities Research & Economics
Group.
Eric Mitofsky has served as the Index 500 Fund's Portfolio Manager since the
Fund commenced operations on December 13, 1996. He has served as Vice
President of MLAM since 1992, and was an employee of Merrill Lynch's Equity
Trading Group from 1983 to 1992.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net
results, taking into account various factors, including price, dealer spread
or commission, if any, size of the transactions and difficulty of execution.
While the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in over-
the-counter transactions conducted on an agency basis. 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 continuously offers shares of Class A Common Stock in each of
its Funds to the Insurance Companies at prices equal to the respective per
share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a
wholly owned subsidiary of the Investment Adviser, acts as the distributor of
the shares. Net asset value is determined in the manner set forth below under
"Additional Information--Determination of Net Asset Value."
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market and
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Reserve Assets Funds, will consist of all payments of dividends or interest
received by such Fund less the estimated expenses of such Fund (including fees
payable to the Investment Adviser).
Dividends from net investment income of the Global Bond Focus Fund are
declared and reinvested monthly in additional full and fractional shares of
the respective Funds at net asset value. Dividends from net investment income
of the Global Utility Focus Fund are declared and reinvested quarterly in
additional full and fractional shares of the Fund. Dividends from net
investment income of the International Equity Focus, Basic Value Focus,
Developing Capital Markets Focus, Index 500 and Equity Growth Funds are
declared and reinvested at least annually in additional full and fractional
shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, a Fund will not be subject to federal income
tax on such part of its net ordinary income and net realized capital gains
which it distributes to shareholders. One of the requirements to qualify for
treatment as a regulated investment company under the Code is that a Fund,
among other things, derive less than 30% of its gross income in each taxable
year from gains (without deduction of losses) from the sale or other
disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. This requirement may limit the
ability of certain Funds to dispose of certain securities at times when
management of the Company might otherwise deem such disposition appropriate or
desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest
income, its distributions to the Insurance Companies will be eligible for the
present 70% dividends received deduction applicable in the case of a life
insurance company as provided in the Code. See the Prospectus for the
Contracts for a description of the respective Insurance Company's tax status
and the charges which may be made to cover any taxes attributable to the
Separate Account. Not later than 60 days after the end of each calendar year,
the Company will send to the Insurance Companies a written notice required by
the Code designating the amount and character of any distributions made during
such year.
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
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assumed substantially all the liabilities of the International Bond Fund, a
separate fund of the Company, (ii) implemented a change in its investment
objective and policies from seeking high current income from a global
portfolio of fixed income securities, including non-investment grade
securities, to seeking a high total investment return by investing in a global
portfolio of investment grade fixed income securities and (iii) changed its
name from the World Income Focus Fund to its current name. For the period from
the commencement of the World Income Focus Fund's operations through its
reorganization on December 6, 1996, the portfolio of the Fund included debt
securities rated below investment grade (i.e., junk bonds).
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return will be computed assuming all dividends
and distributions are reinvested and taking into account all applicable
recurring and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during
the period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the offering
price per share on the last day of the period. The yield for the 30-day period
ending December 31, 1996 was 6.42% for the Global Bond Focus Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
the amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost. The yield and total return quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the
Separate Account level, which, if included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value
Line Composite Index, the Dow Jones Industrial Average, or performance data
published by Lipper Analytical Services, Inc., or Variable Annuity Research
Data Service or contained in publications such as Morningstar Publications,
Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World
Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall
Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors
Business Daily and Ibbotson Associates. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market Fund is computed
by dividing the sum of the value of the securities held by that Fund plus any
cash or other assets (including interest and dividends accrued) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding of that Fund at such time, rounded to the nearest cent. Expenses,
including the investment advisory fees payable to the Investment Adviser, are
accrued daily.
Securities held by each Fund will be valued as follows: Portfolio securities
that are traded on stock exchanges are valued at the last sale price (regular
way) as of the close of business on the day the securities are
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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 over-the-counter market. When a Portfolio 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.
The Company has used pricing services, including Merrill Lynch Securities
Pricing SM Service ("MLSPS"), to value bonds held by certain of the Company's
Funds. The Board of Directors of the Company has examined the methods used by
the pricing services in estimating the value of securities held by the Funds
and believes that such methods will reasonably and fairly approximate the
price at which those securities may be sold and result in a good faith
determination of the fair value of such securities; however, there is no
assurance that securities can be sold at the prices at which they are valued.
During the fiscal year ended December 31, 1996, Global Bond Focus Fund and the
Global Utility Focus Fund paid MLSPS $3,020 and $77, respectively for such
services.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. The Equity Growth Fund
commenced operations on April 20, 1982. The Basic Value Focus, Global Bond
Focus, Global Utility Focus and International Equity Focus Funds commenced
operations on July 1, 1993. The Developing Capital Markets Focus Fund
commenced operations on May 2, 1994. The authorized capital stock of the
Company consists of 3,400,000,000 shares of 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 Reserve Assets Fund
Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High
Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common
Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Natural
Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common
Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch
Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund
Common Stock, Merrill Lynch Global Bond Focus Fund, Merrill Lynch Global
Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund
Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common
Stock, Merrill Lynch Government Bond Fund Common Stock and Merrill Lynch Index
500 Common Stock, respectively. The Company may, from time to time, at the
sole discretion of its Board of Directors and without the need to obtain the
approval of its shareholders or of Contract Owners, offer and sell shares of
one or more of such classes. Each class consists of 100,000,000 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
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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.
The Board of Directors of the Company has authorized the issuance of shares
of such Class B Common Stock with respect to each of the Company's Funds, with
the existing shares of Common Stock of each Fund to be designated Class A
Common Stock of such Fund. The Board of Directors have also authorized the
Company to enter into a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. under which the Company would pay distribution fees in
respect of the shares of its Class B Common Stock. No shares of Class B Common
Stock have been issued; however, the Company may commence issuing shares of
Class B Common Stock later in 1997 pursuant to a separate or amended
Prospectus.
MLLIC purchased $100 worth of shares of each of the Basic Value Focus,
Global Bond Focus, Global Utility Focus and International Equity Focus Funds
on June 28, 1993. MLLIC purchased, on July 1, 1993, $8,000,000 worth of shares
of each of the Global Bond Focus Fund and International Equity Focus Fund and
$2,000,000 worth of shares of each of the Basic Value Focus Fund and the
Global Utility Focus Fund. MLLIC purchased, on May 2, 1994 and $8,000,000
worth of shares of the Developing Capital Markets Focus Fund. 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.
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 02102, 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.
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LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on December 31 of each year. The Company
will send to its shareholders at least semi-annually reports showing the
Funds' portfolio securities and other information. An annual report containing
financial statements, audited by independent auditors, will be sent to
shareholders each year.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 and the Investment Company Act of 1940, with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
The Statement of Additional Information, dated April 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.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, each of the Funds may invest in the
various types of marketable securities issued by or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a
discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each of the Funds may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or
to be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
depositary institutions money instruments, such as certificates of deposit,
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon
a specified market rate. As a result of these adjustments, the interest rate
on these obligations may be increased or decreased periodically. Often,
dealers selling variable rate certificates of deposit to the Funds agree to
repurchase such instruments, at the Funds' option, at par on the coupon dates.
The dealers' obligations to repurchase these instruments are subject to
conditions imposed by the various dealers; such conditions typically are the
continued credit standing of the issuer and the existence of reasonably
orderly market conditions. The Funds are also able to sell variable rate
certificates of deposit in the secondary market. Variable rate certificates of
deposit normally carry a higher interest rate than comparable fixed rate
certificates of deposit because variable rate certificates of deposit
generally have a longer stated maturity than comparable fixed rate
certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
For temporary or defensive purposes, the Global Bond Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may invest in certificates of deposit and bankers'
acceptances issued by foreign branches or subsidiaries of U.S. banks
("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks
("Yankeedollar" obligations). The Fund may invest only in Eurodollar
obligations which by their terms are general obligations of the U.S. parent
bank and meet the other criteria discussed below. Yankeedollar obligations in
which the Fund may invest must be issued by U.S. branches or subsidiaries of
foreign banks which are subject to state or federal banking regulations in the
U.S. and by their terms must be general obligations of the foreign parent. In
addition, the Fund will limit its investments in Yankeedollar obligations to
obligations issued by banking institutions with more than $1 billion in
assets.
For temporary or defensive purposes, the Global Bond Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may also invest in U.S. dollar-denominated obligations of
foreign depository institutions and their foreign branches and subsidiaries,
such as certificates of deposit, bankers' acceptances, time deposits and
deposit notes. The obligations of such foreign branches and subsidiaries may
be the general obligation of the parent bank or may be limited to the issuing
branch or subsidiary by the terms of the specific obligation or by government
regulation.
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Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United
States, has total assets of at least $1 billion and its deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets
of a Fund (taken at market value at the time of each investment) in
certificates of deposit issued by banks and savings and loan associations with
assets of less than $1 billion if the principal amount of each such
certificate of deposit is fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
commercial paper (including variable amount master demand notes and insurance
company funding agreements), which refers to short-term, unsecured promissory
notes issued by corporations, partnerships, trusts and other entities to
finance short-term credit needs and by trusts issuing asset-backed commercial
paper. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. Variable amount master
demand notes are demand obligations that permit the investment of fluctuating
amounts at varying market rates of interest pursuant to arrangements between
the issuer and a commercial bank acting as agent for the payees of such notes,
whereby both parties have the right to vary the amount of the outstanding
indebtedness on the notes. Because variable amount master notes are direct
lending arrangements between the lender and borrower, it is not generally
contemplated that such instruments will be traded and there is no secondary
market for the notes. Typically, agreements relating to such notes provide
that the lender may not sell or otherwise transfer the note without the
borrower's consent. Such notes provide that the interest rate on the amount
outstanding is adjusted periodically, typically on a daily basis, in
accordance with a stated short-term interest rate benchmark. Because the
interest rate of a variable amount master note is adjusted no less often than
every 60 days and since repayment of the note may be demanded at any time, the
Investment Adviser values such a note in accordance with the amortized cost
basis described under "Determination of Net Asset Value" in the Statement of
Additional Information.
For temporary or defensive purposes, the Global Bond Focus Fund, Global
Utility Focus Fund, International Equity Focus Fund and Developing Capital
Markets Focus Fund may also invest in U.S. dollar-denominated commercial paper
and other short-term obligations issued by foreign entities. Such investments
are subject to quality standards similar to those applicable to investments in
comparable obligations of domestic issuers. Investments in foreign entities in
general involve the same risks as those described in the Statement of
Additional Information in connection with investments in Eurodollar,
Yankeedollar and foreign bank obligations.
REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed yield for the Fund insulated from fluctuations in the
market value of the underlying security during such period, although, to the
extent the repurchase agreement is not denominated in U.S. dollars, the Fund's
return may be affected by currency fluctuations. Repurchase agreements may be
entered into only with a member bank of the Federal Reserve System, a primary
dealer in U.S. government securities or an affiliate thereof. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the underlying
security to the purchaser during the term of the agreement and generally do
not require the seller to provide additional securities in the event of a
decline in the market value of the purchased security during the term of the
agreement. In all instances, the Fund takes possession of the underlying
securities when investing in repurchase agreements or purchase and sale
contracts. If the seller were to default on its obligation to repurchase a
security under a repurchase agreement or purchase and sale contract and the
market value of the underlying security at such time was less than the Fund
had paid to the seller, the Fund would realize a loss. Repurchase agreements
maturing in more than seven days will be considered "illiquid securities."
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DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded both during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
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.
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BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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APPENDIX 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 Global Bond Focus Fund, the Global Utility Focus Fund, the Index 500
Fund and the International Equity Focus 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 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 and the International Equity 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 Utility Focus Fund, the Index 500 Fund and the
International Equity 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.
The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the
Index 500 Fund and the International Equity 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
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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 Basic Value Focus Fund, the Developing Capital Markets
Focus Fund, the Equity Growth Fund, the Global Bond Focus Fund, the Global
Utility Focus Fund, the Index 500 Fund and the International Equity Focus 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 Utility Focus Fund, the Index 500 Fund and the International Equity
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").
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.
B-2
<PAGE>
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 Utility Focus Fund, the Index 500 Fund and the International Equity
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.
FOREIGN EXCHANGE TRANSACTIONS
The Developing Capital Markets Focus Fund, the Global Bond Focus Fund, the
Global Utility Focus Fund and the International Equity Focus 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
B-3
<PAGE>
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. 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.
B-4
<PAGE>
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
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.
B-5
<PAGE>
PROSPECTUS
APRIL 25, 1997
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
----------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its sixteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock ("Common Stock")
is issued for each Fund. The Company is offering shares of its Class A Common
Stock pursuant to this Prospectus.
The shares of the Funds are sold to separate accounts ("Separate Accounts")
of certain insurance companies (the "Insurance Companies"), including Merrill
Lynch Life Insurance Company ("MLLIC") and ML Life Insurance Company of New
York ("ML of New York"), to fund benefits under variable annuity contracts
("Variable Annuity Contracts") and/or variable life insurance contracts
(together with the Variable Annuity Contracts, the "Contracts") issued by such
companies. The Insurance Companies will redeem shares to the extent necessary
to provide benefits under the respective Contracts or for such other purposes
as may be consistent with the respective Contracts. Certain insurance
companies are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is
the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the
"Investment Adviser"). The investment objectives of the Funds and certain
investment policies, each of whose name is preceded by "Merrill Lynch," are as
follows:
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the
highest possible current income consistent with the foregoing objectives by
investing in short-term domestic money market securities.
GLOBAL STRATEGY FOCUS FUND. High total investment return by investing
primarily in a portfolio of equity and fixed income securities of U.S. and
foreign issuers.
HIGH CURRENT INCOME FUND. As high a level of current income as is
consistent with its investment policies and prudent investment management,
and 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 DOMESTIC MONEY MARKET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO
SO. AN INVESTMENT IN THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND INVESTS IN
HIGH YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"), WHICH INVOLVE SPECIAL
RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH
YIELD SECURITIES."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................... 3
The Insurance Companies.................................................... 7
Domestic Money Market Fund Yield Information............................... 7
Investment Objectives and Policies of the Funds............................ 7
Directors.................................................................. 16
Investment Adviser......................................................... 17
Portfolio Transactions and Brokerage....................................... 18
Purchase of Shares......................................................... 19
Redemption of Shares....................................................... 19
Dividends, Distributions and Taxes......................................... 19
Performance Data........................................................... 20
Additional Information..................................................... 21
Appendix A................................................................. A-1
Appendix B................................................................. B-1
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables 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. 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
FOR THE YEAR ENDED PERIOD JULY
DECEMBER 31, 1, 1993+ TO
---------------------------- DECEMBER 31,
1996 1995 1994 1993
-------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET AS-
SET VALUE:
PER SHARE OPERATING PERFOR-
MANCE:
Net asset value, beginning of
period........................ $ 13.10 $ 11.10 $ 10.95 $ 10.00
-------- -------- -------- -------
Investment income--net......... .17 .18 .17 .04
Realized and unrealized gain
(loss) on investments--net.... 2.37 2.49 .08 .91
-------- -------- -------- -------
Total from investment opera-
tions......................... 2.54 2.67 .25 .95
-------- -------- -------- -------
Less dividends and distribu-
tions:
Investment income--net........ (.18) (.19) (.10) --
Realized gain on investments--
net.......................... (.72) (.48) -- --
-------- -------- -------- -------
Total dividends and distribu-
tions......................... (.90) (.67) (.10) --
-------- -------- -------- -------
Net asset value, end of peri-
od............................ $ 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 period (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>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND
----------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, FEBRUARY 20, 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...... $ 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 in-
vestments--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.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND#
-----------------------------------------------------
FOR THE
PERIOD
FEBRUARY 28,
FOR THE YEAR ENDED 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 invest-
ments--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.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# On December 6, 1996, the Global Strategy Focus Fund acquired substantially
all of the assets and assumed substantially all the liabilities of the
Flexible Strategy Fund, a separate Fund of the Company.
## Aggregate total investment return.
### For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transactions. Such conversions may significantly affect the average rate
shown.
Further information about each Fund's performance is contained in the
Company's Annual Report, which can be obtained, without charge, upon request.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND
------------------------------------------------------------------------------------------
FOR THE 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
investments--net....... .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79)
-------- -------- -------- -------- ------- ------ ------ ------- ------- -------
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%
======== ======== ======== ======== ======= ====== ====== ======= ======= =======
</TABLE>
- --------
*Total investment returns exclude insurance-related fees and expenses.
+Based on average shares outstanding during the year.
6
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under variable annuity and
variable life Contracts issued by the Insurance Companies. Through this
Prospectus, the Company is offering shares in four Funds to certain separate
accounts (the "Separate Accounts") of certain Insurance Companies to fund
benefits under the Contracts. Those four Funds are: the Basic Value Focus
Fund, Domestic Money Market Fund, Global Strategy Focus Fund, and High Current
Income Fund. Through separate Prospectuses, the Company offers shares in some
or all of its funds to certain other Separate Accounts of other Insurance
Companies to fund benefits under variable life and variable annuity Contracts
issued by them.
The right of the Insurance Companies as shareholders should be distinguished
from the rights of a Contract owner, which are set forth in the Contract. A
Contract owner has no interest in the shares of a Fund, but only in the
Contract. The Contract is described in the Prospectus for each Contract. That
Prospectus describes the relationship between increases or decreases in the
net asset value of shares of a Fund, and any distributions on such shares, and
the benefits provided under a Contract. The Prospectus for the Contracts also
describes various fees payable to the Insurance Companies and charges to the
Separate Accounts made by the Insurance Companies with respect to the
Contracts. Because shares of the Funds will be sold only to the Insurance
Companies for the Separate Accounts, the terms "shareholder" and
"shareholders" in this Prospectus refer to the Insurance Companies.
DOMESTIC MONEY MARKET FUND YIELD INFORMATION
Set forth below is yield information for the Domestic Money Market Fund for
the seven-day period ended December 31, 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.
<TABLE>
<CAPTION>
DOMESTIC MONEY
MARKET FUND
--------------
<S> <C>
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
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective which it
pursues through separate investment policies as described below. The
differences in objectives and policies among the Funds can be expected to
affect the return of each Fund and the degree of market and financial risk to
which each Fund is subject. Each Fund is classified as "diversified," as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act" or, the "Act"), except for the Global Strategy Focus Fund, which
is classified as "nondiversified." The investment objectives and
classification of each Fund may not be changed without the approval of the
holders of a majority of the outstanding shares of each Fund affected. The
investment objectives and policies of each Fund are discussed below. There can
be no assurance that any Fund will achieve its investment objective.
Fixed Income Security Ratings. No Fund other than the High Current Income
Fund invests in fixed-income securities which are rated below investment grade
(i.e., securities rated Ba or below by Moody's Investors Service, Inc.
("Moody's") or BB or below by Standard & Poor's Rating Group ("Standard &
Poor's")). However, securities purchased by a Fund may subsequently be
downgraded. Such securities may continue to be
7
<PAGE>
held and will be sold only if, in the judgement of the Investment Adviser, it
is advantageous to do so. Securities in the lowest category of investment
grade debt securities may have speculative characteristics which may lead to
weakened capacity to pay interest and principal during periods of adverse
economic conditions. See Appendix A for a fuller description of corporate bond
ratings.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund seeks special opportunities
in securities that are selling at a discount, either from book value or
historical price-earnings ratios, or seem capable of recovering from
temporarily out of favor considerations. Particular emphasis is placed on
securities which provide an above average dividend return and sell at a below-
average price-earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates
and depress prices of securities in unfavorable climates. Based on this
premise, management believes that favorable changes in market prices are more
likely to begin when securities are out of favor, earnings are depressed,
price-earnings ratios are relatively low, investment expectations are limited,
and there is no real general interest in the particular security or industry
involved. On the other hand, management believes that negative developments
are more likely to occur when investment expectations are generally high,
stock prices are advancing or have advanced rapidly, price-earnings ratios
have been inflated, and the industry or issue continues to gain new investment
acceptance on an accelerated basis. In other words, management believes that
market prices of securities with relatively high price-earnings ratios are
more susceptible to unexpected adverse developments while securities with
relatively low price-earnings ratios are more favorably positioned to benefit
from favorable, but generally unanticipated, events. This investment policy
departs from traditional philosophy. Management of the Fund believes that the
market risk involved in this policy is moderated somewhat by an emphasis on
securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation
of the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities rated
investment grade and utilize covered call options with respect to portfolio
securities as described in Appendix B. It reserves the right as a defensive
measure to hold other types of securities, including U.S. Government and
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant. The Fund may invest up to
10% of its total assets, taken at market value at the time of acquisition, in
the securities of foreign issuers.
DOMESTIC MONEY MARKET FUND
The investment objectives of the Domestic Money Market Fund are to preserve
shareholder capital, to maintain liquidity and to achieve the highest possible
current income consistent with the foregoing objectives by investing in short-
term domestic money market securities. The Fund will invest in short-term U.S.
Government securities, U.S. Government agency securities, domestic depository
institution money instruments (including certificates of deposit, bankers'
acceptances, time deposits and bank notes), short-term debt securities (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, the Fund may not
8
<PAGE>
purchase securities of foreign issuers (including Eurodollar or Yankeedollar
bank obligations). U.S. Government securities may be purchased on a forward
commitment basis. The types of money market securities in which the Domestic
Money Market Fund may invest are described more fully in Appendix A to this
Prospectus. The Domestic Money Market Fund will be subject to portfolio
maturity, quality and diversification restrictions discussed below under
"Money Market Fund Portfolio Restrictions."
GLOBAL STRATEGY FOCUS FUND
The investment objective of the Global Strategy Focus Fund is to seek high
total investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of U.S. and foreign
issuers. Total investment return consists of interest, dividends, discount
accruals and capital changes, including changes in the value of non-dollar-
denominated securities and other assets and liabilities resulting from
currency fluctuations. There can be no assurance that the Fund's investment
objective will be achieved. Investing on an international basis involves
special considerations. See "Other Portfolio Strategies--Foreign Securities."
The Global Strategy Focus Fund seeks to achieve its objective by investing
in the securities of issuers located in the United States, Canada, Western
Europe and 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 judgement of the
Investment Adviser, economic or market conditions warrant, the Fund reserves
the right to concentrate its investments in one or more capital markets,
including the United States. For additional information, concerning the risks
of investing in foreign securities, see "Other Portfolio Strategies--Foreign
Securities."
The corporate debt securities, including convertible debt securities, in
which the Fund may invest will be rated BBB or better by Standard and Poor's
or Baa or better by 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
(the "World Bank") and the European Coal and Steel Community. Investments in
securities of supranational entities are subject to the risk that member
governments will fail to make required capital contributions and that a
supranational entity will thus be unable to meet its obligations.
When market or financial considerations warrant, the Global Strategy Focus
Fund may invest as a temporary defensive measure up to 100% of its assets in
U.S. Government or Government agency securities issued or guaranteed by the
United States Government or its agencies or instrumentalities, money market
securities or other fixed income securities deemed by the Investment Adviser
to be consistent with a defensive posture, or may hold its assets in cash.
The Global Strategy Focus Fund may use derivatives in connection with
certain trading strategies. See Appendix B.
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund is to
obtain the highest level of current income that is consistent with the
investment policies of the Fund and with prudent investment management. As a
secondary objective, the Fund seeks capital appreciation when consistent with
its primary objective. There can be no assurance that the Fund's investment
objectives will be achieved.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard and Poor's), or in unrated securities of comparable
quality. Securities rated below Baa by Moody's and below BBB by Standard and
Poor's are commonly known as "junk bonds." Additional
9
<PAGE>
information regarding various bond ratings is set forth in Appendix A to the
Prospectus. The market price of fixed-income securities such as those
purchased by the Fund is affected by changes in interest rates generally. As
interest rates rise, the market value of fixed-income securities will fall,
adversely affecting the net asset value of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater
market fluctuations and risks of loss of income and principal than lower-
yielding, higher-rated fixed-income securities. Such securities are generally
issued by corporations which are not as financially secure or as creditworthy
as issuers of higher-rated securities. There is, accordingly, a greater risk
that the issuers of higher-yielding securities will not be able to pay
principal and interest on such securities, especially during periods of
adverse economic conditions. Because investment in such high-yield securities
entails relatively greater risk of loss of income or principal, an investment
in the High Current Income Fund may not be appropriate as the exclusive
investment to fund the Contracts for all Contract Owners. See "Risks of High
Yield Securities."
Selection and supervision by the management of the Company of investments in
lower-rated fixed-income securities involves continuous analysis of individual
issuers, general business conditions and other factors which may be too time
consuming or too costly for the average investor. The furnishing of these
services does not, of course, guarantee successful results. The analysis of
issuers may include, among other things, historic and current financial
condition, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management,
responsiveness to business conditions, credit standing, and current and
anticipated results of operations. Analysis of general business conditions and
other factors may include anticipated changes in economic activity and
interest rates, the availability of new investment opportunities, and the
economic outlook for specific industries. While the Investment Adviser
considers as one factor in its credit analysis the ratings assigned by the
rating services, the Investment Adviser performs its own independent credit
analysis of issuers and consequently, the Fund may invest, without limit, in
unrated securities if such securities offer, in the opinion of the Investment
Adviser, a relatively high yield without undue risk. As a result, the High
Current Income Fund's ability to achieve its investment objective may depend
to a greater extent on the Investment Adviser's own credit analysis than the
Funds which invest in higher-rated securities. Although the High Current
Income Fund will invest primarily in lower-rated securities, it will not
invest in securities rated Ca or lower by Moody's and CC or lower by Standard
and Poor's unless the Investment Adviser believes that the financial condition
of the issuer or the protection afforded to the particular securities is
stronger than would otherwise be indicated by such low ratings. However,
securities purchased by the Fund may subsequently be downgraded. Such
securities may continue to be held and will be sold only if, in the judgement
of the Investment Adviser, it is advantageous to do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that
the risk of loss of income and principal may be substantially reduced with
only a relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending upon
the judgement of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. It is anticipated that under normal
circumstances more than 90% of the Fund's assets will be invested in fixed-
income securities, including convertible and non-convertible debt securities
and preferred stock. Although it is expected that, in general, the Fund will
not invest in common stocks, rights or other equity securities, it will
acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in connection with an actual or proposed conversion or exchange
of fixed-income securities. In addition, under unusual market or economic
conditions, the High Current Income Fund for defensive purposes may invest up
to 100% of its assets in U.S. Government or Government agency securities,
money market securities or other fixed income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or may hold its
assets in cash. The yield on such securities may be lower than the yield on
lower-rated fixed-income securities.
10
<PAGE>
The table below shows the average monthly dollar-weighted market value, by
Standard and Poor's rating category, of the securities held by the High
Current Income Fund during the year ended December 31, 1996.
<TABLE>
<CAPTION>
% MARKET
VALUE
% NET CORPORATE
RATING* ASSETS BONDS
------- ------ ---------
<S> <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 Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard
& Poor's, or may not be rated by any other organizations.
NON-DIVERSIFIED FUNDS
The Global Strategy Focus Fund is classified as a non-diversified investment
company under the Investment Company Act. However, the Fund will have to limit
its investments to the extent required by the diversification requirements
applicable to regulated investment companies under the Internal Revenue Code.
To qualify as a regulated investment company, a Fund, at the close of each
fiscal quarter, may not have more than 25% of its total assets invested in the
securities (except obligations of the U.S. Government, its agencies or
instrumentalities) of any one issuer and with respect to 50% of its assets,
(i) may not have more than 5% of its total assets invested in the securities
of any one issuer and (ii) may not own more than 10% of the outstanding voting
securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each
Fund). Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
MONEY MARKET FUND PORTFOLIO RESTRICTIONS
For purposes of the investment policies of the Domestic Money Market Fund,
the Company defines short-term money market securities as securities having a
maturity of no more than 762 days (25 months) in the case of U.S. Government
and agency securities and no more than 397 days (13 months) in the case of all
other securities. Management of the Company expects that substantially all the
assets of the Domestic Money Market Fund will be invested in securities
maturing in less than one year, but at times some portion may have maturities
of up to 25 months. For these purposes, the maturity of a variable rate
security is deemed to be the next coupon date on which the interest rate is
adjusted. The dollar-weighted average maturity of the Fund's portfolio assets
will not exceed 90 days.
The Domestic Money Market Fund's investments in short-term debt and
depository institution money instruments will be rated, or will be issued by
issuers who have been rated, in one of the two highest rating categories for
short-term debt obligations by a nationally recognized statistical rating
organization (an "NRSRO") or, if not rated, will be of comparable quality as
determined by the Directors of the Company. The Fund's investments in
corporate bonds and debentures (which must have maturities at the date of
purchase of 397 days (13 months) or less) will be in issuers which have
received from an NRSRO a rating, with respect to a class of short-term debt
obligations that is comparable in priority and security with the investment,
in one of the two highest rating categories for short-term obligations or, if
not rated, are of comparable quality as determined
11
<PAGE>
by the Directors of the Company. Currently, there are six NRSROs: Duff &
Phelps Inc., Fitch Investors Services, Inc., IBCA Limited and its affiliate
IBCA Inc., Moody's, Standard & Poor's and Thomson BankWatch.
A regulation of the Securities and Exchange Commission (the "SEC") limits
investments by the Domestic Money Market Fund in securities issued by any one
issuer (other than the U.S. Government, its agencies or instrumentalities)
ordinarily to not more than 5% of its total assets, or in the event that such
securities do not have the highest rating, not more than 1% of its total
assets. In addition, this regulation requires that not more than 5% of the
Fund's total assets be invested in securities that have a rating lower than
the highest rating.
OTHER PORTFOLIO STRATEGIES
Restricted Securities. Each of the Funds is subject to limitations on the
amount of illiquid securities 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
which are freely tradeable in their primary market offshore should be deemed
liquid. The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity
and availability of information. This investment practice could have the
effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Foreign Securities. The Basic Value Focus, Global Strategy Focus and High
Current Income Funds may invest in securities of foreign issuers. Investments
in foreign securities, particularly those of non-governmental issuers, involve
considerations and risks which are not ordinarily associated with investing in
domestic issuers. These considerations and risks include changes in currency
rates, currency exchange control regulations, the possibility of
expropriation, the unavailability of financial information or the difficulty
of interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities markets,
the impact of political, social or diplomatic developments, and the difficulty
of assessing economic trends in foreign countries. If it should become
necessary, a Fund could encounter greater difficulties in invoking legal
processes abroad than would be the case in the United States. Transaction
costs in foreign securities may be higher. The operating expense ratio of a
Fund investing in foreign securities can be expected to be higher than that of
an investment company investing exclusively in United States securities
because the expenses of the Fund, such as custodial costs, are higher. In
addition, net investment income earned by a Fund on a foreign security may be
subject to withholding and other taxes imposed by foreign governments which
will reduce a Fund's net investment income. The Investment Adviser will
consider these and other factors before investing in foreign securities, and
will not make such investments unless, in its opinion, such investments will
meet the standards and objectives of a particular Fund. No Fund which may
invest in foreign securities will concentrate its investments in any
particular country. The Global Strategy Focus Fund may from time to time be
substantially invested in non-dollar-denominated securities of foreign
issuers. 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
12
<PAGE>
in those countries. Each Fund other than the Basic Value Focus and Global
Strategy Focus Funds will purchase only securities issued in dollar
denominations.
Each of the Funds which is permitted to invest in foreign securities may
from time to time invest in securities of foreign issuers in smaller capital
markets. Foreign investments 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, which 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
outside such countries. Delays in settlement could result in temporary periods
when assets of such a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the
United States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it
may not be practicable or appropriate to invest in a particular country. A
Fund may invest in countries in which foreign investors, including management
of the Fund, have had no or limited prior experience.
Certain of the Funds may invest in debt securities issued by foreign
governments. Investments in foreign government debt securities, particularly
those of emerging market country governments, involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market country's debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, and, in the case of a government
debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole and the political constraints to
which a government debtor may be subject. Government debtors may default on
their debt and may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. Holders of government debt, including the
Fund, may be requested to participate in the rescheduling of such debt and to
extend further loans to government debtors.
13
<PAGE>
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing
and emerging market countries are among the world's largest debtors to
commercial banks, other governments, international financial organizations and
other financial institutions. The issuers of the government debt securities in
which a Fund may invest have in the past experienced substantial difficulties
in servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements.
Some countries with smaller capital markets prohibit or impose substantial
restrictions on investments in their capital markets, particularly their
equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by
foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons to only a
specific class of securities of a company which may have less advantageous
terms than securities of the company available for purchase by nationals.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a
Fund's investments in any equity security of an issuer which, in its most
recent fiscal year, derived more than 15% of its revenues from "securities
related activities," as defined by the rules thereunder. These provisions may
also restrict a Fund's investments in certain foreign banks and other
financial institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which, while the loan is outstanding, will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities plus accrued interest. Such cash collateral will be invested in
short-term securities, the income from which will increase the return to the
Fund.
Forward Commitments. Each of the Funds may purchase securities on a when-
issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to the Fund at the time of entering
into the transaction. The value of the security on the delivery date may be
more or less than its purchase price. A Fund entering into such transactions
will maintain a segregated account with its custodian of cash or liquid, high-
grade debt obligations in an aggregate amount equal to the amount of its
commitments in connection with such delayed delivery and purchase
transactions.
Standby Commitment Agreements. The High Current Income Fund may from time to
time enter into standby commitment agreements. Such agreements commit the
Fund, for a stated period of time, to purchase a stated amount of a fixed
income security which may be issued and sold to the Fund at the option of the
issuer. The price and coupon of the security is fixed at the time of the
commitment. At the time of entering into the agreement the Fund is paid a
commitment fee which is typically approximately 0.5% of the aggregate purchase
price of the security which the Fund has committed to purchase. The Fund will
at all times maintain a segregated account with its custodian of cash or
liquid equity or debt securities in an amount equal to the purchase price of
the securities underlying the commitment. There can be no assurance that the
securities subject to a standby commitment will be issued, and the value of
the security, if issued, on the delivery date may be more or less than its
purchase price.
Portfolio Strategies Involving 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 Appendix B attached to this
Prospectus.
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RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund may invest a substantial portion of its assets
in high yield, high risk securities or junk bonds, which are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial
risk. Issuers of junk bonds may be highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risks associated
with acquiring the securities of such issuers generally are greater than is
the case with higher-rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During recessionary periods, such issuers
may not have sufficient revenues to meet their interest payment obligations.
The issuer's ability to service its debt obligations also may be adversely
affected by specific issuer developments or the issuer's inability to meet
specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of junk bonds because such securities may be unsecured
and may be subordinated to other creditors of the issuer. While the high yield
securities in which the High Current Income Fund may invest normally do not
include securities which, at the time of investment, are in default or the
issuers of which are in bankruptcy, there can be no assurance that such events
will not occur after the Fund purchases a particular security, in which case
the Fund may experience losses and incur costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund will diversify its holdings among many issuers. However,
there can be no assurance that diversification will protect the Fund from
widespread defaults brought about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated fixed-
income securities, so that adverse economic events may have a greater impact
on their prices and yields than on higher-rated fixed-income securities. Zero
coupon bonds and bonds which pay interest and/or principal in additional bonds
rather than in cash are especially volatile. Like higher-rated fixed-income
securities, junk bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts. However, there are
fewer dealers in this market, which may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions
(whether or not based on economic fundamentals) may impair the liquidity of
this market, and may cause the prices the High Current Income Fund receives
for its junk bonds to be reduced, or the Fund may experience difficulty in
liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgement may play a greater role in valuing certain of the Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund. In addition, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on
a portfolio holding or to participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the High Current Income Fund may
invest include junk bonds issued by sovereign entities. Investment in such
sovereign debt involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay
the principal and/or interest when due in accordance with the terms of such
debt. A governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity's
policy towards the International Monetary Fund and the political constraints
to which a governmental entity may be subject. Governmental entities may also
be dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on
their debt. The commitment on the part of these governments, agencies and
others to make such disbursements may be conditioned on a governmental
entity's implementation of economic reforms and/or economic performance and
the timely service
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<PAGE>
of such debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the High Current Income Fund, may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. In the event of a default by a
governmental entity, there may be few or no effective legal remedies available
to the Fund and there can be no assurance the Fund will be able to collect on
defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund
to limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." 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*--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).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
Stephen B. Swensrud--Chairman of Fernwood Associates (financial
consultants).
- --------
*Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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INVESTMENT ADVISER
Merrill Lynch Asset Management L.P. ("MLAM"), an indirect wholly owned
subsidiary of Merrill Lynch & Co., Inc., is the investment adviser (the
"Investments 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 totalled $24,131,430 of which $2,414,605
related to the Basic Value Focus Fund (representing .60% 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), and $1,881,541
related to the High Current Income Fund (representing .49% of its average net
assets).
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: $2,657,872 related to the Basic Value Focus
Fund (representing .66% 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), and $2,096,102 related to the High Current Income Fund
(representing .54% of its average net assets).
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") have
entered into two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"). The reimbursement agreements, dated April 30,
1985 and February 11, 1992, provide that any expenses in excess of 1.25% of
average daily net assets will be reimbursed to the Fund by the Investment
Adviser which, in turn, will be reimbursed by MLLA. See "Investment Advisory
Arrangements" in the Statement of Additional Information. MLLA sells certain
Contracts described in the Prospectus for such Contracts.
The Investment Adviser has entered into 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 has entered into administrative services agreements
with certain Insurance Companies, including Insurance Companies owned by
ML&Co., pursuant to which the Investment Adviser compensates such companies
for administrative responsibilities relating to the Company which are
performed by such Insurance Companies.
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<PAGE>
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for each
of the Company's Funds.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993;
Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to
1990.
Jacqueline Rogers has served as the Domestic Money Market Fund's Portfolio
Manager since October 1996, and is primarily responsible for the Fund's day-
to-day management. She has served as Vice President of MLAM since January
1986.
Thomas R. Robinson has served as the Global Strategy Focus Fund's Portfolio
Manager since November 1995, and is primarily responsible for the Fund's day-
to-day management. He has served as a Senior Portfolio Manager of MLAM since
November 1995. From 1989 to 1995, he served as Manager of International
Strategy for Merrill Lynch & Co. Global Securities Research & Economics Group.
Aldona Schwartz has served as the High Current Income Fund's Portfolio
Manager since July 1993, and is primarily responsible for the Fund's day-to-
day management. She has served as Vice President of MLAM since 1991 and an
employee of the Investment Adviser since 1986.
PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net
results, taking into account various factors, including price, dealer spread
or commission, if any, size of the transactions and difficulty of execution.
While the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act, persons affiliated with the Company are
prohibited from dealing with the Company as a principal in the purchase and
sale of the Company's portfolio securities unless an exemptive order allowing
such transactions is obtained from the SEC. Affiliated persons of the Company
may serve as its broker in over-the-counter transactions conducted on an
agency basis. The SEC has issued an order permitting the Company to conduct
certain principal transactions with respect to the Domestic Money Market Fund
with Merrill Lynch Government Securities Inc. and Merrill Lynch Money Markets
Inc. in U.S. Government and government agency securities, and certain other
money market securities, subject to certain terms and conditions.
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<PAGE>
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 in the Funds, without sales charge, only for
purchase by the Insurance Companies for the Separate Accounts to fund benefits
under the Contracts. The Company continuously offers shares of Class A Common
Stock in each of its Funds to the Insurance Companies at prices equal to the
respective per share net asset value of the Funds. Merrill Lynch Funds
Distributor, Inc., a wholly owned subsidiary of the Investment Adviser, acts
as the distributor of the shares. Net asset value is determined in the manner
set forth below under "Additional Information--Determination of Net Asset
Value."
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to the conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market Fund, will consist
of all payments of dividends or interest received by such Fund less the
estimated expenses of such Fund (including fees payable to the Investment
Adviser).
Dividends on the Domestic Money Market Fund are declared daily and
reinvested monthly in additional full and fractional shares of such Fund.
Dividends from net investment income of the High Current Income Fund are
declared and reinvested monthly in additional full and fractional shares of
the respective Funds at net asset value. Dividends from net investment income
of the Basic Value Focus and Global Strategy Focus Funds are declared and
reinvested at least annually in additional full and fractional shares of the
respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, a Fund will not be subject to federal income
tax on such part of its net ordinary income and net realized capital gains
which it distributes to shareholders. One of the requirements to qualify for
treatment as a regulated investment company under the Code is that a Fund,
among other things, derive less than 30% of its gross income in each taxable
year from gains (without deduction of losses) from the sale or other
disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. This requirement may limit the
ability of certain Funds to dispose of certain securities at times when
management of the Company might otherwise deem such disposition appropriate or
desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
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TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest
income, its distributions to the Insurance Companies will be eligible for the
present 70% dividends received deduction applicable in the case of a life
insurance company as provided in the Code. See the Prospectus for the
Contracts for a description of the respective Insurance Company's tax status
and the charges which may be made to cover any taxes attributable to the
Separate Account. Not later than 60 days after the end of each calendar year,
the Company will send to the Insurance Companies a written notice required by
the Code designating the amount and character of any distributions made during
such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present
or prospective Contract owners. Average annual total return and yield are
computed in accordance with formulas specified by the SEC.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return will be computed assuming all dividends
and distributions are reinvested and taking into account all applicable
recurring and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during
the period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the offering
price per share on the last day of the period. The yield for the 30-day period
ending December 31, 1996 was 9.30% for the High Current Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
the amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost. The yield and total return quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the
Separate Account level which, if included, would decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price Index, the Value
Line Composite Index, the Dow Jones Industrial Average, or performance data
published by Lipper Analytical Services, Inc., or Variable Annuity Research
Data Service or contained in publications such as Morningstar Publications,
Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World
Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall
Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors
Business Daily and Ibbotson Associates. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
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ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund other than the Domestic Money Market Fund is computed
by dividing the sum of the value of the securities held by that Fund plus any
cash or other assets (including interest and dividends accrued) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding of that Fund at such time, rounded to the nearest cent. Expenses,
including the investment advisory fees payable to the Investment Adviser, are
accrued daily. Because the net investment income of the Domestic Money Market
Fund (including realized and unrealized gains and losses on its portfolio
securities) are declared as a dividend each time the net income of the Fund is
determined (see "Dividends, Distributions and Taxes"), the net asset value per
share of the Fund normally remains at $1.00 per share immediately after each
such determination and dividend declaration.
Securities held by each Fund will be valued as follows: Portfolio securities
that are traded on stock exchanges are valued at the last sale price (regular
way) as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. Securities traded in
the over-the-counter ("OTC") market are valued at the last available bid price
in the OTC market 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 over-the-counter market. When a
Portfolio 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 Fund with a remaining maturity of 60 days or
less are valued on an amortized cost basis, unless particular circumstances
dictate otherwise.
The Company has used pricing services, including Merrill Lynch Securities
PricingSM Service ("MLSPS"), to value securities held by the High Current
Income Fund and to value bonds held by other of the Company's Funds. The Board
of Directors of the Company has examined the methods used by the pricing
services in estimating the value of securities held by the Funds and believes
that such methods will reasonably and fairly approximate the price at which
those securities may be sold and result in a good faith determination of the
fair value of such securities; however, there is no assurance that securities
can be sold at the prices at which they are valued. During the fiscal year
ended December 31, 1996, High Current Income Fund and Global Strategy Focus
Fund paid MLSPS $7,269 and $175 respectively, for such pricing services.
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981. Operations of the High
Current Income Fund commenced on April 20, 1982. The Domestic Money Market and
Global Strategy Focus Funds commenced operations on February 20 and February
28, 1992, respectively. The Basic Value Focus Fund commenced operations on
July 1, 1993. The authorized capital stock of the Company consists of
3,400,000,000 shares of 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 Reserve Assets Fund Common Stock, Merrill
Lynch Prime Bond Fund Common Stock,
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Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality
Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock,
Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch
American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund
Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill
Lynch Basic Value Focus Fund Common Stock, Merrill Lynch Global Bond Focus
Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock,
Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch
Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Government
Bond Fund Common Stock and Merrill Lynch Index 500 Fund Common Stock,
respectively. The Company may, from time to time, at the sole discretion of
its Board of Directors and without the need to obtain the approval of its
shareholders or of Contract Owners, offer and sell shares of one or more of
such classes. Each class consists of 100,000,000 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 and the rules and regulations
thereunder, certain matters approved by a vote of all shareholders of the
Company may not be binding on a class whose shareholders have not approved
such matter. Each issued and outstanding share of a class is entitled to one
vote and to participate equally in dividends and distributions declared with
respect to such class and in net assets of such class upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities. The
shares of each class, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Holders of shares of any class are entitled to redeem
their shares as set forth under "Redemption of Shares." Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Company voting for the election of directors can elect all of the directors of
the Company if they choose to do so and in such event the holders of the
remaining shares would not be able to elect any directors. The Company does
not intend to hold meetings of shareholders unless under the Investment
Company Act shareholders are required to act on any of the following matters:
(i) election of directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of the
selection of independent accountants.
The Board of Directors of the Company has authorized the issuance of shares
of Class B Common Stock with respect to each of the Company's Funds, with the
existing shares of Common Stock of each Fund to be designated Class A Common
Stock of such Fund. The Board of Directors have also authorized the Company to
enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
under which the Company would pay distribution fees in respect of the shares
of its Class B Common Stock. No shares of Class B Common Stock have been
issued; however, the Company may commence issuing shares of Class B Common
Stock later in 1997 pursuant to a separate or amended Prospectus.
The organizational expenses of each of the Company's Funds are paid by the
Investment Adviser. The Investment Adviser is reimbursed by its affiliate,
Merrill Lynch Life Insurance Company, for all such expenses over a five-year
period.
In connection with the reorganization on December 6, 1996, the Global
Strategy Focus Fund acquired substantially all of the assets and assumed
substantially all the liabilities of the Flexible Strategy Fund, a separate
Fund of the Company.
INDEPENDENT AUDITORS
Deloitte & Touche llp, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to annual ratification by the Company's
shareholders.
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CUSTODIAN
The Bank of New York ("BONY"), 110 Washington Street, New York, New York
10286, acts as Custodian of each of the Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), which is a wholly
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Company's Transfer
Agent and is responsible for the issuance, transfer and redemption of shares
and the opening and maintenance of shareholder accounts. MLFDS will receive an
annual fee of $5,000 per Fund and will be entitled to reimbursement of out-of-
pocket expenses.
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.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, each of the Funds may invest in the
various types of marketable securities issued by or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a
discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each of the Funds may invest in
government agency securities, which are debt securities issued by government
sponsored enterprises, federal agencies and international institutions. Such
securities are not direct obligations of the Treasury but involve government
sponsorship or guarantees by government agencies or enterprises. The Funds may
invest in all types of government agency securities currently outstanding or
to be issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each of the Funds may invest in
depositary institutions money instruments, such as certificates of deposit,
including variable rate certificates of deposit, bankers' acceptances, time
deposits and bank notes. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks, savings
banks or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity, usually at 30, 90 or 180 day intervals ("coupon dates"), based upon
a specified market rate. As a result of these adjustments, the interest rate
on these obligations may be increased or decreased periodically. Often,
dealers selling variable rate certificates of deposit to the Funds agree to
repurchase such instruments, at the Funds' option, at par on the coupon dates.
The dealers' obligations to repurchase these instruments are subject to
conditions imposed by the various dealers; such conditions typically are the
continued credit standing of the issuer and the existence of reasonably
orderly market conditions. The Funds are also able to sell variable rate
certificates of deposit in the secondary market. Variable rate certificates of
deposit normally carry a higher interest rate than comparable fixed rate
certificates of deposit because variable rate certificates of deposit
generally have a longer stated maturity than comparable fixed rate
certificates of deposit.
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
For temporary or defensive purposes, the Global Strategy Focus Fund may
invest in certificates of deposit and bankers' acceptances issued by foreign
branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or U.S.
branches or subsidiaries of foreign banks ("Yankeedollar" obligations). The
Fund may invest only in Eurodollar obligations which by their terms are
general obligations of the U.S. parent bank and meet the other criteria
discussed below. Yankeedollar obligations in which the Fund may invest must be
issued by U.S. branches or subsidiaries of foreign banks which are subject to
state or federal banking regulations in the U.S. and by their terms must be
general obligations of the foreign parent. In addition, the Fund will limit
its investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
For temporary or defensive purposes, the Global Strategy Focus Fund may also
invest in U.S. dollar-denominated obligations of foreign depository
institutions and their foreign branches and subsidiaries, such as certificates
of deposit, bankers' acceptances, time deposits and deposit notes. The
obligations of such foreign branches and subsidiaries may be the general
obligation of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government
regulation.
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Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United
States, has total assets of at least $1 billion and its deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets
of a Fund (taken at market value at the time of each investment) in
certificates of deposit issued by banks and savings and loan associations with
assets of less than $1 billion if the principal amount of each such
certificate of deposit is fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
For temporary or defensive purposes (and the Domestic Money Market Fund for
other than temporary or defensive purposes), each of the Funds may invest in
commercial paper (including variable amount master demand notes and insurance
company funding agreements), which refers to short-term, unsecured promissory
notes issued by corporations, partnerships, trusts and other entities to
finance short-term credit needs and by trusts issuing asset-backed commercial
paper. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. Variable amount master
demand notes are demand obligations that permit the investment of fluctuating
amounts at varying market rates of interest pursuant to arrangements between
the issuer and a commercial bank acting as agent for the payees of such notes,
whereby both parties have the right to vary the amount of the outstanding
indebtedness on the notes. Because variable amount master notes are direct
lending arrangements between the lender and borrower, it is not generally
contemplated that such instruments will be traded and there is no secondary
market for the notes. Typically, agreements relating to such notes provide
that the lender may not sell or otherwise transfer the note without the
borrower's consent. Such notes provide that the interest rate on the amount
outstanding is adjusted periodically, typically on a daily basis, in
accordance with a stated short-term interest rate benchmark. Because the
interest rate of a variable amount master note is adjusted no less often than
every 60 days and since repayment of the note may be demanded at any time, the
Investment Adviser values such a note in accordance with the amortized cost
basis described under "Determination of Net Asset Value" in the Statement of
Additional Information.
The Domestic Money Fund may also invest in nonconvertible debt securities
issued by entities or asset-backed nonconvertible debt securities issued by
trusts (e.g., bonds and debentures) with no more than 397 days (13 months)
remaining to maturity at date of settlement. Short-term debt securities with a
remaining maturity of less than one year tend to become extremely liquid and
are traded as money market securities. For a discussion of the ratings
requirements of the Funds' portfolio securities, see "Investment Objectives
and Policies of the Funds' Money Market Fund Portfolio Restrictions" and
"Investment Objectives and Policies of the Funds--Domestic Money Market Fund"
in the Prospectus.
For temporary or defensive purposes, the Global Strategy Focus Fund may also
invest in U.S. dollar-denominated commercial paper and other short-term
obligations issued by foreign entities. Such investments are 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
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term of the agreement and generally do not require the seller to provide
additional securities in the event of a decline in the market value of the
purchased security during the term of the agreement. In all instances, the
Fund takes possession of the underlying securities when investing in
repurchase agreements or purchase and sale contracts. If the seller were to
default on its obligation to repurchase a security under a repurchase
agreement or purchase and sale contract and the market value of the underlying
security at such time was less than the Fund had paid to the seller, the Fund
would realize a loss. Repurchase agreements maturing in more than seven days
will be considered "illiquid securities."
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded both during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
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AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
NR--Not rated by the indicated rating agency.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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APPENDIX 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 and the Global Strategy Focus 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 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
Global Strategy Focus Fund may invest in securities the potential return of
which is based inversely on the change in an index. For example, this Fund may
invest in securities that pay a higher rate of interest when a particular
index decreases and pay a lower rate of interest (or do not fully return
principal) when the value of the index increases. If 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 Global Strategy Focus Fund is 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.
The Global Strategy Focus Fund is 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.
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The 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 Basic Value Focus Fund and the Global Strategy Focus
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 Global Strategy Focus Fund 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").
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.
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FUTURES
The Global Strategy 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 the 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.
FOREIGN EXCHANGE TRANSACTIONS
The Global Strategy Focus 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.
The 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. The 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. The 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 Fund 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 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
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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.
The Fund will not speculate in Currency Instruments. Accordingly, the 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. The 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. Furthermore, the 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 the 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.
B-4
<PAGE>
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
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.
B-5
<PAGE>
PROSPECTUS
APRIL 25, 1997
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
----------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its sixteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). A separate class of common stock ("Common Stock")
is issued for each Fund. The Company is offering shares of its Class A Common
Stock pursuant to this Prospectus.
The shares of the Funds are sold to separate accounts ("Separate Accounts")
of certain insurance companies (the "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 Insurance Companies
will redeem shares to the extent necessary to provide benefits under the
respective Contracts or for such other purposes as may be consistent with the
respective Contracts. Certain Insurance Companies are wholly owned
subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment
adviser, Merrill Lynch Asset Management, L.P. (the "Investment Adviser"). The
investment objectives of the Funds and certain investment policies, each of
whose name is preceded by "Merrill Lynch," are as follows:
BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by
investing in securities, principally equities, of issuers in countries
having smaller capital markets.
HIGH CURRENT INCOME FUND. 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 AND DEVELOPING CAPITAL MARKETS FOCUS FUND
INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS "JUNK BONDS"),
WHICH INVOLVE SPECIAL RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES OF THE
FUNDS--RISKS OF HIGH YIELD SECURITIES."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-- DISTRIBUTOR
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE
IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT
LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Highlights....................................................... 3
The Insurance Companies.................................................... 5
Investment Objectives and Policies of the Funds............................ 5
Directors.................................................................. 15
Investment Adviser......................................................... 15
Portfolio Transactions and Brokerage....................................... 17
Purchase of Shares......................................................... 17
Redemption of Shares....................................................... 17
Dividends, Distributions and Taxes......................................... 17
Performance Data........................................................... 18
Additional Information..................................................... 19
Appendix A................................................................. A-1
Appendix B................................................................. B-1
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables 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. 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
BASIC VALUE FOCUS FUND FOCUS FUND
--------------------------------------------- ---------------------------------
FOR THE YEAR FOR THE
FOR THE YEAR ENDED FOR THE PERIOD ENDED PERIOD MAY 2,
DECEMBER 31, JULY 1, 1993+ DECEMBER 31, 1994+ TO
---------------------------- TO DECEMBER 31, ------------------ DECEMBER 31,
1996 1995 1994 1993 1996 1995 1994
-------- -------- -------- --------------- ------- ------- -------------
<S> <C> <C> <C> <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 $ 9.32 $ 9.51 $ 10.00
-------- -------- -------- ------- ------- ------- -------
Investment income--net.. .17 .18 .17 .04 .20 .20 .09
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 2.37 2.49 .08 .91 .76 (.30) (.58)
-------- -------- -------- ------- ------- ------- -------
Total from investment
operations............. 2.54 2.67 .25 .95 .96 (.10) (.49)
-------- -------- -------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. (.18) (.19) (.10) -- (.23) (.09) --
Realized gain on
investments--net....... (.72) (.48) -- -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Total dividends and
distributions.......... (.90) (.67) (.10) -- (.23) (.09) --
-------- -------- -------- ------- ------- ------- -------
Net asset value, end of
year................... $ 14.74 $ 13.10 $ 11.10 $ 10.95 $ 10.05 $ 9.32 $ 9.51
======== ======== ======== ======= ======= ======= =======
Total Investment
Return:**
Based on net asset value
per share.............. 20.69% 25.49% 2.36% 9.50%# 10.59% (1.08)% (4.90)%#
======== ======== ======== ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... .66% .72% .86%* 1.25% 1.25% 1.29%*
======== ======== ======== ======= ======= ======= =======
Expenses................ .66% .66% .72% .86%* 1.31% 1.36% 1.35%*
======== ======== ======== ======= ======= ======= =======
Investment income--net.. 1.37% 1.68% 2.08% 1.69%* 2.42% 2.73% 2.18%*
======== ======== ======== ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $524,930 $306,463 $164,307 $47,207 $95,599 $55,209 $36,676
======== ======== ======== ======= ======= ======= =======
Portfolio turnover...... 68.41% 74.10% 60.55% 30.86% 87.33% 62.53% 29.79%
======== ======== ======== ======= ======= ======= =======
Average commission rate
paid##................. $ .0549 -- -- -- $ .0003### -- --
======== ======== ======== ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
### The "Average Commission Rate Paid" 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<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
investments--net....... .12 .65 (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79)
-------- -------- -------- -------- ------- ------ ------ ------- ------- -------
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 RE-
TURN:*
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%
======== ======== ======== ======== ======= ====== ====== ======= ======= =======
</TABLE>
- --------
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
4
<PAGE>
THE INSURANCE COMPANIES
The Company was organized to fund benefits under Contracts issued by Family
Life Insurance Company ("Family Life"), formerly a wholly owned subsidiary of
Merrill Lynch & Co., Inc. ("ML&Co."). On June 12, 1991, Family Life was sold
to a non-affiliated corporation and most (although not all) of its Contracts
were transferred to 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 of Family Life, MLLIC and ML of New
York as well as other insurance companies not affiliated with Family Life,
MLLIC or ML of New York (together with MLLIC, ML of New York and Family Life,
"Insurance Companies") to fund certain variable life insurance contracts
and/or variable annuities issued by such companies.
The rights of the Insurance Companies as shareholders should be
distinguished from the rights of a Contract owner, which are set forth in the
Contract. A Contract owner has no interest in the shares of a Fund, but only
in the Contract. The Contract is described in the Prospectus for each
Contract. That Prospectus describes the relationship between increases or
decreases in the net asset value of shares of a Fund, and any distributions on
such shares, and the benefits provided under a Contract. The Prospectus for
the Contracts also describes various fees payable to the Insurance Companies
and charges to the Separate Accounts made by the Insurance Companies with
respect to the Contracts. Since shares of the Funds will be sold only to the
Insurance Companies for the Separate Accounts, the terms "shareholder" and
"shareholders" in this Prospectus refer to the Insurance Companies. MLLIC and
ML of New York are wholly owned subsidiaries of ML&Co., as is the Investment
Adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
INVESTMENT OBJECTIVES
Each Fund of the Company has a different investment objective, which it
pursues through separate investment policies as described below. The
differences in objectives and policies among the Funds can be expected to
affect the return of each Fund and the degree of market and financial risk to
which each Fund is subject. Each Fund is classified as "diversified," as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act" or the "Act"), except for the Developing Capital Markets Focus
Fund, which is classified as "non-diversified." The investment objectives and
classification of each Fund may not be changed without the approval of the
holders of a majority of the outstanding shares of each Fund affected. The
investment objectives and policies of each Fund are discussed below. There can
be no assurance that any Fund will achieve its investment objective.
Fixed Income Security Ratings. No Fund other than the High Current Income
Fund and Developing Capital Markets Focus Fund invests in fixed-income
securities which are rated below investment grade (i.e., securities rated Ba
or below by Moody's or BB or below by Standard & Poor's). However, securities
purchased by a Fund may subsequently be downgraded. Such securities may
continue to be held and will be sold only if, in the judgement of the
Investment Adviser, it is advantageous to do so. Securities in the lowest
category of investment grade debt securities may have speculative
characteristics which may lead to weakened capacity to pay interest and
principal during periods of adverse economic conditions. See Appendix A for a
fuller description of corporate bond ratings.
HIGH CURRENT INCOME FUND
The primary investment objective of the High Current Income Fund, like the
Prime Bond Fund, is to obtain the highest level of current income that is
consistent with the investment policies of the Fund and with prudent
investment management. As a secondary objective, the Fund seeks capital
appreciation when consistent with its primary objective. There can be no
assurance that the Fund's investment objectives will be achieved.
The High Current Income Fund seeks high current income by investing
principally in fixed-income securities that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's and BBB
or lower by Standard & Poor's), or in unrated securities of comparable
quality. Securities rated below Baa by Moody's and below BBB by Standard &
Poor's are commonly known as "junk bonds." Additional
5
<PAGE>
information regarding various bond ratings is set forth in Appendix A to the
Prospectus. The market price of fixed-income securities such as those
purchased by the Fund is affected by changes in interest rates generally. As
interest rates rise, the market value of fixed-income securities will fall,
adversely affecting the net asset value of the Fund.
Although they can be expected to provide higher yields, lower-rated
securities such as those purchased by the Fund may be subject to greater
market fluctuations and risks of loss of income and principal than lower-
yielding, higher-rated fixed-income securities. Such securities are generally
issued by corporations which are not as financially secure or as creditworthy
as issuers of higher-rated securities. There is, accordingly, a greater risk
that the issuers of higher-yielding securities will not be able to pay
principal and interest on such securities, especially during periods of
adverse economic conditions. Because investment in such high-yield securities
entails relatively greater risk of loss of income or principal, an investment
in the High Current Income Fund may not be appropriate as the exclusive
investment to fund the Contracts for all Contract Owners. See "Risks of High
Yield Securities."
Selection and supervision by the management of the Company of investments in
lower-rated fixed-income securities involves continuous analysis of individual
issuers, general business conditions and other factors which may be too time
consuming or too costly for the average investor. The furnishing of these
services does not, of course, guarantee successful results. The analysis of
issuers may include, among other things, historic and current financial
condition, current and anticipated cash flow and borrowing requirements, value
of assets in relation to historical cost, strength of management,
responsiveness to business conditions, credit standing, and current and
anticipated results of operations. Analysis of general business conditions and
other factors may include anticipated changes in economic activity and
interest rates, the availability of new investment opportunities, and the
economic outlook for specific industries. While the Investment Adviser
considers as one factor in its credit analysis the ratings assigned by the
rating services, the Investment Adviser performs its own independent credit
analysis of issuers and consequently, the Fund may invest, without limit, in
unrated securities if such securities offer, in the opinion of the Investment
Adviser, a relatively high yield without undue risk. As a result, the High
Current Income Fund's ability to achieve its investment objective may depend
to a greater extent on the Investment Adviser's own credit analysis than the
Funds which invest in higher-rated securities. Although the High Current
Income Fund will invest primarily in lower-rated securities, it will not
invest in securities rated Ca or lower by Moody's and CC or lower by Standard
& Poor's unless the Investment Adviser believes that the financial condition
of the issuer or the protection afforded to the particular securities is
stronger than would otherwise be indicated by such low ratings. However,
securities purchased by the Fund may subsequently be downgraded. Such
securities may continue to be held and will be sold only if, in the judgement
of the Investment Adviser, it is advantageous to do so.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the Fund
may purchase higher-rated securities if the Investment Adviser believes that
the risk of loss of income and principal may be substantially reduced with
only a relatively small reduction in yield.
The securities in the Fund will be varied from time to time depending upon
the judgement of management as to prevailing conditions in the economy and the
securities markets and the prospects for interest rate changes among different
categories of fixed-income securities. It is anticipated that under normal
circumstances more than 90% of the Fund's assets will be invested in fixed-
income securities, including convertible and non-convertible debt securities
and preferred stock. Although it is expected that, in general, the Fund will
not invest in common stocks, rights or other equity securities, it will
acquire or hold such securities (if consistent with the objectives of the
Fund) when such securities are acquired in unit offerings with fixed-income
securities or in connection with an actual or proposed conversion or exchange
of fixed-income securities. In addition, under unusual market or economic
conditions, the High Current Income Fund for defensive purposes may invest up
to 100% of its assets in U.S. Government or Government agency securities,
money market securities or other fixed-income securities deemed by the
Investment Adviser to be consistent with a defensive posture, or may hold its
assets in cash. The yield on such securities may be lower than the yield on
lower-rated fixed-income securities.
6
<PAGE>
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 Appendix A to the Prospectus.
** Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard
& Poor's, or may not be rated by any other organizations.
BASIC VALUE FOCUS FUND
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund seeks special opportunities
in securities that are selling at a discount, either from book value or
historical price-earnings ratios, or seem capable of recovering from
temporarily out of favor considerations. Particular emphasis is placed on
securities which provide an above-average dividend return and sell at a below-
average price-earnings ratio.
The investment policy of the Basic Value Focus Fund is based on the belief
that the pricing mechanism of the securities market lacks total efficiency and
has a tendency to inflate prices of securities in favorable market climates
and depress prices of securities in unfavorable climates. Based on this
premise, management believes that favorable changes in market prices are more
likely to begin when securities are out of favor, earnings are depressed,
price-earnings ratios are relatively low, investment expectations are limited,
and there is no real general interest in the particular security or industry
involved. On the other hand, management believes that negative developments
are more likely to occur when investment expectations are generally high,
stock prices are advancing or have advanced rapidly, price-earnings ratios
have been inflated, and the industry or issue continues to gain new investment
acceptance on an accelerated basis. In other words, management believes that
market prices of securities with relatively high price-earnings ratios are
more susceptible to unexpected adverse developments while securities with
relatively low price-earnings ratios are more favorably positioned to benefit
from favorable, but generally unanticipated, events. This investment policy
departs from traditional philosophy. Management of the Fund believes that the
market risk involved in this policy is moderated somewhat by an emphasis on
securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Basic Value Focus Fund's portfolio generally will have significant
representation in this secondary segment of the market. The basic orientation
of the Fund's investment policies is such that at times a large portion of its
common stock holdings may carry less than favorable research ratings from
research analysts.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Basic Value Focus Fund
also may invest in preferred stocks and non-convertible debt securities rated
investment grade and utilize covered call options with respect to portfolio
securities as described in Appendix B. It reserves the right as a defensive
measure to hold other types of securities, including U.S. Government and
Government agency securities, money market securities or other fixed-income
securities deemed by the Investment Adviser to be consistent with a defensive
posture, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant. The Fund may invest up to
10% of its total assets, taken at market value at the time of acquisition, in
the securities of foreign issuers.
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DEVELOPING CAPITAL MARKETS FOCUS FUND
The investment objective of the Developing Capital Markets Focus Fund is to
seek long-term capital appreciation by investing in securities, principally
equities, of issuers in countries having smaller capital markets. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. The investment objective of the Fund is a fundamental
policy and may not be changed without approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may employ a variety of investments and
techniques to hedge against market and currency risk. See Appendix B.
Investing on an international basis involves special considerations. Investing
in smaller capital markets entails the risk of significant volatility in the
Fund's security prices. See "Other Portfolio Strategies--Foreign Securities."
The Fund is designed for investors seeking to complement their U.S. holdings
through foreign investments. The Fund should be considered as a long-term
investment and a vehicle for diversification and not as a balanced investment
program.
For purposes of its investment objective, the Fund considers countries
having smaller capital markets to be all countries other than the four
countries having the largest equity market capitalizations. Currently, these
four countries are Japan, the United Kingdom, the United States and Germany.
At 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 Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called "emerging" countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more market-
oriented economies, may experience relatively high rates of economic growth.
Other countries (such as France, the Netherlands and Spain), although having
relatively mature smaller capital markets, may also be in a position to
benefit from local or international developments encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability
or inclination to invest in countries having smaller capital markets. It also
may not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Investment Adviser will emphasize the
allocation of assets among certain countries' capital markets, rather than the
selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Fund may invest in a
relatively small number of leading or actively traded companies in a country's
capital markets in the expectation that the investment experience of the
securities of such companies will substantially represent the investment
experience of the country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as
a result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance
with its investment objective, the Fund will not seek to benefit from
anticipated short-term fluctuations in currency exchange rates. The Fund may,
from time to time, invest in debt securities with relatively high yields (as
compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. See "Risks of High Yield
Securities" below. Such income can be used, however, to offset the operating
expenses of the Fund.
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The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgement, analysis and experience
in evaluating the creditworthiness of an issuer of such securities. The
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will be in default.
See "Other Portfolio Strategies--Foreign Securities" and "Risks of High Yield
Securities" below.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country where the primary trading market of
its securities is located. The Fund, however, may consider a company to be
located in countries having smaller capital markets, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues or profits in any
one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in such countries. The Fund
also may consider closed-end investment companies to be located in the country
or countries in which they primarily make their portfolio investments.
Foreign investments in smaller capital markets involve risks not involved in
domestic investment, including fluctuations in foreign exchange rates, future
political and economic developments, different legal systems and the existence
or possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. These risks
are often heightened for investments in small capital markets. With respect to
certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social
instability or diplomatic developments which could affect investment in those
countries. In addition, certain foreign investments may be subject to foreign
withholding taxes.
There may be less publicly available information about an issuer in a
smaller capital market than would be available about a United States company,
and it may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States companies. As
a result, traditional investment measurements, such as price/earnings ratios,
as used in the United States, may not be applicable in certain capital
markets.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities. The
Fund may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
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NON-DIVERSIFIED FUNDS
The Developing Capital Markets Focus Fund is classified as a non-diversified
investment company under the Investment Company Act. However, the Fund will
have to limit its investments to the extent required by the diversification
requirements applicable to regulated investment companies under the Internal
Revenue Code. To qualify as a regulated investment company, a Fund, at the
close of each fiscal quarter, may not have more than 25% of its total assets
invested in the securities (except obligations of the U.S. Government, its
agencies or instrumentalities) of any one issuer and with respect to 50% of
its assets, (i) may not have more than 5% of its total assets invested in the
securities of any one issuer and (ii) may not own more than 10% of the
outstanding voting securities of any one issuer.
INVESTMENT RESTRICTIONS
The Company has adopted a number of restrictions and policies relating to
the investment of its assets and its activities which are fundamental policies
and may not be changed without the approval of the holders of the Company's
outstanding voting securities (including a majority of the shares of each
Fund). Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
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
which are freely tradeable in their primary market offshore should be deemed
liquid. The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity
and availability of information. This investment practice could have the
effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Foreign Securities. The High Current Income, Basic Value Focus and
Developing Capital Markets Focus Funds may invest in securities of foreign
issuers. Investments in foreign securities, particularly those of non-
governmental issuers, involve considerations and risks which are not
ordinarily associated with investing in domestic issuers. These considerations
and risks include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of financial
information or the difficulty of interpreting financial information prepared
under foreign accounting standards, less liquidity and more volatility in
foreign securities markets, the impact of political, social or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. If it should become necessary, a Fund could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs in foreign securities may be higher. The
operating expense ratio of a Fund investing in foreign securities can be
expected to be higher than that of an investment company investing exclusively
in United States securities because the expenses of the Fund, such as
custodial costs, are higher. In addition, net investment income earned by a
Fund on a foreign security may be subject to withholding and other taxes
imposed by foreign governments which will reduce a Fund's net investment
income. The Investment Adviser will consider these and other factors before
investing in foreign securities, and will not make such investments unless, in
its opinion, such investments will meet the standards and objectives of a
particular Fund. No Fund which may invest in foreign securities other than the
Developing Capital Markets Focus Fund 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
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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. The High Current Income Fund will
purchase only securities issued in dollar denominations.
The 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 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
outside such countries. Delays in settlement could result in temporary periods
when assets of such a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in countries having smaller capital markets than there is in the
United States.
As a result, management of a Fund which invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it
may not be practicable or appropriate to invest in a particular country. A
Fund may invest in countries in which foreign investors, including management
of the Fund, have had no or limited prior experience. Due to its emphasis on
securities of issuers located in smaller capital markets, the Developing
Capital Markets Focus Fund 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
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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 Fund intends 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 Fund may invest
up to 10% of its total assets in securities of such closed-end investment
companies. This restriction on investments in securities of closed-end
investment companies may limit opportunities for the Fund to invest indirectly
in certain smaller capital markets. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their net asset values. If a Fund acquires shares in closed-end investment
companies, shareholders would bear both their proportionate share of expenses
in the Fund (including management and advisory fees) and, indirectly, the
expenses of such closed-end investment companies. A Fund also may seek, at its
own cost, to create its own investment entities under the laws of certain
countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts a
Fund's investments in any equity security of an issuer which, in its most
recent fiscal year, derived more than 15% of its revenues from "securities
related activities," as defined by the rules thereunder. These provisions may
also restrict a Fund's investments in certain foreign banks and other
financial institutions.
Lending of Portfolio Securities. Each Fund of the Company may from time to
time lend securities (but not in excess of 20% of its total assets) from its
portfolio to brokers, dealers and financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which, while the loan is outstanding, will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities plus accrued interest. Such cash collateral will be invested in
short-term securities, the income from which will increase the return to the
Fund.
Forward Commitments. Each of the Funds may purchase securities on a when-
issued basis, and they may purchase or sell such securities for delayed
delivery. These transactions occur when securities are purchased or
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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 High Current Income and Developing
Capital Markets Focus Funds may from time to time enter into standby
commitment agreements. Such agreements commit the respective Fund, for a
stated period of time, to purchase a stated amount of a fixed income security
which may be issued and sold to the Fund at the option of the issuer. The
price and coupon of the security is fixed at the time of the commitment. At
the time of entering into the agreement the Fund is paid a commitment fee
which is typically approximately 0.5% of the aggregate purchase price of the
security which the Fund has committed to purchase. The Fund will at all times
maintain a segregated account with its custodian of cash or liquid securities
in an amount equal to the purchase price of the securities underlying the
commitment. There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price.
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. Certain Funds may use derivative instruments, including 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 Appendix B
attached to this Prospectus.
RISKS OF HIGH YIELD SECURITIES
The High Current Income Fund and Developing Capital Markets Focus Fund may
invest a substantial portion of their assets in high yield, high risk
securities or junk bonds, which are regarded as being predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Investment in such securities involves substantial risk. Issuers of
junk bonds may be highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the
case with higher-rated securities. For example, during an economic downturn or
a sustained period of rising interest rates, issuers of high yield securities
may be more likely to experience financial stress, especially if such issuers
are highly leveraged. During recessionary periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to other creditors of the issuer. While the high yield securities
in which the High Current Income Fund or Developing Capital Markets Focus Fund
may invest normally do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there
can be no assurance that such events will not occur after a Fund purchases a
particular security, in which case a Fund may experience losses and incur
costs.
In an effort to minimize the risk of issuer default or bankruptcy, the High
Current Income Fund and the Developing Capital Markets Focus Fund each will
diversify its holdings among many issuers. However, there can be no assurance
that diversification will protect a Fund from widespread defaults brought
about by a sustained economic downturn.
High yield securities tend to be more volatile than higher-rated fixed-
income securities, so that adverse economic events may have a greater impact
on their prices and yields than on higher-rated fixed-income securities. Zero
coupon bonds and bonds which pay interest and/or principal in additional bonds
rather than in cash are especially volatile. Like higher-rated fixed-income
securities, junk bonds are generally purchased and sold through dealers who
make a market in such securities for their own accounts. However, there are
fewer dealers in this market, which may be less liquid than the market for
higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
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by various dealers. Adverse economic conditions or investor perceptions
(whether or not based on economic fundamentals) may impair the liquidity of
this market, and may cause the prices the High Current Income Fund and the
Developing Capital Markets Focus Fund receive for their junk bonds to be
reduced, or a Fund may experience difficulty in liquidating a portion of its
portfolio when necessary to meet the Fund's liquidity needs or in response to
a specific economic event such as a deterioration in the creditworthiness of
the issuer. Under such conditions, judgement may play a greater role in
valuing certain of each Fund's portfolio securities than in the case of
securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the High Current Income Fund and the Developing Capital Markets Focus Fund. In
addition, each Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.
Sovereign Debt. The junk bonds in which the High Current Income Fund and
Developing Capital Markets Focus Fund may invest include junk bonds issued by
sovereign entities. Investment in such sovereign debt involves a high degree
of risk. The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as
a whole, the governmental entity's policy towards the International Monetary
Fund and the political constraints to which a governmental entity may be
subject. Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to reduce
principal and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the High Current Income Fund and the
Developing Capital Markets Focus Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. In the event of a default by a governmental entity, there may be few
or no effective legal remedies available to a Fund and there can be no
assurance a Fund will be able to collect on defaulted sovereign debt in whole
or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund
to limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
The New York insurance law requires that investments of each Fund be made
with the degree of care of an "ordinarily prudent person." 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.
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DIRECTORS
The Directors of the Company consist of six individuals, five of whom are
not "interested persons" of the Company as defined in the Investment Company
Act of 1940. The Directors of the Company are responsible for the overall
supervision of the operations of the Company and perform the various duties
imposed on the directors of the investment companies by the Investment Company
Act of 1940. The Board of Directors elects officers of the Company annually.
The Directors of the Company and their principal employment are as follows:
Arthur Zeikel*--President of the Investment Adviser and its affiliate, Fund
Asset Management, L.P. ("FAM"); President and Director of Princeton Services,
Inc. ("Princeton Services"); Executive Vice President of ML&Co.; and Director
of 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).
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 $1,881,541
related to the High Current Income Fund (representing .49% of its average net
assets), $2,414,605 related to the Basic Value Focus Fund (representing .60%
of its average net assets), and, $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.
- --------
* Interested person, as defined in the Investment Company Act of 1940, of the
Company.
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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: $2,096,102 related to the High Current
Income Fund (representing .54% of its average net assets), $2,657,872 related
to the Basic Value Focus Fund (representing .66% of its average net assets),
and, $1,009,535 related to the Developing Capital Markets Focus Fund
(representing 1.31% 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 two agreements which limit the operating expenses paid by each
Fund in a given year to 1.25% of its average daily net assets (the
"Reimbursement Agreements"). The reimbursement agreements, dated April 30,
1985 and February 11, 1992, provide that any expenses in excess of 1.25% of
average daily net assets will be reimbursed to the Fund by the Investment
Adviser which, in turn, will be reimbursed by MLLA.
The Investment Adviser has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
PORTFOLIO MANAGERS
The following is information with respect to the Portfolio Managers for each
of the Company's Funds.
Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager
since July 1993, and is primarily responsible for the Fund's day-to-day
management. He has served as Vice President of MLAM since December 1993;
Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to
1990.
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.
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.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
None of the Company's Funds has any obligation to deal with any dealer or
group of dealers in the execution of transactions in portfolio securities.
Subject to policy established by the Board of Directors of the Company, the
Investment Adviser is primarily responsible for the Company's portfolio
decisions and the placing of the Company's portfolio transactions. In placing
orders, it is the policy of each Fund to obtain the most favorable net
results, taking into account various factors, including price, dealer spread
or commission, if any, size of the transactions and difficulty of execution.
While the Investment Adviser generally seeks reasonably competitive spreads or
commissions, the Company will not necessarily be paying the lowest spread or
commission available.
Under the Investment Company Act of 1940, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of the Company's portfolio securities unless an exemptive
order allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Company may serve as its broker in over-
the-counter transactions conducted on an agency basis. During the year ended
December 31, 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 continuously offers shares of Class A Common Stock in each of
its Funds to the Insurance Companies at prices equal to the respective per
share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a
wholly owned subsidiary of the Investment Adviser, acts as the distributor of
the shares. Net asset value is determined in the manner set forth below under
"Additional Information--Determination of Net Asset Value."
The Company and the Distributor reserve the right to suspend the sale of
shares of each Fund in response to conditions in the securities markets or
otherwise.
REDEMPTION OF SHARES
The Company is required to redeem all full and fractional shares of the
Funds for cash. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Domestic Money Market and Reserve Assets
Funds, will consist of all payments of dividends or interest received by such
Fund less the estimated expenses of such Fund (including fees payable to the
Investment Adviser).
Dividends from net investment income of the High Current Income Fund are
declared and reinvested monthly in additional full and fractional shares at
net asset value. Dividends from net investment income of the Basic Value Focus
and Developing Capital Markets Focus Funds are declared and reinvested at
least annually in additional full and fractional shares of the respective
Funds.
All net realized long-term or short-term capital gains of the Company, if
any, are declared and distributed annually after the close of the Company's
fiscal year to the shareholders of the Fund or Funds to which such gains are
attributable. Short-term capital gains are taxable as ordinary income.
TAX TREATMENT OF THE COMPANY
Each Fund intends to continue to qualify as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, a Fund will not be subject to
17
<PAGE>
federal income tax on such part of its net ordinary income and net realized
capital gains which it distributes to shareholders. One of the requirements to
qualify for treatment as a regulated investment company under the Code is that
a Fund, among other things, derive less than 30% of its gross income in each
taxable year from gains (without deduction of losses) from the sale or other
disposition of stocks, securities and certain options, futures or forward
contracts held for less than three months. This requirement may limit the
ability of certain Funds to dispose of certain securities at times when
management of the Company might otherwise deem such disposition appropriate or
desirable.
If a Fund earns original issue discount income in a taxable year which is
not represented by correlative cash income, or if a Fund receives property
rather than cash in payment of interest, shareholders will be allocated income
greater than the amount of cash distributed to them. In addition, the Fund may
have to dispose of securities and use the proceeds thereof to make
distributions in amounts necessary to satisfy its distribution requirements
under the Code.
TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS
Dividends paid by the Company from its ordinary income and distributions of
the Company's net realized capital gains are includable in the respective
Insurance Company's gross income. Distributions of the Company's net realized
long-term capital gains retain their character as long-term capital gains in
the hands of the Insurance Companies if certain requirements are met. The tax
treatment of such dividends and distributions depends on the respective
Insurance Company's tax status. To the extent that income of the Company
represents dividends on common or preferred stock, rather than interest
income, its distributions to the Insurance Companies will be eligible for the
present 70% dividends received deduction applicable in the case of a life
insurance company as provided in the Code. See the Prospectus for the
Contracts for a description of the respective Insurance Company's tax status
and the charges which may be made to cover any taxes attributable to the
Separate Account. Not later than 60 days after the end of each calendar year,
the Company will send to the Insurance Companies a written notice required by
the Code designating the amount and character of any distributions made during
such year.
PERFORMANCE DATA
From time to time the average annual total return and yield of one or more
of the Company's Funds for various specified time periods may be included in
advertisements or information furnished by the Insurance Companies to present
or prospective Contract owners. Average annual total return and yield are
computed in accordance with formulas specified by the Securities and Exchange
Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return will be computed assuming all dividends
and distributions are reinvested and taking into account all applicable
recurring and nonrecurring expenses.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during
the period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the offering
price per share on the last day of the period. The yield for the 30-day period
ending December 31, 1996 was 9.30% for the High Current Income Fund.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
the amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost. The yield and total return quotations
18
<PAGE>
may be of limited use for comparative purposes because they do not reflect
charges imposed at the Separate Account level which, if included, would
decrease the yield.
On occasion, one or more of the Company's Funds may compare its performance
to that of the S&P 500 Index, the Value Line Composite Index, the Dow Jones
Industrial Average, or performance data published by Lipper Analytical
Services, Inc., or Variable Annuity Research Data Service or contained in
publications such as Morningstar Publications, Inc., Chase Investment
Performance Digest, Money Magazine, U.S. News & World Report, Business Week,
Financial Services Weekly, Kiplinger Personal Finances, CDA Investment
Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA
Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and
Ibbotson Associates. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends, if any,
and is determined as of fifteen minutes following the close of trading on each
day the New York Stock Exchange is open for business. The New York Stock
Exchange is open on business days other than national holidays (except for
Martin Luther King Day, when it is open) and Good Friday. The net asset value
per share of each Fund is computed by dividing the sum of the value of the
securities held by that Fund plus any cash or other assets (including interest
and dividends accrued) minus all liabilities (including accrued expenses) by
the total number of shares outstanding of that Fund at such time, rounded to
the nearest cent. Expenses, including the investment advisory fees payable to
the Investment Adviser, are accrued daily.
Securities held by each Fund will be valued as follows: Portfolio securities
that are traded on stock exchanges are valued at the last sale price (regular
way) as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. Securities traded in
the over-the-counter ("OTC") market are valued at the last available bid price
in the OTC market 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 Portfolio
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.
The Company has used pricing services, including Merrill Lynch Securities
Pricing(TM) Service ("MLSPS"), to value securities held by the High Current
Income and Prime Bond Funds and to value bonds held by other of the Company's
Funds. The Board of Directors of the Company has examined the methods used by
the pricing services in estimating the value of securities held by the Funds
and believes that such methods will reasonably and fairly approximate the
price at which those securities may be sold and result in a good faith
determination of the fair value of such securities; however, there is no
assurance that securities can be sold at the prices at which they are valued.
During the fiscal year ended December 31, 1996, the High Current Income Fund
paid MLSPS $7,269, for such services.
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
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Equity Growth Funds commenced on April 20, 1982. The Natural Resources Focus
Fund and the American Balanced Fund commenced operations on June 1, 1988 and
June 1, 1988, respectively. The Domestic Money Market Fund and the Global
Strategy Focus Fund commenced operations on February 20 and February 28, 1992,
respectively. The Basic Value Focus, Global Bond Focus, Global Utility Focus
and International Equity Focus Funds commenced operations on July 1, 1993. The
Developing Capital Markets Focus Fund and Government Bond Fund commenced
operations on May 2, 1994. The Index 500 Fund commenced operations on 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 Reserve Assets Fund Common Stock, Merrill
Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund
Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch
Equity Growth Fund Common Stock, Merrill Lynch Natural Resources Focus Fund
Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch
Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market
Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill
Lynch Global Bond Focus Fund Common Stock, Merrill Lynch Global Utility Focus
Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock,
Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill
Lynch Government Bond Fund Common Stock and Merrill Lynch Index 500 Common
Stock, respectively. The Company may, from time to time, at the sole
discretion of its Board of Directors and without the need to obtain the
approval of its shareholders or of Contract Owners, offer and sell shares of
one or more of such classes. Each class consists of 100,000,000 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.
The Board of Directors of the Company has authorized the issuance of shares
of Class B Common Stock with respect to each of the Company's Funds, with the
existing shares of Common Stock of each Fund to be designated Class A Common
Stock of such Fund. The Board of Directors have also authorized the Company to
enter into a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
under which the Company would pay distribution fees in respect of the shares
of its Class B Common Stock. No shares of Class B Common Stock have been
issued; however, the Company may commence issuing shares of Class B Common
Stock later in 1997 pursuant to a separate or amended Prospectus.
MLLIC purchased $100 worth of Shares of the Basic Value Focus Fund on June
28, 1993. MLLIC purchased, on July 1, 1993, $2,000,000 worth of shares of the
Basic Value Focus Fund. MLLIC purchased on May 2, 1994 $8,000,000 worth of
shares of the Developing Capital Markets Focus Fund. The organizational
expenses of each of the Company's Funds are paid by the Investment Adviser.
The Investment Adviser is reimbursed by MLLIC for all such expenses over a
five-year period.
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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.
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APPENDIX A
U.S. GOVERNMENT SECURITIES
For temporary or defensive purposes, each Fund may invest in the various
types of marketable securities issued by or guaranteed as to principal and
interest by the U.S. Government and supported by the full faith and credit of
the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a
discount basis.
GOVERNMENT AGENCY SECURITIES
For temporary or defensive purposes, each Fund may invest in government
agency securities, which are debt securities issued by government sponsored
enterprises, federal agencies and international institutions. Such securities
are not direct obligations of the Treasury but involve government sponsorship
or guarantees by government agencies or enterprises. The Funds may invest in
all types of government agency securities currently outstanding or to be
issued in the future.
DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS
For temporary or defensive purposes, each 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.
For temporary or defensive purposes, the Developing Capital Markets Focus
Fund may invest in certificates of deposit and bankers' acceptances issued by
foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations) or
U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations).
The Fund may invest only in Eurodollar obligations which by their terms are
general obligations of the U.S. parent bank and meet the other criteria
discussed below. Yankeedollar obligations in which the Fund may invest must be
issued by U.S. branches or subsidiaries of foreign banks which are subject to
state or federal banking regulations in the U.S. and by their terms must be
general obligations of the foreign parent. In addition, the Fund will limit
its investments in Yankeedollar obligations to obligations issued by banking
institutions with more than $1 billion in assets.
For temporary or defensive purposes, the Developing Capital Markets Focus
Fund may also invest in U.S. dollar-denominated obligations of foreign
depository institutions and their foreign branches and subsidiaries, such as
certificates of deposit, bankers' acceptances, time deposits and deposit
notes. The obligations of such foreign branches and subsidiaries may be the
general obligation of the parent bank or may be limited to the issuing branch
or subsidiary by the terms of the specific obligation or by government
regulation.
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Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United
States, has total assets of at least $1 billion and its deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets
of a Fund (taken at market value at the time of each investment) in
certificates of deposit issued by banks and savings and loan associations with
assets of less than $1 billion if the principal amount of each such
certificate of deposit is fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
For temporary or defensive purposes, each 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.
For temporary or defensive purposes, the 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."
A-2
<PAGE>
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded both during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
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.
A-3
<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.
A-4
<PAGE>
APPENDIX B
Certain Funds of the Company are authorized to use derivative instruments,
including options, and futures, and to purchase and sell foreign exchange, as
described below. Such instruments are referred to collectively herein as
"Strategic Instruments."
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Developing Capital Markets Focus Fund is 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 the 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.
The Developing Capital Markets Focus Fund is 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 the 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.
The Developing Capital Markets Focus 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 Basic Value Focus Fund and the Developing Capital
Markets Focus Fundare 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 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
B-1
<PAGE>
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").
The Developing Capital Markets Focus 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 may 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 the 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 the 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.
B-2
<PAGE>
The 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). The 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.
FOREIGN EXCHANGE TRANSACTIONS
The Developing Capital Markets Focus 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.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The 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. The 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 Fund 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 Fund 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.
The Fund will not speculate in Currency Instruments. Accordingly, the 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. The 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. Furthermore, a
B-3
<PAGE>
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).
B-4
<PAGE>
Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
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.
B-5
<PAGE>
APRIL 25, 1997
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company which has a wide range of investment objectives
among its sixteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"): Merrill Lynch Domestic Money Market Fund, Merrill
Lynch Reserve Assets Fund, Merrill Lynch Prime Bond Fund, Merrill Lynch High
Current Income Fund, Merrill Lynch Quality Equity Fund, Merrill Lynch Equity
Growth Fund, Merrill Lynch Natural Resources Focus Fund, Merrill Lynch
American Balanced Fund, Merrill Lynch Global Strategy Focus Fund, Merrill
Lynch Basic Value Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill
Lynch Global Utility Focus Fund, Merrill Lynch International Equity Focus
Fund, Merrill Lynch Developing Capital Markets Focus Fund, Merrill Lynch
Government Bond Fund and Merrill Lynch Index 500 Fund. A separate class of
Common Stock is issued for each Fund.
The shares of the Funds are sold to separate accounts ("Separate Accounts")
of certain insurance companies (the "Insurance Companies") including Merrill
Lynch Life Insurance Company ("MLLIC") and ML Life Insurance Company of New
York ("ML of New York") to fund benefits under variable annuity contracts (the
"Variable Annuity Contracts") and/or variable life insurance contracts
(together with the Variable Annuity Contracts, the "Contracts") issued by such
companies. The Insurance Companies will redeem shares to the extent necessary
to provide benefits under the respective Contracts or for such other purposes
as may be consistent with the respective Contracts. MLLIC and ML of New York
are wholly owned subsidiaries of Merrill Lynch & Co., Inc., as is the
Company's investment adviser, Merrill Lynch Asset Management, L.P. (the
"Investment Adviser").
----------------
THIS STATEMENT OF ADDITIONAL INFORMATION OF THE COMPANY IS NOT A PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE COMPANY (THE
"PROSPECTUS") DATED APRIL 25, 1997 WHICH HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND WHICH IS AVAILABLE UPON
REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT
THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Objectives and Policies......................................... 3
Investment Restrictions.................................................... 3
Management of the Company.................................................. 11
Investment Advisory Arrangements........................................... 15
Determination of Net Asset Value........................................... 17
Portfolio Transactions and Brokerage....................................... 18
Redemption of Shares....................................................... 20
Dividends, Distributions and Taxes......................................... 20
Distribution Arrangements.................................................. 21
Performance Data........................................................... 21
Additional Information..................................................... 24
Independent Auditors' Report............................................... 25
Audited Financial Statements............................................... 26
Unaudited Financial Statements for the Index 500 Fund...................... 142
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and certain investment policies of the Funds are
as follows: The Domestic Money Market Fund seeks preservation of capital,
liquidity and the highest possible current income consistent with the
foregoing objectives by investing in short-term domestic money market
securities. The Reserve Assets Fund seeks the preservation of capital,
liquidity and the highest possible current income consistent with the
foregoing objectives by investing in short-term money market securities. The
Prime Bond Fund seeks to attain as high a level of current income as is
consistent with prudent investment management, and 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 Rating Group
("Standard & Poor's"). The High Current Income Fund seeks to attain as high a
level of current income as is consistent with its investment policies and
prudent investment management, and as a secondary objective, capital
appreciation when consistent with the foregoing objective; the Fund invests
principally in fixed-income securities which are rated in the lower rating
categories of the established rating services or in unrated securities of
comparable quality. The Quality Equity Fund seeks to attain the highest total
investment return consistent with prudent risk; the 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 Equity Growth Fund seeks to attain long-term
capital growth by investing primarily in common shares, of small companies and
of emerging growth companies regardless of size. The Natural Resources Focus
Fund seeks to attain long-term growth of capital and the protection of the
purchasing power of shareholders' capital by investing primarily in equity
securities of domestic and foreign companies with substantial natural resource
assets. The American Balanced Fund seeks a level of current income and a
degree of stability of principal not normally available from an investment
solely in equity securities and the opportunity for capital appreciation
greater than normally available from an investment solely in debt securities
by investing in a balanced portfolio of fixed income and equity securities.
The Global Strategy Focus Fund seeks high total investment return by investing
primarily in a portfolio of equity and fixed income securities of U.S. and
foreign issuers. The Basic Value Focus Fund seeks to attain capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that management of the Fund believes are undervalued and therefore
represent basic investment value. The Global Bond Focus Fund seeks to attain
high total investment return by investing in a global portfolio of fixed
income securities denominated in various currencies, including multinational
currency units. The Global Utility Focus Fund seeks to attain capital
appreciation and current income through investment of at least 65% of its
total assets in equity and debt securities issued by domestic and foreign
companies which are, in the opinion of the Investment Adviser, primarily
engaged in the ownership or operation of facilities used to generate, transmit
or distribute electricity, telecommunications, gas or water. The International
Equity Focus Fund seeks to attain capital appreciation and, secondarily,
income, through investment in securities, principally equities, of issuers in
countries other than the United States. The Developing Capital Markets Focus
Fund seeks long-term capital appreciation through investment in securities,
principally equities, of issuers in countries having smaller capital markets.
The Government Bond Fund seeks the highest possible current income consistent
with the protection of capital afforded by investing in debt securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities. The Index 500 Fund seeks to provide investment results
that, before expenses, correspond to the aggregate price and yield performance
of Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
Investors are referred to "Investment Objectives and Policies of the Funds"
in the Prospectus for a more complete discussion of the investment objectives
and policies of the Company.
INVESTMENT RESTRICTIONS
The Company has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of the assets of the
Funds and their activities. The fundamental policies set forth below may not
be changed without the approval of the holders of a majority of the
outstanding voting shares of each Fund affected (which for this purpose and
under the Investment Company Act of 1940 means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the affected Fund are represented or (ii) more than 50% of the
outstanding shares of the affected Fund).
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RESTRICTIONS APPLICABLE TO THE DOMESTIC MONEY MARKET FUND
The Domestic Money Market Fund may not purchase any security other than
money market and other securities described under "Investment Objectives and
Policies of the Funds--Domestic Money Market Fund" in the Prospectus. In
addition, the Domestic Money Market Fund may not purchase securities of
foreign issuers (including Eurodollar and Yankeedollar obligations). In
addition, the Domestic Money Market Fund may not:
(1) invest more than 10% of its total assets (taken at market value at
the time of each investment) in the securities (other than U.S. Government
or government agency securities) of any one issuer (including repurchase
agreements with any one bank) except that up to 25% of the value of the
Fund's total assets may be invested without regard to such 10% limitation.
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(4) purchase or sell interests in oil, gas or other mineral exploration
or development programs, commodities, commodity contracts or real estate,
except that the Fund may invest in securities secured by real estate or
interests therein or securities issued by companies which invest in real
estate or interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combination thereof.
(7) make loans to other persons; provided that the Fund may purchase
money market securities or enter into repurchase agreements; lend
securities owned or held by it pursuant to (8) below; and provided further
that for purposes of this restriction the acquisition of a portion of an
issue of publicly distributed bonds, debentures or other corporate debt
securities or of government obligations, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed the
making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to
the current market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes. The borrowing provisions shall not apply to reverse
repurchase agreements. Usually only "leveraged" investment companies may
borrow in excess of 5% of their assets; however, the Fund will not borrow
to increase income but only to meet redemption requests which might
otherwise require untimely dispositions of portfolio securities. The Fund
will not purchase securities while borrowings are outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned
or held by the Fund except as may be necessary in connection with
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 25% of the Fund's total assets, taken at
market value at the time thereof. Although the Fund has the authority to
mortgage, pledge or hypothecate more than 10% of its total assets under
this investment restriction (10), as a matter of operating policy, the Fund
will not mortgage, pledge or hypothecate in excess of 10% of total net
assets.
(11) act as an underwriter of securities, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(12) purchase, either alone or together with any other Fund or Funds,
more than 10% of the outstanding securities of an issuer except that such
restriction does not apply to U.S. Government or government agency
securities, bank money instruments or repurchase agreements.
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<PAGE>
(13) invest in securities (except for repurchase agreements or variable
amount master notes) with legal or contractual restrictions on resale or
for which no readily available market exists or in securities of issuers
(other than issuers of government agency securities) having a record,
together with predecessors, of less than three years of continuous
operation if, regarding all such securities, more than 10% of its total
assets (taken at market value) would be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more than
10% of the Fund's total assets (taken at market value at the time of each
investment) would be subject to repurchase agreements maturing in more than
seven days.
(15) enter into reverse repurchase agreements if, as a result thereof,
the Fund's obligations with respect to reverse repurchase agreements would
exceed one-third of the Fund's net assets (defined to be total assets,
taken at market value, less liabilities other than reverse repurchase
agreements).
(16) invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry (other than U.S. Government securities, government agency
securities or bank money instruments).
RESTRICTIONS APPLICABLE TO THE RESERVE ASSETS FUND
The Reserve Assets Fund may not purchase any security other than money
market and other securities described under "Investment Objectives and
Policies of the Funds--Reserve Assets Fund" in the Prospectus. In addition,
the Reserve Assets Fund may not:
(1) invest more than 10% of its total assets (taken at market value at
the time of each investment) in the securities (other than U.S. Government
or government agency securities) of any one issuer (including repurchase
agreements with any one bank) except that up to 25% of the value of the
Fund's total assets may be invested without regard to such 10% limitation.
(2) alone, or together with any other Fund or Funds, make investments for
the purpose of exercising control or management.
(3) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(4) purchase or sell interests in oil, gas or other mineral exploration
or development programs, commodities, commodity contracts or real estate,
except that the Fund may invest in securities secured by real estate or
interests therein or securities issued by companies which invest in real
estate or interest therein.
(5) purchase any securities on margin except that the Company may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities.
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(7) make loans to other persons; provided that the Fund may purchase
money market securities or enter into repurchase agreements; lend
securities owned or held by it pursuant to (8) below; and provided further
that for purposes of this restriction the acquisition of a portion of an
issue of publicly-distributed bonds, debentures or other corporate debt
securities or of government obligations, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed the
making of a loan.
(8) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided that such loans are
made according to the guidelines set forth below and the guidelines of the
Securities and Exchange Commission and the Company's Board of Directors,
including maintaining collateral from the borrower equal at all times to
the current market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at market
value and then only from banks as a temporary measure for extraordinary or
emergency purposes. The borrowing provisions shall not apply to reverse
repurchase agreements. Usually only "leveraged" investment companies may
borrow in excess of 5% of their assets; however, the Fund will not borrow
to increase income but only to meet redemption requests which might
otherwise require untimely dispositions of portfolio securities. The Fund
will not purchase securities while borrowings are outstanding.
5
<PAGE>
(10) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (8) above), as security for indebtedness, any securities owned
or held by the Fund except as may be necessary in connection with
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 25% of the Fund's total assets, taken at
market value at the time thereof. As a matter of operating policy, the Fund
will not mortgage, pledge or hypothecate in excess of 10% of total net
assets.
(11) act as an underwriter of securities, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(12) purchase, either alone or together with any other Fund or Funds,
more than 10% of the outstanding securities of an issuer except that such
restriction does not apply to U.S. Government or government agency
securities, bank money instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or variable
amount master notes) with legal or contractual restrictions on resale or
for which no readily available market exists or in securities of issuers
(other than issuers of government agency securities) having a record,
together with predecessors, of less than three years of continuous
operation if, regarding all such securities, more than 5% of its total
assets (taken at market value) would be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more than
10% of the Fund's total assets (taken at market value at the time of each
investment) would be subject to repurchase agreements maturing in more than
seven days.
(15) enter into reverse repurchase agreements if, as a result thereof,
the Fund's obligations with respect to reverse repurchase agreements would
exceed one-third of the Fund's net assets (defined to be total assets,
taken at market value, less liabilities other than reverse repurchase
agreements).
(16) invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry (other than U.S. Government securities, government agency
securities or bank money instruments).
RESTRICTIONS APPLICABLE TO EACH OF THE FUNDS (EXCEPT THE DOMESTIC MONEY MARKET
FUND AND THE RESERVE ASSETS FUND)
Under the fundamental investment restrictions, each of the Funds (unless
noted otherwise below) may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.(1)
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).(2)
3. Make investments for the purpose of exercising control or management.
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(1) The Developing Capital Markets Focus, Global Bond Focus, Global Strategy
Focus, Index 500 and Natural Resource Focus Funds are classified as non-
diversified investment companies under the Investment Company Act, and
therefore this restriction is not applicable to those Funds.
(2) For purposes of this restriction, states, municipalities and their
political subdivisions are not considered to be part of any industry, and
utilities will be divided according to their services; for example, gas,
gas transmission, electricity, telecommunications and water each will be
considered a separate industry for purposes of this restriction. In
addition, this restriction will not restrict (i) the Global Utility Focus
Fund, under normal circumstances, from investing 65% or more of its total
assets in equity and debt securities issued by domestic and foreign
companies in the utilities industries (i.e., electricity,
telecommunications, gas or water), and (ii) the Natural Resources Focus
Fund from investing greater than 25% of its assets in gold-related
companies.
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<PAGE>
4. Purchase or sell real estate, except that the Fund may invest in
securities directly or indirectly secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Prospectus and Statement
of Additional Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in the Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933
in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent the Fund may do so in accordance with applicable law and the
Prospectus and Statement of Additional Information, as they may be amended
from time to time, and without registering as a commodity pool operator
under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, each of the Funds
(unless noted otherwise below) may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Engage in short sales of securities or maintain a short position
except to the extent permitted by applicable law. The Fund does not
currently intend to engage in short sales or maintain a short position,
except for short sales "against the box."(3)
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors has otherwise determined to be
liquid pursuant to applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act and determined to be liquid by the Board
of Directors of the Company are not subject to the limitations set forth in
this investment restriction.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's total assets; included within such limitation, but not to exceed
2% of the Fund's total assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
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(3) The Global Bond Focus, Global Strategy Focus, International Equity Focus
and Natural Resources Focus Funds may maintain short positions in forward
currency contracts, options, futures contracts and options on futures
contracts.
7
<PAGE>
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, except to
the extent permitted under applicable law. This restriction shall not apply
to mortgage-backed securities, asset-backed securities or obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Company, the officers and general partner of
the Investment Adviser, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
i. Notwithstanding fundamental investment restriction number 7 above,
borrow amounts in excess of 5% (20% in the case of the Developing Capital
Markets Focus and Global Bond Focus Funds and 10% in the case of the Global
Strategy Focus, Government Bond, International Equity Focus and Natural
Resources Focus Funds) of the total assets of the Fund, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares.(4)
j. Pledge greater than 10% (20% in the case of the Developing Capital
Markets Focus Fund) of its total assets, taken at market value at the time
of the pledge. For the purpose of this restriction, collateral arrangements
with respect to (i) transactions in options, foreign currency contracts,
futures contracts and options on futures contracts and (ii) initial and
variation margin are not deemed to be a pledge of assets.
k. Lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, provided however that the
Quality Equity Fund may only make loans to New York Stock Exchange Member
firms, other brokerage firms having net capital of at least $10 million and
financial institutions, such as registered investment companies, banks and
insurance companies, having at least $10 million in capital and surplus.
l. In the case of the Global Utility Focus Fund only, invest less than
65% of its total assets in equity and debt securities issued by domestic
and foreign companies in the utilities industries, except during temporary
defensive periods.
m. In the case of each of the American Balanced Fund, the Basic Value
Focus Fund, the Equity Growth Fund, the High Current Income Fund, the Prime
Bond Fund and the Quality Equity Fund, invest in the securities of foreign
issuers except that each such Fund (except the American Balanced Fund) may
invest in securities of foreign issuers if at the time of acquisition no
more than 10% (25% in the case of the Quality Equity Fund) of its total
assets, taken at market value at the time of the investment, would be
invested in such securities. Consistent with the general policy of the
Securities and Exchange Commission, the nationality or domicile of an
issuer for determination of foreign issuer status may be (i) the country
under whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) a country in which the
issuer derives a significant proportion (at least 50%) of its revenues or
profits from goods produced or sold, investments made, or services
performed in the country, or in which at
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(4) In addition, the American Balanced, Basic Value Focus, Developing Capital
Markets Focus, Equity Growth, Global Strategy Focus, High Current Income,
Natural Resources Focus, Prime Bond and Quality Equity Funds will not
purchase securities while borrowings are outstanding, except, in the case
of the Developing Capital Markets Focus Fund, (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained exclusively for settlements of other
securities transactions. The Global Bond Focus, Global Utility Focus and
International Equity Focus Funds will not purchase securities while
borrowings in excess of 5% of its total assets are outstanding.
8
<PAGE>
least 50% of the assets of the issuer are situated. See "Other Portfolio
Strategies--Foreign Securities" in the Prospectus.(5)
OVER-THE-COUNTER OPTIONS
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant
to which it will not purchase or sell OTC options if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by a Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are illiquid or are otherwise not
readily marketable. However, if an OTC option is sold by a Fund to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of
New York and if the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying securities minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money." This policy as
to OTC options is not a fundamental policy of any Fund and may be amended by
the Directors of the Company without the approval of the Company's
shareholders. However, the Company will not change or modify this policy prior
to the change or modification by the Commission staff of its position.
RESTRICTED SECURITIES
From time to time a Fund may invest in securities the disposition of which
is subject to legal restrictions, such as restrictions imposed by the
Securities Act of 1933 (the "Securities Act") on the resale of securities
acquired in private placements. If registration of such securities under the
Securities Act is required, such registration may not be readily accomplished
and if such securities may be sold without registration, such resale may be
permissible only in limited quantities. In either event, a Fund may not be
able to sell its restricted securities at a time which, in the judgement of
the Investment Adviser, would be most opportune.
Each of the Funds is subject to limitations on the amount of securities
which are illiquid, because of restrictions under the Securities Act or
otherwise, they may purchase. Each Fund may, however, purchase without regard
to that limitation securities that are not registered under the Securities
Act, but that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the Securities Act, provided that the Company's Board of
Directors continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors may
adopt guidelines and delegate to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity
and availability of information. This investment practice could have the
effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
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(5) Notwithstanding this restriction, each of the Prime Bond Fund and the High
Current Income Fund may invest up to 25% of its total assets in securities
(i) issued, assumed or guaranteed by foreign governments, or political
subdivisions or instrumentalities thereof, (ii) assumed or guaranteed by
domestic issuers, including Eurodollar securities or (iii) issued, assumed
or guaranteed by foreign issuers having a class of securities listed for
trading on the New York Stock Exchange.
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PORTFOLIO STRATEGIES
Liquidity. In order to assure that each Fund has sufficient liquidity, as a
matter of operating policy no Fund may invest more than 10% of its net assets,
except that the Developing Capital Markets Focus Fund may not invest more than
15% of its net assets in securities for which market disposition is not
readily available. Market disposition may not be readily available for
repurchase agreements maturing in more than seven days and for securities
having restrictions on resale.
Lending of Portfolio Securities. Subject to any applicable investment
restriction above, each Fund may from time to time loan securities from its
portfolio to brokers, dealers and financial institutions and receive
collateral in cash, securities issued or guaranteed by the U.S. Government or,
in the case of the Domestic Money Market and Reserve Assets Fund, cash
equivalents which while the loan is outstanding will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Such cash collateral will be invested in short-term
securities, the income from which will increase the return to the Fund. The
Fund will retain all rights of beneficial ownership as to the loaned portfolio
securities, including voting rights and rights to interest or other
distributions, and will have the right to regain record ownership of loaned
securities to exercise such beneficial rights. Such loans will be terminable
at any time. The Fund may pay reasonable finders', administrative and
custodial fees to persons unaffiliated with the Fund in connection with the
arranging of such loans. The dividends, interest and other distributions
received by the Company on loaned securities may, for tax purposes, be treated
as income other than qualified income for the 90% test discussed under
"Dividends, Distributions and Taxes--Federal Income Taxes." The Company
intends to lend portfolio securities only to the extent that such activity
does not jeopardize the Company's qualification as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended.
Forward Commitments. Securities may be purchased or sold on a delayed
delivery basis or may be purchased on a forward commitment basis by each of
the Company's Funds at fixed purchase terms with periods of up to 180 days
between the commitment and settlement dates. The purchase will be recorded on
the date the purchasing Fund enters into the commitment and the value of
security will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the security on the delivery date may be more or
less than its purchase price. A separate account of the Fund will be
established with The Bank of New York or Brown Brothers Harriman & Co. (for
Developing Capital Markets Focus Fund) (the "Custodian") consisting of cash or
liquid securities having a market value at all times until the delivery date
at least equal to the amount of its commitments in connection with such
delayed delivery and purchase transactions. Although a Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, it may dispose of a commitment prior to settlement if the
Investment Adviser deems it appropriate to do so. There can, of course, be no
assurance that the judgement upon which these techniques are based will be
accurate or that such techniques when applied will be effective. The Funds
will enter into forward commitment arrangements only with respect to
securities in which they may otherwise invest as described under "Investment
Objectives and Policies of the Funds" in the Prospectus.
Eurodollar and Yankeedollar Obligations. The Reserve Assets Fund (and, for
temporary or defensive purposes, the Natural Resources Focus, Global Strategy
Focus, Global Bond Focus, Global Utility Focus, International Equity Focus and
Developing Capital Markets Focus Funds) may invest in obligations issued by
foreign branches or subsidiaries of U.S. banks ("Eurodollar" obligations), by
U.S. branches or subsidiaries of foreign banks ("Yankeedollar" obligations),
or by foreign depository institutions and their foreign branches and
subsidiaries ("foreign bank obligations"). Investment in such obligations may
involve different risks from the risks of investing in obligations of U.S.
banks. Such risks include adverse political and economic developments, the
possible imposition of withholding taxes on interest income payable on such
obligations, the possible seizure or nationalization of foreign deposits and
the possible establishment of exchange controls or other foreign governmental
laws or restrictions which might adversely affect the payment of principal and
interest. Generally the issuers of such obligations are subject to fewer U.S.
regulatory requirements than are applicable to U.S. banks. Foreign depository
institutions and their foreign branches and subsidiaries, and foreign branches
or subsidiaries of U.S. banks, may be subject to less stringent reserve
requirements than U.S. banks. U.S. branches or subsidiaries of foreign banks
are subject to the reserve requirements of the state in which they are
located.
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<PAGE>
There may be less publicly available information about a foreign depository
institution, branch or subsidiary, or a U.S. branch or subsidiary of a foreign
bank, than about a U.S. bank, and such institutions may not be subject to the
same accounting, auditing and financial record keeping standards and
requirements as U.S. banks. Evidence of ownership of Eurodollar and foreign
bank obligations may be held outside of the United States, and a Fund may be
subject to the risks associated with the holding of such property overseas.
Eurodollar and foreign bank obligations of the Fund held overseas will be held
by foreign branches of the Custodian for the Fund or by other U.S. or foreign
banks under subcustodian arrangements complying with the requirements of the
Investment Company Act of 1940.
The Investment Adviser will consider the above factors in making investments
in Eurodollar, Yankeedollar and foreign bank obligations and will not
knowingly purchase obligations which, at the time of purchase, are subject to
exchange controls or withholding taxes. Generally, the Reserve Assets Fund
will limit its Yankeedollar investments to obligations of banks organized in
Canada, France, Germany, Japan, the Netherlands, Switzerland, the United
Kingdom and other western industrialized nations.
Standby Commitment Agreements. The High Current Income Fund, Global Utility
Focus Fund, International Equity Focus Fund and Developing Capital Markets
Focus Fund may from time to time enter into standby commitment agreements.
Such agreements commit a Fund, for a stated period of time, to purchase a
stated amount of a fixed income security which may be issued and sold to the
Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security which the Fund has committed to
purchase. A Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. A Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 10% of its
assets taken at the time of acquisition of such commitment or security. A Fund
will at all times maintain a segregated account with its custodian of cash or
liquid 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. Since the issuance
of the security underlying the commitment is at the option of the issuer, a
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of a Fund's net asset value. If the
security is issued, the cost basis of the security will be adjusted by the
amount of the commitment fee. In the event the security is not issued, the
commitment fee will be recorded as income on the expiration date of the
standby commitment.
MANAGEMENT OF THE COMPANY
The Directors and executive officers of the Company and their ages and
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (63)--President and Director(1)(2)--President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM")
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.")
since 1990; Director of the Merrill Lynch Funds Distributor, Inc. (the
"Distributor").
11
<PAGE>
Walter Mintz (67)--Director--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982.
Melvin R. Seiden (66)--Director--780 Third Avenue, Suite 2502, New York, New
York 10017. Director of Silbanc Properties, Ltd. (real estate, consulting and
investments) since 1996 and President thereof since 1987; Chairman and
President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to
1987.
Stephen B. Swensrud (63)--Director--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Associates (financial consultants)
since 1996 and Principal thereof since 1975.
Joe Grills (61)--Director--183 Soundview Lane, New Canaan, Connecticut
06840. Member of the Committee of Investment of Employee Benefit Assets of the
Financial Executives Institute ("CIEBA") since 1986, member of CIEBA's
Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant
Treasurer of International Business Machines Incorporated ("IBM") and Chief
Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the
Investment Advisory Committee of the State of New York Common Retirement Fund;
Director, Duke Management Company since 1993; Director, LaSalle Street Fund
since 1995; Director, Kimco Realty Corporation since January 1997.
Robert S. Salomon, Jr. (59)--Director--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman
and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of
Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Distributor since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Norman Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982.
Peter A. Lehman (38)--Senior Vice President(1)(2)--Vice President of the
Investment Adviser since 1994 and employee of the Investment Adviser since
1992.
Joseph T. Monagle, Jr. (47)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser since 1990; Vice President of MLAM from
1978 to 1990.
Donald C. Burke (35)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1990.
Vincent T. Lathbury, III (54)--Vice President(1)(2)--Vice President of the
Investment Adviser and FAM and Portfolio Manager of the Investment Adviser and
FAM since 1982.
Thomas R. Robinson (52)--Vice President(1)(2)--Senior Portfolio Manager of
the Investment Adviser since November 1995; Manager of International Equity
Strategy of ML&Co.'s Global Securities Research and Economics Group from 1989
to 1995.
Kevin Rendino (29)--Vice President(1)(2)--Vice President of the Investment
Adviser since December 1993; Senior Research Analyst from 1990 to 1992;
Corporate Analyst from 1988 to 1990.
Walter D. Rogers (53)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1987; Vice President of Continental Insurance Asset
Management from 1984 to 1987.
Grace Pineda (38)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1989. Prior to joining the Investment Adviser, Ms. Pineda was a
portfolio manager with Clemente Capital, Inc.
12
<PAGE>
Andrew John Bascand (33)--Vice President(1)(2)--Director of Merrill Lynch
Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global
Asset Management Limited since 1994; Senior Economist of A.M.P. Asset
Management plc in London from 1992 to 1993 and Chief Economist of A.M.P.
Investments (NZ) in New Zealand from 1989 to 1991; Economic Adviser to the
Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989.
Robert Parish (42)--Vice President(1)(2)--Vice President and Portfolio
Manager of the Investment Adviser since 1991; Portfolio Manager of Templeton
International from 1986 to 1991 and Vice President thereof from 1989.
Jay C. Harbeck (62)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1986.
Jacqueline Rogers (38)--Vice President(1)(2)--Vice President of the
Investment Adviser since January 1986.
Aldona A. Schwartz (48)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1991 and an employee of the Investment Adviser since
1986.
Sean Casey (41)--Vice President--Vice President of the Investment Adviser
since 1995; Chief Investment Officer, Chase Asset Management from 1990 to
1995.
P. Valle (39)--Vice President--Vice President of the Investment Adviser
since 1992.
Gerald M. Richard (47)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and FAM since 1984; Treasurer of the Distributor
since 1984 and Vice President since 1981; and Senior Vice President and
Treasurer of Princeton Administrators, Inc. since 1988.
Ira P. Shapiro (34)--Secretary(1)(2)--Vice President of the Investment
Adviser since 1997 and Attorney associated with the Investment Adviser and FAM
since 1993. Prior to 1993 Mr. Shapiro was an attorney in private practice.
- --------
(1) Interested person, as defined in the Investment Company Act of 1940, of
the Company.
(2) The Officers of the Company are officers of certain other investment
companies for which the Investment Adviser or FAM acts as investment
adviser.
The following table sets forth for the fiscal year ended December 31, 1996,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Company) advised by the Investment Adviser
and its affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested
Directors:
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED COMPANY AND
COMPENSATION AS PART OF MLAM/FAM ADVISED
NAME OF DIRECTOR FROM COMPANY COMPANY EXPENSE FUNDS PAID TO DIRECTORS(1)
---------------- ------------ --------------------- --------------------------
<S> <C> <C> <C>
Walter Mintz(1)......... $20,000 NONE $164,000
Melvin R. Seiden(1)..... $20,000 NONE $164,000
Stephen B. Swensrud(1).. $17,500 NONE $154,250
Joe Grills(1)........... $20,000 NONE $164,000
Robert S. Salomon,
Jr.(1)................. $18,750 NONE $187,167
</TABLE>
- --------
(1) The Directors serve on the boards of other MLAM/FAM Advised Funds as
follows: Mr. Grills (18 registered investment companies consisting of 37
portfolios); Mr. Mintz (18 registered investment companies consisting of
37 portfolios); Mr. Salomon (18 registered investment companies consisting
of 37 portfolios); Mr. Seiden (18 registered investment companies
consisting of 38 portfolios); and Mr. Swensrud (24 registered investment
companies consisting of 52 portfolios).
13
<PAGE>
Mr. Zeikel and the officers of the Company owned on March 31, 1997 in the
aggregate less than 1% of the outstanding Common Stock of Merrill Lynch & Co.,
Inc. The Company has an Audit Committee consisting of all of the directors of
the Company who are not interested persons of the Company.
Pursuant to the terms of the Investment Advisory Agreements, the Investment
Adviser pays all compensation of officers and employees of the Company as well
as the fees of all directors of the Company who are affiliated persons of
Merrill Lynch & Co., Inc. or its subsidiaries. The fees payable by the Company
to non-interested directors are $5,000 per year plus $1,250 per quarterly
meeting of the Board of Directors attended, $5,000 per year for serving on the
Audit Committee of the Board of Directors plus $1,250 per meeting of the Audit
Committee attended if such meeting is held on a day other than a day on which
the Board of Directors meets, and reimbursement of out-of-pocket expenses. For
the year ended December 31, 1996, such fees and expenses aggregated $88,545.
14
<PAGE>
INVESTMENT ADVISORY ARRANGEMENTS
The Company has entered into seven separate investment advisory agreements
(the "Investment Advisory Agreements") relating to the Funds with the
Investment Adviser, which is a wholly owned subsidiary of Merrill Lynch & Co.,
Inc. The principal business address of the Investment Adviser is 800 Scudders
Mill Road, Plainsboro, New Jersey 08536. The Investment Adviser and FAM
currently act as the investment adviser to over 110 other registered
investment companies.
The principal executive officers and directors of the Investment Adviser are
Arthur Zeikel, President; Terry K. Glenn, Executive Vice President; Vincent R.
Giordano, Senior Vice President; Elizabeth Griffin, Senior Vice President;
Norman R. Harvey, Senior Vice President; Michael J. Hennewinkel, Senior Vice
President; N. John Hewitt, Senior Vice President; Philip L. Kirstein, Senior
Vice President, General Counsel, Director and Secretary; Ronald M. Kloss,
Senior Vice President and Controller; Richard L. Reller, Senior Vice
President; Stephen M. M. Miller, Senior Vice President; Joseph T. Monagle,
Senior Vice President; Michael L. Quinn, Senior Vice President; Gerald M.
Richard, Senior Vice President and Treasurer; Ronald L. Welburn, Senior Vice
President; and Anthony Wiseman, Senior Vice President.
Securities held by any Fund may also be held by other funds for which the
Investment Adviser or FAM acts as an adviser or by investment advisory clients
of the Investment Adviser. Because of different investment objectives or other
factors, a particular security may be bought for one or more clients when one
or more clients are selling the same security. If purchases or sales of
securities for any Fund or other funds for which the Investment Adviser or FAM
acts as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Investment Adviser or FAM during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
Advisory Fee. As compensation for its services to the Company and its Funds,
the Investment Adviser receives a fee from the Company at the end of each
month at an annual rate of 0.75% of the average daily net assets of the Equity
Growth Fund and International Equity Focus Fund, 0.65% of the average daily
net assets of each of the Natural Resources Focus Fund and Global Strategy
Focus Fund, 0.55% of the average daily net assets of the American Balanced
Fund, 0.50% of the average daily net assets of the Domestic Money Market Fund
and Government Bond Fund, 0.60% of the average daily net assets of the Basic
Value Focus Fund, Global Bond Focus Fund and Global Utility Focus Fund, 1.00%
of the average daily net assets of the Developing Capital Markets Focus Fund,
0.30% of the average daily net assets of the Index 500 Fund and at the
following annual rates with respect to the other Funds:
RESERVE ASSETS FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<CAPTION>
ADVISORY
FEE
--------
<S> <C>
Not exceeding $500 million........................................ 0.500%
In excess of $500 million but not exceeding $750 million.......... 0.425%
In excess of $750 million but not exceeding $1 billion............ 0.375%
In excess of $1 billion but not exceeding $1.5 billion............ 0.350%
In excess of $1.5 billion but not exceeding $2 billion............ 0.325%
In excess of $2 billion but not exceeding $2.5 billion............ 0.300%
In excess of $2.5 billion......................................... 0.275%
</TABLE>
15
<PAGE>
QUALITY EQUITY FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<S> <C>
Not exceeding $250 million.......................................... 0.500%
In excess of $250 million but not exceeding $300 million............ 0.450%
In excess of $300 million but not exceeding $400 million............ 0.425%
In excess of $400 million........................................... 0.400%
</TABLE>
PRIME BOND FUND AND HIGH CURRENT INCOME FUND
Portion of aggregate average daily value of net assets of both Funds:
<TABLE>
<CAPTION>
ADVISORY FEE
-----------------------
HIGH CURRENT PRIME BOND
INCOME FUND FUND
------------ ----------
<S> <C> <C>
Not exceeding $250 million............................ 0.55% 0.50%
In excess of $250 million but not more than $500 mil-
lion................................................. 0.50% 0.45%
In excess of $500 million but not more than $750 mil-
lion................................................. 0.45% 0.40%
In excess of $750 million............................. 0.40% 0.35%
</TABLE>
These fee rates are applied to the average daily net assets of each Fund,
with the reduced rates shown below applicable to portions of each Fund to the
extent that the aggregate of the average daily net assets of the combined Fund
exceed $250 million, $300 million, $400 million and $800 million (each such
amount being a "breakpoint level"). The portion of the assets of a Fund to
which the rate at each breakpoint level applies will be determined on a
"uniform percentage" basis. The uniform percentage applicable to a breakpoint
level is determined by dividing the amount of the aggregate of the average
daily net assets of the combined Fund that falls within that breakpoint level
by the aggregate of the average daily net assets of the combined Fund. The
amount of the fee for a Fund at each breakpoint level is determined by
multiplying the average daily net assets of that Fund by the uniform
percentage applicable to that breakpoint level and multiplying the product by
the advisory fee rate.
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") entered
into two reimbursement agreements, dated April 30, 1985 and February 11, 1992
(the "Reimbursement Agreements"), that provide that the expenses paid by each
Fund (excluding interest, taxes, brokerage fees and commissions and
extraordinary charges such as litigation costs) will be limited to 1.25% of
its average net assets. Any expenses in excess of this percentage will be
reimbursed to the Fund by the Investment Adviser which, in turn, will be
reimbursed by MLLA. The Reimbursement Agreements may be amended or terminated
by the parties thereto upon prior written notice to the Company. For the
fiscal year ended December 31, 1994, the Investment Adviser earned fees of
$16,313,767 from the Company and reimbursed $8,915 for the Developing Capital
Markets Focus Fund, $55,475 for the International Bond Fund (now part of the
Global Bond Focus Fund) and $50,942 for the Government Bond Fund. For the
fiscal year ended December 31, 1995, the Investment Adviser earned fees of
$21,376,742 and reimbursed $49,477 for the Developing Capital Markets Focus
Fund, $190,005 for the Government Bond Fund, and $112,261 for the
International Bond Fund (now part of the Global Bond Focus Fund). Except to
the extent required pursuant to the aforementioned agreements, the Investment
Adviser does not intend to reimburse the Global Bond Focus Fund for such
Fund's operating expenses. For the fiscal year ended December 31, 1996, the
Investment Adviser earned fees of $765,718 for the Developing Capital Markets
Focus Fund of which $52,388 was voluntarily waived, $297,926 for the
Government Bond Fund of which $264,214 was voluntarily waived, and $1,638 for
the Index 500 Fund, all of which was voluntarily waived. In addition, the
Investment Adviser has also reimbursed the Index 500 Fund $1,651 in additional
expenses.
The Investment Advisory Agreements relating to the Company's Funds, unless
earlier terminated as described below, will continue in effect from year to
year if approved annually (a) by the Board of Directors of the Company or by a
majority of the outstanding shares of the respective Funds, and (b) by a
majority of the directors who are not parties to such contracts or interested
persons (as defined in the Investment Company Act of 1940) of any such party.
The Board of Directors of the Company approved the continuation of the
Investment
16
<PAGE>
Advisory Agreements relating to all Funds, other than the Index 500 Fund, at a
meeting held on March 26, 1997. The Board of Directors of the Company approved
the Investment Advisory Agreement relating to the Index 500 Fund at a meeting
held on October 16, 1996. The Investment Advisory Agreements are not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party or by the vote of the shareholders of the
respective Funds.
The Investment Adviser has entered into 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 has entered into administrative services agreements
with certain Insurance Companies, including MLLIC and ML of New York, pursuant
to which the Investment Adviser compensates such companies for administrative
responsibilities relating to the Company which are performed by such Insurance
Companies.
Payment of Expenses. The Investment Advisory Agreements obligate the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Company connected with investment and economic research, trading and
investment management of the Funds, as well as the fees of all directors of
the Company who are affiliated persons of Merrill Lynch & Co., Inc. or any of
its subsidiaries. Each Fund will pay all other expenses incurred in its
operation, including a portion of the Company's general administrative
expenses allocated on the basis of the Fund's asset size. Expenses that will
be borne directly by the Funds include redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, expenses of registering
the shares under federal and state securities laws, pricing costs (including
the daily calculation of net asset value), interest, certain taxes, charges of
the Custodian and Transfer Agent and other expenses attributable to a
particular Fund. Expenses which will be allocated on the basis of size of the
respective Funds include directors' fees, legal expenses, state franchise
taxes, auditing services, costs of printing proxies and stock certificates,
Securities and Exchange Commission fees, accounting costs and other expenses
properly payable by the Company and allocable on the basis of size of the
respective Funds. Accounting services are provided for the Company by the
Investment Adviser, and the Company reimburses the Investment Adviser for its
costs in connection with such services. For the fiscal year ended December 31,
1996, the amount of such reimbursement was $903,975. Depending upon the nature
of the lawsuit, litigation costs may be directly applicable to the Funds or
allocated on the basis of the size of the respective Funds. The Board of
Directors has determined that this is an appropriate method of allocation of
expenses.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus, since the net investment income of the
Domestic Money Market and Reserve Assets Funds (including realized gains and
losses on its portfolio securities) is declared as a dividend each time the
net income of the Funds are determined (see "Dividends, Distributions and
Taxes"), the net asset value per share of the Funds normally remains at $1.00
per share immediately after each such determination and dividend declaration.
The Board of Directors of the Company expects that the Domestic Money Market
and Reserve Assets Funds will have a positive net income at the time of each
determination. If for any reason the net income of either Fund is a negative
amount (i.e., net realized and unrealized losses and expenses exceed interest
income), that Fund will reduce the number of its outstanding shares. This
reduction will be effected by having the Separate Accounts of the Insurance
Companies proportionately contribute to the capital of the Fund the necessary
shares that represent the amount of the excess upon such determination. It is
anticipated that the Insurance Companies will agree to such contribution in
these circumstances. Any such contribution will be treated as a negative
dividend for purposes of the Net Investment Factor under the Contracts
described in the Prospectus for the Contracts. See "Dividends, Distributions
and Taxes" for a discussion of the tax effect of such a reduction. This
procedure will permit the net asset value per share of the Domestic Money
Market and Reserve Assets Funds to be maintained at a constant value of $1.00
per share.
17
<PAGE>
If in the view of the Board of Directors of the Company it is inadvisable to
continue the practice of maintaining the net asset value of the Domestic Money
Market and Reserve Assets Funds at $1.00 per share, the Board of Directors of
the Company reserves the right to alter the procedure. The Company will notify
the Insurance Companies of any such alteration.
Each of the International Equity Focus Fund, Global Utility Focus Fund,
Global Bond Focus Fund and Developing Capital Markets Focus Fund may invest a
substantial portion of its assets in foreign securities which are traded on
days on which such Fund's net asset value is not computed. On any such day,
shares of such a Fund may not be purchased or redeemed since shares of a Fund
may only be purchased or redeemed on days on which the Fund's net asset value
is computed.
As set forth in the Prospectus, securities held by the Domestic Money Market
and Reserve Assets Funds with a remaining maturity of 60 days or less are
valued on an amortized cost basis, unless particular circumstances dictate
otherwise. Under this method of valuation, the security is initially valued at
cost on the date of purchase (or in the case of securities purchased with more
than 60 days remaining to maturity, the market value on the 61st day prior to
maturity); and thereafter the Domestic Money Market and Reserve Assets Funds
assume a constant proportionate amortization in value until maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. For purposes of this method of valuation,
the maturity of a variable rate certificate of deposit is deemed to be the
next coupon date on which the interest rate is to be adjusted. If, due to the
impairment of the creditworthiness of the issuer of a security held by either
Fund or to other factors with respect to such security, the fair value of such
security is not fairly reflected through the amortized cost method of
valuation, such security will be valued at fair value as determined in good
faith by the Board of Directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
If the securities in which a particular Fund of the Company invests are
traded primarily in the over-the-counter market, where possible, the Fund will
deal directly with the dealers who make a market in the securities involved,
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principals for their own
account. On occasions, securities may be purchased directly from the issuer.
Bonds and money market securities are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. The cost
of executing portfolio securities transactions of each Fund will primarily
consist of brokerage commissions or underwriter or dealer spreads. Under the
Investment Company Act of 1940, persons affiliated with the Company are
prohibited from dealing with the Company as a principal in the purchase and
sale of the Company's portfolio securities unless an exemptive order allowing
such transactions is obtained from the Securities and Exchange Commission.
Since over-the-counter transactions are usually principal transactions,
affiliated persons of the Company, including Merrill Lynch Government
Securities Inc. ("GSI"), Merrill Lynch Money Markets Inc. ("MMI") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), may not serve as
the Company's dealer in connection with such transactions except pursuant to
exemptive orders from the Securities and Exchange Commission, such as the one
described below. However, affiliated persons of the Company may serve as its
broker in over-the-counter transactions conducted on an agency basis, subject
to the Company's policy of obtaining best price and execution. The Company may
not purchase securities from any underwriting syndicate of which Merrill Lynch
is a member except in accordance with rules and regulations under the
Investment Company Act of 1940.
The Securities and Exchange Commission has issued an exemptive order
permitting the Company to conduct principal transactions with respect to the
Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S.
Government and government agency securities, and certain other money market
securities, subject to a number of conditions, including conditions designed
to insure that the prices to the Funds available from GSI and MMI are equal to
or better than those available from other sources. GSI and MMI have informed
the Company that they will in no way, at any time, attempt to influence or
control the activities of the Company or the Investment Adviser in placing
such principal transactions. The exemptive order allows GSI and MMI to receive
a dealer spread on any transaction with the Company no greater than their
customary dealer spreads for
18
<PAGE>
transactions of the type involved. Certain court decisions have raised
questions as to whether investment companies should seek to "recapture"
brokerage commissions and underwriting and dealer spreads by effecting their
purchases and sales through affiliated entities. In order to effect such an
arrangement, the Company would be required to seek an exemption from the
Investment Company Act so that it could engage in principal transactions with
affiliates. The Board of Directors has considered the possibilities of seeking
to recapture spreads for the benefit of the Company and, after reviewing all
factors deemed relevant, has made a determination not to seek such recapture
at this time. The Board will reconsider this matter from time to time. The
Company will take such steps as may be necessary to effect recapture,
including the filing of applications for exemption under the Investment
Company Act of 1940, if the Directors should determine that recapture is in
the best interests of the Company or otherwise required by developments in the
law.
While the Investment Adviser seeks to obtain the most favorable net results
in effecting transactions in the Funds' portfolio securities, dealers who
provide supplemental investment research of the Investment Adviser may receive
orders for transactions by the Funds. Such supplemental research services
ordinarily consist of assessments and analysis of the business or prospects of
a company, industry or economic sector. If, in the judgement of the Investment
Adviser, a particular Fund or Funds will be benefited by such supplemental
research services, the Investment Adviser is authorized to pay spreads or
commissions to brokers or dealers furnishing such services which are in excess
of spreads or commissions which another broker or dealer may charge for the
same transaction. Information so received will be in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreements. The expenses of the Investment Adviser
will not necessarily be reduced as a result of the receipt of such
supplemental information. In some cases, the Investment Adviser may use such
supplemental research in providing investment advice to its other investment
advisory accounts. For the fiscal year ended December 31, 1995, the Company
paid brokerage commissions of $5,789,335, of which $264,999 was paid to
Merrill Lynch. For the fiscal year ended December 31, 1996, the Company paid
brokerage commissions of $6,656,814 of which $266,405 was paid to Merrill
Lynch.
PORTFOLIO TURNOVER
Each Fund has a different expected rate of portfolio turnover; however, rate
of portfolio turnover will not be a limiting factor when management of the
Company deems it appropriate to purchase or sell securities for a Fund.
Because of the short-term nature of the securities in which the Domestic Money
Market and Reserve Assets Funds will invest, and because such Funds'
investments will be constantly changing in response to market conditions, no
portfolio turnover rate may be accurately stated for the Domestic Money Market
and Reserve Assets Funds.
Below are portfolio turnover rates for each of the Funds for the fiscal
years ended December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
American Balanced Fund..................................... 236.50% 38.40%
Basic Value Focus Fund..................................... 68.41% 74.10%
Developing Capital Markets Focus Fund...................... 87.33% 62.53%
Equity Growth Fund......................................... 80.84% 96.79%
Global Bond Focus Fund*.................................... 267.13% 132.57%
Global Strategy Focus Fund*................................ 173.44% 27.23%
Global Utility Focus Fund.................................. 11.39% 11.05%
Government Bond Fund*...................................... 21.23% 45.39%
High Current Income Fund................................... 48.92% 41.60%
International Equity Focus Fund............................ 49.87% 100.02%
Natural Resources Focus Fund............................... 31.11% 30.15%
Prime Bond Fund............................................ 91.88% 90.12%
Quality Equity Fund........................................ 88.30% 140.32%
Index 500 Fund............................................. .04%** --
</TABLE>
19
<PAGE>
- --------
* In connection with a reorganization on December 6, 1996 conducted by the
Company with respect to certain of its Funds, the Company, with the
approval of the affected shareholders of the Funds, caused (i) Global Bond
Focus Fund (a) to acquire substantially all of the assets and assume
substantially all the liabilities of the International Bond Fund, a
separate Fund of the Company, (b) to implement a change in its investment
objective and policies from seeking high current income from a global
portfolio of fixed income securities, including non-investment grade
securities, to seeking a high total investment return by investing in a
global portfolio of investment grade fixed income securities and (c) to
change its name from the World Income Focus Fund to its current name; (ii)
the Government Bond Fund (x) to implement a change in its investment
objective so that the Fund may invest in any debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
without regard to remaining maturity and (y) to change its name from the
Intermediate Government Bond Fund to its current name; and (iii) the Global
Strategy Focus Fund to acquire substantially all of the assets and assume
substantially all the liabilities of the Flexible Strategy Fund, a separate
Fund of the Company. As a result, the portfolio turnover rates for the
fiscal years set forth in the table for the Global Bond Focus Fund, the
Global Strategy Focus Fund and the Government Bond Fund may not be
indicative of future portfolio turnover rates of such Funds.
** For the period from December 13, 1996 (commencement of operations) to
December 31, 1996.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the
New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed (other than customary weekend
and holiday closings), for any period during which an emergency exists as
defined by the Securities and Exchange Commission as a result of which
disposal of portfolio securities or determination of the net asset value of
each Fund is not reasonably practicable, and for such other periods as the
Securities and Exchange Commission may by order permit for the protection of
shareholders of each Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Dividends, Distributions and Taxes" in the Prospectus.
FEDERAL INCOME TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), each Fund
of the Company will be treated as a separate corporation for federal income
tax purposes and, thus, each Fund is required to satisfy the qualification
requirements under the Code for treatment as a regulated investment company.
There will be no offsetting of capital gains and losses among the Funds. Each
Fund intends to continue to qualify as a regulated investment company under
certain provisions of the Code. Under such provisions, a Fund will not be
subject to federal income tax on such part of its net ordinary income and net
realized capital gains which it distributes to shareholders. To qualify for
treatment as a regulated investment company, a Fund must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or other disposition of securities and derive less than 30% of its gross
income in each taxable year from the gains (without deduction for losses) from
the sale or other disposition of stocks, securities, certain options, futures
or forward contracts and certain foreign currencies held for less than three
months. In addition, the Code requires that each Fund meet certain
diversification requirements, including the requirement that not more than 25%
of the value of a Fund's total assets be invested in the securities (other
than U.S. Government securities or the securities of other regulated
investment companies) of any one issuer.
20
<PAGE>
Each of the Company's Funds, including the Natural Resources Focus Fund,
intends to comply with the above-described requirements.
On occasion, some amount of the distributions of the Domestic Money Market
Fund or the Reserve Assets Fund for a fiscal year may constitute a return of
capital, in which case such amount would be applied against and reduce the
Separate Account's tax basis in shares of such Fund. If such amount were to
exceed the Separate Account's tax basis for shares of the Domestic Money
Market Fund or the Reserve Assets Fund, the excess would be treated as gain
from the sale or exchange of such shares.
On occasion the net income of the Domestic Money Market Fund or the Reserve
Assets Fund may be a negative amount as a result of a net decline in the value
of the portfolio securities of the Fund which is in excess of the interest
earned. Consequently, the Fund will reduce the number of its outstanding
shares to reflect the negative net income. The adjustment may result in gross
income to shareholders in excess of the net dividend credited to such
shareholders for a period. In such a case, such shareholders' tax basis in the
shares of the Domestic Money Market Fund or the Reserve Assets Fund may be
adjusted to reflect the difference between taxable income and net dividends
actually distributed. Such difference may be realized as a capital loss when
the shares are liquidated.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and these
Regulations are subject to change by legislative or administrative action, and
such change may apply retroactively.
DISTRIBUTION ARRANGEMENTS
The Company has entered into a distribution agreement (the "Distribution
Agreement") with Merrill Lynch Funds Distributor, Inc. with respect to the
sale of the Company's shares to the Distributor for resale to Insurance
Companies' accounts. Such shares will be sold at their respective net asset
values and therefore will involve no sales charge. The Distributor is a wholly
owned subsidiary of the Investment Adviser. The continuation of the
Distribution Agreement was approved by the Company's Board of Directors at a
meeting held on March 26, 1997 and will continue in effect until June 30,
1998.
The Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreements described above.
PERFORMANCE DATA
From time to time the average annual total return and other total return
data, as well as yield, of one or more of the Company's Funds may be included
in advertisements or information furnished to present or prospective Contract
Owners. Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. Average
annual total return and yield are determined in accordance with formulas
specified by the Securities and Exchange Commission. In connection with its
reorganization on December 6, 1996, the Global Bond Focus Fund (i) acquired
substantially all of the assets and assumed substantially all the liabilities
of the International Bond Fund, a separate Fund of the Company, (ii)
implemented a change in its investment objective and policies from seeking
high current income from a global portfolio of fixed income securities,
including non-investment grade securities, to seeking a high total investment
return by investing in a global portfolio of investment grade fixed income
securities and (iii) changed its name from the World Income Focus Fund to its
current name. For the period from the commencement of the World Income Focus
Fund's operations through its reorganization on December 6, 1996, the
portfolio of the Fund included debt securities rated below investment grade
(i.e., junk bonds). On December 6, 1996, the Government Bond Fund (i)
implemented a change in its investment objective so that the Fund may invest
in any debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities without regard to remaining maturity and (ii)
changed its name from the Intermediate Government Bond Fund to its current
name.
21
<PAGE>
For the period from the commencement of the Fund's operations through December
6, 1996, the portfolio of the Intermediate Government Bond Fund consisted
primarily of intermediate-term debt securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with a maximum maturity not
to exceed fifteen years. As a result of the foregoing changes in the
investment objective of each of the Global Bond Focus Fund and the Government
Bond Fund, the performance information set forth herein and in the Prospectus
for the period prior to December 6, 1996 may not be indicative of future
performance of each Fund.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
The Reserve Assets Fund normally computes its annualized yield by
determining the net change for a seven-day base period, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance
of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by
365 and then dividing by seven. Under this calculation, the yield does not
reflect realized and unrealized gains and losses on portfolio securities. The
Fund may also include its yield in advertisements, calculated in the same
manner as set forth above but including realized and unrealized gains and
losses. The Securities and Exchange Commission also permits the calculation of
a standardized effective or compounded yield. This is computed by compounding
the unannualized base period return by dividing the base period by seven,
adding one to the quotient, raising the sum to the 365th power, and
subtracting one from the result. This compounded yield calculation also
excludes realized or unrealized gains or losses on portfolio securities.
Set forth below is average annual total return information for the shares of
each of the Company's Funds, other than the Reserve Assets Fund and Domestic
Money Market Fund. The total return quotations may be of limited use for
comparative purposes because they do not reflect charges imposed at the
Separate Account level which, if included, would decrease total return.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD
----------------- -----------------
<S> <C> <C>
PRIME BOND FUND:
One Year Ended December 31, 1996............ 2.21% $1,022.10
Five Years Ended December 31, 1996.......... 7.04 1,404.90
Ten Years Ended December 31, 1996........... 7.68 2,095.50
HIGH CURRENT INCOME FUND:
One Year Ended December 31, 1996............ 11.27% $1,112.70
Five Years Ended December 31, 1996.......... 12.21 1,778.70
Ten Years Ended December 31, 1996........... 11.42 2,948.00
QUALITY EQUITY FUND:
One Year Ended December 31, 1996............ 17.90% $1,179.00
Five Years Ended December 31, 1996.......... 10.94 1,680.20
Ten Years Ended December 31, 1996........... 12.50 3,246.10
EQUITY GROWTH FUND:
One Year Ended December 31, 1996............ 8.11% $1,081.10
Five Years Ended December 31, 1996.......... 11.38 1,713.80
Ten Years Ended December 31, 1996........... 7.83 2,124.80
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END
$1,000 INVESTMENT OF THE PERIOD
----------------- -----------------
<S> <C> <C>
INDEX 500 FUND:
December 13, 1996 (commencement of opera-
tions)*
thru Year Ending December 31, 1996......... 1.70% $1,017.00
NATURAL RESOURCES FOCUS FUND:
One Year Ended December 31, 1996........... 13.52% $1,135.20
Five Years Ended December 31, 1996......... 7.76 1,452.80
Inception* Through December 31, 1996....... 5.35 1,564.10
AMERICAN BALANCED FUND:
One Year Ended December 31, 1996........... 9.73% $1,097.30
Five Years Ended December 31, 1996......... 8.79 1,524.10
Inception* Through December 31, 1996....... 10.12 2,288.30
GLOBAL STRATEGY FOCUS FUND:
One Year Ended December 31, 1996........... 13.17% $1,131.70
Inception* Through December 31, 1996....... 9.21 1,532.00
BASIC VALUE FOCUS FUND:
One Year Ended December 31, 1996........... 20.69% $1,206.90
Inception* Through December 31, 1996....... 16.32 1,697.60
GLOBAL BOND FOCUS FUND:
One Year Ended December 31, 1996........... 8.02% $1,080.20
Inception* Through December 31, 1996....... 7.27 1,278.70
GLOBAL UTILITY FOCUS FUND:
One Year Ended December 31, 1996........... 12.96% $1,129.60
Inception* Through December 31, 1996....... 9.47 1,372.90
INTERNATIONAL EQUITY FOCUS FUND:
One Year Ended December 31, 1996........... 6.62% $1,066.20
Inception* Through December 31, 1996....... 6.51 1,247.20
DEVELOPING CAPITAL MARKETS FOCUS FUND:
One Year Ended December 31, 1996........... 10.59% $1,105.90
Inception* Through December 31, 1996....... 1.49 1,040.30
GOVERNMENT BOND FUND:
One Year Ended December 31, 1996........... 2.86% $1,028.60
Inception* Through December 31, 1996....... 7.15 1,202.30
</TABLE>
- --------
* Inception for Natural Resources Focus Fund is June 1, 1988; American
Balanced Fund is June 1, 1988; and Global Strategy Focus Fund is February
28, 1992; Basic Value Focus Fund is July 1, 1993; Global Bond Focus Fund is
July 1, 1993; Global Utility Focus Fund is July 1, 1993; International
Equity Focus Fund is July 1, 1993; Developing Capital Markets Focus Fund is
May 2, 1994; Government Bond Fund is May 2, 1994; and Index 500 Fund is
December 13, 1996.
23
<PAGE>
ADDITIONAL INFORMATION
Under a separate agreement Merrill Lynch has granted the Company the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Company at any time, or to grant the use of such
name to any other company, and the Company has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Variable Series Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of American Balanced, Basic Value
Focus, Developing Capital Markets Focus, Domestic Money Market, Equity Growth,
Global Bond Focus, Global Strategy Focus, Global Utility Focus, Government
Bond, High Current Income, Index 500, International Equity Focus, Natural
Resources Focus, Prime Bond, Quality Equity, and Reserve Assets Funds of
Merrill Lynch Variable Series Funds, Inc. as of December 31, 1996, the related
statements of operations for the periods then ended and changes in net assets
for each of the periods in the two-year period then ended, and the financial
highlights for each of the periods presented. These financial statements and
the financial highlights are the responsibility of the Funds's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at December 31, 1996, by correspondence with the custodians and brokers
or other alternative procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of American
Balanced, Basic Value Focus, Developing Capital Markets Focus, Domestic Money
Market, Equity Growth, Global Bond Focus, Global Strategy Focus, Global
Utility Focus, Government Bond, High Current Income, Index 500, International
Equity Focus, Natural Resources Focus, Prime Bond, Quality Equity, and Reserve
Assets Funds of Merrill Lynch Variable Series Funds, Inc. as of December 31,
1996, the results of their operations, the changes in their net assets, and
the financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche llp
Princeton, New Jersey
February 21, 1997
25
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--American Balanced Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 24,000 Northrop Grumman Corp. ..... $ 1,590,745 $ 1,986,000 0.9%
22,460 United Technologies
Corp. .................... 721,552 1,482,360 0.7
------------ ------------ ------
2,312,297 3,468,360 1.6
- ---------------------------------------------------------------------------------------------------------------------
Auto & Truck 26,000 General Motors Corp. ....... 1,421,298 1,449,500 0.7
- ---------------------------------------------------------------------------------------------------------------------
Automobile Parts 61,000 +Lear Corporation........... 2,043,500 2,081,625 1.0
- ---------------------------------------------------------------------------------------------------------------------
Banking 58,500 Bank of New York, Co.,
Inc. ..................... 1,383,399 1,974,375 0.9
8,500 BankAmerica Corporation..... 869,637 847,875 0.4
18,800 Citicorp.................... 1,441,474 1,936,400 0.9
------------ ------------ ------
3,694,510 4,758,650 2.2
- ---------------------------------------------------------------------------------------------------------------------
Building & Construction 35,900 Oakwood Homes Corp. ........ 817,893 821,213 0.4
- ---------------------------------------------------------------------------------------------------------------------
Building Products 59,500 Spieker Properties, Inc. ... 1,580,921 2,142,000... 1.0
- ---------------------------------------------------------------------------------------------------------------------
Chemicals 25,000 +FMC Corporation............ 1,771,815 1,753,125 0.8
33,000 PPG Industries, Inc. ....... 1,634,499 1,852,125 0.9
------------ ------------ ------
3,406,314 3,605,250 1.7
- ---------------------------------------------------------------------------------------------------------------------
Computer 24,000 +Compaq Computer
Corporation............... 1,774,301 1,782,000 0.8
- ---------------------------------------------------------------------------------------------------------------------
Computer Services 29,000 +cisco Systems, Inc. ....... 1,300,503 1,845,125 0.9
12,000 International Business
Machines Corp. ........... 1,318,751 1,812,000 0.8
------------ ------------ ------
2,619,254 3,657,125 1.7
- ---------------------------------------------------------------------------------------------------------------------
Computer Software 39,750 +Oracle Corp. .............. 1,251,044 1,654,594 0.8
- ---------------------------------------------------------------------------------------------------------------------
Computer Technology 41,000 +Gulfstream Aerospace
Corporation............... 1,012,865 994,250 0.5
- ---------------------------------------------------------------------------------------------------------------------
Congolomerates 12,000 AlliedSignal Inc. .......... 882,039 804,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
Consumer Goods 12,000 Philip Morris Companies,
Inc. ..................... 1,190,498 1,351,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
Diversified 43,500 Corning, Inc. .............. 1,231,615 2,011,875 0.9
- ---------------------------------------------------------------------------------------------------------------------
Electric & Gas 83,100 Edison International........ 1,548,607 1,651,612 0.8
- ---------------------------------------------------------------------------------------------------------------------
Electronic Equipment 15,000 General Electric Co. ....... 1,161,154 1,483,125 0.7
9,400 Linear Technology
Corporation............... 385,494 411,250 0.2
------------ ------------ ------
1,546,648 1,894,375 0.9
- ---------------------------------------------------------------------------------------------------------------------
Engineering & Construction 42,400 Foster Wheeler Corp. ....... 1,786,990 1,574,100 0.7
- ---------------------------------------------------------------------------------------------------------------------
Financial Services 36,500 American Express Company.... 1,707,587 2,062,250 1.0
49,000 First Data Corp. ........... 1,732,206 1,788,500 0.8
------------ ------------ ------
3,439,793 3,850,750 1.8
- ---------------------------------------------------------------------------------------------------------------------
Food 52,000 Heinz (H.J.) Company........ 1,702,574 1,859,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
Hospital Management 62,600 +Health Management
Associates, Inc. (Class
A)........................ 1,414,154 1,408,500 0.7
- ---------------------------------------------------------------------------------------------------------------------
Industrial Equipment 34,000 +American Standard
Companies, Inc. .......... 1,109,533 1,300,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
Insurance 16,000 Aetna Inc. ................. 1,190,736 1,280,000 0.6
33,300 Allstate Corp. ............. 1,363,042 1,927,238 0.9
28,000 UNUM Corporation............ 1,787,306 2,023,000 1.0
------------ ------------ ------
4,341,084 5,230,238 2.5
- ---------------------------------------------------------------------------------------------------------------------
Leisure/Tourism 64,000 Brunswick Corporation....... 1,583,557 1,536,000 0.7
11,105 TCI Pacific Communications
(Convertible Preferred)... 1,054,744 1,007,779 0.5
------------ ------------ ------
2,638,301 2,543,779 1.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--American Balanced Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Machinery 49,900 Deere & Co. ................ $ 2,076,934 $ 2,027,188 1.0%
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas 44,000 Enron Corp. ................ 1,698,696 1,897,500 0.9
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas Pipelines 22,000 IMC Global, Inc............. 852,715 860,750 0.4
- ---------------------------------------------------------------------------------------------------------------------
Oil Services 60,300 Dresser Industries, Inc..... 1,197,521 1,869,300 0.9
- ---------------------------------------------------------------------------------------------------------------------
Paper 20,300 Kimberly-Clark
Corporation............... 1,560,117 1,933,575 0.9
- ---------------------------------------------------------------------------------------------------------------------
Petroleum 35,400 Pennzoil Co................. 1,462,787 2,000,100 0.9
49,000 Unocal Corp. ............... 1,649,549 1,990,625 0.9
------------ ------------ ------
3,112,336 3,990,725 1.8
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 34,900 Abbott Laboratories......... 1,110,169 1,771,175 0.8
23,900 Merck & Co., Inc. .......... 734,284 1,894,075 0.9
------------ ------------ ------
1,844,453 3,665,250 1.7
- ---------------------------------------------------------------------------------------------------------------------
Railroads 18,500 Burlington Northern Santa Fe
Inc....................... 1,499,672 1,597,937 0.8
- ---------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trust 41,300 Prentiss Properties Trust... 844,062 1,032,500 0.5
- ---------------------------------------------------------------------------------------------------------------------
Recreation 58,746 +Viacom, Inc. (Class B)..... 2,151,340 2,048,767 1.0
- ---------------------------------------------------------------------------------------------------------------------
Retail 48,000 Sears, Roebuck & Co. ....... 2,003,303 2,214,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
Retail--Drug Stores 32,760 Rite Aid Corporation........ 976,203 1,302,210 0.6
- ---------------------------------------------------------------------------------------------------------------------
Retail Specialty 67,500 +Toys 'R' Us, Inc. ......... 2,100,037 2,025,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
Scientific Equipment 25,000 Fisher Scientific
International, Inc. ...... 783,673 1,178,125 0.6
- ---------------------------------------------------------------------------------------------------------------------
Software--Computer 45,000 +BMC Software, Inc. ........ 1,677,378 1,861,875 0.9
- ---------------------------------------------------------------------------------------------------------------------
Steel 52,000 AK Steel Holding Corp. ..... 2,145,624 2,060,500 1.0
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications 75,000 +AirTouch Communications,
Inc. ..................... 2,147,192 1,893,750 0.9
20,000 Bell Atlantic Corp. ........ 1,043,470 1,295,000 0.6
------------ ------------ ------
3,190,662 3,188,750 1.5
- ---------------------------------------------------------------------------------------------------------------------
Travel & Lodging 60,000 Carnival Corp. (Class A).... 1,697,029 1,980,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
Utilities--Gas 18,000 El Paso Natural Gas
Company................... 882,267 909,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks 77,060,055 89,537,748 42.2
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount US Government & Agency Obligations
---------------------------------------------------------------------------------------------------------------------
US Government & Federal National
Agency Obligations Mortgage Association:
$ 4,352,547 6.00% due 6/01/2001......... 4,309,022 4,299,500 2.0
9,546,755 6.00% due 6/06/2001......... 9,449,796 9,416,979 4.5
5,818,867 6.00% due 2/01/2004......... 5,749,767 5,729,765 2.7
US Treasury Notes:
18,550,000 5.00% due 1/31/1998......... 18,386,238 18,419,593 8.7
24,225,000 6.25% due 4/30/2001......... 24,540,891 24,278,053 11.4
30,000,000 7.25% due 5/15/2004......... 31,727,344 31,565,700 14.9
24,075,000 7.00% due 7/15/2006......... 25,060,930 25,011,758 11.8
- ---------------------------------------------------------------------------------------------------------------------
Total US Government & Agency
Obligations 119,223,988 118,721,348 56.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--American Balanced Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial Paper* $ 262,000 General Motors Acceptance
Corp., 7.50% due
1/02/1997................. $ 261,891 $ 261,891 0.1%
2,029,000 Preferred Receivable Funding
Corp., 5.65% due
1/15/1997................. 2,024,223 2,024,223 1.0
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 2,286,114 2,286,114 1.1
- ---------------------------------------------------------------------------------------------------------------------
Total Investments........... $198,570,157 210,545,210 99.3
============
Other Assets Less
Liabilities............... 1,501,804 0.7
------------ ------
Net Assets.................. $212,047,014 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
-28-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Basic Value Focus Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Low Price to Book Value
- ---------------------------------------------------------------------------------------------------------------------
Metals--Non Ferrous 375,000 ASARCO Inc. ................ $ 10,204,510 $ 9,328,125 1.8%
Software--Computer 400,000 +Advanced Micro Devices,
Inc....................... 5,528,488 10,300,000 2.0
Banking 125,000 Bankers Trust New York
Corp. .................... 7,946,060 10,781,250 2.0
Home--Builders 350,000 +Beazer Homes USA, Inc.
(b)....................... 5,392,282 6,475,000 1.2
Retail 1,700,000 +Charming Shoppes, Inc. .... 7,011,954 8,500,000 1.6
Savings & Loans 753,100 Greater N.Y. Savings
Bank (b).................. 7,674,112 10,072,713 1.9
Conglomerates 808,200 Hanson PLC (ADR) (a)........ 6,795,411 5,455,350 1.0
Retail 1,200,000 Hechinger Company
(Class A)................. 5,038,275 2,400,000 0.5
Entertainment 105,900 +ITT Corporation............ 4,710,982 4,593,412 0.9
Software 622,700 +Mentor Graphics
Corporation............... 6,403,414 6,071,325 1.2
Airlines 800,000 +Mesa Airlines, Inc. ....... 6,790,323 5,400,000 1.0
Technology 1,150,000 +Micronics Computers,
Inc. (b).................. 4,168,442 2,228,125 0.4
Chemicals 297,700 +Millennium Chemicals
Inc. ..................... 6,093,804 5,284,175 1.0
Savings and Loans 500,000 +PFF Bancorp, Inc. ......... 5,715,000 7,312,500 1.4
Metals--Non Ferrous 116,000 Phelps Dodge Corporation.... 6,867,280 7,830,000 1.5
Computer Services 801,800 Scitex Corp. Ltd. (ADR)
(a)....................... 11,364,879 7,617,100 1.4
Beverage & Entertainment 200,000 Seagram Company
Ltd. (The)................ 6,791,149 7,750,000 1.5
Technology 150,000 +Storage Technology
Corp. .................... 5,098,314 7,143,750 1.4
Oil--Refiners 700,000 Total Petroleum Ltd. ....... 7,941,281 7,262,500 1.4
Healthcare 900,000 +Transitional Hospitals
Co. ...................... 7,924,083 8,662,500 1.6
Steel 809,300 +WHX Corp................... 8,623,208 7,182,537 1.4
------------ ------------ ------
144,083,251 147,650,362 28.1
- ---------------------------------------------------------------------------------------------------------------------
Below-Average Price/Earnings Ratio
- ---------------------------------------------------------------------------------------------------------------------
Oil--Domestic 450,000 +American Exploration
Co. ...................... 5,028,426 7,200,000 1.4
Technology 950,000 +Computervision Corp. ...... 9,196,567 8,787,500 1.7
Retail 300,000 Dillard Department Stores
Inc. ..................... 9,320,727 9,262,500 1.8
Automotive 200,000 General Motors Corp. ....... 9,267,984 11,150,000 2.1
Banking 650,000 Hibernia Corporation (Class
A)........................ 7,468,466 8,612,500 1.6
Machinery 300,000 ITT Industries Inc. ........ 6,899,739 7,350,000 1.4
Forest Products & Paper 220,000 International Paper Co. .... 8,418,780 8,882,500 1.7
Electronics 200,000 Micron Technology, Inc. .... 4,888,098 5,825,000 1.1
Auto-Related 581,000 National Auto Credit,
Inc. ..................... 5,918,046 6,972,000 1.3
Athletic Footwear 175,000 Reebok International
Ltd. ..................... 4,847,939 7,350,000 1.4
Information Processing 900,000 +Tandem Computers, Inc...... 10,279,044 12,375,000 2.4
Steel 350,000 +USX-US Steel Group......... 10,551,925 10,981,250 2.1
------------ ------------ ------
92,085,741 104,748,250 20.0
- ---------------------------------------------------------------------------------------------------------------------
Above-Average Yield
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 70,000 Bristol-Myers Squibb Co. ... 5,315,433 7,612,500 1.4
Real Estate Investment Trust 253,500 Evans Withycombe
Residential, Inc. ........ 5,128,207 5,323,500 1.0
Automotive 275,000 Ford Motor Co. ............. 8,244,320 8,765,625 1.7
Telecommunications 150,000 GTE Corporation............. 6,366,750 6,825,000 1.3
Retail 800,000 +Kmart Corporation.......... 8,463,269 8,300,000 1.6
Forest Products & Paper 300,000 Louisiana-Pacific Corp. .... 7,657,924 6,337,500 1.2
Oil--Domestic 450,000 Occidental Petroleum
Corp. .................... 9,447,997 10,518,750 2.0
Financial Services 90,000 Student Loan Marketing
Association............... 4,439,450 8,381,250 1.6
Oil--International 450,000 Yacimientos Petroliferos
Fiscales S.A. (ADR)(a).... 8,832,840 11,362,500 2.2
------------ ------------ ------
63,896,190 73,426,625 14.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Basic Value Focus Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Special Situations
- ---------------------------------------------------------------------------------------------------------------------
Environmental Services 1,025,000 +Allwaste, Inc. ............ $ 5,187,397 $ 5,253,125 1.0%
Information Processing 500,000 +Apple Computer, Inc. ...... 11,412,685 10,375,000 2.0
Household Products 400,000 Black & Decker Corporation
(The)..................... 13,217,404 12,050,000 2.3
Photography 80,000 Eastman Kodak Co. .......... 4,672,300 6,420,000 1.2
Technology 500,000 +Exabyte Corp. ............. 6,796,977 6,687,500 1.3
Health Maintenance
Organization 375,000 +Humana, Inc. .............. 7,062,358 7,171,875 1.4
Information Processing 70,000 International Business
Machines Corp............. 6,661,756 10,570,000 2.0
Semiconductors 350,000 +National Semiconductor
Corp. .................... 6,214,269 8,531,250 1.6
Medical Services 450,000 +Pharmaceutical Product
Development, Inc. ........ 7,292,590 11,250,000 2.1
Electronics 150,000 Texas Instruments Inc. ..... 7,316,356 9,562,500 1.8
Telecommunications 450,000 +US West Media Group,
Inc. ..................... 7,815,940 8,325,000 1.6
Retail 500,000 +Woolworth Corp. ........... 6,339,630 10,937,500 2.1
------------ ------------ ------
89,989,662 107,133,750 20.4
- ---------------------------------------------------------------------------------------------------------------------
Total Stocks 390,054,844 432,958,987 82.5
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
Commercial Paper* $10,000,000 Eureka Securitization, Inc.,
5.38% due 1/30/1997....... 9,955,167 9,955,167 1.9
20,045,000 General Electric Capital
Corp., 7.10% due
1/02/1997................. 20,037,093 20,037,093 3.8
10,000,000 Lehman Brothers Holdings,
Inc., 5.45% due
2/14/1997................. 9,931,875 9,931,875 1.9
10,000,000 Three Rivers Funding, Corp.,
5.60% due 1/15/1997....... 9,976,667 9,976,667 1.9
------------ ------------ ------
49,900,802 49,900,802 9.5
- ---------------------------------------------------------------------------------------------------------------------
US Government & 7,000,000 Federal Home Loan Bank,
Agency Obligations* 5.22% due 1/09/1997....... 6,990,865 6,990,865 1.3
Federal National Mortgage
Association:
10,000,000 5.24% due 2/03/1997....... 9,950,511 9,950,511 1.9
23,000,000 5.26% due 2/10/1997....... 22,862,217 22,862,217 4.4
------------ ------------ ------
39,803,593 39,803,593 7.6
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 89,704,395 89,704,395 17.1
- ---------------------------------------------------------------------------------------------------------------------
Total Investments........... $479,759,239 522,663,382 99.6
============
Other Assets Less
Liabilities............... 2,266,782 0.4
------------ ------
Net Assets.................. $524,930,164 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
+ Non-income producing security.
* Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
(a) American Depositary Receipts (ADR).
(b) Investment in companies 5% or more of whose outstanding securities are
held by the Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) are as follows:
---------------------------------------------------------------------------------------------------------------------
Net Share Net Dividend
Industry Affiliate Activity Cost Income
- ---------------------------------------------------------------------------------------------------------------------
Home--Builders Beazer Homes USA, Inc. .............................. 50,000 $ 665,558 --
Savings & Loans Greater N.Y. Savings Bank............................ 328,100 3,770,476 $37,500
Technology Micronics Computers, Inc. ........................... 257,500 206,942 --
- ---------------------------------------------------------------------------------------------------------------------
Total $4,642,976
==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-30-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Developing Capital Markets Focus
Fund
Schedule of Investments as of December 31, 1996 (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
AFRICA Industries Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morocco Banking 7,050 Wafa Bank................... $ 337,444 $ 445,329 0.4%
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Morocco 337,444 445,329 0.4
- ---------------------------------------------------------------------------------------------------------------------
South Africa Beverage & 15,241 South African Breweries
Ltd....................... 352,755 386,240 0.4
14,688 South African Breweries Ltd.
(ADR) (a)................. 467,719 370,872 0.4
----------- ------
820,474 757,112 0.8
------------------------------------------------------------------------------------------------------
Coal 120,300 Ingwe Coal Corporation
Ltd....................... 909,851 861,858 0.9
------------------------------------------------------------------------------------------------------
Entertainment 574,700 Sun International, Ltd. .... 789,589 460,891 0.5
------------------------------------------------------------------------------------------------------
Financial Services 6,200 Anglo American Corp. of
South Africa, Ltd. (ADR)
(a)....................... 389,005 336,350 0.3
39,785 Nedcor Ltd. (Ordinary)...... 483,190 544,534 0.6
----------- ------
872,195 880,884 0.9
------------------------------------------------------------------------------------------------------
Mining 78,700 Beatrix Mines Ltd........... 679,625 492,296 0.5
23,300 De Beers Centenary AG....... 619,984 667,707 0.7
4,687 Vaal Reefs Exploration &
Mining Co. Ltd............ 403,774 300,706 0.3
24,238 +Western Areas Gold Mining
Company Ltd............... 384,854 334,335 0.4
----------- ------
2,088,237 1,795,044 1.9
------------------------------------------------------------------------------------------------------
Total Investments in South
Africa 5,480,346 4,755,789 5.0
- ---------------------------------------------------------------------------------------------------------------------
Zimbabwe Beverage & Tobacco 327,843 Delta Corporation Ltd....... 781,291 1,152,988 1.2
------------------------------------------------------------------------------------------------------
Total Investments in
Zimbabwe 781,291 1,152,988 1.2
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Africa 6,599,081 6,354,106 6.6
- ---------------------------------------------------------------------------------------------------------------------
EUROPE
---------------------------------------------------------------------------------------------------------------------
Czech Republic Broadcast--Media 17,500 +Central European Media
Enterprises Ltd. (Class
A)(GDR) (b)............... 481,250 546,875 0.6
------------------------------------------------------------------------------------------------------
Total Investments in the
Czech Republic 481,250 546,875 0.6
- ---------------------------------------------------------------------------------------------------------------------
France Utilities--Water 14,700 Compagnie Generale des Eaux
S.A....................... 1,607,353 1,821,916 1.9
------------------------------------------------------------------------------------------------------
Total Investments in France 1,607,353 1,821,916 1.9
- ---------------------------------------------------------------------------------------------------------------------
Greece Banking 13,680 Ergo Bank S.A. (Ordinary)... 611,797 694,102 0.7
------------------------------------------------------------------------------------------------------
Beverage 11,010 Hellenic Bottling Co.
S.A....................... 215,402 353,137 0.4
------------------------------------------------------------------------------------------------------
Telecommunications 23,400 Hellenic Telecommunication
Organization S.A.......... 387,013 400,191 0.4
------------------------------------------------------------------------------------------------------
Total Investments in Greece 1,214,212 1,447,430 1.5
- ---------------------------------------------------------------------------------------------------------------------
Hungary Health/Personal 31,600 Gedeon Richter Ltd. (GDR)
Care (b)....................... 724,600 1,832,800 1.9
1,000 Gedeon Richter Ltd. (GDR)
(b)(e).................... 40,875 58,000 0.1
----------- ------
765,475 1,890,800 2.0
------------------------------------------------------------------------------------------------------
Telecommunications 1,100 +Magyar TarKozlesi
Reszvenytarsasag
(Ordinary) (e)............ 174,885 238,243 0.2
------------------------------------------------------------------------------------------------------
Total Investments in Hungary 940,360 2,129,043 2.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-31-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPE Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Italy Automobiles 300,000 Fiat S.p.A.................. 884,110 906,965 0.9
------------------------------------------------------------------------------------------------------
Broadcast--Media 168,000 Mediaset S.p.A.............. 805,116 774,576 0.8
------------------------------------------------------------------------------------------------------
Total Investments in Italy 1,689,226 1,681,541 1.7
- ---------------------------------------------------------------------------------------------------------------------
Netherlands Electronics 11,250 Philips Electronics N.V..... 457,905 456,257 0.5
11,250 Philips Electronics N.V. (NY
Registered Shares)........ 438,600 450,000 0.4
------------------------------------------------------------------------------------------------------
Total Investments in the
Netherlands 896,505 906,257 0.9
- ---------------------------------------------------------------------------------------------------------------------
Poland Automotive 10,000 +T.C. Debica S.A............ 211,943 223,339 0.2
------------------------------------------------------------------------------------------------------
Banking 58,118 Wielkopolsky Bank Kredytowy
S.A....................... 350,009 393,457 0.4
------------------------------------------------------------------------------------------------------
Electrical & 4,400 Elektrim Towarzystow
Electronics Handlowe S.A.............. 25,742 39,922 0.1
------------------------------------------------------------------------------------------------------
Financial Services 9,207 Bank Rozwoju Eksportu S.A.
(BRE)..................... 247,903 276,313 0.3
------------------------------------------------------------------------------------------------------
Multi-Industry 114,551 Mostostal-Export S.A........ 302,975 271,827 0.3
------------------------------------------------------------------------------------------------------
Total Investments in Poland 1,138,572 1,204,858 1.3
- ---------------------------------------------------------------------------------------------------------------------
Portugal Building Products 45,000 Cimpor-Cimentos de Portugal
S.A....................... 916,303 969,097 1.0
------------------------------------------------------------------------------------------------------
Multi-Industry 35,100 Sonae Investimentos-SGPS
S.A....................... 866,343 1,111,877 1.2
------------------------------------------------------------------------------------------------------
Total Investments in
Portugal 1,782,646 2,080,974 2.2
- ---------------------------------------------------------------------------------------------------------------------
Russia Energy Sources 56,100 A.O. Mosenergo (ADR) (a).... 1,567,968 1,697,025 1.8
1,980,000 +Irkutskenergo (GDR) (b).... 249,592 261,360 0.2
----------- ------
1,817,560 1,958,385 2.0
------------------------------------------------------------------------------------------------------
Multi-Industry 7,600 Templeton Russia Fund,
Inc....................... 115,344 167,200 0.2
------------------------------------------------------------------------------------------------------
Natural Gas 27,000 +RAO Gazprom (ADR) (a)(e)... 425,250 479,250 0.5
------------------------------------------------------------------------------------------------------
Oil & Related 8,000 Lukoil Oil Company (ADR)
(a)....................... 331,050 368,000 0.4
------------------------------------------------------------------------------------------------------
Telecommunications 16,500 +Vimpel-Communications (ADR)
(a)....................... 395,943 389,813 0.4
------------------------------------------------------------------------------------------------------
Total Investments in Russia 3,085,147 3,362,648 3.5
- ---------------------------------------------------------------------------------------------------------------------
Turkey Metal Fabricating 7,800,000 Eregli Demir Ve Celik
Fabrikalari T.A.S......... 983,792 936,288 1.0
------------------------------------------------------------------------------------------------------
Total Investments in Turkey 983,792 936,288 1.0
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Europe 13,819,063 16,117,830 16.9
- ---------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
---------------------------------------------------------------------------------------------------------------------
Argentina Banking 64,384 Banco Frances del Rio de la
Plata S.A. (ADR) (a)...... 1,346,566 1,770,557 1.8
60,500 +Bansud S.A. (Class B)...... 710,916 724,935 0.8
----------- ------
2,057,482 2,495,492 2.6
------------------------------------------------------------------------------------------------------
Oil & Related 236,390 Companhia Naviera Perez
Companc S.A.C.F.I.M.F.A.
(Class B)................. 1,156,335 1,662,154 1.7
------------------------------------------------------------------------------------------------------
Telecommunications 17,354 Telefonica de Argentina S.A.
(Class B) (ADR) (a)....... 497,806 449,035 0.5
------------------------------------------------------------------------------------------------------
Total Investments in
Argentina 3,711,623 4,606,681 4.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-32-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICA Shares Value Percent of
(continued) Industries Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brazil Banking 103,086,523 Banco Bradesco S.A.
(Preferred)............... 696,489 747,176 0.8
------------------------------------------------------------------------------------------------------
Beverage 2,452,525 Companhia Cervejaria Brahma
S.A. PN (Preferred)....... 993,758 1,340,874 1.4
------------------------------------------------------------------------------------------------------
Mining 10,296 Companhia Vale do Rio Doce
S.A. (Preferred).......... 227,523 198,210 0.2
------------------------------------------------------------------------------------------------------
Oil & Related 11,658,000 Petroleo Brasileiro S.A.
(Preferred)............... 1,641,531 1,857,156 2.0
------------------------------------------------------------------------------------------------------
Steel 8,410,000 Companhia Siderurgica
Nacional S.A.............. 202,969 238,805 0.2
1,256,100,000 Usinas Siderurgicas de Minas
Gerais - Usiminas S.A.
(Preferred)............... 1,313,468 1,281,611 1.4
----------- ------
1,516,437 1,520,416 1.6
------------------------------------------------------------------------------------------------------
Telecommuni- 29,685 Telecomunicacoes Brasileiras
cations S.A.--Telebras PN
(ADR)(a).................. 1,629,450 2,270,903 2.4
13,972,227 Telecomunicacoes Brasileiras
S.A.--Telebras PN
(Preferred)............... 737,840 1,075,925 1.1
7,227,925 Telecomunicacoes de Minas
Gerais S.A.--TELEMIG
(Class B) (Preferred)..... 652,510 894,011 0.9
----------- ------
3,019,800 4,240,839 4.4
------------------------------------------------------------------------------------------------------
Utilities--Electrical 1,060,000 Centrais Eletricas
& Gas Brasileiras
S.A.--Eletrobras.......... 367,723 379,555 0.4
155,000 Centrais Eletricas
Brasileiras
S.A.--Eletrobras 'B'
(Preferred)............... 54,645 57,590 0.1
7,513 Companhia Energetica de
Minas Gerais S.A. (CEMIG)
(ADR)(a).................. 169,798 253,564 0.2
20,000 Companhia Energetica de
Minas Gerais S.A. (CEMIG)
(ADR)(a)(e)............... 426,315 675,000 0.7
----------- ------
1,018,481 1,365,709 1.4
------------------------------------------------------------------------------------------------------
Total Investments in Brazil 9,114,019 11,270,380 11.8
- ---------------------------------------------------------------------------------------------------------------------
Mexico Banking 10,650 Grupo Financiero Banamex
--Accival, S.A. de C.V.
(BANACCI)
(Class L)................. 18,179 20,973 0.0
------------------------------------------------------------------------------------------------------
Beverage & Tobacco 16,100 Panamerican Beverages, Inc.
(Class A)................. 644,974 754,687 0.8
------------------------------------------------------------------------------------------------------
Building & 126,000 Apasco, S.A. de C.V......... 458,715 864,439 0.9
Construction
------------------------------------------------------------------------------------------------------
Building Materials 154,000 Cementos Mexicanos, S.A. de
C.V....................... 665,660 600,661 0.6
------------------------------------------------------------------------------------------------------
Financial Services 77,000 +Banca Quadrum, S.A. de C.V.
(ADR)(a).................. 510,125 279,125 0.3
355,000 Banco Nacional de Mexico,
S.A. de C.V. (Class B)
(BANAMEX)................. 660,134 749,600 0.8
----------- ------
1,170,259 1,028,725 1.1
------------------------------------------------------------------------------------------------------
Health/Personal 100,000 Kimberly-Clark de Mexico,
Care S.A. de C.V............... 1,333,327 1,975,607 2.1
------------------------------------------------------------------------------------------------------
Leisure 445,787 Grupo Carso, S.A. de C.V.
'A1'...................... 2,700,380 2,350,421 2.5
------------------------------------------------------------------------------------------------------
</TABLE>
-33-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mexico Retail 30,000 +Cifra, S.A. de C.V. 'B'
(concluded) (ADR)(a).................. 40,599 35,400 0.0
996,200 +Cifra, S.A. de C.V. 'C'.... 1,558,437 1,215,032 1.3
----------- ------
1,599,036 1,250,432 1.3
------------------------------------------------------------------------------------------------------
Telecommunications 35,979 Telefonos de Mexico, S.A. de
C.V. (ADR) (a)............ 1,145,507 1,187,307 1.2
------------------------------------------------------------------------------------------------------
Total Investments in Mexico 9,736,037 10,033,252 10.5
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Latin
America 22,561,679 25,910,313 27.1
- ---------------------------------------------------------------------------------------------------------------------
MIDDLE EAST
---------------------------------------------------------------------------------------------------------------------
Egypt Banking 2,962 +Commercial International
Bank (Egypt) S.A.E........ 350,673 447,622 0.5
------------------------------------------------------------------------------------------------------
Cement 7,375 Tora Portland Cement Co..... 149,085 149,111 0.1
------------------------------------------------------------------------------------------------------
Total Investments in Egypt 499,758 596,733 0.6
- ---------------------------------------------------------------------------------------------------------------------
Israel Banking 6,000 +Bank Hapoalim Ltd. ........ 8,651 9,518 0.0
653,600 +Bank Leumi Israel.......... 894,162 899,625 0.9
----------- ------
902,813 909,143 0.9
------------------------------------------------------------------------------------------------------
Merchandising 72,000 +Blue Square Chain Stores
Properties & Investments
Ltd. ..................... 522,937 564,392 0.6
4,800 +Blue Square Chain Stores
Properties & Investments
Ltd. (ADR)(a)............. 66,380 68,400 0.1
----------- ------
589,317 632,792 0.7
------------------------------------------------------------------------------------------------------
Multi-Industry 10,578 Koor Industries Ltd. ....... 968,604 922,812 1.0
3,500 Koor Industries Ltd.
(ADR)(a).................. 67,069 59,500 0.1
----------- ------
1,035,673 982,312 1.1
------------------------------------------------------------------------------------------------------
Total Investments in Israel 2,527,803 2,524,247 2.7
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in the
Middle East 3,027,561 3,120,980 3.3
- ---------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN/ASIA
---------------------------------------------------------------------------------------------------------------------
Australia Merchandising 19,740 Amway Asia Pacific Ltd.(GDR)
(b)....................... 690,260 836,482 0.9
------------------------------------------------------------------------------------------------------
Total Investments in
Australia 690,260 836,482 0.9
- ---------------------------------------------------------------------------------------------------------------------
China Telecommunications 622,000 +Eastern Communications Co.,
Ltd. (Class B)............ 502,576 553,580 0.6
------------------------------------------------------------------------------------------------------
Total Investments in China 502,576 553,580 0.6
- ---------------------------------------------------------------------------------------------------------------------
Hong Kong Automotive 377,000 Sime Darby (Hong Kong)
Ltd. ..................... 448,773 475,272 0.5
------------------------------------------------------------------------------------------------------
Banking 440,000 JCG Holdings, Ltd. ......... 400,979 429,532 0.4
65,000 +Wing Hang Bank Ltd......... 239,973 294,996 0.3
----------- ------
640,952 724,528 0.7
------------------------------------------------------------------------------------------------------
Food 2,659,000 C.P. Pokphand Co. Ltd.
(Ordinary)................ 1,024,250 1,040,015 1.1
7,991,000 +Tingyi (Cayman Islands)
Holdings Co............... 2,041,042 2,092,291 2.2
----------- ------
3,065,292 3,132,306 3.3
------------------------------------------------------------------------------------------------------
Industrial 5,066,000 Sinocan Holdings Ltd. ...... 1,328,338 2,489,113 2.6
------------------------------------------------------------------------------------------------------
Real Estate 3,699,000 China Overseas Land &
Investment................ 1,047,051 1,877,240 2.0
------------------------------------------------------------------------------------------------------
Total Investments in Hong
Kong 6,530,406 8,698,459 9.1
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA Shares Held/ Value Percent of
(continued) Industries Face Amount Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
India Automotive 89,000 Ashok Leyland Ltd.
(GDR)(b).................. 947,250 825,475 0.8
39,000 Ashok Leyland Ltd.
(GDR)(b)(e)............... 532,185 361,725 0.4
----------- ------
1,479,435 1,187,200 1.2
------------------------------------------------------------------------------------------------------
Building Materials 71,600 Larsen & Toubro Ltd.
(GDR)(b)(e)............... 1,124,562 1,031,040 1.1
------------------------------------------------------------------------------------------------------
Energy Sources 37,900 Bombay Suburban Electric
Supply Co. Ltd.(GDR)(b)... 694,175 776,950 0.8
------------------------------------------------------------------------------------------------------
Leisure 51,800 East India Hotels Ltd.
(GDR)(b)(e)............... 820,294 1,217,300 1.3
------------------------------------------------------------------------------------------------------
Total Investments in India 4,118,466 4,212,490 4.4
- ---------------------------------------------------------------------------------------------------------------------
Indonesia Broadcasting & US$ 750,000 P.T. Surya Citra Television,
Publishing 4% due 7/01/1997
(Convertible)............. 785,697 750,452 0.8
US$ 15,000 P.T. Surya Citra Television,
4% due 7/01/1997
(Convertible)(e).......... 15,000 15,009 0.0
----------- ------
800,697 765,461 0.8
------------------------------------------------------------------------------------------------------
Food 208,000 P.T. Indofood Sukses
Makmur.................... 434,008 414,062 0.4
------------------------------------------------------------------------------------------------------
Multi--Industry 632,000 P.T. Bimantara Citra........ 822,513 843,202 0.9
------------------------------------------------------------------------------------------------------
Real Estate 1,008,000 P.T. Ciputra Development.... 899,550 1,045,997 1.1
------------------------------------------------------------------------------------------------------
Telecommunications 164,000 P.T. Telekomunikasi
Indonesia................. 246,872 283,058 0.3
4,000 P.T. Telekomunikasi
Indonesia (ADR)(a)........ 126,560 138,000 0.1
----------- ------
373,432 421,058 0.4
------------------------------------------------------------------------------------------------------
Telecommunications 21,000 P.T. Kabelmetal Indonesia
& Equipment (Rights)(d)............... 0 0 0.0
------------------------------------------------------------------------------------------------------
Total Investments in
Indonesia 3,330,200 3,489,780 3.6
- ---------------------------------------------------------------------------------------------------------------------
Malaysia Airlines 151,000 Malaysian Airline System
BHD....................... 426,861 391,703 0.4
------------------------------------------------------------------------------------------------------
Banking 66,000 Commerce Asset Holdings
BHD....................... 422,451 496,634 0.5
360,000 Public Bank BHD 'Foreign'... 507,714 762,772 0.8
----------- ------
930,165 1,259,406 1.3
------------------------------------------------------------------------------------------------------
Broadcasting & 110,000 New Straits Times Press
Publishing BHD....................... 579,672 636,040 0.7
134,000 Sistem Televisyen Malaysia
BHD (Class A)............. 195,771 248,364 0.2
----------- ------
775,443 884,404 0.9
------------------------------------------------------------------------------------------------------
Building Materials US$ 455,000 Aokam Perdana BHD, 3.50% due
6/13/2004 (Convertible)... 365,816 277,550 0.3
82,000 Hume Industries (Malaysia)
BHD (Class A)............. 435,693 516,356 0.5
----------- ----------- -------
801,509 793,906 0.8
------------------------------------------------------------------------------------------------------
Chemicals 135,000 Nylex (Malaysia) BHD........ 354,841 304,752 0.3
------------------------------------------------------------------------------------------------------
Consumer Products & 8,500 +Amway (Malaysia) Holdings
Services BHD (GDR)(b).............. 50,682 48,139 0.1
------------------------------------------------------------------------------------------------------
Diversified 42,300 OYL Industries BHD.......... 438,242 443,941 0.5
Holdings
------------------------------------------------------------------------------------------------------
Engineering & 125,000 Malaysian Resources Corp.
Construction BHD....................... 437,809 492,574 0.5
------------------------------------------------------------------------------------------------------
Food 54,000 Nestle (Malaysia) BHD....... 420,759 434,139 0.5
------------------------------------------------------------------------------------------------------
</TABLE>
-35-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA Shares Held/ Value Percent of
(continued) Industries Face Amount Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Malaysia Multi-Industry 96,000 Ekran BHD................... 429,945 403,010 0.4
(concluded) 427,000 Renong BHD.................. 723,102 757,608 0.8
130,000 Sime Darby BHD.............. 432,179 512,277 0.6
98,000 Sungei Way Holdings BHD..... 255,634 291,089 0.3
----------- ----------- ----------
1,840,860 1,963,984 2.1
------------------------------------------------------------------------------------------------------
Natural Gas 103,000 Petronas Gas BHD............ 425,739 428,317 0.4
------------------------------------------------------------------------------------------------------
Oil & Related 78,000 Petronas Dagangan BHD....... 227,916 200,792 0.2
------------------------------------------------------------------------------------------------------
Telecommunications 341,400 +Technology Resources
Industries BHD (TRI)...... 1,233,355 673,335 0.7
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Malaysia 8,364,181 8,319,392 8.7
- ---------------------------------------------------------------------------------------------------------------------
Pakistan Chemicals--Fertilizers 15,000 Fauji Fertilizer Co.
Ltd. ..................... 31,246 25,262 0.0
------------------------------------------------------------------------------------------------------
Telecommunications 2,800 +Pakistan Telecommunications
Corp...................... 258,800 175,350 0.2
------------------------------------------------------------------------------------------------------
Total Investments in
Pakistan 290,046 200,612 0.2
- ---------------------------------------------------------------------------------------------------------------------
Philippines International Trade 637,500 International Container
Terminal Services, Inc.... 278,784 333,801 0.3
------------------------------------------------------------------------------------------------------
Total Investments in the
Philippines 278,784 333,801 0.3
- ---------------------------------------------------------------------------------------------------------------------
South Korea Automotive 6,940 +Dong Ah Tire Industries.... 581,436 485,182 0.5
------------------------------------------------------------------------------------------------------
Banking 69,330 Cho Hung Bank Co. Ltd....... 746,446 559,413 0.6
2,740 Shinhan Bank................ 50,472 44,881 0.1
----------- ----------- ----------
796,918 604,294 0.7
------------------------------------------------------------------------------------------------------
Telecommunications 127,967 Korea Mobile Telecom-
munications
Corp.(ADR)(a)(e).......... 1,993,680 1,641,179 1.7
------------------------------------------------------------------------------------------------------
Total Investments in South
Korea 3,372,034 2,730,655 2.9
- ---------------------------------------------------------------------------------------------------------------------
Thailand Banking 132,000 Krung Thai Bank Public Co.
Ltd....................... 623,254 254,767 0.3
93,400 Phatra Thanakit Public Co.
Ltd....................... 893,341 265,848 0.3
11,000 Siam Commercial Bank Public
Co. Ltd. "Foreign"........ 175,656 79,775 0.1
140,000 +Thai Farmers Bank Co.,
Ltd....................... 1,521,890 873,396 0.9
17,500 Thai Farmers Bank Co., Ltd.
"Foreign" (Warrants)(c)... 17,292 16,547 0.0
----------- ----------- ----------
3,231,433 1,490,333 1.6
------------------------------------------------------------------------------------------------------
Finance 148,400 Finance One Public Company
Ltd. "Foreign"............ 1,045,477 300,885 0.3
------------------------------------------------------------------------------------------------------
Merchandising 19,300 Siam Makro Public Co.
Ltd....................... 92,578 81,273 0.1
------------------------------------------------------------------------------------------------------
Real Estate Chf 1,300,000 Bangkok Land Public Co.
Ltd., 3.125% due 3/31/2001
(Convertible)............. 456,864 388,408 0.4
US$ 184,000 Bangkok Land Public Co.,
Ltd., 4.50% due 10/13/2003
(Convertible)............. 135,825 115,920 0.1
US$ 433,000 Hemaraj Land and Development
Public Co., Ltd., 3.50%
due 9/09/2003............. 425,104 441,660 0.5
US$ 163,000 Tanayong Public Co. Ltd.,
3.50% due 3/01/2004
(Convertible)............. 148,167 145,477 0.1
----------- ----------- ----------
1,165,960 1,091,465 1.1
------------------------------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Developing Capital Markets Focus Fund
Schedule of Investments as of December 31, 1996 (concluded) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thailand Telecommunications 62,900 Advanced Info Service Public
(concluded) Company Ltd. 'Foreign'.... 1,150,003 534,651 0.6
454,000 +TelecomAsia Corporation
Public Company Ltd.
'Foreign'................. 859,481 947,050 1.0
----------- ----------- ----------
2,009,484 1,481,701 1.6
------------------------------------------------------------------------------------------------------
Total Investments in
Thailand 7,544,932 4,445,657 4.7
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in the
Pacific Basin/Asia 35,021,885 33,820,908 35.4
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
Commercial US$1,000,000 American Brands, Inc., 5.30%
Paper* due 1/06/1997............. 999,117 999,117 1.0
2,884,000 General Motors Acceptance
Corp., 7.50% due
1/02/1997................. 2,882,798 2,882,798 3.0
3,000,000 Riverwoods Funding Corp.,
5.40% due 1/15/1997....... 2,993,250 2,993,250 3.2
----------- ----------- ----------
6,875,165 6,875,165 7.2
- ---------------------------------------------------------------------------------------------------------------------
US Government & 2,000,000 Federal Home Loan Mortgage
Agency Corp., 5.60% due
Obligations* 1/07/1997................. 1,997,822 1,997,822 2.1
2,000,000 Federal National Mortgage
Association, 5.55% due
1/16/1997................. 1,995,067 1,995,067 2.1
----------- ----------- ----------
3,992,889 3,992,889 4.2
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Short-
Term Securities 10,868,054 10,868,054 11.4
- ---------------------------------------------------------------------------------------------------------------------
Total Investments........... $91,897,323 96,192,191 100.6
===========
Liabilities in Excess of
Other Assets.............. (593,289) (0.6)
----------- ----------
Net Assets.................. $95,598,902 100.0
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
* Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase of the Fund.
+ Non-income producing security.
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and the number of shares are subject to
adjustment under certain conditions until the expiration date.
(d) The rights may be exercised until 2/14/1997.
(e) Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $5,717,000 representing 6.0% of
net assets.
- ------------------------------------------------------------------------------
Acquisition Value
Issue Date(s) Cost (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------
Ashok Leyland Ltd. (GDR)............................................. 3/09/1995-5/22/1996 $ 532,185 $ 361,725
Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR).............. 7/20/1995-8/01/1995 426,315 675,000
East India Hotels Ltd. (GDR)......................................... 12/12/1994-7/10/1995 820,294 1,217,300
RAO Gazprom (ADR).................................................... 10/21/1996 425,250 479,250
Gedeon Richter Ltd. (GDR)............................................ 7/03/1996 40,875 58,000
Korea Mobile Telecommunications Corp.(ADR)........................... 1/18/1996 1,993,680 1,641,179
Larsen & Toubro Ltd. (GDR)........................................... 3/22/1996-3/26/1996 1,124,562 1,031,040
Magyar TarKozlesi Reszvenytarsasag (Ordinary)........................ 12/01/1995 174,885 238,243
P.T. Surya Citra Television, 4% due 7/01/1997 (Convertible).......... 6/24/1994 15,000 15,009
- ---------------------------------------------------------------------------------------------------------------------
Total $5,553,046 $5,716,746
========== ==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-37-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Domestic Money Market Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Interest Maturity Value
Amount Issue Rate* Date (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Certificate of Deposit--1.8% $ 5,000,000 Chase Manhattan Bank USA (Delaware)... 5.60 % 4/01/97 $ 5,001,002
- ---------------------------------------------------------------------------------------------------------------------
Total Certificate of Deposit (Cost--$5,000,000) 5,001,002
- ---------------------------------------------------------------------------------------------------------------------
Commercial Paper--46.9% 6,338,000 Allomon Funding Corp. ................ 5.31 2/10/97 6,301,094
7,691,000 Bear Stearns Companies, Inc. ......... 5.35 1/31/97 7,657,699
5,000,000 Beta Finance Inc. .................... 5.44 3/28/97 4,936,014
4,500,000 Beta Finance Inc. .................... 5.32 5/01/97 4,419,675
4,649,000 CSW Credit, Inc. ..................... 5.35 1/22/97 4,635,311
5,000,000 CSW Credit, Inc. ..................... 5.45 3/14/97 4,946,553
5,000,000 Eureka Securitization Inc. ........... 5.33 1/17/97 4,988,958
4,188,000 Eureka Securitization Inc. ........... 5.35 1/28/97 4,171,969
7,815,000 Finova Capital Corp. ................. 5.38 2/24/97 7,752,756
5,096,000 Finova Capital Corp. ................. 5.48 3/20/97 5,036,923
10,000,000 Ford Motor Credit Co. ................ 5.30 2/07/97 9,946,250
4,000,000 General Electric Capital Corp. ....... 5.55 1/10/97 3,995,271
2,000,000 General Electric Capital Corp. ....... 5.50 3/03/97 1,981,933
6,665,000 General Electric Capital Corp. ....... 5.64 3/05/97 6,602,786
426,000 General Motors Acceptance Corp. ...... 5.33 1/13/97 425,310
4,600,000 General Motors Acceptance Corp. ...... 5.34 1/23/97 4,585,778
5,402,000 General Motors Acceptance Corp. ...... 5.32 2/05/97 5,374,577
2,000,000 General Motors Acceptance Corp. ...... 5.34 5/14/97 1,960,400
2,500,000 Goldman Sachs Group, L.P. ........... 5.68 1/06/97 2,498,522
1,857,000 International Securitization Corp. ... 5.35 1/29/97 1,849,514
5,000,000 International Securitization Corp. ... 5.58 2/28/97 4,957,171
7,000,000 Lehman Brothers Holdings Inc. ........ 5.75 1/31/97 6,967,576
4,000,000 Lehman Brothers Holdings Inc. ........ 5.40 3/03/97 3,963,867
2,000,000 Morgan Stanley Group, Inc. ........... 5.41 1/27/97 1,992,639
6,000,000 New Center Asset Trust................ 5.43 1/29/97 5,975,813
7,000,000 New Center Asset Trust................ 5.40 2/07/97 6,962,375
4,000,000 Transamerica Finance Corp. ........... 5.60 3/11/97 3,959,049
- ---------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost--$128,841,542) 128,845,783
- ---------------------------------------------------------------------------------------------------------------------
Bank Notes--1.3% 3,500,000 Bank of America, Illinois............. 5.63 12/30/97 3,498,247
- ---------------------------------------------------------------------------------------------------------------------
Total Bank Notes (Cost--$3,499,667) 3,498,247
- ---------------------------------------------------------------------------------------------------------------------
Corporate Notes--7.6% 7,000,000 Asset Backed Securities Investment
Trust 1996-M+....................... 5.605 10/15/97 7,000,000
5,000,000 CIT Group Holdings, Inc. (The)+....... 5.36 10/27/97 4,997,158
9,000,000 SMM Trust 1995-Q+..................... 5.605 1/08/97 9,000,000
- ---------------------------------------------------------------------------------------------------------------------
Total Corporate Notes (Cost--$20,997,144) 20,997,158
- ---------------------------------------------------------------------------------------------------------------------
Funding Agreements--1.8% 5,000,000 Jackson National Life Insurance
Co.+................................ 5.41 4/08/97 5,000,000
- ---------------------------------------------------------------------------------------------------------------------
Total Funding Agreements (Cost--$5,000,000) 5,000,000
- ---------------------------------------------------------------------------------------------------------------------
Master Notes--1.1% 3,000,000 Goldman Sachs Group L.P.+............. 5.88 8/01/97 3,000,000
- ---------------------------------------------------------------------------------------------------------------------
Total Master Notes (Cost--$3,000,000) 3,000,000
- ---------------------------------------------------------------------------------------------------------------------
US Government, Agency & 32,000 Federal Home Loan Mortgage Corp. ..... 5.35 2/03/97 31,851
Instrumentality Obligations-- 115,000 Federal National Mortgage
Discount--0.2% Association......................... 5.35 2/11/97 114,332
380,000 Federal National Mortgage
Association......................... 5.33 3/27/97 375,239
- ---------------------------------------------------------------------------------------------------------------------
Total US Government, Agency & Instrumentality
Obligations--Discount (Cost--$521,438) 521,422
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-38-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Domestic Money Market Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Interest Maturity Value
Amount Issue Rate* Date (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Government, Agency & 1,500,000 Federal Farm Credit Bank.............. 5.85 % 10/01/97 $ 1,502,580
Instrumentality Obligations-- 5,000,000 Federal Farm Credit Bank+............. 5.38 11/25/97 4,999,062
Non-Discount--38.7% 4,000,000 Federal Home Loan Bank+............... 5.41 12/10/97 3,998,191
1,040,000 Federal Home Loan Bank+............... 5.60 1/26/98 1,040,299
1,500,000 Federal Home Loan Bank................ 6.12 4/15/98 1,499,530
1,000,000 Federal Home Loan Bank................ 6.17 11/06/98 999,375
5,000,000 Federal National Mortgage
Association+........................ 5.85 2/14/97 5,002,473
12,000,000 Federal National Mortgage
Association+........................ 5.44 2/21/97 12,000,000
2,000,000 Federal National Mortgage
Association+........................ 5.385 5/14/97 1,999,365
9,500,000 Federal National Mortgage
Association+........................ 5.521 5/22/97 9,497,525
5,000,000 Federal National Mortgage
Association+........................ 5.40 7/16/97 4,998,194
2,000,000 Federal National Mortgage
Association+........................ 5.42 8/01/97 1,999,497
2,000,000 Federal National Mortgage
Association+........................ 5.405 9/03/97 1,999,022
1,000,000 Federal National Mortgage
Association+........................ 5.41 9/09/97 999,533
1,000,000 Federal National Mortgage
Association+........................ 5.41 9/29/97 999,559
3,200,000 Federal National Mortgage
Association*........................ 5.47 12/30/97 3,196,016
2,000,000 Federal National Mortgage
Association*........................ 5.19 1/08/98 1,991,380
5,500,000 Federal National Mortgage
Association+........................ 5.46 4/24/98 5,497,250
5,000,000 Student Loan Marketing Association+... 5.62 1/23/97 5,000,249
2,000,000 Student Loan Marketing Association+... 5.54 3/03/97 2,000,038
6,500,000 Student Loan Marketing Association+... 5.57 10/30/97 6,501,136
2,000,000 US Treasury Notes..................... 6.625 3/31/97 2,005,624
2,000,000 US Treasury Notes..................... 8.50 4/15/97 2,017,186
1,750,000 US Treasury Notes..................... 6.50 4/30/97 1,756,563
1,750,000 US Treasury Notes..................... 6.50 5/15/97 1,757,109
1,500,000 US Treasury Notes..................... 6.125 5/31/97 1,503,750
1,800,000 US Treasury Notes..................... 6.00 8/31/97 1,805,062
4,800,000 US Treasury Notes..................... 5.75 9/30/97 4,808,621
3,500,000 US Treasury Notes..................... 5.625 10/31/97 3,502,188
3,800,000 US Treasury Notes..................... 5.375 11/30/97 3,792,278
2,200,000 US Treasury Notes..................... 5.25 12/31/97 2,192,951
1,170,000 US Treasury Notes..................... 5.00 1/31/98 1,161,773
1,200,000 US Treasury Notes..................... 5.625 11/30/98 1,194,937
1,000,000 US Treasury Notes..................... 5.75 12/31/98 998,359
- ---------------------------------------------------------------------------------------------------------------------
Total US Government, Agency & Instrumentality
Obligations--Non-Discount (Cost--$106,239,960) 106,216,675
- ---------------------------------------------------------------------------------------------------------------------
Repurchase Agreements**--2.1% 5,780,000 Lehman Brothers Inc., purchased on
12/31/1996 to yield 7.10% to
1/02/1997........................... 5,780,000
- ---------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreement (Cost--$5,780,000) 5,780,000
- ---------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--
$278,879,751)--101.5%................. 278,860,287
Liabilities in Excess of Other
Assets--(1.5%)........................ (4,104,273)
------
Net Assets--100.0%.................... $274,756,014
======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund. Other securities bear interest at the rates
shown, payable at fixed dates or upon maturity. The interest rates on
variable rate securities are adjusted periodically based upon appropriate
indexes; the interest rates shown are the rates in effect at December 31,
1996.
** Repurchase Agreements are fully collateralized by US Government
Obligations.
+ Variable Rate Notes.
See Notes to Financial Statements.
-39-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advertising 75,000 +Outdoor Systems Inc. ...... $ 1,725,000 $ 2,100,000 0.5%
50,000 +Universal Outdoor Holdings
Inc. ..................... 1,850,000 1,150,000 0.2
------------ ------------ ------
3,575,000 3,250,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
Automotive 57,000 +United Auto Group, Inc. ... 1,710,000 1,467,750 0.3
- ---------------------------------------------------------------------------------------------------------------------
Banking 159,300 TCF Financial Corp. ........ 4,274,782 6,929,550 1.5
- ---------------------------------------------------------------------------------------------------------------------
Biotechnology 75,000 +CN Biosciences Inc. ....... 937,500 1,368,750 0.3
350,000 +COR Therapeutics Inc. ..... 3,820,630 3,456,250 0.8
320,000 +Neoprobe Corp. ............ 5,810,262 4,800,000 1.0
------------ ------------ ------
10,568,392 9,625,000 2.1
- ---------------------------------------------------------------------------------------------------------------------
Broadcast, Radio & TV 197,000 +Jacor Communications, Inc.
......................... 5,516,000 5,392,875 1.2
- ---------------------------------------------------------------------------------------------------------------------
Building Materials 150,000 Apogee Enterprises, Inc.
......................... 2,153,512 5,925,000 1.3
265,000 Ply-Gem Industries, Inc. ... 4,750,765 3,279,375 0.7
------------ ------------ ------
6,904,277 9,204,375 2.0
- ---------------------------------------------------------------------------------------------------------------------
Business Services 240,000 +Accustaff, Inc. ........... 6,340,514 5,070,000 1.1
244,000 Reynolds & Reynolds Co.
(The) (Class A)........... 3,386,946 6,344,000 1.4
------------ ------------ ------
9,727,460 11,414,000 2.5
- ---------------------------------------------------------------------------------------------------------------------
Chemicals 255,000 Crompton & Knowles Corp. ... 4,062,361 4,908,750 1.1
- ---------------------------------------------------------------------------------------------------------------------
Commercial Services 155,000 Rollins Inc. ............... 3,898,215 3,100,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
Computer Software 265,000 +Activision Inc. ........... 3,858,754 3,312,500 0.7
- ---------------------------------------------------------------------------------------------------------------------
Computers & Peripherals 112,500 +3d Systems Corp. .......... 1,988,750 1,434,375 0.3
100,000 +Adtran, Inc. .............. 4,873,162 4,150,000 0.9
90,000 +Cabletron Systems, Inc. ... 2,882,223 2,992,500 0.7
262,500 +MicroAge Inc. ............. 2,860,757 5,217,187 1.1
100,000 +SCI Systems, Inc. ......... 4,467,211 4,462,500 1.0
50,000 +U.S. Robotics Corp. ....... 3,213,125 3,600,000 0.8
------------ ------------ ------
20,285,228 21,856,562 4.8
- ---------------------------------------------------------------------------------------------------------------------
Diversified 75,400 Harsco Corp. ............... 4,007,056 5,164,900 1.2
150,000 Lancaster Colony Corp. ..... 5,148,124 6,825,000 1.5
------------ ------------ ------
9,155,180 11,989,900 2.7
- ---------------------------------------------------------------------------------------------------------------------
Drug Stores 100,000 +Revco D.S., Inc. .......... 2,555,874 3,700,000 0.8
185,000 Rite Aid Corporation ....... 5,592,412 7,353,750 1.6
------------ ------------ ------
8,148,286 11,053,750 2.4
- ---------------------------------------------------------------------------------------------------------------------
Electrical Equipment 190,000 Belden, Inc. ............... 5,864,294 7,030,000 1.6
217,500 Methode Electronics Inc.
(Class A)................. 2,705,417 4,295,625 0.9
200,750 +Vishay Intertechnology,
Inc. ..................... 5,506,140 4,692,531 1.0
------------ ------------ ------
14,075,851 16,018,156 3.5
- ---------------------------------------------------------------------------------------------------------------------
Electronic/Instruments 250,500 BMC Industries, Inc. ....... 2,162,900 7,890,750 1.8
- ---------------------------------------------------------------------------------------------------------------------
Electronics 170,000 Fisher Scientific International
Inc. ..................... 5,111,731 8,011,250 1.8
133,300 +ITI Technologies, Inc. .... 3,796,760 1,999,500 0.4
200,000 +Kemet Corp. ............... 4,131,252 4,575,000 1.0
200,000 +Semitool Inc. ............. 3,381,041 1,900,000 0.4
------------ ------------ ------
16,420,784 16,485,750 3.6
- ---------------------------------------------------------------------------------------------------------------------
Environmental 186,718 +TETRA Technologies, Inc. .. 2,121,250 3,641,001 0.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-40-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Services 115,000 FINOVA Group, Inc. ......... 4,281,177 7,388,750 1.6
200,000 +Imperial Credit Industries,
Inc. ..................... 2,581,376 4,175,000 0.9
240,000 +National Auto Credit,
Inc. ..................... 2,690,561 2,880,000 0.7
130,000 +Southern Pacific Funding
Corp. .................... 2,266,125 4,046,250 0.9
------------ ------------ ----------
11,819,239 18,490,000 4.1
- ---------------------------------------------------------------------------------------------------------------------
Healthcare-- 110,000 +Thermedics, Inc. .......... 1,535,333 1,993,750 0.4
Products & Services
- ---------------------------------------------------------------------------------------------------------------------
Hospital Management 170,000 +Emcare Holdings Inc........ 4,693,754 3,846,250 0.9
190,500 +Health Care & Retirement
Corp. .................... 4,001,067 5,453,063 1.2
185,000 +OrNda Health Corp. ........ 3,182,121 5,411,250 1.2
------------ ------------ ----------
11,876,942 14,710,563 3.3
- ---------------------------------------------------------------------------------------------------------------------
Hotels 200,000 +Extended Stay America
Inc. ..................... 3,567,050 4,000,000 0.9
200,000 La Quinta Inns, Inc. ....... 3,919,340 3,825,000 0.8
------------ ------------ ----------
7,486,390 7,825,000 1.7
- ---------------------------------------------------------------------------------------------------------------------
Leisure 167,500 Royal Caribbean Cruises
Ltd. ..................... 3,905,376 3,915,313 0.9
- ---------------------------------------------------------------------------------------------------------------------
Manufactured Housing 312,812 Clayton Homes, Inc. ........ 3,590,402 4,222,962 0.9
175,000 Oakwood Homes Corporation... 3,867,933 4,003,125 0.9
------------ ------------ ----------
7,458,335 8,226,087 1.8
- ---------------------------------------------------------------------------------------------------------------------
Medical 200,000 +Paracelsus Healthcare
Corp. .................... 1,700,000 725,000 0.2
- ---------------------------------------------------------------------------------------------------------------------
Medical Equipment 435,000 +Angeion Corp. ............. 2,509,688 1,495,313 0.3
175,000 +Physio-Control
International Corp. ...... 3,710,000 3,850,000 0.9
------------ ------------ ----------
6,219,688 5,345,313 1.2
- ---------------------------------------------------------------------------------------------------------------------
Medical Services 100,000 +Collaborative Clinical
Research, Inc. .......... 1,414,250 1,075,000 0.2
330,000 +Mariner Health Group,
Inc. ..................... 4,886,250 2,722,500 0.6
250,000 +Medpartners/Mullikin
Inc. ..................... 4,971,078 5,250,000 1.2
465,000 +North American Biologicals,
Inc. ..................... 4,211,875 4,068,750 0.9
------------ ------------ ----------
15,483,453 13,116,250 2.9
- ---------------------------------------------------------------------------------------------------------------------
Medical Supplies 285,000 +ATS Medical, Inc. ......... 1,845,625 2,208,750 0.5
170,000 Beckman Instruments, Inc. .. 4,949,331 6,523,750 1.5
250,000 +Cholestech Corp. .......... 1,250,000 1,375,000 0.3
165,000 Dentsply International,
Inc. ..................... 6,162,500 7,837,500 1.7
320,000 +Healthdyne Technologies
Inc. ..................... 3,805,625 2,840,000 0.6
130,000 Meridan Diagnostics,
Inc. ..................... 1,315,875 1,690,000 0.4
85,300 +Urologix, Inc. ............ 1,281,050 1,364,800 0.3
------------ ------------ ----------
20,610,006 23,839,800 5.3
- ---------------------------------------------------------------------------------------------------------------------
Metal Fabricating 112,500 Valmont Industries, Inc. ... 2,398,750 4,584,375 1.0
- ---------------------------------------------------------------------------------------------------------------------
Office Equipment 145,000 Danka Business Systems PLC
(ADR)*.................... 5,003,689 5,129,375 1.1
- ---------------------------------------------------------------------------------------------------------------------
Oil & Gas 135,000 Vintage Petroleum, Inc. .... 3,056,706 4,657,500 1.0
- ---------------------------------------------------------------------------------------------------------------------
Oil & Gas Producers 175,000 +Barrett Resources Corp. ... 4,132,342 7,459,375 1.7
200,000 +Belden & Blake Energy
Co. ...................... 3,248,647 5,100,000 1.1
125,000 NICOR Inc. ................. 3,068,051 4,468,750 1.0
150,000 +Seagull Energy Corp. ...... 2,956,364 3,300,000 0.7
------------ ------------ ----------
13,405,404 20,328,125 4.5
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-41-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oil/Gas-- Equipment & Services 300,000 +Pride Petroleum Services,
Inc. ..................... 2,347,880 6,900,000 1.5
100,000 +Trico Marine Services,
Inc. ..................... 1,600,000 4,800,000 1.1
156,000 +Weatherford Enterra,
Inc. ..................... 4,362,012 4,680,000 1.0
------------ ------------ ----------
8,309,892 16,380,000 3.6
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 95,000 +Flamel Technologies
S.A.(ADR)*................ 1,140,000 688,750 0.2
310,000 Mylan Laboratories Inc. .... 5,551,352 5,192,500 1.2
290,000 +NeXstar Pharmaceuticals,
Inc. ..................... 6,138,688 4,241,250 0.9
100,000 +Sano Corporation........... 1,356,875 1,475,000 0.3
------------ ------------ ----------
14,186,915 11,597,500 2.6
- ---------------------------------------------------------------------------------------------------------------------
Printing & Publishing 122,000 Banta Corp. ................ 2,822,042 2,745,000 0.6
- ---------------------------------------------------------------------------------------------------------------------
Railroads 68,000 +Genesee & Wyoming Inc.
(Class A)................. 1,209,749 2,227,000 0.5
- ---------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts 175,000 Brandywine Realty Trust..... 3,010,862 3,412,500 0.8
162,000 Cali Realty Corp. .......... 3,928,250 5,001,750 1.1
115,000 National Golf Properties
Inc. ..................... 2,565,430 3,636,875 0.8
120,450 National Health Investors,
Inc. ..................... 3,561,600 4,562,044 1.0
------------ ------------ ----------
13,066,142 16,613,169 3.7
- ---------------------------------------------------------------------------------------------------------------------
Restaurants 150,000 Apple South, Inc. .......... 2,079,375 1,968,750 0.4
260,000 Applebee's International,
Inc. ..................... 5,459,375 7,085,000 1.5
100,000 +Boston Chicken, Inc. ...... 3,114,250 3,575,000 0.8
170,000 +Outback Steakhouse,
Inc. ..................... 4,681,565 4,505,000 1.0
50,000 +Rainforest Cafe, Inc. ..... 1,741,250 1,175,000 0.3
------------ ------------ ----------
17,075,815 18,308,750 4.0
- ---------------------------------------------------------------------------------------------------------------------
Retail Specialty 220,000 +Discount Auto Parts,
Inc. ..................... 5,463,948 5,142,500 1.1
135,000 +Moovies, Inc. ............. 1,552,500 700,312 0.2
150,000 +Movie Gallery, Inc. ....... 3,620,623 1,950,000 0.4
------------ ------------ ----------
10,637,071 7,792,812 1.7
- ---------------------------------------------------------------------------------------------------------------------
Retail Stores 180,800 +Barnes & Noble, Inc. ...... 6,046,946 4,881,600 1.1
- ---------------------------------------------------------------------------------------------------------------------
Semiconductors 130,000 +Asyst Technologies,
Inc. ..................... 4,072,189 2,177,500 0.5
100,000 +Electro Scientific
Industries, Inc. ......... 2,437,502 2,600,000 0.6
110,000 +Lattice Semiconductor
Corp. .................... 3,002,906 5,032,500 1.1
70,000 +Microchip Technology,
Inc. ..................... 1,984,438 3,552,500 0.8
------------ ------------ ----------
11,497,035 13,362,500 3.0
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications 50,000 +LCC International, Inc.
(Class A)................. 800,000 881,250 0.2
- ---------------------------------------------------------------------------------------------------------------------
Textiles 138,800 +Galey & Lord, Inc. ........ 1,688,953 2,064,650 0.5
185,000 Unifi, Inc. ................ 4,347,516 5,943,125 1.3
------------ ------------ ----------
6,036,469 8,007,775 1.8
- ---------------------------------------------------------------------------------------------------------------------
Toys 140,000 +Galoob Toys, Inc. ......... 3,752,652 1,960,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
Utilities--Gas 150,000 MCN Corp. .................. 3,004,324 4,331,250 1.0
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks 336,869,083 389,515,726 86.0
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Corporate Bonds
---------------------------------------------------------------------------------------------------------------------
Environmental $ 3,500,000 Sanifill, Inc., 5% due
3/01/2006................. 3,500,000 4,410,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds 3,500,000 4,410,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Equity Growth Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial Paper** $10,275,000 General Motors Acceptance
Corp., 7.50% due
1/02/1997................. 10,270,719 10,270,719 2.3
15,000,000 Xerox Credit Corporation,
5.28% due 1/10/1997....... 14,978,000 14,978,000 3.3
------------ ------------ ----------
25,248,719 25,248,719 5.6
- ---------------------------------------------------------------------------------------------------------------------
US Government & 12,755,000 Federal Home Loan Bank:
Agency Obligations** 5.20% due 1/08/1997....... 12,740,261 12,740,261 2.8
Federal National Mortgage
Association:
10,000,000 5.24% due 2/03/1997....... 9,950,511 9,950,511 2.2
10,000,000 5.26% due 2/10/1997....... 9,940,094 9,940,094 2.2
------------ ------------ ----------
32,630,866 32,630,866 7.2
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 57,879,585 57,879,585 12.8
- ---------------------------------------------------------------------------------------------------------------------
Total Investments........... $398,248,668 451,805,311 99.7
=============
Other Assets Less
Liabilities............... 1,223,954 0.3
------------ ----------
Net Assets.................. $453,029,265 100.0%
============= ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
-43-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Bond Focus Fund
Schedule of Investments as of December 31, 1996 (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Value Percent of
NORTH AMERICA Industry Amount Fixed-Income Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Canada Foreign Canadian Government Bonds:
Government
Obligations C$ 550,000 7% due 9/01/2001........... 408,652 426,752 0.5
350,000 7% due 12/01/2006.......... 248,559 266,843 0.3
5,000,000 8% due 6/01/2023........... 4,080,888 4,072,993 4.3
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Canada 4,738,099 4,766,588 5.1
- ---------------------------------------------------------------------------------------------------------------------
United States Broadcasting/ US$ 1,011,242 American Telecasting Inc.,
Cable 12.59%* due
6/15/2004(c)............. 729,105 414,609 0.4
1,000,000 Bell Cablemedia PLC,
12.03%* due 9/15/2005.... 646,110 802,500 0.9
1,000,000 Videotron Holdings PLC,
11.05%* due 7/01/2004.... 731,219 870,000 0.9
------------ ----------- ------
2,106,434 2,087,109 2.2
------------------------------------------------------------------------------------------------------
Communications 1,375,000 PanAmSat L.P., 11.35%* due
8/01/2003................ 1,108,623 1,278,750 1.4
------------------------------------------------------------------------------------------------------
Energy 250,000 Consolidated-Hydro Inc.,
16.05%* due 7/15/2003.... 209,492 80,000 0.1
------------------------------------------------------------------------------------------------------
Gaming 1,100,000 Greate Bay Properties,
Inc., 10.875% due
1/15/2004................ 990,750 924,000 1.0
500,000 +Harrah's Jazz Company,
14.25% due 11/15/2001.... 482,500 245,625 0.2
------------ ----------- ------
1,473,250 1,169,625 1.2
------------------------------------------------------------------------------------------------------
Specialty 500,000 +Bradlees Inc., 11% due
Retailing 8/01/2002................ 489,375 52,500 0.1
------------------------------------------------------------------------------------------------------
US Government 2,000,000 US Treasury Notes, 6.50%
Obligations due 10/15/2006........... 2,031,875 2,010,940 2.2
------------------------------------------------------------------------------------------------------
Utilities 233,382 ++Tucson Electric Power
Co., 10.732% due
1/01/2013................ 223,464 228,713 0.2
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in the United
States 7,642,513 6,907,637 7.4
- ---------------------------------------------------------------------------------------------------------------------
Shares
Held Stocks & Warrants
- ---------------------------------------------------------------------------------------------------------------------
United States Broadcasting & 1 K-III Communications Corp.
Publishing (Non-Convertible
Preferred)............... 79 80 0.0
9,608 On Command Corporation..... 279,101 152,527 0.2
3,057 On Command Corporation
(Warrants)(a)............ 24,456 20,635 0.0
------------ ----------- ------
303,636 173,242 0.2
------------------------------------------------------------------------------------------------------
Broadcasting/Cable 4,700 American Telecasting Inc.
(Warrants)(a)............ 11,222 10,575 0.0
------------------------------------------------------------------------------------------------------
Entertainment 13 Time Warner Inc. (Non-
Convertible Preferred)
(Series M)............... 13,650 14,105 0.0
------------------------------------------------------------------------------------------------------
Supermarkets 17,674 Grand Union Co............. 917,438 86,161 0.1
- ---------------------------------------------------------------------------------------------------------------------
Total Stocks & Warrants in
the United States 1,245,946 284,083 0.3
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in North
America 13,626,558 11,958,308 12.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-44-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Global Bond Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Value Percent of
PACIFIC BASIN Industry Amount Fixed-Income Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Australia Foreign Australian Government
Government Bonds:
Obligations A$ 6,000,000 9.75% due 3/15/2002...... 5,435,527 5,318,773 5.7
353,000 9.50% due 8/15/2003...... 298,116 313,588 0.3
4,200,000 9% due 9/15/2004......... 3,633,191 3,662,566 3.9
3,000,000 Queensland Treasury Corp.,
8% due 8/14/2001......... 2,479,656 2,472,162 2.7
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Australia 11,846,490 11,767,089 12.6
- ---------------------------------------------------------------------------------------------------------------------
Japan Banking Y 65,000,000 Asian Development Bank,
5.625% due 2/18/2002..... 750,697 662,349 0.7
50,000,000 Export Import Bank of
Japan, 4.375% due
10/01/2003............... 503,455 486,399 0.5
225,000,000 IBRD World Bank, 4.75% due
12/20/2004............... 2,336,316 2,258,938 2.4
112,000,000 World Bank, 4.50% due
3/20/2003................ 1,137,254 1,100,850 1.2
------------ ----------- ----------
4,727,722 4,508,536 4.8
------------------------------------------------------------------------------------------------------
Foreign 90,000,000 Federal National Mortgage
Government Association, 2% due
Obligations 12/20/1999............... 844,636 798,964 0.8
82,600,000 Japanese Government Bond,
3% due 9/20/2005......... 756,992 735,126 0.8
60,000,000 Republic of Finland, 6% due
1/29/2002................ 654,914 619,689 0.7
------------ ----------- ----------
2,256,542 2,153,779 2.3
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Japan 6,984,264 6,662,315 7.1
- ---------------------------------------------------------------------------------------------------------------------
New Zealand Foreign NZ$ 6,200,000 New Zealand Government
Government Bond, 8% due 2/15/2001... 4,523,325 4,536,150 4.8
Obligations
- ---------------------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in New Zealand 4,523,325 4,536,150 4.8
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in the
Pacific Basin 23,354,079 22,965,554 24.5
- ---------------------------------------------------------------------------------------------------------------------
WESTERN EUROPE
- ---------------------------------------------------------------------------------------------------------------------
Denmark Finance Dkr 15,940,000 Nykredit, 6% due
10/01/2026............... 2,306,331 2,348,839 2.5
------------------------------------------------------------------------------------------------------
Foreign Denmark Government Bonds:
Government
Obligations 2,800,000 8% due 5/15/2003......... 516,582 526,953 0.6
33,200,000 8% due 3/15/2006......... 6,119,857 6,201,919 6.6
------------ ----------- ----------
6,636,439 6,728,872 7.2
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Denmark 8,942,770 9,077,711 9.7
- ---------------------------------------------------------------------------------------------------------------------
France Foreign Frf 2,000,000 French Government 'B-Tan',
Government 7% due 10/12/2000........ 420,453 422,205 0.5
Obligations 2,300,000 French OAT, 7.25% due
4/25/2006................ 483,739 490,279 0.5
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in France 904,192 912,484 1.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-45-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Global Bond Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN EUROPE Face Value Percent of
(concluded) Industry Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Germany Finance DM 2,450,000 KFW International Finance
Inc., 6.25% due
10/15/2003............... $ 1,644,147 $ 1,660,936 1.8%
------------------------------------------------------------------------------------------------------
Foreign Bundesrepublik Deutschland:
Government 625,000 7.50% due 11/11/2004..... 452,947 453,729 0.5
Obligations 500,000 6.25% due 4/26/2006...... 337,334 335,912 0.3
2,000,000 Deutschland Republic, 6.75%
due 4/22/2003............ 1,385,871 1,401,365 1.5
1,900,000 German Unity Fund,
8% due 1/21/2002......... 1,416,586 1,404,407 1.5
------------ ----------- ----------
3,592,738 3,595,413 3.8
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Germany 5,236,885 5,256,349 5.6
- ---------------------------------------------------------------------------------------------------------------------
Italy Foreign Skr Buoni Poliennali del Tesoro
Government (Italian Government
Obligations Bonds):
Lit 4,000,000,000 9.50% due 5/01/2001...... 2,857,054 2,912,827 3.1
4,000,000,000 8.75% due 7/01/2006...... 2,841,855 2,870,673 3.1
Government of Italy:
2,200,000,000 10.50% due 7/15/2000..... 1,456,374 1,624,080 1.7
750,000,000 8.50% due 4/01/2004...... 515,391 529,261 0.6
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Italy 7,670,674 7,936,841 8.5
- ---------------------------------------------------------------------------------------------------------------------
Spain Foreign Government of Spain:
Government Pta 75,000,000 10.10% due 2/28/2001..... 650,217 664,414 0.7
Obligations 290,000,000 10.50% due 10/30/2003.... 2,694,264 2,713,544 2.9
135,000,000 8% due 5/30/2004......... 1,094,423 1,127,339 1.2
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Spain 4,438,904 4,505,297 4.8
- ---------------------------------------------------------------------------------------------------------------------
Sweden Finance L 4,300,000 Swedish Export Credit
Corp., 7.625% due
12/27/2001............... 7,148,129 7,366,739 7.8
------------------------------------------------------------------------------------------------------
Foreign Government of Sweden:
Government Skr 8,500,000 10.25% due 5/05/2000..... 1,411,881 1,438,926 1.5
Obligations 17,500,000 6% due 2/09/2005......... 2,407,211 2,489,545 2.7
18,100,000 8% due 8/15/2007......... 2,854,379 2,899,028 3.1
------------ ----------- ----------
6,673,471 6,827,499 7.3
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in Sweden 13,821,600 14,194,238 15.1
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom Foreign United Kingdom Treasury
Government Gilt:
Obligations L 2,000,000 8% due 12/07/2000........ 3,344,163 3,516,763 3.7
2,500,000 7% due 11/06/2001........ 4,113,200 4,230,220 4.5
300,000 8% due 6/10/2003......... 490,794 529,279 0.6
530,000 8.50% due 12/07/2005..... 945,081 965,661 1.0
150,000 9% due 7/12/2011......... 252,238 286,693 0.3
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Investments in the United
Kingdom 9,145,476 9,528,616 10.1
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Western Europe 50,160,501 51,411,536 54.8
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Securities
- ---------------------------------------------------------------------------------------------------------------------
Commercial Paper** US$ 4,161,000 General Electric Capital
Corp., 7.10% due
1/02/1997................ 4,160,179 4,160,179 4.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-46-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Bond Focus Fund
Schedule of Investments as of December 31, 1996 (concluded) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Government & Federal Home Loan Mortgage
Agency Obligations** Corp.:
US$1,000,000 6.50% due 1/02/1997........ $ 999,819 $ 999,819 1.1%
4,545,000 5.33% due 1/06/1997........ 4,541,635 4,541,635 4.8
Federal National Mortgage
Association:
1,000,000 5.25% due 1/10/1997........ 998,688 998,688 1.1
3,000,000 5.37% due 1/22/1997........ 2,990,603 2,990,603 3.2
United States Treasury
Bills(b):
125,000 4.82% due 3/13/1997........ 123,812 123,793 0.1
200,000 5.27% due 3/13/1997........ 197,921 198,068 0.2
------------ ----------- ----------
9,852,478 9,852,606 10.5
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Short-Term Securities 14,012,657 14,012,785 14.9
- ---------------------------------------------------------------------------------------------------------------------
Total Investments................................ $101,153,795 100,348,183 107.0
=============
Variation Margin on Financial Futures
Contracts***..................................... (17,464) 0.0
Unrealized Depreciation on Forward Foreign
Exchange Contracts****........................... (78,492) (0.1)
Liabilities in Excess of Other Assets............ (6,462,317) (6.9)
----------- ----------
Net Assets....................................... $93,789,910 100.0%
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustments under certain conditions until the expiration date.
(b) Security held as collateral in connection with open financial futures
contracts.
(c) Subject to principal paydowns.
* Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
** Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
*** Financial futures contracts sold as of December 31, 1996 were as follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Number of Expiration (Notes 1a &
Contracts Issue Exchange Date 1b)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15 Italian BTP LIFFE March 1997 $2,556,891
70 UK Gilt LIFFE March 1997 6,582,838
- --------------------------------------------------------------------------
Total Financial Futures Contracts Sold (Total Contract
Price-$9,069,181) $ 9,139,729
==========
- -----------------------------------------------------------------------
</TABLE>
****Forward foreign exchange contracts as of December 31, 1996 were as
follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Depreciation
Foreign Currency Sold Expiration Date (Note 1b)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dkr 10,000,000........................................................... January 1997 $(16,909)
DM 5,436,386............................................................ January 1997 (35,279)
L 4,000,000............................................................ January 1997 (24,948)
Y 500,000,000........................................................... January 1997 (1,356)
- ---------------------------------------------------------------------------------------------------------------------
Total Unrealized Depreciation--Net on Forward Foreign Exchange Contracts (US$
Commitment--$16,323,461) $(78,492)
========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $229,000, representing 0.2% of net
assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION> Value
Issue Acquisition Date Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tucson Electric Power Co., 10.732% due 1/01/2013........................ 8/19/1993 $223,464 $228,713
- ---------------------------------------------------------------------------------------------------------------------
Total $223,464 $228,713
======= ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-47-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund
Schedule of Investments as of December 31, 1996 (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held US Stocks & Warrants Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 64,500 Northrop Grumman Corp......... $ 4,288,238 $ 5,337,375 0.6%
55,000 United Technologies Corp...... 2,256,982 3,630,000 0.4
------------ ------------ ------
6,545,220 8,967,375 1.0
- ---------------------------------------------------------------------------------------------------------------------
Auto & Truck 70,000 General Motors Corp........... 3,775,240 3,902,500 0.4
- ---------------------------------------------------------------------------------------------------------------------
Automobile Parts 173,500 +Lear Corporation............. 5,812,250 5,920,688 0.7
- ---------------------------------------------------------------------------------------------------------------------
Banking 38,000 Bank of New York Co., Inc.
(Warrants)(a)............... 285,875 2,816,750 0.3
115,000 Bank of New York, Co., Inc.... 2,904,748 3,881,250 0.4
28,000 BankAmerica Corp.............. 2,864,806 2,793,000 0.3
57,000 Citicorp...................... 4,452,439 5,871,000 0.7
------------ ------------ ------
10,507,868 15,362,000 1.7
- ---------------------------------------------------------------------------------------------------------------------
Building Products 15,700 Spieker Properties, Inc....... 432,692 565,200 0.1
- ---------------------------------------------------------------------------------------------------------------------
Building & Construction 134,500 Oakwood Homes Corporation..... 3,064,418 3,076,688 0.4
- ---------------------------------------------------------------------------------------------------------------------
Business Services 110,375 +Oracle Corp.................. 3,621,396 4,594,359 0.5
- ---------------------------------------------------------------------------------------------------------------------
Chemicals 92,000 +FMC Corporation.............. 6,520,585 6,451,500 0.7
107,000 PPG Industries, Inc........... 5,294,623 6,005,375 0.7
------------ ------------ ------
11,815,208 12,456,875 1.4
- ---------------------------------------------------------------------------------------------------------------------
Computer Services 97,000 +cisco Systems, Inc........... 4,376,411 6,171,625 0.7
142,200 First Data Corp............... 5,031,267 5,190,300 0.6
------------ ------------ ------
9,407,678 11,361,925 1.3
- ---------------------------------------------------------------------------------------------------------------------
Computer Technology 152,000 +Gulfstream Aerospace
Corporation................. 3,756,241 3,686,000 0.4
- ---------------------------------------------------------------------------------------------------------------------
Computers 81,000 +Compaq Computer Corp......... 6,008,178 6,014,250 0.7
38,500 International Business
Machines Corp............... 4,230,992 5,813,500 0.7
------------ ------------ ------
10,239,170 11,827,750 1.4
- ---------------------------------------------------------------------------------------------------------------------
Conglomerates 45,800 AlliedSignal Inc.............. 3,366,507 3,068,600 0.4
- ---------------------------------------------------------------------------------------------------------------------
Diversified 137,500 Corning, Inc.................. 4,183,441 6,359,375 0.7
- ---------------------------------------------------------------------------------------------------------------------
Electrical Equipment 28,300 Linear Technology
Corporation................. 1,160,935 1,238,125 0.1
- ---------------------------------------------------------------------------------------------------------------------
Electronics 42,000 General Electric Co. ......... 3,325,769 4,152,750 0.5
- ---------------------------------------------------------------------------------------------------------------------
Engineering & Construction 155,900 Foster Wheeler Corp. ......... 6,680,398 5,787,788 0.7
- ---------------------------------------------------------------------------------------------------------------------
Entertainment 162,399 +Viacom, Inc. (Class B)....... 5,963,826 5,663,665 0.7
- ---------------------------------------------------------------------------------------------------------------------
Financial Services 102,500 American Express Company...... 4,852,027 5,791,250 0.7
- ---------------------------------------------------------------------------------------------------------------------
Foods 146,000 Heinz (H.J.) Company.......... 4,731,138 5,219,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
Hospital Management 234,000 +Health Management Associates,
Inc. (Class A).............. 5,276,847 5,265,000 0.6
- ---------------------------------------------------------------------------------------------------------------------
Insurance 58,000 Aetna Inc. ................... 4,082,043 4,640,000 0.5
220,000 +Airtouch Communications,
Inc. ....................... 6,292,837 5,555,000 0.7
91,200 Allstate Corp. ............... 3,747,599 5,278,200 0.6
81,000 UNUM Corporation.............. 5,157,613 5,852,250 0.7
------------ ------------ ------
19,280,092 21,325,450 2.5
- ---------------------------------------------------------------------------------------------------------------------
Leisure 240,000 Brunswick Corporation......... 5,938,252 5,760,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
Leisure & Entertainment 10,500 +Imax Corporation............. 324,543 322,875 0.0
- ---------------------------------------------------------------------------------------------------------------------
Leisure & Tourism 69,177 TCI Pacific Communications
(Convertible Preferred)..... 6,473,121 6,277,813 0.7
- ---------------------------------------------------------------------------------------------------------------------
Machinery 126,000 +American Standard Companies,
Inc. ....................... 4,111,697 4,819,500 0.6
136,200 Deere & Co. .................. 5,770,935 5,533,125 0.6
------------ ------------ ------
9,882,632 10,352,625 1.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-48-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held US Stocks & Warrants Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Natural Gas 144,000 Enron Corp.................... $ 5,443,166 $ 6,210,000 0.7%
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas Pipelines 65,000 IMC Global, Inc. ............. 2,519,391 2,543,125 0.3
- ---------------------------------------------------------------------------------------------------------------------
Oil Services 196,000 Dresser Industries, Inc. ..... 4,324,082 6,076,000 0.7
50,000 Schlumberger Ltd. ............ 4,053,012 4,993,750 0.6
------------ ------------ ------
8,377,094 11,069,750 1.3
- ---------------------------------------------------------------------------------------------------------------------
Paper 64,500 Kimberly-Clark Corp. ......... 4,955,548 6,143,625 0.7
- ---------------------------------------------------------------------------------------------------------------------
Petroleum 108,100 Pennzoil Co. ................. 4,485,180 6,107,650 0.7
143,000 Unocal Corp. ................. 4,802,812 5,809,375 0.7
------------ ------------ ------
9,287,992 11,917,025 1.4
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 85,700 Abbott Laboratories........... 3,516,941 4,349,275 0.5
59,000 Merck & Co., Inc. ............ 3,072,725 4,675,750 0.5
------------ ------------ ------
6,589,666 9,025,025 1.0
- ---------------------------------------------------------------------------------------------------------------------
Railroads 69,000 Burlington Northern Santa Fe
Inc. ....................... 5,638,407 5,959,875 0.7
- ---------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trust 156,000 Prentiss Properties Trust..... 3,189,080 3,900,000 0.4
83,700 Starwood Lodging Trust........ 3,280,230 4,613,962 0.5
------------ ------------ ------
6,469,310 8,513,962 0.9
- ---------------------------------------------------------------------------------------------------------------------
Retail 126,000 Sears, Roebuck & Co. ......... 5,464,285 5,811,750 0.7
- ---------------------------------------------------------------------------------------------------------------------
Retail--Drug Stores 157,105 Rite Aid Corp. ............... 4,914,258 6,244,924 0.7
- ---------------------------------------------------------------------------------------------------------------------
Retail Specialty 190,000 +Toys 'R' Us, Inc. ........... 5,934,584 5,700,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
Scientific Instruments 110,000 Fisher Scientific
International, Inc. ........ 3,579,430 5,183,750 0.6
- ---------------------------------------------------------------------------------------------------------------------
Software--Computer 147,500 BMC Software, Inc. ........... 5,509,418 6,102,812 0.7
- ---------------------------------------------------------------------------------------------------------------------
Steel 110,000 AK Steel Holding Corp. ....... 4,459,883 4,358,750 0.5
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications 95,800 Bell Atlantic Corporation..... 5,396,243 6,203,050 0.7
- ---------------------------------------------------------------------------------------------------------------------
Tobacco 44,000 Philip Morris Companies,
Inc. ....................... 4,329,124 4,955,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
Travel & Lodging 185,100 Carnival Corp. (Class A)...... 5,310,160 6,108,300 0.7
- ---------------------------------------------------------------------------------------------------------------------
Utilities--Communications 260,300 Edison International.......... 4,944,918 5,173,462 0.6
- ---------------------------------------------------------------------------------------------------------------------
Utilities--Gas 54,000 El Paso Natural Gas Co. ...... 2,646,557 2,727,000 0.3
- ---------------------------------------------------------------------------------------------------------------------
Total US Stocks & Warrants 252,186,343 288,257,861 33.2
- ---------------------------------------------------------------------------------------------------------------------
Country Foreign Stocks++
---------------------------------------------------------------------------------------------------------------------
Argentina 373,772 Banco de Galicia y Buenos
Aires S.A. (ADR)* (3)....... 6,990,318 9,017,249 1.0
305,933 Banco Frances del Rio de la
Plata S.A.(ADR)* (3)........ 7,017,779 8,413,144 1.0
355,900 Yacimientos Petroliferos
Fiscales S.A.(ADR)* (21).... 8,033,094 8,986,475 1.0
------------ ------------ ------
22,041,191 26,416,868 3.0
- ---------------------------------------------------------------------------------------------------------------------
Brazil 13,950,000 Companhia Cervejaria Brahma
S.A. PN (Preferred) (34).... 7,955,613 7,626,913 0.9
58,400,000 Petroleo Brasileiro S.A.--
Petrobras (Preferred)
(46)........................ 7,234,138 9,303,302 1.1
108,700 Telecomunicacoes Brasileiras
S.A.--Telebras (ADR)* (27).. 6,472,073 8,315,550 0.9
------------ ------------ ------
21,661,824 25,245,765 2.9
- ---------------------------------------------------------------------------------------------------------------------
Canada 318,600 Canadian Pacific, Ltd.
(52) ....................... 6,091,881 8,442,900 1.0
147,800 Magna International Inc.
(Class A) (1)............... 6,830,595 8,239,850 0.9
100,100 Potash Corp. of Saskatchewan,
Inc. (35)................... 7,437,257 8,508,500 1.0
------------ ------------ ------
20,359,733 25,191,250 2.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Country Held Foreign Stocks++ Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finland 132,000 Finnlines OY (36)............. $ 2,486,828 $ 3,241,129 0.4%
121,500 Nokia Corp. (ADR)* (37)....... 4,287,533 7,001,437 0.8
409,900 +UPM-Kymmene OY (38).......... 8,516,525 8,461,463 1.0
------------ ------------ ------
15,290,886 18,704,029 2.2
- ---------------------------------------------------------------------------------------------------------------------
France 130,600 Michelin (C.G.D.E.) S.A.
(Class B) (47).............. 5,794,743 7,051,091 0.8
126,500 +SGS-Thomson Microelectronics
N.V. (NY Registered Shares)
(51)........................ 4,655,571 8,855,000 1.0
236,000 Scor S.A. (16)................ 8,948,438 8,301,850 1.0
545,000 Usinor-Sacilor S.A. (40)...... 8,643,115 7,931,284 0.9
------------ ------------ ------
28,041,867 32,139,225 3.7
- ---------------------------------------------------------------------------------------------------------------------
Germany 13,500 +Henkel KGaA (9).............. 600,048 647,579 0.1
121,500 Henkel KGaA (Preferred) (9)... 5,163,053 6,104,615 0.7
16,900 Mannesmann AG (17)............ 4,620,775 7,326,812 0.8
35,800 +Puma AG (48)................. 1,176,806 1,214,664 0.1
176,500 Siemens AG (12)............... 8,419,829 8,317,355 1.0
------------ ------------ ------
19,980,511 23,611,025 2.7
- ---------------------------------------------------------------------------------------------------------------------
Hong Kong 404,600 HSBC Holdings PLC (3)......... 6,668,545 8,658,042 1.0
4,873,200 Hong Kong Telecommunications,
Ltd. (27)................... 8,569,151 7,844,756 0.9
------------ ------------ ------
15,237,696 16,502,798 1.9
- ---------------------------------------------------------------------------------------------------------------------
Indonesia 313,380 P.T. Indonesian Satellite
Corp. (ADR)* (27)........... 9,998,585 8,578,777 1.0
- ---------------------------------------------------------------------------------------------------------------------
Italy 1,161,800 Danieli & Company (17)........ 4,276,177 4,859,167 0.5
1,659,000 Societa Finanziara Telefonica
S.p.A. (STET) (27).......... 4,931,175 7,539,667 0.9
------------ ------------ ------
9,207,352 12,398,834 1.4
- ---------------------------------------------------------------------------------------------------------------------
Japan 424,000 Bridgestone Corporation
(47)........................ 7,463,165 8,055,268 0.9
314,000 Canon, Inc. (12).............. 5,242,498 6,941,623 0.8
424,000 Eisai Co., Ltd. (22).......... 7,787,610 8,348,187 1.0
803,000 Maeda Corp. (4)............... 7,177,535 5,942,755 0.7
370,000 Matsushita Electric
Industries, Ltd. (12)....... 5,646,070 6,038,860 0.7
1,395,000 Mitsubishi Electric Corp.
(11)........................ 9,130,689 8,312,176 0.9
1,061,000 Mitsubishi Heavy Industry,
Ltd. (8).................... 7,818,945 8,429,361 1.0
809,000 Mitsui-Soko Co., Ltd. (42).... 6,794,019 5,288,541 0.6
512,000 Nomura Securities Co., Ltd.
(33)........................ 9,448,726 7,693,264 0.9
906,000 Okumura Corp. (4)............. 6,730,420 5,507,979 0.6
124,000 Rohm Company Ltd. (12)........ 7,059,616 8,138,169 0.9
808,000 Tokio Marine and Fire
Insurance Co., Ltd. (16).... 9,454,210 7,605,527 0.9
1,011,000 Toray Industries Ltd. (28).... 6,794,999 6,242,358 0.7
------------ ------------ ------
96,548,502 92,544,068 10.6
- ---------------------------------------------------------------------------------------------------------------------
Mexico 411,400 Carso Global Telecom, S.A. de
C.V. (ADR)*(27)............. 1,954,150 1,851,300 0.2
375,400 Grupo Carso, S.A. de C.V.
(ADR)*(18).................. 5,559,251 3,894,775 0.4
5,741 Grupo Financiero Inbursa, S.A.
de C.V. (ADR)*(18).......... 115,192 97,597 0.0
436,300 Kimberly-Clark de Mexico, S.A.
de C.V. (38)................ 8,018,361 8,619,572 1.0
171,000 Panamerican Beverages, Inc.
(Class A) (34).............. 7,114,640 8,015,625 0.9
------------ ------------ ------
22,761,594 22,478,869 2.5
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-50-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Country Held Foreign Stocks++ Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Netherlands 136,000 ABN-AMRO Holdings (3)......... $ 7,835,801 $ 8,856,547 1.0%
466 ABN-AMRO Holdings N.V.
(Convertible Preferred)
(3)......................... 15,383 28,916 0.0
------------ ------------ ------
7,851,184 8,885,463 1.0
- ---------------------------------------------------------------------------------------------------------------------
Norway 641,000 Color Line ASA (36)........... 2,499,223 2,984,125 0.4
- ---------------------------------------------------------------------------------------------------------------------
Philippines 1,650,000 San Miguel Corp. (Class B)
(34)........................ 5,521,217 7,288,652 0.8
- ---------------------------------------------------------------------------------------------------------------------
South Korea 180,600 +Hyundai Engineering &
Construction Co., Ltd.
(GDR)** (44)+++............. 2,353,218 1,128,750 0.1
- ---------------------------------------------------------------------------------------------------------------------
Spain 238,000 Repsol S.A.(ADR)* (21)........ 7,749,030 9,073,750 1.0
- ---------------------------------------------------------------------------------------------------------------------
Sweden 454,100 Bure Investment Aktiebolaget
(45)........................ 3,955,365 5,397,227 0.6
278,000 Sparbanken Sverige AB (Class
A) (3)...................... 3,575,154 4,772,707 0.6
------------ ------------ ------
7,530,519 10,169,934 1.2
- ---------------------------------------------------------------------------------------------------------------------
Switzerland 5,200 BBC Brown Boveri & Cie AG
(11)........................ 4,633,631 6,466,985 0.8
7,000 +Novartis AG (22)............. 6,960,585 8,015,387 0.9
------------ ------------ ------
11,594,216 14,482,372 1.7
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom 801,000 Boots Company PLC (49)........ 7,746,777 8,256,364 0.9
3,085,000 British Steel PLC (50)........ 8,295,968 8,497,287 1.0
1,302,000 General Electric PLC
(Ordinary) (12)............. 7,044,453 8,531,178 1.0
517,500 Glaxo Wellcome PLC (22)....... 7,417,612 8,393,014 1.0
1,012,400 Grand Metropolitan PLC (34)... 7,201,806 7,967,264 0.9
783,900 Imperial Chemical Industries
PLC (43).................... 10,154,513 10,306,324 1.2
720,500 National Westminster Bank PLC
(3)......................... 7,832,617 8,455,851 1.0
2,085,000 Vodafone Group PLC (27)....... 7,541,528 8,810,534 1.0
------------ ------------ ------
63,235,274 69,217,816 8.0
- ---------------------------------------------------------------------------------------------------------------------
Total Foreign Stocks 389,463,622 427,042,370 49.0
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Foreign Bonds++
- ---------------------------------------------------------------------------------------------------------------------
Denmark Dkr 66,250,000 Government of Denmark,
8% due 3/15/2006(15)........ 12,133,252 12,375,817 1.4
- ---------------------------------------------------------------------------------------------------------------------
Germany DM 6,500,000 Bundesrepublik Deutschland,
7.125% due 12/20/2002(15)... 4,514,124 4,638,934 0.6
- ---------------------------------------------------------------------------------------------------------------------
Italy Lit 27,470,000,000 Buoni Poliennali del Tesoro
(Italian Government Bonds),
8.50% due 1/01/2004 (15).... 19,448,018 19,380,531 2.2
- ---------------------------------------------------------------------------------------------------------------------
Sweden
Government of Sweden (15):
Skr 41,300,000 10.25% due 5/05/2000........ 7,052,190 6,991,487 0.8
163,000,000 8% due 8/15/2007............ 25,654,854 26,107,266 3.0
------------ ------------ ----------
32,707,044 33,098,753 3.8
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom
United Kingdom Treasury Gilt
(15):
L 4,000,000 7% due 11/06/2001........... 6,592,392 6,768,352 0.8
7,475,000 7.50% due 12/07/2006........ 12,576,320 12,772,245 1.5
------------ ------------ ----------
19,168,712 19,540,597 2.3
- ---------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds 87,971,150 89,034,632 10.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-51-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Face Value Net
Amount US Government Obligations Cost (Note 1a) Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Treasury Notes:
US$ 16,250,000 6.25% due 4/30/2001.................. $ 16,463,906 $ 16,285,587 1.9%
29,750,000 7% due 7/15/2006..................... 31,584,492 30,907,572 3.5
- ---------------------------------------------------------------------------------------------------------------------
Total US Government Obligations 48,048,398 47,193,159 5.4
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
US Government & 15,755,000 Federal Home Loan Mortgage
Agency
Obligations***
Corp. 5.41% due 1/24/1997............ 15,700,545 15,700,545 1.8
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 15,700,545 15,700,545 1.8
- ---------------------------------------------------------------------------------------------------------------------
Total Investments.......................................... $793,370,058 867,228,567 99.7
=============
Unrealized Depreciation on Forward Foreign
Exchange Contracts++.............................. (2,598,413) (0.3)
Other Assets Less Liabilities.............................. 5,572,664 0.6
------------ ----------
Net Assets................................................. $870,202,818 100.0%
============= ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Certain US Government & Agency Obligations are traded on a discount
basis; the interest rates shown are the discount rates paid at the time
of purchase by the Fund.
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
+ Non-income producing security.
++ Corresponding industry groups for foreign stocks and bonds:
(1) Automobile--Parts (27) Telecommunications
(2) Automotive Equipment (28) Textiles
(3) Banking (29) Toys
(4) Building & Construction (30) Trading
(5) Building Materials (31) Utilities
(6) Business & Public Service (32) Utilities--Electric
(7) Business Publishing (33) Financial Services
(8) Capital Goods (34) Beverages
(9) Chemicals (35) Mining
(10) Diversified (36) Transportation
(11) Electrical Equipment (37) Communications Equipment
(12) Electronics (38) Paper & Forest Products
(13) Food (39) Industrial Components
(14) Glass (40) Metals
(15) Government (Bonds) (41) Photography
(16) Insurance (42) Warehouse & Storage
(17) Machinery & Equipment (43) Oil--Integrated
(18) Multi--Industry (44) Engineering & Construction
(19) Natural Gas (45) Investment Management
(20) Packaging (46) Oil & Related
(21) Petroleum (47) Tire & Rubber
(22) Pharmaceutical (48) Consumer--Goods
(23) Printing & Publishing (49) Merchandising
(24) Real Estate (50) Steel
(25) Retail Stores (51) Semiconductor Capital Equipment
(26) Shipping (52) Natural Resources
-52-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Strategy Focus Fund
Schedule of Investments as of December 31, 1996 (concluded) (in US dollars)
- ------------------------------------------------------------------------------
+++ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $1,129,000, representing 0.1% of
net assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hyundai Engineering & Construction Co., Ltd.(GDR)....................... 3/19/1996 $2,353,218 $1,128,750
- ---------------------------------------------------------------------------------------------------------------------
Total $2,353,218 $1,128,750
========== ==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Forward foreign exchange contracts as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Unrealized
Foreign Expiration Depreciation
Currency Sold Date (Note 1b)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHF 16,000,000 ......................................................... January 1997 $ 246,564
DM 63,822,188 ......................................................... February 1997 554,813
Frf 90,000,000 ......................................................... January 1997 (106,255 )
L 39,555,000 ......................................................... January 1997 (3,135,589 )
Y10,670,000,000 ......................................................... February 1997 (157,946 )
- ---------------------------------------------------------------------------------------------------------------------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts (US$ Commitment--$228,531,727) $(2,598,413 )
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-53-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Global Utility Focus Fund
Schedule of Investments as of December 31, 1996 (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Country Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Argentina Telecommunications 7,900 Central Costanera S.A.
(ADR)*(a)............ $ 261,847 $ 238,975 0.2%
25,600 Telecom Argentina STET
S.A. (ADR)*.......... 1,160,819 1,033,600 0.7
44,800 Telefonica de Argentina
S.A. (ADR)*.......... 1,173,168 1,159,200 0.8
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Argentina 2,595,834 2,431,775 1.7
- ---------------------------------------------------------------------------------------------------------------------
Australia Utilities--Gas 434,496 Australian Gas & Light
Co., Ltd............. 1,238,060 2,470,749 1.8
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Australia 1,238,060 2,470,749 1.8
- ---------------------------------------------------------------------------------------------------------------------
Austria Utilities--Gas 13,560 Energie-Versorgung
Niederoesterreich AG
(EVN).................. 1,388,213 2,041,452 1.4
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Austria 1,388,213 2,041,452 1.4
- ---------------------------------------------------------------------------------------------------------------------
Brazil Telecommunications 30,000 Telecomunicacoes
Brasileiras S.A.--
Telebras (ADR)*...... 1,523,979 2,295,000 1.6
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Brazil 1,523,979 2,295,000 1.6
- ---------------------------------------------------------------------------------------------------------------------
Canada Telecommunications 56,000 BC Telecom, Inc........ 1,052,989 1,211,971 0.8
------------------------------------------------------------------------------------------------------
Utilities--Gas 70,100 Transcanada Pipeline
Co., Ltd. (ADR)*..... 1,045,275 1,226,750 0.9
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Canada 2,098,264 2,438,721 1.7
- ---------------------------------------------------------------------------------------------------------------------
Chile Telecommunications 14,400 Compania de Telefonos
de Chile S.A.
(ADR)*............... 1,254,995 1,456,200 1.0
------------------------------------------------------------------------------------------------------
Utilities--Electric 20,000 Chilgener S.A. (ADR)*.. 460,000 417,500 0.3
35,100 Distribuidora Chilectra
Metropolitana,
S.A. (ADR)*(a)......... 1,098,338 1,860,300 1.3
48,300 Enersis S.A. (ADR)*.... 1,026,061 1,340,325 1.0
----------- ------
2,584,399 3,618,125 2.6
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Chile 3,839,394 5,074,325 3.6
- ---------------------------------------------------------------------------------------------------------------------
Denmark Telecommunications 77,000 Tele Danmark A/S
(ADR)*............... 1,826,433 2,098,250 1.5
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Denmark 1,826,433 2,098,250 1.5
- ---------------------------------------------------------------------------------------------------------------------
France Utilities--Water 16,731 Generale des Eaux...... 1,907,473 2,073,638 1.4
7,265 Lyonnaise des Eaux-
Dumez................ 736,741 676,228 0.5
------------------------------------------------------------------------------------------------------
Total Common Stocks
in France 2,644,214 2,749,866 1.9
- ---------------------------------------------------------------------------------------------------------------------
Germany Telecommunications 8,100 +Deutsche Telekom AG... 154,054 170,845 0.1
------------------------------------------------------------------------------------------------------
Utilities--Electric 40,000 Veba AG................ 1,305,397 2,313,942 1.6
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Germany 1,459,451 2,484,787 1.7
- ---------------------------------------------------------------------------------------------------------------------
Hong Kong Utilities--Gas 568,512 The Hong Kong & China
Gas Co., Ltd......... 755,615 1,098,947 0.8
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Hong Kong 755,615 1,098,947 0.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-54-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Country Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
India Utilities--Electric 1,000 Tata Electric Companies
(GDR)**(a)........... $ 710,000 $ 300,000 0.2%
------------------------------------------------------------------------------------------------------
Total Common Stocks
in India 710,000 300,000 0.2
- ---------------------------------------------------------------------------------------------------------------------
Indonesia Telecommunications 1,110 P.T. Indonesian
Satellite Corp.
(ADR)*............... 35,575 30,386 0.0
8,000 P.T. Telekomunikasi
Indonesia
(PERSERO) (ADR)*....... 144,000 276,000 0.2
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Indonesia 179,575 306,386 0.2
- ---------------------------------------------------------------------------------------------------------------------
Italy Telecommunications 761,900 Societa Finanziara
Telefonica S.p.A.
(STET)................. 1,629,934 2,571,867 1.8
729,600 Telecom Italia Mobile
S.p.A................ 684,328 1,842,922 1.3
729,600 Telecom Italia
S.p.A................ 950,865 1,893,380 1.3
----------- ------
3,265,127 6,308,169 4.4
------------------------------------------------------------------------------------------------------
Utilities--Gas 513,400 Italgas Torino......... 1,581,576 2,142,196 1.5
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Italy 4,846,703 8,450,365 5.9
- ---------------------------------------------------------------------------------------------------------------------
Malaysia Telecommunications 139,000 Telekom Malaysia BHD... 962,438 1,238,614 0.9
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Malaysia 962,438 1,238,614 0.9
- ---------------------------------------------------------------------------------------------------------------------
Mexico Telecommunications 29,000 Telefonos de Mexico,
S.A. de C.V.
(Telemex) (ADR)*....... 1,706,306 957,000 0.7
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Mexico 1,706,306 957,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
New Zealand Telecommunications 36,800 Telecom Corporation of
New Zealand Ltd.
(ADR)*................. 1,680,030 2,980,800 2.1
------------------------------------------------------------------------------------------------------
Total Common Stocks
in New Zealand 1,680,030 2,980,800 2.1
- ---------------------------------------------------------------------------------------------------------------------
Peru Telecommunications 73,000 Telefonica del Peru,
S.A. (ADR)*.......... 1,496,500 1,377,875 1.0
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Peru 1,496,500 1,377,875 1.0
- ---------------------------------------------------------------------------------------------------------------------
Philippines Telecommunications 21,800 Philippine Long Distance
Telephone Co.
(ADR)*............... 1,270,791 1,111,800 0.8
------------------------------------------------------------------------------------------------------
Utilities--Electric 74,100 Manila Electric Co.
(MERALCO) 'B'........ 518,117 606,683 0.4
------------------------------------------------------------------------------------------------------
Total Common Stocks
in the Philippines 1,788,908 1,718,483 1.2
- ---------------------------------------------------------------------------------------------------------------------
Portugal Telecommunications 65,720 Portugal Telecom, S.A.
(ADR)*............... 1,417,539 1,856,590 1.3
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Portugal 1,417,539 1,856,590 1.3
- ---------------------------------------------------------------------------------------------------------------------
South Korea Utilities--Electric 40,800 Korea Electric Power
Corp. (ADR)*......... 821,100 836,400 0.6
------------------------------------------------------------------------------------------------------
Total Common Stocks
in South Korea 821,100 836,400 0.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-55-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Country Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Spain Telecommunications 50,700 Telefonica de Espana
S.A. (ADR)*.......... $ 1,942,165 $ 3,510,975 2.5%
------------------------------------------------------------------------------------------------------
Utilities--Electric 36,400 Empresa Nacional de
Electricidad, S.A.
(Endesa) (ADR)*........ 1,634,684 2,548,000 1.8
15,000 HidroCantabrico,
S.A.................. 503,484 572,303 0.4
131,000 Iberdrola I S.A. ...... 879,896 1,856,010 1.3
----------- ------
3,018,064 4,976,313 3.5
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Spain 4,960,229 8,487,288 6.0
- ---------------------------------------------------------------------------------------------------------------------
Switzerland Utilities--Electric 1,500 Elektrowatt AG......... 588,618 597,177 0.4
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Switzerland 588,618 597,177 0.4
- ---------------------------------------------------------------------------------------------------------------------
Thailand Telecommunications 2,000 +TelecomAsia
Corporation Public
Co., Ltd. (ADR)*..... 43,740 40,000 0.0
------------------------------------------------------------------------------------------------------
Utilities--Electric 68,000 Electricity Generating
Company of Thailand
(EGCOMP)............... 60,715 185,597 0.1
------------------------------------------------------------------------------------------------------
Total Common Stocks
in Thailand 104,455 225,597 0.1
- ---------------------------------------------------------------------------------------------------------------------
United Telecommunications 57,000 British Telecom-
Kingdom munications PLC........ 406,712 385,187 0.3
10,000 British Telecommun-
ications PLC (ADR)*.. 741,450 686,250 0.5
87,000 Vodafone Group PLC
(ADR)*............... 2,549,289 3,599,625 2.5
----------- ------
3,697,451 4,671,062 3.3
------------------------------------------------------------------------------------------------------
Utilities--Electric 73,714 London Electricity
PLC.................. 860,944 858,178 0.6
167,500 National Power PLC..... 1,238,839 1,401,274 1.0
92,690 PowerGen PLC........... 678,633 910,215 0.6
----------- ------
2,778,416 3,169,667 2.2
------------------------------------------------------------------------------------------------------
Total Common Stocks
in the United Kingdom 6,475,867 7,840,729 5.5
- ---------------------------------------------------------------------------------------------------------------------
United Independent Power 40,000 Enron Global Power &
States Producers Pipelines L.L.C. .... 930,101 1,080,000 0.8
------------------------------------------------------------------------------------------------------
Telecommunications 10,000 AT&T Corp. ............ 405,165 435,000 0.3
36,400 +AirTouch
Communications,
Inc.................. 879,157 919,100 0.6
25,800 Ameritech Corp. ....... 1,030,404 1,564,125 1.1
8,000 Bell Atlantic Corp. ... 447,000 518,000 0.4
37,400 BellSouth Corp. ....... 1,138,507 1,510,025 1.1
42,000 Frontier Corp. ........ 969,520 950,250 0.7
33,500 GTE Corp. ............. 1,124,815 1,524,250 1.1
3,240 Lucent Technologies.... 159,185 149,850 0.1
20,000 MCI Communications
Corp. ............... 602,500 652,500 0.4
31,000 NYNEX Corp. ........... 1,184,107 1,491,875 1.0
29,300 SBC Communications,
Inc.................. 1,233,299 1,516,275 1.1
30,000 Sprint Corp............ 864,273 1,196,250 0.8
24,900 U S West Com-
munications Group.... 606,619 803,025 0.6
----------- ------
10,644,551 13,230,525 9.3
------------------------------------------------------------------------------------------------------
Utilities--Electric 65,600 Allegheny Power System,
Inc.................. 1,689,846 1,992,600 1.4
25,000 American Electric Power
Company, Inc......... 1,092,125 1,028,125 0.7
72,500 Boston Edison Co....... 2,012,799 1,948,437 1.4
84,192 CINergy Corp........... 2,052,668 2,809,908 2.0
</TABLE>
-56-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Country Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United Utilities-- 49,300 Consolidated Edison
States Electric Co. of New York........ $ 1,597,050 $ 1,442,025 1.0%
(concluded) (concluded) 31,500 DTE Energy............. 989,953 1,019,812 0.7
26,400 Dominion Resources,
Inc.................. 1,242,516 1,016,400 0.7
31,000 Duke Power Co.......... 1,172,492 1,433,750 1.0
97,000 Edison International... 1,800,212 1,927,875 1.3
50,000 Enova Corporation
Holding Co........... 1,184,750 1,137,500 0.8
54,300 Entergy Corp........... 1,905,240 1,506,825 1.1
30,000 FPL Group, Inc......... 1,374,501 1,380,000 1.0
85,200 GPU, Inc............... 2,559,840 2,864,850 2.0
146,200 Houston Industries,
Inc.................. 3,215,466 3,307,775 2.3
56,000 NIPSCO Industries,
Inc.................. 1,787,890 2,219,000 1.5
50,700 New York State Electric
& Gas Corp........... 1,537,761 1,096,387 0.8
93,800 PECO Energy Co......... 2,719,313 2,368,450 1.7
72,800 PacifiCorp............. 1,401,416 1,492,400 1.0
44,000 Public Service Co. of
Colorado............. 1,312,146 1,710,500 1.2
86,200 Southern Co............ 1,846,654 1,950,275 1.4
55,000 Texas Utilities Co..... 2,237,675 2,241,250 1.6
----------- ------
36,732,313 37,894,144 26.6
------------------------------------------------------------------------------------------------------
Utilities--Gas 33,100 AGL Resources Inc...... 619,896 699,237 0.5
33,000 The Brooklyn Union Gas
Co................... 855,855 994,125 0.7
52,000 The Coastal Corp....... 1,509,758 2,541,500 1.8
24,800 El Paso Natural Gas
Co................... 895,148 1,252,400 0.9
55,000 MDU Resources Group,
Inc.................. 1,171,945 1,265,000 0.9
26,100 National Fuel Gas
Company.............. 788,314 1,076,625 0.7
25,000 New Jersey Resources
Corp................. 656,623 731,250 0.5
53,500 Questar Corp........... 1,908,628 1,966,125 1.4
72,200 Sonat, Inc............. 2,342,585 3,718,300 2.6
49,800 Washington Gas Light
Co................... 1,046,197 1,126,725 0.8
117,900 Williams Co., Inc...... 2,298,643 4,421,250 3.1
----------- ------
14,093,592 19,792,537 13.9
------------------------------------------------------------------------------------------------------
Utilities--Water 38,000 American Water Works
Co., Inc............. 714,875 783,750 0.5
------------------------------------------------------------------------------------------------------
Total Common Stocks
in the United States 63,115,432 72,780,956 51.1
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Common Stocks 110,223,157 135,138,132 94.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-57-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--Global Utility Focus Fund
Schedule of Investments as of December 31, 1996 (concluded) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Fixed-Income Value Percent of
Country Industry Amount Securities Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Australia Telecommunications US$1,040,000 Telstra Corp. Ltd.,
6.50% due
7/31/2003(a)....... $ 1,084,062 $ 1,020,240 0.7%
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Securities in
Australia 1,084,062 1,020,240 0.7
- ---------------------------------------------------------------------------------------------------------------------
Korea Utilities--Electric 1,000,000 Korea Electric Power
Corp., 6.375% due
12/01/2003......... 985,510 971,750 0.7
------------------------------------------------------------------------------------------------------
Total Fixed-Income
Securities in Korea 985,510 971,750 0.7
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Fixed-Income
Securities 2,069,572 1,991,990 1.4
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
Commercial Paper*** 5,049,000 General Electric
Capital Corp.,
7.10% due
1/02/1997.......... 5,047,008 5,047,008 3.5
------------------------------------------------------------------------------------------------------
Total Investments in
Short-Term Securities 5,047,008 5,047,008 3.5
- ---------------------------------------------------------------------------------------------------------------------
Total Investments.... $117,339,737 142,177,130 99.8
=============
Other Assets Less
Liabilities........ 260,671 0.2
------------ ----------
Net Assets........... $142,437,801 100.0%
============= ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper is traded on a discount basis; the interest rate shown is
the discount rate paid at the time of purchase by the Fund.
+ Non-income producing security.
(a) Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $3,420,000, representing 2.4% of
net assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Issue Acquisition Date(s) Cost (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Central Costanera S.A. (ADR)........................................ 12/17/1993 $ 261,847 $ 238,975
Distribuidora Chilectra Metropolitana, S.A. (ADR)................... 8/06/1993-12/21/1993 1,098,338 1,860,300
Tata Electric Companies (GDR)....................................... 2/22/1994 710,000 300,000
Telestra Corp. Ltd., 6.50% due 7/31/2003............................ 7/26/1993-9/29/1993 1,084,062 1,020,240
- ---------------------------------------------------------------------------------------------------------------------
Total $3,154,247 $3,419,515
========== ==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-58-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Government Bond Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Value
Amount Issue Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Government & Agency Obligations
- ---------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage $ 3,000,000 Federal Home Loan Mortgage Corp.,
Corporation--3.4% 7.14% due 9/13/2006.......................... $ 3,064,440 $ 3,082,019
- ---------------------------------------------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corp. 3,064,440 3,082,019
- ---------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Federal National Mortgage Association:
Association--14.8% 2,000,000 8.90% due 6/12/2000........................ 2,171,480 2,161,880
1,045,000 7.50% due 2/11/2002........................ 1,088,232 1,093,007
4,000,000 7.40% due 7/01/2004........................ 4,157,540 4,191,880
500,000 7.85% due 9/10/2004........................ 499,297 511,720
2,000,000 7.65% due 3/10/2005........................ 2,091,140 2,125,320
3,000,000 7.375% due 3/28/2005....................... 3,158,430 3,138,750
- ---------------------------------------------------------------------------------------------------------------------
Total Federal National Mortgage Association 13,166,119 13,222,557
- ---------------------------------------------------------------------------------------------------------------------
US Treasury Notes--72.4% US Treasury Notes:
2,000,000 7.125% due 2/29/2000....................... 2,004,375 2,059,060
1,000,000 6.875% due 3/31/2000....................... 1,019,375 1,022,500
5,000,000 7.50% due 11/15/2001....................... 5,140,469 5,263,300
11,500,000 6.375% due 8/15/2002....................... 11,488,545 11,575,440
2,000,000 6.25% due 2/15/2003........................ 1,992,656 1,997,500
3,000,000 5.75% due 8/15/2003........................ 2,835,781 2,910,000
12,000,000 7.25% due 5/15/2004........................ 12,468,047 12,626,280
3,000,000 7.25% due 8/15/2004........................ 3,219,375 3,157,500
4,000,000 7.875% due 11/15/2004...................... 4,440,000 4,365,000
8,000,000 6.50% due 5/15/2005........................ 7,732,480 8,053,760
3,000,000 6.875% due 5/15/2006....................... 3,082,187 3,091,410
6,000,000 7.00% due 7/15/2006........................ 6,079,687 6,233,460
2,500,000 6.50% due 10/15/2006....................... 2,488,359 2,513,675
- ---------------------------------------------------------------------------------------------------------------------
Total US Treasury Notes 63,991,336 64,868,885
- ---------------------------------------------------------------------------------------------------------------------
Total US Government & Agency
Obligations--90.6% 80,221,895 81,173,461
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Securities
- ---------------------------------------------------------------------------------------------------------------------
Repurchase Agreements*--5.2% 4,661,000 UBS Securities Funding, Inc. purchased on
12/31/1996 to yield 6.75% to 1/02/1997..... 4,661,000 4,661,000
- ---------------------------------------------------------------------------------------------------------------------
US Government US Treasury Bills:
Obligations**--2.2% 1,000,000 4.55% due 1/09/1997........................ 998,863 998,863
1,000,000 4.60% due 1/16/1997........................ 997,956 997,956
-----------
1,996,819 1,996,819
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 6,657,819 6,657,819
- ---------------------------------------------------------------------------------------------------------------------
Total Investments--98.0%..................... $86,879,714 87,831,280
===========
Other Assets Less Liabilities--2.0%.......... 1,749,512
Net Assets--100.0%........................... $89,580,792
- ------------------------------------------------------------------------------
</TABLE>
* Repurchase Agreements are fully collateralized by US Government
Obligations.
** Certain US Government Obligations are traded on a discount basis; the
interest rates shown are the discount rates paid at the time of purchase by
the Fund.
See Notes to Financial Statements.
-59-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--High Current Income Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Issue Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Airlines--1.0% B+ B1 $4,000,000 USAir, Inc., 10.375% due
3/01/2013.................... $ 3,935,000 $ 4,180,000
- ---------------------------------------------------------------------------------------------------------------------
Automotive--0.9% B B3 2,000,000 Collins & Aikman Corp., 11.50%
due 4/15/2006................ 2,000,000 2,180,000
B B2 2,000,000 Exide Corp., 11.64% due
12/15/2004(d)................ 1,817,902 1,840,000
------------ ------------
3,817,902 4,020,000
- ---------------------------------------------------------------------------------------------------------------------
Broadcasting & BB Ba3 4,000,000 Grupo Televisa S.A., 11.375%
Publishing--4.4% due 5/15/2003................ 4,025,000 4,295,000
BB- B1 5,000,000 Hollinger, International Inc.,
9.25% due 2/01/2006.......... 4,961,250 4,950,000
BB- Ba3 1,000,000 K-III Communications Corp.,
10.25% due 6/01/2004......... 995,000 1,040,000
B Caa 4,300,000 NWCG Holding Corp., 13.50% due
6/15/1999(d)................. 3,121,269 3,547,500
Sinclair Broadcasting Group
Inc.:
B B2 2,500,000 10% due 12/15/2003............. 2,436,250 2,537,500
B B2 2,000,000 10% due 9/30/2005.............. 1,993,750 2,030,000
------------ ------------
17,532,519 18,400,000
- ---------------------------------------------------------------------------------------------------------------------
Broadcasting/ CCC+ Caa 5,023,939 American Telecasting, Inc.,
Cable--11.3% 14.38% due 6/15/2004(d)(e)... 3,531,401 2,059,815
B- B2 1,500,000 Argyle Television Inc., 9.75%
due 11/01/2005............... 1,447,500 1,522,500
CCC+ Caa 8,000,000 Australis Media Ltd., 14.59%
due 5/15/2003(d)............. 4,978,793 4,200,000
BB- B2 9,000,000 Bell Cablemedia PLC, 11.74% due
9/15/2005(d)................. 5,917,159 7,222,500
BB- Ba3 3,000,000 Century Communications Corp.,
9.50% due 3/01/2005.......... 2,953,750 3,075,000
CCC+ Caa 5,500,000 Echostar Satellite
Broadcasting, 13.15% due
3/15/2004(d)................. 3,654,874 4,207,500
NR* NR* 2,000,000 +Globo Communicacoes
Participacoes, 10.50% due
12/20/2006................... 2,006,250 2,012,500
B B2 4,000,000 +Intermedia Capital Partners,
11.25% due 8/01/2006......... 3,997,500 4,160,000
BB+ Ba3 5,000,000 Lenfest Communications, Inc.,
8.375% due 11/01/2005........ 4,627,500 4,831,250
B B1 4,000,000 +Olympus Communications L.P.,
10.625% due 11/15/2006....... 4,000,000 4,095,000
B- B3 2,000,000 SFX Broadcasting Inc., 10.75%
due 5/15/2006................ 1,990,000 2,110,000
Videotron Holdings PLC:
B+ B3 5,500,000 11.77% due 7/01/2004(d)........ 4,029,842 4,785,000
BB+ Ba3 2,500,000 10.625% due 2/15/2005.......... 2,559,375 2,750,000
------------ ------------
45,693,944 47,031,065
- ---------------------------------------------------------------------------------------------------------------------
Building BB B1 2,500,000 +Cemex S.A., 12.75% due
Materials--1.5% 7/15/2006.................... 2,500,000 2,793,750
B B3 3,340,000 Pacific Lumber Co., 10.50% due
3/01/2003.................... 3,252,088 3,390,100
------------ ------------
5,752,088 6,183,850
- ---------------------------------------------------------------------------------------------------------------------
Capital Goods--1.6% B+ B1 1,660,000 Essex Group, Inc., 10% due
5/01/2003.................... 1,668,925 1,701,500
B- B3 4,500,000 International Wire Group Inc.,
11.75% due 6/01/2005......... 4,490,625 4,815,000
------------ ------------
6,159,550 6,516,500
- ---------------------------------------------------------------------------------------------------------------------
Chemicals -- 1.9% B+ Ba3 4,100,000 Agricultural Minerals &
Chemicals Co., L.P., 10.75%
due 9/30/2003................ 4,123,188 4,458,750
B+ Ba3 3,500,000 +ISP Holdings Inc., 9.75% due
2/15/2002.................... 3,500,000 3,587,500
------------ ------------
7,623,188 8,046,250
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-60-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--High Current Income Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Issue Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Communications-- NR* NR* $3,000,000 +Comtel Brasileira Ltd., 10.75%
8.7% due 9/26/2004................ $ 3,000,000 $ 3,082,500
B- B3 8,000,000 Millicom International Celular
S.A., 13.31% due
6/01/2006(d)................. 4,555,660 4,960,000
CCC- B3 6,000,000 Nextel Communications, Inc.,
14.11% due 8/15/2004(d)...... 3,722,677 4,095,000
B B2 3,000,000 +Paging Network, Inc., 10% due
10/15/2008................... 3,003,750 3,041,250
B B3 3,000,000 Panamsat L.P., 12.16% due
8/01/2003(d)................. 2,413,727 2,790,000
BB- B2 3,000,000 Rogers Communications Inc.,
10.875% due 4/15/2004........ 3,042,500 3,150,000
BB- B1 4,000,000 Telefonica de Argentina S.A.,
11.875% due 11/01/2004....... 3,917,780 4,420,000
BB B1 7,000,000 TeleWest Communications PLC,
11.45% due 10/01/2007(d)..... 4,520,553 4,882,500
B- B2 3,000,000 USA Mobile Communications
Holdings, Inc., 9.50% due
2/01/2004.................... 2,710,000 2,850,000
B+ B1 1,500,000 Vanguard Cellular Systems,
9.375% due 4/15/2006......... 1,500,000 1,522,500
B- B3 1,000,000 Western Wireless Corp., 10.50%
due 2/01/2007................ 990,000 1,046,250
------------ ------------
33,376,647 35,840,000
- ---------------------------------------------------------------------------------------------------------------------
Computer Services-- B- B3 3,000,000 Dictaphone Corp., 11.75% due
0.7% 8/01/2005.................... 2,943,750 2,760,000
- ---------------------------------------------------------------------------------------------------------------------
Congolomerates-- CCC+ B3 2,125,000 Interlake Corp., 12.125% due
2.0% 3/01/2002.................... 2,000,750 2,199,375
B+ B2 2,000,000 JB Poindexter & Co., 12.50% due
5/15/2004.................... 2,000,000 1,950,000
NR* NR* 890,000 MacAndrews & Forbes Group,
Inc.,13% due 3/01/1999....... 868,373 890,000
Sequa Corp.:
B+ B1 750,000 9.625% due 10/15/1999.......... 740,625 772,500
B+ B3 2,500,000 9.375% due 12/15/2003.......... 2,512,813 2,550,000
------------ ------------
8,122,561 8,361,875
- ---------------------------------------------------------------------------------------------------------------------
Consumer-- B NR* 5,000,000 Coleman Holdings, Inc.,
Products--5.7% 11.39% due 5/27/1998(d)........ 4,254,825 4,150,000
B+ Ba3 1,250,000 Coty Inc., 10.25% due
5/01/2005.................... 1,250,000 1,356,250
B+ Ba2 7,000,000 International Semi-Tech
Microelectronics, Inc.,
13.13% due 8/15/2003(d)...... 4,229,935 4,515,000
B- B2 3,619,000 Polymer Group Inc., 12.25% due
7/15/2002.................... 3,678,048 3,953,758
B- B2 4,500,000 Samsonite Corp., 11.125% due
7/15/2005.................... 4,348,750 4,927,500
B+ B1 4,500,000 Sealy Corp., 9.50% due
5/01/2003.................... 4,453,125 4,545,000
------------ ------------
22,214,683 23,447,508
- ---------------------------------------------------------------------------------------------------------------------
Defense--0.7% B+ B1 3,000,000 +Newport News Ship, 9.25% due
12/01/2006................... 3,000,000 3,090,000
- ---------------------------------------------------------------------------------------------------------------------
Diversified--0.6% Foamex L.P.:
B+ B1 530,000 9.50% due 6/01/2000............ 517,413 537,950
B B1 1,950,000 11.25% due 10/01/2002.......... 1,936,375 2,067,000
------------ ------------
2,453,788 2,604,950
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-61-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--High Current Income Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Issue Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy--6.2% B B2 $4,500,000 Benton Oil & Gas Co, 11.625%
due 05/01/2003............... $ 4,500,000 $ 4,983,750
B+ B1 1,750,000 +Parker Drilling Co., 9.75% due
11/15/2006................... 1,758,750 1,846,250
NR* NR* 3,000,000 +Petroleo Brasileiro S.A.--
Petrobras, 10% due
10/17/2006................... 3,000,313 3,033,750
NR* NR* 4,000,000 +Transamerican Exploration
Corp., 14% due 9/19/1998..... 3,960,000 4,040,000
CCC+ Caa 3,400,000 Transamerican Refining Corp.,
19.11% due 2/15/2002(d)...... 2,731,372 2,805,000
BB- B2 4,500,000 TransTexas Gas Corp., 11.50%
due 6/15/2002................ 4,498,750 4,860,000
BB- B1 4,500,000 Yacimientos Petroliferos
Fiscales S.A., 8% due
2/15/2004.................... 3,694,375 4,342,500
------------ ------------
24,143,560 25,911,250
- ---------------------------------------------------------------------------------------------------------------------
Entertainment--1.1% B B2 5,000,000 Six Flags Theme Parks Corp.,
12.25% due 6/15/2005(d)...... 4,237,019 4,700,000
- ---------------------------------------------------------------------------------------------------------------------
Financial Services--1.0% BB- B1 4,000,000 Reliance Group Holdings Inc.,
9.75% due 11/15/2003......... 3,898,750 4,160,000
- ---------------------------------------------------------------------------------------------------------------------
Food & B+ B1 4,500,000 Chiquita Brands International
Beverage--3.5% Inc., 9.125% due 3/01/2004..... 4,448,750 4,545,000
NR* NR* 1,893,000 Cumberland Farms, Inc., 10.50%
due 10/01/2003............... 1,852,774 1,807,815
CCC+ Caa 2,500,000 Del Monte Corp., 10% due
5/01/2003.................... 2,310,000 2,387,500
B- B3 1,500,000 Envirodyne Industries, Inc.,
10.25% due 12/01/2001........ 1,528,125 1,436,250
B B3 4,500,000 Specialty Foods Corp., 11.125%
due 10/01/2002............... 4,444,375 4,275,000
------------ ------------
14,584,024 14,451,565
- ---------------------------------------------------------------------------------------------------------------------
Foreign Government BB- B1 4,000,000 Republic of Argentina, 8.375%
Obligations--0.9% due 12/20/2003............... 3,175,000 3,765,000
- ---------------------------------------------------------------------------------------------------------------------
Gaming--2.5% B B3 4,000,000 Greate Bay Properties, Inc.,
10.875% due 1/15/2004........ 3,590,000 3,360,000
D Caa 4,500,000 Harrah's Jazz Company, 14.25%
due 11/15/2001(c)............ 4,468,750 2,210,625
BB- B1 5,000,000 Trump Atlantic City
Association, 11.25% due
5/01/2006.................... 4,961,250 4,950,000
------------ ------------
13,020,000 10,520,625
- ---------------------------------------------------------------------------------------------------------------------
Health Services--2.1% B+ B1 4,000,000 Beverly Enterprises, Inc., 9%
due 2/15/2006................ 3,740,000 4,020,000
B+ B2 3,000,000 Quest Diagnostic Inc., 10.75%
due 12/15/2006............... 3,000,000 3,150,000
B B3 2,000,000 Unilab Corp., 11% due
4/01/2006.................... 1,995,000 1,350,000
------------ ------------
8,735,000 8,520,000
- ---------------------------------------------------------------------------------------------------------------------
Home-Builders--0.6% B- B2 2,500,000 Del Webb Corporation, 9% due
2/15/2006.................... 2,497,500 2,437,500
- ---------------------------------------------------------------------------------------------------------------------
Hotels--1.1% BB- Ba3 4,500,000 HMC Acquisition Properties, 9%
due 12/15/2007............... 4,202,500 4,567,500
- ---------------------------------------------------------------------------------------------------------------------
Independent Power BB- Ba3 2,750,000 AES China Generating Co. Ltd.
Producers--2.1% (Class A), 10.125% due
12/15/2006................... 2,747,360 2,860,000
BB B2 2,500,000 California Energy Company,
Inc., 9.875% due 6/30/2003... 2,518,750 2,625,000
NR* NR* 1,500,000 Consolidated Hydro, Inc.,
11.80% due 7/15/2003(d)...... 1,256,950 480,000
Midland Cogeneration Venture
L.P.:
BB Ba3 2,327,454 10.33% due 7/23/2002(e)........ 2,367,215 2,478,739
B- B2 250,000 11.75% due 7/23/2005........... 250,000 276,790
------------ ------------
9,140,275 8,720,529
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-62-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--High Current Income Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Issue Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Metals & Mining-- B- B2 $4,500,000 Kaiser Aluminum Corp., 12.75%
1.8% due 2/01/2003................ $ 4,770,000 $ 4,837,500
B- B3 3,000,000 Maxxam Group, Inc., 12.25% due
8/01/2003(d)................. 2,484,169 2,557,500
------------ ------------
7,254,169 7,395,000
- ---------------------------------------------------------------------------------------------------------------------
Packaging--2.1% Owens-Illinois, Inc.:
B+ B2 2,000,000 10% due 8/01/2002............ 2,000,000 2,090,000
BB Ba3 2,000,000 11% due 12/01/2003........... 2,145,312 2,225,000
B B2 4,000,000 Portola Packaging Inc., 10.75%
due 10/01/2005............... 4,000,000 4,170,000
------------ ------------
8,145,312 8,485,000
- ---------------------------------------------------------------------------------------------------------------------
Paper--4.6% B B3 4,000,000 Crown Paper Co., 11% due
9/01/2005.................... 3,663,750 3,760,000
B B2 3,000,000 Fort Howard Corp., 9% due
2/01/2006.................... 2,895,000 3,030,000
BB- B2 3,000,000 Repap Wisconsin Finance, Inc.,
9.25% due 2/01/2002.......... 2,760,000 3,022,500
B B3 4,000,000 Riverwood International Corp.,
10.875% due 4/01/2008........ 3,978,750 3,700,000
B+ B1 2,000,000 S.D. Warren Co., 12% due
12/15/2004................... 2,000,000 2,160,000
Stone Container Corp.:
B+ B1 1,950,000 9.875% due 2/01/2001......... 1,869,375 1,969,500
BB- B1 1,300,000 10.75% due 10/01/2002........ 1,287,000 1,369,875
------------ ------------
18,453,875 19,011,875
- ---------------------------------------------------------------------------------------------------------------------
Real Estate--0.5% NR* NR* 3,000,000 Rockefeller Center Properties,
11.09% Inc., due 12/31/2000
(Convertible)(d)............. 1,965,742 1,852,500
- ---------------------------------------------------------------------------------------------------------------------
Restaurants--1.5% Foodmaker, Inc.:
B B1 4,000,000 9.25% due 3/01/1999.......... 4,010,000 4,090,000
CCC+ B1 2,000,000 9.75% due 11/01/2003......... 1,972,075 1,965,000
------------ ------------
5,982,075 6,055,000
- ---------------------------------------------------------------------------------------------------------------------
Retail Specialty--0.1% D Caa 4,500,000 Bradlees, Inc., 11% due
8/01/2002(c)................. 4,466,562 472,500
- ---------------------------------------------------------------------------------------------------------------------
Steel--0.8% B B2 3,500,000 Weirton Steel Corp., 10.75% due
6/01/2005.................... 3,346,250 3,430,000
- ---------------------------------------------------------------------------------------------------------------------
Supermarkets--1.5% B B2 3,500,000 Penn Traffic American Corp.,
8.625% due 12/15/2003........ 2,888,750 2,878,750
B B1 1,000,000 Ralph's Grocery Co., 10.45% due
6/15/2004.................... 962,500 1,063,750
B B1 2,000,000 Ralph's Grocery Co. (New),
10.45% due 6/15/2004......... 1,897,358 2,125,000
------------ ------------
5,748,608 6,067,500
- ---------------------------------------------------------------------------------------------------------------------
Textiles--2.3% B- Caa 3,000,000 Decorative Home Accents, Inc.
(Class F), 13% due
6/30/2002.................... 2,977,008 1,950,000
BB- Ba3 3,500,000 Tultex Corp., 10.625% due
3/15/2005.................... 3,500,000 3,815,000
B+ B2 3,500,000 Westpoint Stevens Industries,
Inc., 9.375% due 12/15/2005.. 3,291,250 3,605,000
------------ ------------
9,768,258 9,370,000
- ---------------------------------------------------------------------------------------------------------------------
Transportation--2.5% BB- B1 4,000,000 Sea Containers Ltd., 12.50% due
12/01/2004................... 4,380,000 4,400,000
B- B3 3,700,000 Transtar Holdings Inc., 11.02%
due 12/15/2003(d)............ 2,720,132 2,960,000
BB Ba2 3,000,000 Viking Star Shipping Co.,
9.625% due 7/15/2003......... 2,905,937 3,138,750
------------ ------------
10,006,069 10,498,750
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-63-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--High Current Income Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Issue Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Utilities--4.8% B+ B1 $3,453,000 Beaver Valley Funding Corp., 9%
due 6/01/2017................ $ 3,252,225 $ 3,297,580
CTC Mansfield Funding Corp.:
B+ Ba3 995,000 10.25% due 3/30/2003......... 978,850 1,009,686
B+ Ba3 2,300,000 11.125% due 9/30/2016........ 2,402,500 2,426,500
BB Ba2 2,000,000 Cleveland Electric Illuminating
Co., 9.50% due 5/15/2005..... 1,996,160 2,108,760
BB- B1 4,000,000 Metrogas S.A., 12% due
8/15/2000.................... 3,935,000 4,390,000
BBB- NR* 3,000,000 +Trans Gas de Occidente S.A.,
9.79% due 11/01/2010......... 3,000,000 3,105,000
+Tucson Electric & Power Co.:
NR* NR* 3,070,687 10.21% due 1/01/2009......... 2,948,074 2,990,357
NR* NR* 500,000 10.732% due 1/01/2013........ 461,050 489,995
------------ ------------
18,973,859 19,817,878
- ---------------------------------------------------------------------------------------------------------------------
Waste D Ca 3,500,000 Mid-American Waste Systems,
Management--0.3% Inc., 12.25% due 2/15/2003... 3,555,000 1,225,000
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Corporate
Bonds--84.9% 347,925,027 351,916,970
- ---------------------------------------------------------------------------------------------------------------------
Shares
Held Preferred Stocks
---------------------------------------------------------------------------------------------------------------------
Broadcasting & 15,259 K-III Communications Corp.
Publishing--1.8% (Series B)(a)................ 1,513,108 1,533,622
5,375 Time Warner Inc. (Series
M)(a)........................ 5,376,812 5,831,875
------------ ------------
6,889,920 7,365,497
- ---------------------------------------------------------------------------------------------------------------------
Communications--0.7% 3,000 +Paxson Communications(a)...... 2,835,000 2,857,500
- ---------------------------------------------------------------------------------------------------------------------
Industrials--0.7% 30,000 Cablevision Systems Corp.,
(Series M)(a)................ 2,617,500 2,760,000
- ---------------------------------------------------------------------------------------------------------------------
Packaging--0.6% 2,578 +Silgan Holdings Inc.(a)....... 2,581,120 2,758,460
- ---------------------------------------------------------------------------------------------------------------------
Steel--0.7% 120,000 USX Capital Corp............... 3,000,000 3,045,000
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Preferred
Stocks--4.5% 17,923,540 18,786,457
- ---------------------------------------------------------------------------------------------------------------------
Common Stocks
---------------------------------------------------------------------------------------------------------------------
Broadcasting & 93,747 On Command Corporation (c)..... 2,744,654 1,488,234
Publishing--0.3%
- ---------------------------------------------------------------------------------------------------------------------
Food & Beverage--0.0% 4,300 FoodBrands America, Inc.(c).... 240,909 59,125
- ---------------------------------------------------------------------------------------------------------------------
Gaming--0.0% 2,500 Goldriver Hotel & Casino
Finance Corp. (Class B) (c).. 18,603 0
- ---------------------------------------------------------------------------------------------------------------------
Hotel--0.0% 107 Buckhead America Corp.(c)...... 575 642
- ---------------------------------------------------------------------------------------------------------------------
Industrial Services--0.0% 311 Thermadyne Industries,
Inc.(c)...................... 4,495 8,242
- ---------------------------------------------------------------------------------------------------------------------
Supermarkets--0.1% 53,022 Grand Union Co.(c)............. 3,090,000 258,482
- ---------------------------------------------------------------------------------------------------------------------
Textiles--0.0% 3,000 +Decorative Home Accents, Inc.
(Class F)(c)................. 22,992 16,500
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Common
Stocks--0.4% 6,122,228 1,831,225
- ---------------------------------------------------------------------------------------------------------------------
Trusts and Warrants
---------------------------------------------------------------------------------------------------------------------
Broadcasting & 29,830 On Command Corporation
Publishing--0.1% (Warrants)(b)................ 238,640 201,353
- ---------------------------------------------------------------------------------------------------------------------
Broadcasting/Cable--0.0% 23,350 American Telecasting, Inc.
(Warrants)(b)................ 4,776 52,537
- ---------------------------------------------------------------------------------------------------------------------
Energy--0.0% 42,733 Transamerican Refining Corp.
(Warrants) (b)............... 99,622 85,466
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-64-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--High Current Income Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
Industry Held Trusts and Warrants Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gaming--0.0% 250 +Goldriver Hotel & Casino
Finance Corp., (Liquidating
Trust)(c)................... $ 6,000 $ 2,141
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Trusts
and Warrants--0.1% 349,038 341,497
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
Commercial Paper**--3.5% $14,421,000 General Electric Capital
Corp., 7.10% due
1/02/1997................... 14,415,312 14,415,312
- ---------------------------------------------------------------------------------------------------------------------
US Government & Agency Federal Home Loan Bank:
Obligations**--5.7% 8,000,000 5.21% due 1/02/1997......... 7,997,684 7,997,684
8,000,000 5.49% due 1/23/1997......... 7,971,940 7,971,940
2,618,000 Federal Home Loan Mortgage
Corp., 6.50% due 1/02/1997.. 2,617,055 2,617,055
5,000,000 Federal National Mortgage
Association, 5.45% due
1/14/1997................... 4,989,403 4,989,403
------------ ------------
23,576,082 23,576,082
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in Short-
Term Securities--9.2% 37,991,394 37,991,394
- ---------------------------------------------------------------------------------------------------------------------
Total Investments--99.1%...... $410,311,227 410,867,543
=============
Other Assets Less
Liabilities--0.9%........... 3,747,375
------------
Net Assets--100.0%............ $414,614,918
=============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Rated.
** Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay interest/dividend in
additional face/shares.
(b) Warrants entitle the portfolio to purchase a predetermined number of
shares of common stock/face amount of bonds. The purchase price and
number of shares/face amount are subject to adjustment under certain
conditions until the expiration date.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
(e) Subject to principal paydowns.
+ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $47,002,000, representing 11.3% of
net assets.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Value
Issue Acquisition Date(s) Cost (Note 1a)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cemex S.A., 12.75% due 7/15/2006....................... 7/16/1996 $ 2,500,000 $ 2,793,750
Comtel Brasileira Ltd., 10.75% due 9/26/2004........... 9/18/1996 3,000,000 3,082,500
Decorative Home Accents, Inc. (Class F)................ 6/30/1995-9/21/1995 22,992 16,500
Globo Communicacoes Participacoes, 10.50% due
12/20/2006........................................... 12/10/1996-12/12/1996 2,006,250 2,012,500
Goldriver Hotel & Casino Finance Corp. (Liquidating
Trust)............................................... 8/31/1992 6,000 2,141
ISP Holdings Inc., 9.75% due 2/15/2002................. 10/21/1996 3,500,000 3,587,500
Intermedia Capital Partners, 11.25% due 8/01/2006...... 10/30/1996-11/20/1996 3,997,500 4,160,000
Newport News Ship, 9.25% due 12/01/2006................ 11/21/1996 3,000,000 3,090,000
Olympus Communications L.P. 10.625% due 11/15/2006..... 11/06/1996 4,000,000 4,095,000
Paging Network, Inc., 10% due 10/15/2008............... 11/25/1996-1/26/1996 3,003,750 3,041,250
Parker Drilling Co., 9.75% due 11/15/2006.............. 11/6/1996 1,758,750 1,846,250
Paxson Communications.................................. 12/19/1996 2,835,000 2,857,500
Petroleo Brasileiro S.A. -- Petrobras,
10% due 10/17/2006................................... 10/21/1996-11/25/1996 3,000,313 3,033,750
Silgan Holdings Inc. .................................. 7/17/1996-10/3/1996 2,581,120 2,758,460
Trans Gas de Occidente S.A., 9.79% due 11/01/2010...... 11/02/1995 3,000,000 3,105,000
Transamerican Exploration Corp., 14% due 9/19/1998..... 9/19/1996 3,960,000 4,040,000
Tucson Electric & Power Co., 10.21% due 1/01/2009...... 6/16/1993-4/01/1996 2,948,074 2,990,357
Tucson Electric & Power Co., 10.732% due 1/01/2013..... 3/01/1993 461,050 489,995
-----------------------------------------------------------------------------------------------------------------
Total $45,580,799 $47,002,453
=========== ===========
-----------------------------------------------------------------------------------------------------------------
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
See Notes to Financial Statements.
-65-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
General Electric Co.++ ...... 2,758 $ 272,697
Coca-Cola Co................. 4,168 219,341
Exxon Corp................... 2,080 203,840
Intel Corp. ................. 1,375 179,953
+Microsoft Corporation....... 2,000 165,250
Merck & Co., Inc. ........... 2,019 160,006
Philip Morris Companies,
Inc. ...................... 1,364 153,620
Royal Dutch Petroleum Co. ... 898 153,333
International Business
Machines Corp. ............ 867 130,917
Procter & Gamble Co. ........ 1,143 122,872
American Telephone &
Telegraph Co. ............. 2,714 118,059
Johnson & Johnson Co. ....... 2,231 110,992
Bristol-Myers Squibb Co. .... 839 91,241
Pfizer, Inc. ................ 1,080 89,505
duPont (E.I.) de Nemours &
Co. ....................... 943 88,996
Wal-Mart Companies, Inc. .... 3,843 87,909
Hewlett-Packard Co. ......... 1,703 85,576
American International
Group, Inc. ............... 787 85,193
Citicorp..................... 788 81,164
Mobil Corp. ................. 660 80,685
Disney (Walt) Company
(The) ..................... 1,136 79,094
PepsiCo, Inc. ............... 2,603 76,138
GTE Corp. ................... 1,611 73,301
Gillette Co. ................ 927 72,074
Chevron Corp. ............... 1,093 71,045
General Motors Corp. ........ 1,266 70,580
+cisco Systems, Inc. ........ 1,100 69,988
Federal National Mortgage
Association................ 1,829 68,130
Lilly (Eli) & Co. ........... 924 67,452
BellSouth Corp. ............. 1,664 67,184
Amoco Corp. ................. 833 67,057
Abbott Laboratories.......... 1,301 66,026
Chase Manhattan Corp. ....... 735 65,599
Boeing Co. .................. 600 63,825
Ford Motor Co. .............. 1,986 63,304
American Home Products
Corp. ..................... 1,070 62,729
Motorola, Inc. .............. 993 60,945
BankAmerica Corp. ........... 601 59,950
Minnesota Mining &
Manufacturing Co........... 700 58,012
Ameritech Corporation........ 920 55,775
McDonald's Corp. ............ 1,169 52,897
SBC Communications, Inc. .... 1,011 52,319
Lucent Technologies, Inc. ... 1,067 49,349
Travelers Corporation........ 1,073 48,687
Bell Atlantic Corp. ......... 733 47,462
NationsBank Corp. ........... 482 47,115
Unilever N.V. ............... 268 46,967
Columbia/HCA Healthcare
Corp. ..................... 1,125 45,844
+Oracle Corporation.......... 1,100 45,787
Kimberly-Clark Corp. ........ 473 45,053
American Express Co. ........ 794 44,861
Eastman Kodak Co. ........... 558 44,780
Texaco Inc. ................. 443 43,469
Allstate Corporation ........ 745 43,117
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
Wells Fargo & Co. ........... 155 41,811
Schlumberger, Ltd. .......... 413 41,248
Home Depot, Inc. ............ 805 40,351
Chrysler Corp................ 1,221 40,293
Schering-Plough Corp. ....... 619 40,080
Monsanto Co. ................ 985 38,292
MCI Communications Corp. .... 1,150 37,519
+WorldCom, Inc. ............. 1,435 37,310
Emerson Electric Co. ........ 376 36,378
Time Warner, Inc. ........... 953 35,737
Atlantic Richfield Co. ...... 269 35,643
NYNEX Corp. ................. 737 35,468
First Union Corp. ........... 475 35,150
Warner-Lambert Co. .......... 454 34,050
Pharmacia & Upjohn Inc. ..... 851 33,721
+Compaq Computer Corp. ...... 454 33,710
Anheuser-Busch
Companies, Inc. ........... 837 33,480
Federal Home Loan Mortgage
Corp. ..................... 300 33,038
Dow Chemical Co. ............ 407 31,899
AlliedSignal Inc. ........... 474 31,758
Campbell Soup Co. ........... 392 31,458
BancOne Corp. ............... 716 30,788
Morgan (J.P.) & Co., Inc. ... 312 30,459
Computer Associates
International, Inc. ....... 611 30,397
Sears, Roebuck & Co. ........ 656 30,258
Sara Lee Corporation......... 811 30,210
Lockheed Martin Corp. ....... 323 29,554
Nike, Inc. (Class B) ........ 483 28,859
Sprint Corp. ................ 721 28,750
First Chicago Corp. ......... 534 28,702
Xerox Corp. ................. 544 28,628
First Data Corporation....... 750 27,375
Medtronic, Inc. ............. 401 27,268
Norwest Corp. ............... 620 26,970
Northern Telecom Ltd. ....... 433 26,792
United Technologies Corp. ... 403 26,598
WMX Technologies, Inc. ...... 813 26,524
Pacific Telesis Group........ 718 26,386
US West Communications
Group...................... 800 25,800
Southern Co. ................ 1,129 25,544
Union Pacific Corp. ......... 410 24,651
+Amgen, Inc. ................ 450 24,469
Seagram Co. Ltd. ............ 625 24,219
Caterpillar, Inc. ........... 321 24,155
Kellogg Co. ................. 353 23,166
McDonnell Douglas Corp. ..... 355 22,720
Colgate-Palmolive Co. ....... 246 22,694
Merrill Lynch & Co., Inc. ... 276 22,494
+Rockwell International
Corp. ..................... 366 22,280
Bank of New York Co.,
Inc. ...................... 657 22,174
Burlington Northern Santa Fe
Inc. ...................... 256 22,112
Heinz (H.J.) Company......... 616 22,022
+3Com Corp. ................. 300 21,975
Fleet Financial Group,
Inc. ...................... 439 21,895
General Re Corp. ............ 138 21,770
PNC Bank Corp. .............. 571 21,484
</TABLE>
-66-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
+Airtouch Communications,
Inc. ...................... 840 21,210
Automatic Data
Processing, Inc............ 486 20,837
Westinghouse Electric
Corp....................... 1,046 20,789
+Viacom, Inc. (Class B)...... 593 20,681
International Paper Co. ..... 503 20,309
Texas Instruments, Inc. ..... 318 20,272
Aetna Inc. .................. 252 20,160
ConAgra, Inc. ............... 403 20,049
Archer-Daniels-Midland
Co. ....................... 911 20,042
May Department Stores Co. ... 422 19,728
Phillips Petroleum Co. ...... 441 19,514
+US West Media Group,
Inc. ...................... 1,046 19,351
CoreStates Financial
Corp. ..................... 373 19,349
KeyCorp...................... 378 19,089
Raytheon Co. ................ 395 19,009
Penney (J.C.) Co. ........... 387 18,866
Baxter International,
Inc. ...................... 457 18,737
CPC International, Inc. ..... 241 18,678
Aluminum Co. of America...... 291 18,551
Sun Trust Banks, Inc. ....... 374 18,419
Norfolk & Southern Corp. .... 210 18,375
Enron Corp. ................. 426 18,371
Loews Corporation............ 193 18,190
+Boston Scientific Corp. .... 298 17,880
Dean Witter, Discover &
Co. ....................... 269 17,821
Corning, Inc. ............... 385 17,806
Gannett Co., Inc. ........... 236 17,671
Deere & Co. ................. 433 17,591
PPG Industries, Inc. ........ 307 17,230
CIGNA Corp. ................. 126 17,215
Barrick Gold Corporation..... 598 17,193
Unocal Corp. ................ 420 17,062
National City Corporation.... 372 16,693
General Mills, Inc. ......... 263 16,668
+Seagate Technology, Inc. ... 420 16,590
Illinois Tool Works Inc. .... 207 16,534
Walgreen Co. ................ 412 16,480
Bank of Boston Corp. ........ 256 16,448
Boatmen's Bancshares,
Inc. ...................... 250 16,094
+Dell Computer Corp. ........ 300 15,938
Weyerhaeuser Co. ............ 332 15,728
Chubb Corp. ................. 292 15,695
+CUC International, Inc. .... 659 15,651
Wachovia Corp. .............. 277 15,650
Duke Power Company........... 338 15,633
MBNA Corp. .................. 373 15,479
Mellon Bank Corp. ........... 217 15,407
+Sun Microsystems, Inc. ..... 600 15,375
First Bank Systems, Inc. .... 225 15,356
CSX Corp. ................... 363 15,337
Texas Utilities Company...... 376 15,322
Albertson's, Inc. ........... 422 15,034
Household International,
Inc. ...................... 162 14,945
Morgan Stanley Group,
Inc. ...................... 255 14,567
Pacific Gas and Electric
Co. ....................... 691 14,511
Edison International......... 726 14,429
Gap, Inc. ................... 475 14,309
+TCI Communications, Inc.
(Class A).................. 1,100 14,300
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
Dayton Hudson Corporation
(Class A).................. 363 14,248
American Brands, Inc. ....... 285 14,143
AMP, Inc. ................... 368 14,122
FPL Group, Inc. ............. 307 14,122
Honeywell, Inc. ............. 212 13,939
American General Corp. ...... 341 13,938
United Healthcare
Corporation................ 308 13,860
Tyco International, Ltd. .... 262 13,853
+Toys 'R' Us, Inc. .......... 459 13,770
Pitney Bowes, Inc. .......... 249 13,570
Barnett Banks, Inc. ......... 327 13,448
+AMR Corp. .................. 152 13,395
Goodyear Tire & Rubber
Co. ....................... 260 13,357
Conrail, Inc. ............... 134 13,350
ITT Hartford Group Inc. ..... 197 13,297
Textron Inc. ................ 139 13,101
Ralston Purina Co. .......... 177 12,987
Air Products and Chemicals,
Inc. ...................... 187 12,926
+EMC Corporation............. 390 12,919
American Electric Power
Company, Inc. ............. 314 12,913
+HFS Inc. ................... 216 12,906
+Tenneco, Inc. .............. 286 12,906
Occidental Petroleum
Corp. ..................... 551 12,880
Alcan Aluminium, Ltd. ....... 379 12,744
Avon Products, Inc. ......... 223 12,739
Halliburton Co. ............. 210 12,653
Mattel, Inc. ................ 455 12,626
Fifth Third Bank............. 200 12,550
Marsh & McLennan Companies,
Inc. ...................... 120 12,480
Union Pacific Resources
Group...................... 418 12,226
Praxair, Inc. ............... 262 12,085
+Federated Department
Stores, Inc. .............. 348 11,876
Marriott International,
Inc. ...................... 214 11,823
Bankers Trust New York
Corp. ..................... 137 11,816
Crown Company, Inc. ......... 215 11,691
Dominion Resources, Inc. .... 302 11,627
Consolidated Edison Company
of New York................ 394 11,525
USX Marathon Group, Inc. .... 482 11,508
Panenergy Corporation........ 253 11,385
+Tellabs, Inc. .............. 300 11,287
Alco Standard Corp. ......... 218 11,254
Aon Corporation.............. 181 11,245
Hershey Foods Corporation.... 257 11,244
USBANCORP., Inc. ............ 250 11,219
Service Corporation.......... 395 11,060
International Georgia-Pacific
Corp. ..................... 153 11,016
Wrigley (WM) Jr. Co. (Class
B)......................... 195 10,969
Public Service Enterprise
Group, Inc. ............... 399 10,873
Hilton Hotels Corporation.... 414 10,816
+Applied Materials, Inc. .... 300 10,763
Entergy Corp. ............... 387 10,739
TRW Inc. .................... 213 10,543
</TABLE>
-67-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
Burlington Resources Inc. ... 209 10,528
+Computer Sciences
Corporation................ 127 10,430
Thermo Electron
Corporation................ 249 10,271
Lowe's Companies, Inc. ...... 289 10,259
Micron Technology, Inc. ..... 350 10,194
PacifiCorp................... 494 10,127
UST, Inc. ................... 312 10,101
ALLTEL Corp. ................ 318 9,977
American Stores Company...... 244 9,974
Williams Companies, Inc. .... 262 9,844
+Kroger Co. ................. 211 9,811
Unicom Corp. ................ 361 9,792
Sysco Corp. ................. 300 9,787
Comcast Corp.--Special (Class
A)......................... 550 9,763
Morton International,
Inc. ...................... 239 9,739
Masco Corporation............ 269 9,684
Freeport-McMoRan Copper &
Gold Inc. (Class B)........ 324 9,680
Pioneer Hi-Bred
International, Inc......... 138 9,660
Cognizant Corporation........ 287 9,471
Dover Corp. ................. 188 9,447
Comerica Inc. ............... 180 9,428
+Digital Equipment
Corporation................ 259 9,421
Peco Energy Co. ............. 373 9,418
Browning Ferris Industries,
Inc. ...................... 356 9,345
Carolina Power & Light
Company.................... 254 9,271
Lincoln National Corp. ...... 175 9,187
Dresser Industries, Inc. .... 294 9,114
Becton, Dickinson and
Company.................... 209 9,065
Central and South West
Corp. ..................... 353 9,046
Amerada Hess Corporation..... 156 9,029
Eaton Corp. ................. 129 8,998
Genuine Parts Company........ 202 8,989
Inco Ltd. ................... 282 8,989
Houston Industries Inc. ..... 393 8,892
UNUM Corporation............. 123 8,887
Greentree Financial Corp. ... 230 8,884
Delta Air Lines, Inc. ....... 125 8,859
CINergy Corporation ......... 264 8,811
+Price/Costco, Inc. ......... 350 8,794
Consolidated Natural
Gas Co. ................... 159 8,785
Fluor Corporation............ 140 8,785
Transamerica Corporation..... 111 8,769
Rohm & Haas Co. ............. 107 8,734
Placer Dome Inc. ............ 401 8,722
+Cabletron Systems, Inc. .... 262 8,712
Union Carbide Corp. ......... 213 8,706
Quaker Oats Company.......... 228 8,692
Clorox Company............... 86 8,632
Salomon Inc. ................ 183 8,624
Coastal Corp. ............... 176 8,602
+Federal Express Corp. ...... 191 8,500
+ITT Corp. .................. 195 8,458
+K Mart Corp. ............... 811 8,414
Newell Co. .................. 266 8,379
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
Baker Hughes, Inc. .......... 242 8,349
Limited, Inc. (The).......... 454 8,342
International Flavors &
Fragrances, Inc. .......... 185 8,325
Times Mirror Co. ............ 166 8,258
Rite Aid Corporation......... 205 8,149
St. Paul Companies, Inc. .... 139 8,149
Ingersoll-Rand Company....... 183 8,144
Tribune Co. ................. 103 8,124
Providian Corporation........ 157 8,066
Sherwin-Williams Company..... 144 8,064
Northrop Grumman Corp. ...... 97 8,027
Winn-Dixie Stores, Inc. ..... 253 8,001
+Tenet Healthcare Corp. ..... 364 7,962
Donnelley (R.R.) & Sons
Co. ....................... 252 7,907
DTE Energy Holdings
Company.................... 243 7,867
SAFECO Corporation........... 200 7,850
Grace (W.R.) & Co. .......... 149 7,711
McGraw-Hill, Inc. ........... 167 7,703
Cooper Industries, Inc. ..... 181 7,625
Republic New York
Corporation................ 93 7,591
MGIC Investment Corp. ....... 99 7,524
Nucor Corporation............ 147 7,497
General Dynamics
Corporation................ 106 7,473
Newmont Mining Corporation... 167 7,473
+Silicon Graphics, Inc. ..... 293 7,471
Sonat, Inc. ................. 145 7,467
Hercules Inc. ............... 171 7,396
Phelps Dodge Corporation..... 109 7,357
CVS Corporation.............. 177 7,323
MBIA, Inc. .................. 72 7,290
VF Corp. .................... 107 7,222
Eastman Chemical Co. ........ 130 7,183
Grainger (W.W.) Inc. ........ 89 7,142
Guidant Corp. ............... 124 7,068
Willamette Industries,
Inc. ...................... 100 6,962
Champion International
Corp. ..................... 160 6,920
+Autozone, Inc. ............. 250 6,875
General Public Utilities Corp.... 202 6,792
+Bay Networks Inc. .......... 325 6,784
Dun & Bradstreet Corp. ...... 285 6,769
Jefferson Pilot Corp. ....... 119 6,738
Allegheny Teledyne Inc. ..... 292 6,716
Case Corp. .................. 123 6,704
Great Western Financial
Corp. ..................... 231 6,699
Baltimore Gas &
Electric Company........... 247 6,607
Union Electric Company....... 171 6,583
Interpublic Group of
Companies, Inc. ........... 136 6,460
+Western Atlas, Inc. ........ 90 6,379
PP&L Resources Inc. ......... 272 6,256
Frontier Corp. .............. 273 6,177
TJX Companies Inc. .......... 130 6,159
New York Times Co. .......... 162 6,156
Avery Dennison Corp. ........ 174 6,155
Golden West Financial
Corporation................ 96 6,060
Laidlaw Inc. ................ 526 6,049
</TABLE>
-68-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
Reynolds Metals Co. ......... 107 6,032
Raychem Corp. ............... 75 6,009
Knight-Ridder, Inc. ......... 157 6,005
Torchmark Corp. ............. 118 5,959
+Advanced Micro Devices, Inc. ... 229 5,897
Dillard Department
Stores Inc. ............... 190 5,866
Columbia Gas System, Inc. ... 92 5,854
Kerr-McGee Corp. ............ 81 5,832
Whirlpool Corp. ............. 125 5,828
Ohio Edison Company.......... 256 5,824
+St. Jude Medical, Inc. ..... 136 5,797
+LSI Logic Corporation....... 216 5,778
Ahmanson (H.F) & Co. ........ 177 5,753
Johnson Controls, Inc. ...... 69 5,718
Rubbermaid Inc. ............. 251 5,710
Beneficial Corp. ............ 90 5,704
+National Semiconductor
Corp. ..................... 232 5,655
Hasbro, Inc. ................ 144 5,598
Union Camp Corp. ............ 117 5,587
Dana Corp. .................. 171 5,579
Tupperware Corporation....... 104 5,577
Harcourt General Inc. ....... 119 5,489
Dow Jones & Co. , Inc. ...... 162 5,488
Mallinckrodt Group Inc. ..... 124 5,471
+Novell, Inc. ............... 575 5,427
Southwest Airlines Co. ...... 243 5,376
Northern States Power Co. ... 116 5,321
Brown-Forman Corp. (Class
B)......................... 116 5,307
Nordstrom, Inc. ............. 150 5,306
+Andrew Corp. ............... 100 5,300
+Humana, Inc. ............... 272 5,202
Mead Corp. .................. 88 5,115
PACCAR Inc. ................. 75 5,081
Block (H & R), Inc. ......... 174 5,046
Temple-Inland Inc. .......... 93 5,034
Great Lakes Chemical
Corporation................ 106 4,956
+General Instrument Corp. ... 229 4,952
Circuit City Stores, Inc. ... 164 4,941
Pall Corp. .................. 193 4,921
Westvaco Corp. .............. 171 4,916
+Woolworth Corp. ............ 224 4,900
+Fruit of the Loom, Inc. .... 129 4,886
ITT Industries Inc. ......... 198 4,851
Parker Hannifin Corp. ....... 125 4,844
Armstrong World
Industries, Inc. .......... 69 4,796
James River Corp. of
Virginia................... 144 4,770
Ashland Oil Inc. ............ 108 4,739
+Ceridian Corp. ............. 116 4,698
Sigma-Aldrich Corp. ......... 75 4,678
Liz Claiborne, Inc. ......... 120 4,635
Engelhard Corporation........ 241 4,609
Deluxe Corporation........... 138 4,520
Harris Corp. ................ 65 4,461
Wendy's International,
Inc. ...................... 217 4,448
Black & Decker Corporation... 147 4,428
USX-US Steel Group, Inc...... 141 4,424
Pennzoil Co. ................ 78 4,407
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
+Oryx Energy Co. ............ 176 4,356
+FMC Corporation............. 62 4,348
Pacific Enterprises.......... 142 4,313
Tandy Corp. ................. 98 4,312
Perkin-Elmer Corporation..... 72 4,239
+Apple Computer, Inc. ....... 200 4,150
United States Surgical
Corp. ..................... 105 4,134
Nalco Chemical Company....... 113 4,082
Ecolab Inc. ................. 108 4,064
USF&G Corp. ................. 194 4,050
Stanley Works................ 149 4,023
Whitman Corp. ............... 174 3,980
Brunswick Corp. ............. 165 3,960
Thomas & Betts Corp. ........ 89 3,949
Harnischfeger Industries,
Inc. ...................... 82 3,946
Allergan, Inc. .............. 110 3,919
Reebok International Ltd. ... 93 3,906
Ryder System, Inc. .......... 137 3,853
Louisiana-Pacific Corp. ..... 182 3,845
+ALZA Corp. ................. 142 3,674
Owens-Corning Fiberglass
Corp. ..................... 86 3,666
Cyprus Amax Minerals Co. .... 156 3,647
Goodrich (B.F.) Co. ......... 90 3,645
Snap-On, Inc. ............... 102 3,634
General Signal Corporation... 84 3,591
+DSC Communications Corp. ... 200 3,575
American Greetings Corp.
(Class A).................. 125 3,547
Noram Energy Corp. .......... 230 3,536
Homestake Mining Company..... 246 3,506
Giant Food, Inc. (Class A)... 100 3,450
+Harrah's Entertainment,
Inc. ...................... 172 3,419
Moore Corp. Ltd. ............ 167 3,403
Santa Fe Pacific Gold
Corp. ..................... 220 3,382
Maytag Corp. ................ 168 3,318
Polaroid Corp. .............. 76 3,306
Echlin Inc. ................. 104 3,289
Bausch & Lomb, Inc. ......... 93 3,255
Bemis Company, Inc. ......... 88 3,245
+Rowan Companies, Inc. ...... 143 3,235
Pep Boys--Manny, Moe &
Jack....................... 105 3,229
Super Valu, Inc. ............ 113 3,206
Mercantile Stores
Company, Inc. ............. 62 3,061
Louisiana Land &
Exploration Co. ........... 57 3,057
Cummins Engine
Company, Inc. ............. 66 3,036
Biomet, Inc. ................ 200 3,025
National Service
Industries, Inc. .......... 80 2,990
Millipore Corp. ............. 72 2,979
Sun Company, Inc. ........... 122 2,974
NICOR Inc. .................. 83 2,967
Manor Care, Inc. ............ 105 2,835
Tektronix, Inc. ............. 55 2,819
Cooper Tire & Rubber Co. .... 138 2,726
+Tandem Computers, Inc. ..... 198 2,722
Worthington Industries,
Inc. ...................... 150 2,719
ENSERCH Corporation.......... 117 2,691
</TABLE>
-69-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Index 500 Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
Bard (C.R.), Inc. ........... 96 2,688
Battle Mountain Gold
Company.................... 376 2,585
Boise Cascade Corp. ......... 81 2,572
Foster Wheeler Corp. ........ 68 2,525
+USAir Group, Inc. .......... 108 2,524
Stone Container Corp. ....... 166 2,469
+Amdahl Corp. ............... 203 2,461
Shared Medical Systems
Corp. ..................... 50 2,456
+Niagara Mohawk Power
Corp. ..................... 242 2,390
Timken Co. .................. 52 2,385
Meredith Corp. .............. 45 2,374
+King World Productions,
Inc. ...................... 63 2,323
Darden Restaurants, Inc. .... 264 2,310
Alberto-Culver Company (Class
B)......................... 47 2,256
Crane Co. ................... 77 2,233
Helmerich & Payne, Inc. ..... 42 2,189
+Beverly Enterprises,
Inc. ...................... 166 2,117
Briggs & Stratton Corp. ..... 48 2,112
+Santa Fe Energy
Resources, Inc. ........... 152 2,109
Autodesk, Inc. .............. 75 2,100
Potlatch Corp. .............. 48 2,064
Great Atlantic & Pacific Tea
Co., Inc. ................. 64 2,040
Peoples Energy Corp. ........ 59 1,999
+Unisys Corp. ............... 293 1,978
Scientific-Atlanta, Inc. .... 130 1,950
USLIFE Corp. ................ 58 1,928
Russell Corp. ............... 64 1,904
Centex Acceptance Corp. ..... 48 1,806
ASARCO, Inc. ................ 72 1,791
Harland John H. Company...... 52 1,716
Trinova Corp. ............... 47 1,710
+Bethlehem Steel Corp. ...... 187 1,683
Fleetwood Enterprises,
Inc. ...................... 60 1,650
Inland Steel Co. ............ 82 1,640
Longs Drug Stores Corp. ..... 33 1,621
Safety-Kleen Corp. .......... 98 1,605
EG&G, Inc. .................. 79 1,590
Echo Bay Mines Ltd. ......... 233 1,544
<CAPTION>
Shares Value
Common Stocks Held (Note 1a)
-------------------------------------------------------
<S> <C> <C>
McDermott International,
Inc. ...................... 92 1,529
Cincinnati Milacron, Inc. ... 67 1,466
Springs Industries, Inc. .... 34 1,462
ONEOK, Inc. ................. 46 1,380
Jostens, Inc. ............... 65 1,373
Ball Corp. .................. 51 1,326
Alexander & Alexander
Services, Inc. ............ 76 1,321
Caliber Systems, Inc. ....... 66 1,271
Eastern Enterprises.......... 34 1,203
Pulte Corp. ................. 39 1,199
+Navistar International
Corp. ..................... 123 1,122
Fleming Companies, Inc. ..... 63 1,087
+Data General Corp. ......... 66 957
Coors (Adolph) Co. (Class
B)......................... 50 950
+Charming Shoppes, Inc. ..... 175 875
Kaufman and Broad Home
Corp. ..................... 65 837
Stride Rite Corp. ........... 83 830
Nacco Industries, Inc. (Class
A)......................... 15 802
+Intergraph Corp. ........... 75 769
+Armco, Inc. ................ 179 738
Giddings & Lewis, Inc. ...... 50 644
- -------------------------------------------------------
Total Common Stocks
(Cost--$9,340,272)--88.3%.... 9,488,361
- -------------------------------------------------------
Short-Term Obligations--
US Government Agency Face
Obligations* Amount
- -------------------------------------------------------
Federal Home Loan
Mortgage Corp., 6.50% due
1/02/1997.................. $1,356,000 1,355,755
- -------------------------------------------------------
Total Short-Term Obligations
(Cost--$1,355,755)--12.6%.... 1,355,755
- -------------------------------------------------------
Total Investments
(Cost--$10,696,027)--100.9%.. 10,844,116
Variation Margin on Stock
Index Futures
Contracts**--(0.3%)........ (29,200)
Liabilities in Excess of
Other Assets--(0.6%)....... (63,076)
-----------
Net Assets--100.0%........... $10,751,840
===========
- ------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Portion of holdings pledged as collateral for stock index futures
contracts.
* Certain US Government Agency Obligations are traded on a discount basis;
the interest rate shown is the discount rate paid at the time of purchase
by the Fund.
** Stock index futures contracts purchased as of December 31, 1996 were as
follows:
- ----------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Note 1b)
- ----------------------------------------------------------------
4 S&P 500 Stock Index March 1997 $ 1,489,000
- ----------------------------------------------------------------
Total Stock Index Futures Contracts Purchased
(Contract Price--$1,483,955).................... $ 1,489,000
===========
- ------------------------------------------------------------
See Notes to Financial Statements.
-70-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
AFRICA Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
South Africa Banking 14,500 Nedcor Ltd. (ADR)(a)(d).. $ 210,250 $ 194,010 0.1%
102,858 Nedcor Ltd. (GDR)(b)(e).. 1,097,188 1,376,240 0.4
10,072 Nedcor Ltd. (Ordinary)... 148,818 137,855 0.0
----------- ------
1,456,256 1,708,105 0.5
-----------------------------------------------------------------------------------------------------
Beverages 138,736 South African Breweries,
Ltd.................... 3,702,680 3,515,872 1.0
-----------------------------------------------------------------------------------------------------
Entertainment 496,000 Sun International (South
Africa), Ltd........... 613,843 397,776 0.1
-----------------------------------------------------------------------------------------------------
Mining 5,150 Anglo American Corp. of
South Africa, Ltd...... 347,236 283,602 0.1
23,800 Anglo American Corp. of
South Africa, Ltd.
(ADR)(a)............... 1,522,851 1,291,150 0.4
47,300 Evander Gold Mines Ltd... 511,564 404,619 0.1
----------- ------
2,381,651 1,979,371 0.6
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Africa 8,154,430 7,601,124 2.2
- ---------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
---------------------------------------------------------------------------------------------------------------------
Argentina Banking 60,853 Banco Frances del Rio de
la Plata S.A.
(ADR)(a)............... 1,345,168 1,673,458 0.5
-----------------------------------------------------------------------------------------------------
Oil & Related 246,594 Companhia Naviera Perez
Companc
S.A.C.F.I.M.F.A. (Class
B)..................... 1,604,857 1,733,903 0.5
-----------------------------------------------------------------------------------------------------
Telecommunications 14,300 Telefonica de Argentina
S.A. (Class B)
(ADR)(a)............... 351,750 370,013 0.1
-----------------------------------------------------------------------------------------------------
Total Investments in
Argentina 3,301,775 3,777,374 1.1
- ---------------------------------------------------------------------------------------------------------------------
Brazil Banking 139,240,000 Banco Bradesco S.A. PN
(Preferred)............ 1,075,689 1,009,219 0.3
-----------------------------------------------------------------------------------------------------
Beverages 3,270,000 Companhia Cervejaria
Brahma S.A. PN
(Preferred)............ 1,637,606 1,787,814 0.5
-----------------------------------------------------------------------------------------------------
Telecommunications 75,755 Telecomunicacoes
Brasileiras S.A.-
Telebras (ADR)(a)...... 3,897,541 5,795,258 1.7
-----------------------------------------------------------------------------------------------------
Utilities 41,000 Companhia Energetica de
Minas Gerais S.A.
(CEMIG) (ADR)(a)....... 1,253,624 1,383,750 0.4
-----------------------------------------------------------------------------------------------------
Total Investments in
Brazil 7,864,460 9,976,041 2.9
- ---------------------------------------------------------------------------------------------------------------------
Chile Telecommunications 18,100 Compania de
Telecomunicaciones de
Chile S.A. (ADR)(a).... 1,410,403 1,830,363 0.5
-----------------------------------------------------------------------------------------------------
Utilities 20,480 Enersis S.A. (ADR)(a).... 530,086 568,320 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Chile 1,940,489 2,398,683 0.7
- ---------------------------------------------------------------------------------------------------------------------
Mexico Beverages 35,970 Panamerican Beverages,
Inc. (Class A)......... 1,640,662 1,686,094 0.5
-----------------------------------------------------------------------------------------------------
Broadcast--Media 19,000 Grupo Televisa, S.A. de
C.V. (GDR)(b)(d)....... 530,765 486,875 0.1
-----------------------------------------------------------------------------------------------------
Building & 264,950 Apasco, S.A. de C.V.
Construction 'A'.................... 1,593,376 1,817,723 0.5
-----------------------------------------------------------------------------------------------------
Health & Personal 65,885 Kimberly-Clark de Mexico,
S.A. de C.V. (ADR)(a).. 2,460,495 2,520,101 0.7
-----------------------------------------------------------------------------------------------------
</TABLE>
-71-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICA Shares Value Percent of
(concluded) Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mexico Multi-Industry 269,200 Grupo Carso, S.A. de C.V.
(concluded) 'A1'................... 2,259,825 1,419,362 0.4
-----------------------------------------------------------------------------------------------------
Telecommunications 269,200 Carso Global Telecom,
S.A. de C.V. 'A1'
(d).................... 709,354 625,887 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Mexico 9,194,477 8,556,042 2.4
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Latin America 22,301,201 24,708,140 7.1
- ---------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
---------------------------------------------------------------------------------------------------------------------
Australia Food & Beverage 192,019 Coca-Cola Amatil, Ltd.
(Ordinary)............. 1,289,134 2,051,145 0.6
-----------------------------------------------------------------------------------------------------
Media 89,939 The News Corp., Ltd.
(Ordinary)............. 431,743 474,292 0.1
52,364 The News Corp., Ltd.
(Preferred)............ 222,611 232,890 0.1
----------- ------
654,354 707,182 0.2
-----------------------------------------------------------------------------------------------------
Merchandising 18,700 Amway Asia Pacific
Ltd.(ADR)(a)........... 725,368 792,413 0.2
-----------------------------------------------------------------------------------------------------
Natural Gas 37,943 Broken Hill Proprietary
Pipelines Co. ................... 452,087 540,007 0.1
-----------------------------------------------------------------------------------------------------
Property 371,927 Lend Lease Corp. ........ 4,978,452 7,207,380 2.1
-----------------------------------------------------------------------------------------------------
Total Investments in
Australia 8,099,395 11,298,127 3.2
- ---------------------------------------------------------------------------------------------------------------------
Hong Kong Banking 354,242 HSBC Holdings PLC........ 4,447,990 7,580,431 2.2
34,000 J.C.G. Holdings Ltd...... 32,167 33,191 0.0
----------- ------
4,480,157 7,613,622 2.2
-----------------------------------------------------------------------------------------------------
Diversified 854,140 Hutchison Whampoa Ltd. .. 4,945,751 6,709,207 1.9
-----------------------------------------------------------------------------------------------------
Foods 3,166,000 C.P. Pokphand Co.,
Ltd. .................. 1,084,557 1,238,318 0.4
4,224,000 Tingyi (Cayman Islands)
Holdings Co. (d)....... 1,113,725 1,105,974 0.3
----------- ------
2,198,282 2,344,292 0.7
-----------------------------------------------------------------------------------------------------
Insurance 176,000 National Mutual Asia
Ltd. .................. 184,973 167,261 0.0
-----------------------------------------------------------------------------------------------------
Multi-Industry 399,000 Swire Pacific Ltd. (Class
A)..................... 2,742,209 3,804,791 1.1
-----------------------------------------------------------------------------------------------------
Property 527,000 Cheung Kong (Holdings)
Ltd. .................. 3,684,755 4,684,672 1.4
4,192,000 China Overseas Land &
Investment............. 1,182,026 2,127,437 0.6
----------- ------
4,866,781 6,812,109 2.0
-----------------------------------------------------------------------------------------------------
Total Investments in Hong
Kong 19,418,153 27,451,282 7.9
- ---------------------------------------------------------------------------------------------------------------------
Japan Automobiles 440,000 Suzuki Motor Corp.
(Ordinary)............. 4,988,943 4,027,634 1.2
-----------------------------------------------------------------------------------------------------
Capital Goods 911,000 Mitsubishi Heavy
Industries, Ltd........ 7,221,146 7,237,651 2.1
-----------------------------------------------------------------------------------------------------
Chemicals 347,000 Shin-Etsu Chemical Co.,
Ltd. (Ordinary)........ 6,674,107 6,322,712 1.8
-----------------------------------------------------------------------------------------------------
Electrical 84,000 Chudenko Corp.
Construction (Ordinary)............. 2,961,934 2,422,798 0.7
61,000 Taihei Dengyo Kaisha,
Ltd. .................. 1,103,158 605,786 0.2
----------- ------
4,065,092 3,028,584 0.9
-----------------------------------------------------------------------------------------------------
Electrical 219,000 Murata Manufacturing Co.,
Equipment Ltd. .................. 8,117,559 7,281,088 2.1
515,000 NEC Corp. ............... 6,701,653 6,226,252 1.8
118,000 Rohm Co., Ltd. .......... 4,979,943 7,744,387 2.2
261,000 Sharp Corporation........ 4,076,502 3,718,912 1.0
----------- ------
23,875,657 24,970,639 7.1
-----------------------------------------------------------------------------------------------------
</TABLE>
-72-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN Shares Value Percent of
(continued) Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Insurance 365,000 Dai-Tokyo Fire & Marine
(concluded) Insurance Co., Ltd. ... 2,575,006 1,938,472 0.5
187,000 Koa Fire & Marine
Insurance Co., Ltd. ... 1,281,743 907,548 0.3
166,000 Mitsui Fire & Marine
Insurance Co., Ltd. ... 1,353,118 893,074 0.2
118,000 Nichido Fire & Marine
Insurance Co., Ltd. ... 917,801 672,539 0.2
152,000 Nippon Fire & Marine
Insurance Co., Ltd. ... 1,069,498 689,119 0.2
498,000 Sumitomo Marine & Fire
Insurance Co., Ltd. ... 4,176,958 3,096,373 0.9
330,000 Tokio Marine & Fire
Insurance Co., Ltd.
(Ordinary)............. 3,890,208 3,106,218 0.9
268,000 Yasuda Marine & Fire
Insurance Co., Ltd. ... 2,004,769 1,393,230 0.4
------------ ------------ ----------
17,269,101 12,696,573 3.6
-----------------------------------------------------------------------------------------------------
Office Equipment 408,000 Canon, Inc. (Ordinary)... 7,392,805 9,019,689 2.6
-----------------------------------------------------------------------------------------------------
Packaging 194,000 Toyo Seikan Kaisha, Ltd.
(Ordinary)............. 6,036,561 4,674,093 1.3
-----------------------------------------------------------------------------------------------------
Pharmaceuticals 197,000 Sankyo Co., Ltd.
(Ordinary)............. 4,452,652 5,579,965 1.6
140,000 Taisho Pharmaceutical
Co., Ltd. (Ordinary)... 2,828,042 3,300,518 0.9
------------ ------------ ----------
7,280,694 8,880,483 2.5
-----------------------------------------------------------------------------------------------------
Retailing 127,000 Ito Yokado Co., Ltd.
(Ordinary)............. 7,163,905 5,527,461 1.6
-----------------------------------------------------------------------------------------------------
Tire & Rubber 197,000 Bridgestone Corp......... 3,447,899 3,742,660 1.1
-----------------------------------------------------------------------------------------------------
Total Investments in
Japan 95,415,910 90,128,179 25.8
- ---------------------------------------------------------------------------------------------------------------------
Malaysia Airlines 351,000 Malaysian Airline System
BHD.................... 895,065 910,515 0.3
-----------------------------------------------------------------------------------------------------
Banking 247,000 Arab-Malaysian Merchant
Bank Holding BHD....... 1,760,803 2,073,822 0.6
257,000 Malayan Banking BHD...... 2,320,535 2,849,901 0.8
598,666 Public Bank (Malaysia)
BHD 'Foreign'.......... 1,055,118 1,268,461 0.4
------------ ------------ ----------
5,136,456 6,192,184 1.8
-----------------------------------------------------------------------------------------------------
Building Products 300,500 Hume Industries
(Malaysia) BHD......... 1,773,006 1,892,257 0.5
-----------------------------------------------------------------------------------------------------
Diversified 690,000 Renong Berhad............ 1,129,538 1,224,238 0.3
Holdings
-----------------------------------------------------------------------------------------------------
Printing/Publishing 232,000 The New Straits Times
Press BHD (Malaysia)... 1,308,148 1,341,465 0.4
-----------------------------------------------------------------------------------------------------
Telecommunications 568,000 Technology Resources
Industries BHD (d)..... 1,803,275 1,120,253 0.3
8,000 Telekom Malaysia BHD
(d).................... 69,490 71,287 0.0
------------ ------------ ----------
1,872,765 1,191,540 0.3
-----------------------------------------------------------------------------------------------------
Utilities--Electric 114,000 Tenaga Nasional BHD...... 523,137 546,297 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Malaysia 12,638,115 13,298,496 3.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-73-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN Shares Value Percent of
(concluded) Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New Zealand Chemicals 10,000 Fernz Corporation
Ltd. .................. 27,213 34,319 0.0
-----------------------------------------------------------------------------------------------------
Electronics 17,000 PDL Holdings Ltd. ....... 82,587 92,023 0.0
-----------------------------------------------------------------------------------------------------
Foods 548,600 Wrightson Ltd. .......... 418,731 477,473 0.2
-----------------------------------------------------------------------------------------------------
Telecommunications 60,000 Telecom Corporation of
New Zealand............ 256,371 306,532 0.1
-----------------------------------------------------------------------------------------------------
Textiles 93,450 Lane Walker Rudkin
Industries, Ltd. ...... 109,531 112,413 0.0
-----------------------------------------------------------------------------------------------------
Total Investments in New
Zealand 894,433 1,022,760 0.3
- ---------------------------------------------------------------------------------------------------------------------
South Korea Telecommunications 79,207 Korea Mobile
Telecommunications
Corp. (ADR)(a)......... 986,349 1,019,790 0.3
-----------------------------------------------------------------------------------------------------
Utilities 17,580 Korea Electric Power
Corp. ................. 752,967 513,315 0.1
-----------------------------------------------------------------------------------------------------
Total Investments in
South Korea 1,739,316 1,533,105 0.4
- ---------------------------------------------------------------------------------------------------------------------
Thailand Banking 108,500 Finance One Public Co.,
Ltd 'Foreign'.......... 856,748 219,987 0.1
430,500 Krung Thai Bank Public
Co., Ltd. ............. 2,013,799 830,887 0.3
410,800 Phatra Thanakit Public
Co., Ltd. 'Foreign'.... 2,925,216 1,169,275 0.3
------------ ------------ ----------
5,795,763 2,220,149 0.7
-----------------------------------------------------------------------------------------------------
Utilities-- 518,000 TelecomAsia Corporation
Communications Public Company Ltd.
'Foreign' (d).......... 990,931 1,080,555 0.3
-----------------------------------------------------------------------------------------------------
Total Investments in
Thailand 6,786,694 3,300,704 1.0
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in the
Pacific Basin 144,992,016 148,032,653 42.4
- ---------------------------------------------------------------------------------------------------------------------
SOUTHEAST ASIA
---------------------------------------------------------------------------------------------------------------------
India Automobiles 26,300 Ashok Leyland Ltd.
(GDR)(b)............... 302,506 243,933 0.1
20,000 Ashok Leyland Ltd.
(GDR)(b)(e)............ 255,800 185,500 0.0
------------ ------------ ----------
558,306 429,433 0.1
-----------------------------------------------------------------------------------------------------
Hotels 14,700 East India Hotels Ltd.
(GDR)(b)(d)(e)......... 404,100 345,450 0.1
13,300 Indian Hotels Co., Ltd.
(GDR)(b)(e)............ 299,250 339,150 0.1
------------ ------------ ----------
703,350 684,600 0.2
-----------------------------------------------------------------------------------------------------
Machinery & 49,500 Larsen & Toubro Ltd.
Engineering (GDR)(b)(e)............ 888,875 712,800 0.2
-----------------------------------------------------------------------------------------------------
Utilities 103,750 BSES Ltd.(GDR)(b)........ 2,025,897 2,126,875 0.6
-----------------------------------------------------------------------------------------------------
Total Investments in
India 4,176,428 3,953,708 1.1
- ---------------------------------------------------------------------------------------------------------------------
Indonesia Building Materials 305,000 PT Semen Gresik.......... 992,608 981,787 0.3
-----------------------------------------------------------------------------------------------------
Food & Household 614,000 PT Wicaksana Overseas
Products International.......... 574,396 702,160 0.2
-----------------------------------------------------------------------------------------------------
Telecommunications 50,000 P.T. Kabelmetal Indonesia
(Rights)++............. 0 0 0.0
24,100 P.T. Telekomunikasi
Indonesia (ADR)(a)..... 786,702 831,450 0.2
------------ ------------ ----------
786,702 831,450 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Indonesia 2,353,706 2,515,397 0.7
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Southeast Asia 6,530,134 6,469,105 1.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-74-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
WESTERN EUROPE Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Czech Republic Broadcast--Media 10,000 Central European Media
Enterprises Ltd. (Class
A) (d)................. 275,000 312,500 0.1
-----------------------------------------------------------------------------------------------------
Total Investments in the
Czech Republic 275,000 312,500 0.1
- ---------------------------------------------------------------------------------------------------------------------
Finland Diversified 24,500 Outokumpu OY............. 412,272 417,907 0.1
-----------------------------------------------------------------------------------------------------
Paper & Forest 154,100 Enso-Gutzeit OY (Class A)
Products (d).................... 1,154,546 1,248,980 0.4
149,200 Metsa Serla OY (Class
B)..................... 1,124,023 1,118,489 0.3
73,900 UPM-Kymmene OY (d)....... 1,409,376 1,525,499 0.4
------------ ------------ ----------
3,687,945 3,892,968 1.1
-----------------------------------------------------------------------------------------------------
Total Investments in
Finland 4,100,217 4,310,875 1.2
- ---------------------------------------------------------------------------------------------------------------------
France Automobiles 6,027 Peugeot S.A.............. 792,975 678,444 0.2
-----------------------------------------------------------------------------------------------------
Banking 15,900 Compagnie Financiere de
Paribas (Ordinary)..... 867,231 1,075,426 0.3
18,900 Compangie Financiere de
Suez (Ordinary)........ 743,625 803,651 0.2
6,050 Societe Generale de
Surveillance S.A.
(Class A) (Ordinary)... 634,340 654,212 0.2
------------ ------------ ----------
2,245,196 2,533,289 0.7
-----------------------------------------------------------------------------------------------------
Building & 8,777 Bouygues S.A............. 908,125 910,182 0.3
Construction
-----------------------------------------------------------------------------------------------------
Communication 10,027 Alcatel Alsthom Cie
Equipment Generale d'Electricite
S.A.................... 932,571 805,562 0.2
-----------------------------------------------------------------------------------------------------
Foods 4,300 Groupe Danone S.A........ 683,124 599,248 0.2
-----------------------------------------------------------------------------------------------------
Insurance 16,340 Assurances Generales de
France S.A. (AGF)...... 416,753 527,554 0.2
-----------------------------------------------------------------------------------------------------
Multi-Industry 2,969 EuraFrance S.A........... 918,349 1,283,057 0.4
-----------------------------------------------------------------------------------------------------
Oil & Related 13,220 Societe Nationale Elf
Aquitaine.............. 967,228 1,203,509 0.3
-----------------------------------------------------------------------------------------------------
Semiconductor 5,650 SGS-Thomson
Microelectronics N.V.
(d).................... 259,759 399,682 0.1
-----------------------------------------------------------------------------------------------------
Steel 75,498 Usinor-Sacilor S.A....... 1,116,040 1,098,708 0.3
-----------------------------------------------------------------------------------------------------
Total Investments in
France 9,240,120 10,039,235 2.9
- ---------------------------------------------------------------------------------------------------------------------
Germany Automobiles 3,418 Volkswagen AG............ 1,285,442 1,421,852 0.4
-----------------------------------------------------------------------------------------------------
Banking 29,610 Commerzbank AG........... 700,836 752,519 0.2
3,100 Deutsche Bank AG
(Ordinary)............. 151,032 144,875 0.0
19,800 Deutsche Bank AG
(Warrants)(c).......... 169,779 111,966 0.0
------------ ------------ ----------
1,021,647 1,009,360 0.2
-----------------------------------------------------------------------------------------------------
Chemicals 4,199 Henkel KGaA (d).......... 180,333 201,421 0.1
42,527 Henkel KGaA (Preferred).. 1,764,347 2,136,716 0.6
------------ ------------ ----------
1,944,680 2,338,137 0.7
-----------------------------------------------------------------------------------------------------
Engineering & 1,800 Philipp Holzmann AG (d).. 688,665 421,190 0.1
Construction
-----------------------------------------------------------------------------------------------------
Machinery 17,250 Kloeckner Werke AG (d)... 1,232,262 801,674 0.2
-----------------------------------------------------------------------------------------------------
Machinery & 3,511 Thyssen AG (Ordinary).... 652,027 623,011 0.2
Equipment
-----------------------------------------------------------------------------------------------------
Metals 1,290 Degussa AG............... 462,391 584,001 0.2
-----------------------------------------------------------------------------------------------------
</TABLE>
-75-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN Shares
EUROPE Held/ Value Percent of
(continued) Industry Face Amount Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Germany Retail 1,940 Karstadt AG.............. 757,073 655,704 0.2
(concluded) -----------------------------------------------------------------------------------------------------
Retail Specialty 5,500 Moebel Walther........... 306,369 296,718 0.1
-----------------------------------------------------------------------------------------------------
Total Investments in
Germany 8,350,556 8,151,647 2.3
- ---------------------------------------------------------------------------------------------------------------------
Greece Banking 10,850 Ergo Bank S.A.
(Registered)........... 471,469 550,512 0.2
-----------------------------------------------------------------------------------------------------
Beverages 44,109 Hellenic Bottling Co.
S.A.................... 1,176,157 1,414,760 0.4
-----------------------------------------------------------------------------------------------------
Total Investments in
Greece 1,647,626 1,965,272 0.6
- ---------------------------------------------------------------------------------------------------------------------
Hungary Telecommunications 5,500 Magyar TarKozlesi
Reszvenytarsasag
(Ordinary) (d)(e)...... 910,789 1,191,213 0.4
-----------------------------------------------------------------------------------------------------
Total Investments in
Hungary 910,789 1,191,213 0.4
- ---------------------------------------------------------------------------------------------------------------------
Ireland Insurance 157,000 Irish Life PLC........... 526,948 727,894 0.2
-----------------------------------------------------------------------------------------------------
Packaging & 297,800 Jefferson Smurfit Group
Containers PLC (Ordinary)......... 888,436 858,467 0.3
-----------------------------------------------------------------------------------------------------
Total Investments in
Ireland 1,415,384 1,586,361 0.5
- ---------------------------------------------------------------------------------------------------------------------
Italy Building Materials 109,418 Italcementi S.p.A........ 607,540 612,582 0.2
-----------------------------------------------------------------------------------------------------
Chemicals 2,243,560 Montedison S.p.A. (d).... 1,966,796 1,527,970 0.4
-----------------------------------------------------------------------------------------------------
Diversified 1,411,500 Compagnie Industrial
Riunite S.p.A. (CIR)
(d).................... 1,306,203 869,259 0.3
335,500 Compagnie Industrial
Riunite S.p.A. (CIR)
(NC Savings) (d)....... 157,313 109,163 0.0
------------ ------------ ----------
1,463,516 978,422 0.3
-----------------------------------------------------------------------------------------------------
Insurance 60,500 Assicurazioni Generali
S.p.A.................. 1,392,767 1,145,645 0.3
713,560 Istituto Nazionale della
Assicurazioni (INA)
S.p.A.................. 1,027,949 928,697 0.3
------------ ------------ ----------
2,420,716 2,074,342 0.6
-----------------------------------------------------------------------------------------------------
Oil & Related 264,000 Ente Nazionale
Idrocarburi S.p.A.
(ENI).................. 1,102,238 1,353,690 0.4
-----------------------------------------------------------------------------------------------------
Telecommunications 643,016 Stet Societa Finanziaria
Telefonica S.p.A....... 1,452,678 2,170,563 0.6
-----------------------------------------------------------------------------------------------------
Tire & Rubber Lit 967,974,800 Pirelli S.p.A. 5% due
12/31/1998............. 681,998 706,097 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Italy 9,695,482 9,423,666 2.7
- ---------------------------------------------------------------------------------------------------------------------
Netherlands Chemicals 6,660 Akzo Nobel N.V........... 823,170 910,637 0.3
24,770 European Vinyls
Corporation
International N.V...... 1,064,893 786,440 0.2
------------ ------------ ----------
1,888,063 1,697,077 0.5
-----------------------------------------------------------------------------------------------------
Electrical 29,250 Philips Electronics
Equipment N.V.................... 1,055,864 1,186,269 0.3
-----------------------------------------------------------------------------------------------------
Engineering & 8,550 Kondor Wessels Groep NV.. 301,062 346,260 0.1
Construction
-----------------------------------------------------------------------------------------------------
Holding Company 13,600 Internatio-Muller NV..... 300,713 341,970 0.1
-----------------------------------------------------------------------------------------------------
Insurance 56,055 Internationale Nederlanden
Groep N.V.............. 1,629,332 2,020,059 0.6
-----------------------------------------------------------------------------------------------------
</TABLE>
-76-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE Shares Value Percent of
(continued) Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Netherlands Telecommunications 25,700 Koninklijke PTT Nederland
(concluded) N.V.................... 600,608 561,350 0.1
-----------------------------------------------------------------------------------------------------
Transportation 22,350 KLM Royal Dutch Airlines
N.V.................... 655,652 629,322 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in the
Netherlands 6,431,294 6,782,307 1.9
- ---------------------------------------------------------------------------------------------------------------------
Norway Consumer Goods 17,618 Orkla A.S. (Class A)..... 918,190 1,216,618 0.3
-----------------------------------------------------------------------------------------------------
Oil & Gas Producers 36,005 Saga Petroleum A.S.
(Class B).............. 396,180 558,728 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Norway 1,314,370 1,775,346 0.5
- ---------------------------------------------------------------------------------------------------------------------
Poland Automotive & 19,000 T.C. Debica S.A. (d)..... 299,311 424,344 0.1
Equipment
-----------------------------------------------------------------------------------------------------
Banking 17,078 Wielkopolsky Bank
Kredytowy S.A.......... 108,118 115,617 0.1
-----------------------------------------------------------------------------------------------------
Engineering & 188,300 Mostostal-Export S.A..... 512,705 446,831 0.1
Construction
-----------------------------------------------------------------------------------------------------
Total Investments in
Poland 920,134 986,792 0.3
- ---------------------------------------------------------------------------------------------------------------------
Portugal Forest Products 38,273 Sonae Investimentos --
SGPS S.A............... 880,494 1,212,390 0.3
-----------------------------------------------------------------------------------------------------
Total Investments in
Portugal 880,494 1,212,390 0.3
- ---------------------------------------------------------------------------------------------------------------------
Russia Natural Gas 36,194 RAO Gazprom
(ADR)(a)(d)(e)......... 622,839 642,444 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Russia 622,839 642,444 0.2
- ---------------------------------------------------------------------------------------------------------------------
Spain Engineering & 3,500 Fomento de Construciones Y
Construction Contratas S.A.......... 289,804 326,095 0.1
-----------------------------------------------------------------------------------------------------
Financial Services 16,500 Argentaria Corp. Bancaria
de Espana.............. 704,967 738,161 0.2
-----------------------------------------------------------------------------------------------------
Total Investments in
Spain 994,771 1,064,256 0.3
- ---------------------------------------------------------------------------------------------------------------------
Sweden Appliances 20,481 Electrolux AB............ 1,002,283 1,190,092 0.3
-----------------------------------------------------------------------------------------------------
Banking 7,549 Sparbanken Sverige AB
(Class A).............. 93,787 129,601 0.0
-----------------------------------------------------------------------------------------------------
Building Related 47,531 Svedala Industry AB...... 690,761 805,551 0.2
-----------------------------------------------------------------------------------------------------
Engineering 27,400 SKF AB 'A'............... 496,206 629,215 0.2
-----------------------------------------------------------------------------------------------------
Forest Products 37,800 Mo Och Domsjo AB-'B'
Free................... 962,403 1,064,945 0.3
432,300 Rottneros Bruks AB....... 666,730 548,701 0.2
91,500 Stora Kopparbergs
Bergslags AB........... 1,152,700 1,262,069 0.4
------------ ------------ ----------
2,781,833 2,875,715 0.9
-----------------------------------------------------------------------------------------------------
Insurance 50,335 Forsakrings AB Skandia... 1,198,333 1,425,481 0.4
-----------------------------------------------------------------------------------------------------
Metals & Mining 46,553 Avesta Sheffield AB...... 411,954 502,076 0.1
-----------------------------------------------------------------------------------------------------
Pharmaceutical-- 19,005 Astra 'A' Fria........... 833,308 939,792 0.3
Prescription
-----------------------------------------------------------------------------------------------------
Total Investments in
Sweden 7,508,465 8,497,523 2.4
- ---------------------------------------------------------------------------------------------------------------------
Switzerland Banking 10,360 CS Holding AG
(Registered)........... 1,060,531 1,064,013 0.3
-----------------------------------------------------------------------------------------------------
Chemicals 1,375 Clariant AG
(Registered)........... 449,723 588,493 0.2
-----------------------------------------------------------------------------------------------------
</TABLE>
-77-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE Shares Value Percent of
(concluded) Industry Held Investments Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Switzerland Diversified 13,805 Oerlikon-Buehrle Holdings
(concluded) AG (d)................. 1,459,291 1,361,114 0.4
-----------------------------------------------------------------------------------------------------
Jewelry 4,738 SMH AG (Societe Suisse pour
la Microelectronique et
l'Horlogerie).......... 673,901 675,947 0.2
-----------------------------------------------------------------------------------------------------
Leisure 798 Fotolabo S.A............. 331,433 309,949 0.1
-----------------------------------------------------------------------------------------------------
Machinery 417 Saurer AG (d)............ 181,527 180,654 0.0
-----------------------------------------------------------------------------------------------------
Total Investments in
Switzerland 4,156,406 4,180,170 1.2
- ---------------------------------------------------------------------------------------------------------------------
Turkey Beverages 7,915,658 Erciyas Biracilik Ve Malt
Sanayii A.S............ 1,131,316 858,809 0.2
-----------------------------------------------------------------------------------------------------
Metal Fabricating 7,949,486 Eregli Demir Ve Celik
Fabrikalari T.A.S...... 941,635 954,232 0.3
-----------------------------------------------------------------------------------------------------
Retail Stores 1,398,387 Migros Turk A.S.......... 997,813 1,710,861 0.5
-----------------------------------------------------------------------------------------------------
Total Investments in
Turkey 3,070,764 3,523,902 1.0
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom Beverages 151,140 Grand Metropolitan PLC
(Ordinary) (d)......... 958,951 1,189,423 0.3
42,433 Matthew Clark PLC........ 411,176 188,745 0.1
------------ ------------ ----------
1,370,127 1,378,168 0.4
-----------------------------------------------------------------------------------------------------
Chemicals 94,500 Inspec Group PLC......... 285,567 342,742 0.1
6,183 Millennium Chemicals Inc.
(d).................... 177,414 109,748 0.0
------------ ------------ ----------
462,981 452,490 0.1
-----------------------------------------------------------------------------------------------------
Computer Services 26,190 Misys PLC................ 323,536 497,793 0.1
-----------------------------------------------------------------------------------------------------
Congolomerates 432,825 Hanson PLC (Ordinary).... 734,719 607,191 0.2
-----------------------------------------------------------------------------------------------------
Diversified 100,000 Peninsular & Oriental
Steam Navigation Co.
(The).................. 802,965 1,009,372 0.3
-----------------------------------------------------------------------------------------------------
Food & Household 85,336 Cadbury Schweppes PLC.... 679,109 719,015 0.2
Products
-----------------------------------------------------------------------------------------------------
Food Manufacturing 62,660 Unilever PLC............. 1,180,687 1,518,470 0.4
-----------------------------------------------------------------------------------------------------
Industrial--Other 134,000 Tomkins PLC (d).......... 461,257 618,967 0.2
-----------------------------------------------------------------------------------------------------
Insurance 110,150 Prudential Corp. PLC..... 588,540 926,205 0.3
-----------------------------------------------------------------------------------------------------
Pharmaceuticals 51,700 Glaxo Holdings PLC....... 679,333 838,490 0.2
-----------------------------------------------------------------------------------------------------
Real Estate 60,000 Land Securities PLC...... 593,293 766,781 0.2
-----------------------------------------------------------------------------------------------------
Retail 196,500 Tesco PLC (Ordinary)..... 901,348 1,193,411 0.3
-----------------------------------------------------------------------------------------------------
Retail Trade 389,160 ASDA Group PLC........... 716,019 818,903 0.2
-----------------------------------------------------------------------------------------------------
Tobacco 43,282 Imperial Tobacco Group
PLC (d)................ 301,618 279,897 0.1
-----------------------------------------------------------------------------------------------------
Utilities 60,000 Anglian Water PLC........ 491,821 605,623 0.2
60,000 Severn Trent PLC......... 514,675 683,636 0.2
115,500 United Utilities PLC..... 1,024,248 1,227,080 0.4
50,000 Yorkshire Water PLC...... 482,984 603,057 0.2
------------ ------------ ----------
2,513,728 3,119,396 1.0
-----------------------------------------------------------------------------------------------------
Utilities-- 104,623 Cable & Wireless PLC..... 698,024 868,992 0.3
Communications
-----------------------------------------------------------------------------------------------------
Total Investments in the
United Kingdom 13,007,284 15,613,541 4.5
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Western Europe 74,541,995 81,259,440 23.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-78-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (continued) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM Face Value Percent of
SECURITIES Amount Short-Term Securities Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper* US$5,000,000 Alpine Securitization
Co., 5.33% due
1/16/1997.............. 4,988,156 4,988,156 1.4
7,000,000 Dean Witter, Discover &
Co., 5.45% due
1/15/1997.............. 6,984,104 6,984,104 2.0
16,682,000 General Motors Accept-
ance Corp., 7.50% due
1/02/1997.............. 16,675,049 16,675,049 4.8
------------ ------------ ----------
28,647,309 28,647,309 8.2
-----------------------------------------------------------------------------------------------------
Commercial A$10,660,744 Westpac Banking Corp.,
Paper -- Foreign* 6.17% due 5/15/1997.... 8,238,547 8,288,961 2.4
-----------------------------------------------------------------------------------------------------
Foreign Government L 4,250,000 UK Treasury Bill, 6.11%
Obligations* due 2/17/1997.......... 6,996,929 7,217,474 2.0
-----------------------------------------------------------------------------------------------------
US Government & Federal National
Agency Mortgage Association:
Obligations* US$5,000,000 5.23% due 1/07/1997.... 4,994,915 4,994,915 1.4
5,000,000 5.49% due 1/24/1997.... 4,981,700 4,981,700 1.4
United States Treasury
Bills+:
11,000,000 4.93% due 1/09/1997.... 10,986,443 10,989,660 3.2
12,000,000 4.98% due 1/09/1997.... 11,985,060 11,988,720 3.5
350,000 4.94% due 1/30/1997.... 348,559 348,681 0.1
1,600,000 4.99% due 1/30/1997.... 1,593,347 1,593,968 0.5
10,000 4.75% due 2/27/1997.... 9,923 9,923 0.0
30,000 4.81% due 2/27/1997.... 29,768 29,768 0.0
90,000 4.82% due 2/27/1997.... 89,301 89,305 0.0
150,000 5% due 2/27/1997....... 148,792 148,842 0.0
320,000 5.01% due 2/27/1997.... 317,417 317,530 0.1
------------ ------------ ----------
35,485,225 35,493,012 10.2
- ---------------------------------------------------------------------------------------------------------------------
Total Investments in
Short-Term Securities 79,368,010 79,646,756 22.8
- ---------------------------------------------------------------------------------------------------------------------
Nominal
Value/Number
of Contracts
OPTIONS Covered by Premiums
PURCHASED Options Issue Paid
---------------------------------------------------------------------------------------------------------------------
Call Options 348 Nikkei, expiring June
Purchased 1997 at 22,000......... 106,592 57,556 0.0
-----------------------------------------------------------------------------------------------------
Currency Put 5,600,000 German Deutschemark,
Options Purchased expiring July 1997 at
DM1.55................. 64,848 94,640 0.0
1,600,000 Japanese Yen, expiring
February 1997 at Y115... 9,040 22,997 0.0
17,000,000 Japanese Yen, expiring
July 1997 at Y115.5.... 237,575 306,000 0.1
4,600,000 Swiss Franc, expiring
July 1997 at
Chf1.285............... 62,100 194,120 0.1
------------ ------------ ----------
373,563 617,757 0.2
-----------------------------------------------------------------------------------------------------
Put Options 35 Bovespa, expiring Febru-
Purchased ary 1997 at 64,469..... 117,250 29,962 0.0
-----------------------------------------------------------------------------------------------------
Total Options Purchased 597,405 705,275 0.2
- ---------------------------------------------------------------------------------------------------------------------
Total Investments 336,485,191 348,422,493 99.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-79-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--International Equity Focus Fund
Schedule of Investments as of December 31, 1996 (concluded) (in US dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nominal
Value/Number
of Contracts
Covered by Premiums Value Percent of
OPTIONS WRITTEN Options Issue Received (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Call Options 35 Bovespa, expiring
Written February 1997 at
64,469................. (117,250) (154,869) 0.0
-----------------------------------------------------------------------------------------------------
Total Options Written (117,250) (154,869) 0.0
- ---------------------------------------------------------------------------------------------------------------------
Total Investments, Net of Options Written................... $336,367,941 348,267,624 99.8
=============
Variation Margin on Stock Index Futures Contracts**......... 51,556 0.0
Unrealized Depreciation on Forward Foreign Exchange
Contracts***................................................ (305) 0.0
Other Assets Less Liabilities............................... 760,954 0.2
------------ ----------
Net Assets.................................................. $349,079,829 100.0%
============= ===========
- ---------------------------------------------------------------------------------------------------------------------
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and the
number of shares are subject to adjustment under certain conditions until the expiration date.
(d) Non-income producing security.
(e) Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $4,793,000 representing 1.4% of
net assets.
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ashok Leyland Ltd. (GDR).................................................... 3/09/1995 $ 255,800 $ 185,500
East India Hotels Ltd. (GDR)................................................ 4/23/1996- 404,100 345,450
4/24/1996
Indian Hotels Co., Ltd. (GDR)............................................... 3/08/1996 299,250 339,150
Larsen & Toubro (GDR)....................................................... 3/06/1996- 888,875 712,800
4/23/1996
Magyar Tar Kozlesi Reszvenytarsasag (Ordinary).............................. 2/15/1995- 910,789 1,191,213
12/01/1995
Nedcor Ltd. (GDR)........................................................... 5/23/1995- 1,097,188 1,376,240
5/22/1996
RAO Gazprom (ADR)........................................................... 10/21/1996- 622,839 642,444
12/06/1996
- ---------------------------------------------------------------------------------------------------------------------
Total $4,478,841 $4,792,797
========== ==========
- ---------------------------------------------------------------------------------------------------------------------
* Commercial Paper, Commercial Paper -- Foreign and certain Foreign and US Government & Agency Obligations are traded on a
discount basis; the interest rates shown are the rates paid at the time of purchase by the Fund.
</TABLE>
** Stock index futures contracts purchased as of December 31, 1996 were as
follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Note 1a & 1b)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
250 All Ordinaries..............................................
SFE March 1997 $12,156,224
36 Nikkei 225..................................................
SIMEX March 1997 3,006,995
61 TOPIX.......................................................
TSE March 1997 7,754,059
---------------------------------------------------------------------------------------------------------------------
Total Stock Index Futures Contracts Purchased (Total Contract Price--$22,724,370) $22,917,278
---------------------------------------------------------------------------------------------------------------------
Stock index futures contracts sold as of December 31, 1996 were as follows:
---------------------------------------------------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Exchange Date (Note 1a & 1b)
---------------------------------------------------------------------------------------------------------------------
42 FTSE 100....................................................
LIFFE March 1997 $ 7,408,106
17 Hang Seng...................................................
HKFE January 1997 1,479,312
---------------------------------------------------------------------------------------------------------------------
Total Stock Index Futures Contracts Sold (Total Contract Price--$8,607,499) $ 8,887,418
---------------------------------------------------------------------------------------------------------------------
***Forward foreign exchange contracts as of December 31, 1996 were as follows:
---------------------------------------------------------------------------------------------------------------------
Unrealized
Expiration Depreciation
Foreign Currency Purchased Date (Note 1b)
---------------------------------------------------------------------------------------------------------------------
DM15,978,060 ......................................................................
January 1997 $ (305)
---------------------------------------------------------------------------------------------------------------------
Total (US$ Commitment--10,400,000) $ (305)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
++ The rights may be exercised until February 18, 1997.
+ Securities held as collateral in connection with open futures contracts.
See Notes to Financial Statements.
-80-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Natural Resources Focus Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aluminum 15,000 Alcan Aluminium, Ltd. ........ $ 314,175 $ 504,375 1.1%
7,600 +Alumax, Inc. ................ 250,293 253,650 0.6
4,300 Aluminum Co. of America....... 224,399 274,125 0.6
------------ ------------ ------
788,867 1,032,150 2.3
- ---------------------------------------------------------------------------------------------------------------------
Chemicals 4,300 Air Products & Chemicals,
Inc. ....................... 245,939 297,238 0.7
72,000 Asahi Chemical Industry Co.,
Ltd. ....................... 530,650 407,876 0.9
17,000 BASF AG....................... 407,600 655,028 1.4
10,400 Dow Chemical Co. ............. 646,664 815,100 1.8
6,700 duPont (E.I.) de Nemours &
Co. ........................ 323,847 632,313 1.4
------------ ------------ ------
2,154,700 2,807,555 6.2
- ---------------------------------------------------------------------------------------------------------------------
Diversified Resources 20,000 Asahi Glass Co., Ltd. ........ 240,000 188,256 0.4
Companies 12,800 Canadian Pacific, Ltd. ....... 197,224 339,200 0.7
5,100 Coastal Corp. ................ 137,570 249,263 0.6
33,000 Cyprus Amax Minerals Co. ..... 921,470 771,375 1.7
25,500 Norcen Energy Resources
Ltd. ....................... 378,524 565,839 1.3
20,000 Occidental Petroleum Corp. ... 391,200 467,500 1.0
52,300 RGC Ltd. ..................... 206,473 232,190 0.5
------------ ------------ ------
2,472,461 2,813,623 6.2
- ---------------------------------------------------------------------------------------------------------------------
Gold 122,000 +Acacia Resources Ltd. ....... 250,570 237,386 0.5
43,700 +Amax Gold, Inc. ............. 259,987 278,588 0.6
17,500 Ashanti Goldfields Co. Ltd.
(GDR)***.................... 434,367 216,563 0.5
23,500 Cambior Inc. ................. 315,479 346,496 0.8
173,300 +Delta Gold N.L. ............. 333,170 324,818 0.7
30,600 Driefontein Consolidated
Ltd. ....................... 477,914 322,295 0.7
133,000 Great Central Mines N.L. ..... 411,933 378,150 0.8
51,600 +Miramar Mining Corporation... 268,637 225,985 0.5
45,000 Newcrest Mining Ltd. ......... 192,990 178,695 0.4
20,864 Newmont Mining Corp. ......... 828,080 933,664 2.1
45,000 Placer Dome Inc. ............. 1,018,177 978,750 2.2
24,800 Prime Resources Group,
Inc. ....................... 242,631 175,591 0.4
42,900 Santa Fe Pacific Gold
Corp. ...................... 535,350 659,588 1.5
22,000 +TVX Gold, Inc. .............. 179,135 170,500 0.4
------------ ------------ ------
5,748,420 5,427,069 12.1
- ---------------------------------------------------------------------------------------------------------------------
Integrated Oil 12,300 Amerada Hess Corp. ........... 646,044 711,863 1.6
Companies 10,500 Amoco Corp. .................. 554,378 845,250 1.9
5,200 British Petroleum, Co. PLC
(ADR)*...................... 396,812 735,150 1.6
14,000 ENI Societa per Azioni
(ADR)*...................... 654,500 722,750 1.6
2,000 OMV AG........................ 214,068 225,547 0.5
25,000 Petro-Canada (Installment
Receipts)(c)................ 195,677 271,875 0.6
7,300 Repsol, S.A. ................. 210,174 279,926 0.6
3,000 Repsol, S.A. (ADR)* .......... 86,490 114,375 0.2
17,800 Societe Nationale Elf
Aquitaine (ADR)* ........... 645,343 805,450 1.8
12,000 Total, S.A. (Class B)......... 728,842 976,099 2.2
19,700 Yacimientos Petroliferos
Fiscales, S.A. (ADR)*....... 427,078 497,425 1.1
------------ ------------ ------
4,759,406 6,185,710 13.7
- ---------------------------------------------------------------------------------------------------------------------
Metals & Mining 10,800 ASARCO Inc. .................. 305,116 268,650 0.6
259,000 +Centaur Mining & Exploration
Ltd. ....................... 390,350 401,111 0.9
25,600 Falconbridge Ltd. (Installment
Receipts) (a)............... 384,069 366,248 0.8
7,400 Inco Ltd...................... 244,911 235,875 0.5
51,300 Industrias Penoles, S.A. de
C.V. ....................... 230,560 181,841 0.4
465,000 M.I.M. Holdings Ltd. ......... 867,286 649,973 1.4
34,370 Minsur S.A. (T Shares)........ 111,555 119,542 0.3
</TABLE>
-81-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Natural Resources Focus Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Metals & Mining 91,000 Mitsubishi Materials Corp. ... 461,572 367,772 0.8
(concluded) 32,400 Noranda Inc. ................. 600,505 722,496 1.6
25,500 Outokumpu OY.................. 455,626 434,964 1.0
9,400 ++P.T. Tambang Timah
(GDR)***.................... 115,742 169,905 0.4
144,400 Pasminco Ltd. ................ 195,275 227,071 0.5
6,700 Phelps Dodge Corp. ........... 382,311 452,250 1.0
108,000 QNI Ltd. ..................... 216,381 217,007 0.5
52,400 (The) RTZ Corp. PLC .......... 680,570 840,879 1.9
28,000 Resolute Ltd. ................ 60,351 58,263 0.1
6,000 Rio Algom Ltd. ............... 116,616 134,015 0.3
410,000 Savage Resources Ltd. ........ 313,412 449,358 1.0
41,000 Savage Resources Ltd.
(Warrants) (b).............. 5,506 10,420 0.0
46,000 Sumitomo Metal Mining Co.
Ltd. ....................... 383,546 310,242 0.7
34,000 Trelleborg 'B' Fria........... 454,495 451,504 1.0
23,000 +Westmin Resources, Inc. ..... 120,329 111,642 0.2
164,900 WMC Ltd. ..................... 964,809 1,038,541 2.3
------------ ------------ ------
8,060,893 8,219,569 18.2
- ---------------------------------------------------------------------------------------------------------------------
Oil & Gas Producers 21,400 Apache Corp. ................. 573,935 757,025 1.7
37,000 +Chauvco Resources Ltd. ...... 437,096 380,803 0.8
10,200 +Chieftain International, Inc.
(f) ........................ 227,716 265,200 0.6
23,100 Enserch Exploration Inc. ..... 230,541 271,425 0.6
68,300 Enterprise Oil PLC............ 449,045 753,667 1.7
37,300 +Gulf Canada Resources,
Ltd. ....................... 264,784 272,263 0.6
7,300 Louisiana Land and Exploration
Co. (The)................... 283,067 391,463 0.9
21,400 Mitchell Energy & Development
Corp. (Class B)............. 374,226 473,475 1.0
28,600 +Northrock Resources Ltd. .... 227,905 256,774 0.6
13,000 +Oryx Energy Co. ............. 216,739 321,750 0.7
4,000 PanCanadian Petroleum Ltd. ... 152,305 157,956 0.4
93,000 Ranger Oil Ltd. .............. 625,617 918,375 2.0
8,200 Sonat, Inc. .................. 269,737 422,300 0.9
9,800 Vastar Resources, Inc. ....... 268,604 372,400 0.8
------------ ------------ ------
4,601,317 6,014,876 13.3
- ---------------------------------------------------------------------------------------------------------------------
Oil Services 12,500 +Coflexip Stena Offshore, Inc.
(ADR)*...................... 259,460 326,562 0.7
9,800 IHC Caland N.V. .............. 214,018 560,406 1.3
10,600 +Petroleum Geo-Services ASA
(ADR)*...................... 309,952 412,075 0.9
6,400 Schlumberger Ltd. ............ 382,287 639,200 1.4
10,300 +Smedvig ASA (ADR)*........... 218,875 207,288 0.5
7,200 Transocean Offshore Inc.
(d)......................... 440,451 450,900 1.0
------------ ------------ ------
1,825,043 2,596,431 5.8
- ---------------------------------------------------------------------------------------------------------------------
Paper & Forest Products 24,533 Aracruz Celulose S.A.
(ADR)*...................... 196,788 202,397 0.5
31,400 Avenor Inc. .................. 611,175 465,270 1.0
15,800 Empresa Nacional de Celulosas,
S.A. ....................... 233,184 189,181 0.4
8,700 Georgia-Pacific Corp. ........ 615,783 626,400 1.4
14,800 International Paper Co. ...... 497,368 597,550 1.3
57,500 Metsa Serla OY 'B'............ 499,397 431,053 1.0
16,800 Mo Och Domsjo AB 'B' Co. ..... 373,697 473,309 1.0
52,000 Slocan Forest Products
Ltd. ....................... 523,964 588,321 1.3
9,520 +UPM-Kymmene OY (e)........... 169,172 196,519 0.4
17,200 Weyerhaeuser Co. ............. 687,415 814,850 1.8
9,000 Willamette Industries,
Inc. ....................... 376,875 626,625 1.4
------------ ------------ ------
4,784,818 5,211,475 11.5
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-82-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Natural Resources Focus Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Common Stocks Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Plantations 136,000 Golden Hope Plantations BHD... 240,608 231,604 0.5
90,000 Kuala Lumpur Kepong BHD....... 120,553 228,119 0.5
------------ ------------ ------
361,161 459,723 1.0
- ---------------------------------------------------------------------------------------------------------------------
Refining 45,300 Total Petroleum (North
America), Ltd. (ADR)*....... 579,947 469,987 1.0
- ---------------------------------------------------------------------------------------------------------------------
Steel 83,000 British Steel PLC............. 218,182 228,614 0.5
135,000 +Kobe Steel, Ltd. ............ 390,945 284,456 0.6
12,800 Koninklijke Nederlandsche
Hoogovens en Staalfabrienken
N.V. ....................... 529,034 533,951 1.2
148,000 Nippon Steel Corp. ........... 501,972 437,098 1.0
244,000 Sumitomo Metal Industries,
Ltd. ....................... 773,176 600,518 1.3
------------ ------------ ------
2,413,309 2,084,637 4.6
- ---------------------------------------------------------------------------------------------------------------------
Wood Products 18,400 Louisiana-Pacific Corp. ...... 467,929 388,700 0.8
26,800 Riverside Forest Products
Ltd......................... 352,710 348,204 0.8
------------ ------------ ------
820,639 736,904 1.6
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks 39,370,981 44,059,709 97.5
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Investments
---------------------------------------------------------------------------------------------------------------------
Commercial Paper** $1,352,000 General Electric Capital
Corp., 7.10% due
1/02/1997................... 1,351,467 1,351,467 3.0
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Investments 1,351,467 1,351,467 3.0
- ---------------------------------------------------------------------------------------------------------------------
Total Investments............. $ 40,722,448 45,411,176 100.5
============
Liabilities in Excess of Other
Assets...................... (214,181) (0.5)
------------ ------
Net Assets.................... $ 45,196,995 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Receipts evidence payment by the Fund of 67% of the purchase price common
stock of Falconbridge Ltd. The Fund is obligated to pay the remaining 33%,
approximately $360,000, over the next year.
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and the number of shares are subject to
adjustment under certain conditions until the expiration date.
(c) Receipts evidence payment by the Fund of 71% of the purchase price common
stock of Petro-Canada. The Fund is obligated to pay the remaining 29%,
approximately $189,000, over the next year.
(d) Created as a result of the merger of Sonat Offshore and Transocean.
(e) Created as a result of the merger of Kymmene Corporation and Repola Ltd.
(f) Investment in companies 5% or more of whose outstanding securities are
held by the Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) were as follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oil & Gas Producers Chieftain International, Inc. ..................... 10,200 $227,716 --
- ---------------------------------------------------------------------------------------------------------------------
Total $227,716
=======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
*** Global Depositary Receipts (GDR).
+ Non-income producing security.
++ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $170,000, representing 0.4% of net
assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
P.T. Tambang Timah (GDR)......................................................... 10/06/1995 $115,742 $169,905
- ---------------------------------------------------------------------------------------------------------------------
Total $115,742 $169,905
======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-83-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset-Backed AAA Aaa $ 9,000,000 Banc One Credit Card Master
Securities++--3.3% Trust (Series B),
7.55% due 12/15/1999............. $ 9,171,523 $ 9,129,330
AAA Aaa 4,000,000 Citibank, Credit Card Master Trust
I, 5.62% due 12/10/2008.......... 3,998,440 3,996,240
AAA Aaa 4,462,458 Fifth Third Auto Grantor Trust,
6.45% due 3/15/2002.............. 4,460,715 4,480,575
------------ ------------
17,630,678 17,606,145
- ---------------------------------------------------------------------------------------------------------------------
Banks & Thrifts--12.0% Bank of New York Co., Inc.:
A- A2 4,000,000 7.625% due 7/15/2002............. 4,306,000 4,159,160
A- A2 2,000,000 7.875% due 11/15/2002............ 2,213,400 2,106,200
BankAmerica Corp.:
A A2 7,000,000 8.375% due 3/15/2002............. 7,361,550 7,499,310
A+ A1 1,000,000 7.125% due 5/12/2005............. 985,500 1,007,540
BBB+ A2 2,000,000 First Interestate Bancorp, 11.25%
due 3/27/2001.................... 2,354,060 2,303,520
BBB+ A1 5,000,000 +First Union Capital Corp., 7.85%
due 1/01/2027.................... 4,991,300 4,991,300
A- A2 1,500,000 First Union Corp., 7.50% due
7/15/2006........................ 1,500,690 1,539,720
A- A3 2,000,000 Golden West Financial Corp., 9.15%
due 5/23/1998.................... 2,271,480 2,075,860
BBB+ A3 1,000,000 +HSBC Americas Inc., 7.808% due
12/15/2026....................... 988,460 966,100
AA- Aa2 3,000,000 JPM Capital Trust, 7.54% due
1/15/2027........................ 3,000,000 2,931,870
NationsBank Corp.:
A A2 2,000,000 7.50% due 2/15/1997.............. 1,998,280 2,003,740
A- A3 5,000,000 6.50% due 8/15/2003.............. 4,755,150 4,887,850
Norwest Corp.:
AA- Aa3 5,000,000 6.25% due 4/15/1999.............. 4,983,600 5,004,000
AA- Aa3 2,500,000 6.75% due 5/12/2000.............. 2,529,975 2,528,250
A A2 12,950,000 US Bancorp, 6.95% due 11/28/1997... 13,048,032 13,082,738
AA+ Aa2 3,000,000 Wachovia Corp., 6.55% due
6/09/1997........................ 2,997,810 3,012,780
BBB A1 4,500,000 Wells Fargo Capital I, 7.96% due
12/15/2026....................... 4,421,515 4,498,065
------------ ------------
64,706,802 64,598,003
- ---------------------------------------------------------------------------------------------------------------------
Canadian Province of Quebec (Canada) (2):
Province*--2.4% A+ A2 3,500,000 8.80% due 4/15/2003.............. 3,944,780 3,852,135
A+ A2 9,500,000 7.125% due 2/09/2024............. 7,990,800 9,123,230
------------ ------------
11,935,580 12,975,365
- ---------------------------------------------------------------------------------------------------------------------
Federal AAA Aaa 3,000,000 Federal Home Loan Banks, 6.65%
Agencies--1.9% due 11/13/2001................... 2,997,656 2,992,020
AAA Aaa 7,000,000 Federal National Mortgage
Association, 7.85% due
9/10/2004........................ 6,925,569 7,164,080
------------ ------------
9,923,225 10,156,100
- ---------------------------------------------------------------------------------------------------------------------
Finance--4.5% Associates Corp. of North America:
AA- Aa3 5,000,000 8.375% due 1/15/1998............. 5,016,100 5,115,700
AA- Aa3 1,500,000 5.25% due 9/01/1998.............. 1,454,385 1,478,085
AA- Aa3 1,000,000 7.25% due 9/01/1999.............. 987,620 1,021,960
A+ Aa3 5,500,000 CIT Group Holdings, Inc., 7% due
9/30/1997........................ 5,547,490 5,545,705
Commercial Credit Co.:
A+ A1 3,250,000 10.00% due 5/01/1999............. 3,626,350 3,506,393
A+ A1 3,000,000 6.70% due 8/01/1999.............. 3,022,580 3,018,030
AAA Aaa 3,245,000 General Electric Capital Corp.,
8.125% due 5/15/2012............. 3,449,052 3,587,347
A+ A2 1,000,000 Transamerica Financial Corp., 6.80%
due 3/15/1999.................... 999,730 1,010,520
------------ ------------
24,103,307 24,283,740
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-84-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance-- Bear Stearns Companies
Other--14.4% Inc.(The):
A A2 10,000,000 6.75% due 8/15/2000.............. 9,936,500 10,059,900
A A2 1,000,000 6.70% due 8/01/2003.............. 1,002,800 983,990
Dean Witter, Discover & Co.:
A A2 3,500,000 6.75% due 8/15/2000.............. 3,486,805 3,525,375
A A2 4,000,000 6.30% due 1/15/2006.............. 3,982,400 3,778,688
A A2 3,500,000 6.75% due 1/01/2016.............. 3,500,000 3,222,170
A+ A2 4,000,000 Equitable Cos. Inc., 9% due
12/15/2004....................... 4,416,200 4,478,800
Equitable Life Assurance Society:
A A2 4,355,000 +6.95% due 12/01/2005............. 4,110,249 4,272,168
A A2 3,500,000 +7.70% due 12/01/2015............. 3,476,060 3,498,530
A Baa1 10,000,000 Lehman Brothers Holdings, Inc.,
7.375% due 8/15/1997............. 9,987,000 10,065,300
BBB+ A3 5,000,000 MBNA Corporation, 5.681% due
9/14/1998........................ 5,000,000 5,001,980
AA- A2 6,100,000 +Pacific Mutual Life Insurance
Company, 7.90% due 12/30/2023.... 5,999,655 6,242,496
PaineWebber Group, Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001............. 3,501,570 3,288,240
BBB+ Baa1 2,000,000 8.875% due 3/15/2005............. 2,012,540 2,169,240
Smith Barney Holdings, Inc.:
A- A2 2,000,000 5.875% due 2/01/2001............. 1,993,680 1,943,496
A- A2 4,000,000 6.50% due 10/15/2002............. 3,980,560 3,933,680
A- A2 2,000,000 6.625% due 11/15/2003............ 1,988,320 1,969,380
A A1 2,000,000 Travelers Capital II, 7.75% due
12/01/2036....................... 2,003,400 1,923,120
Travelers Corp. (The):
A+ A1 1,000,000 9.50% due 3/01/2002.............. 1,084,200 1,119,190
A+ A1 6,000,000 7.875% due 5/15/2025............. 6,053,840 6,266,940
------------ ------------
77,515,779 77,742,683
- ---------------------------------------------------------------------------------------------------------------------
Industrial-- Anheuser-Busch Cos., Inc.:
Consumer AA- A1 2,500,000 8.75% due 12/01/1999............. 2,839,090 2,656,250
Goods--3.8% AA- A1 5,000,000 7.375% due 7/01/2023............. 5,127,300 4,947,100
A- A3 7,000,000 IBP, Inc., 6.125% due 2/01/2006.... 6,431,460 6,600,510
AA Aa2 2,000,000 Kimberly-Clark Corporation, 7.875%
due 2/01/2023.................... 2,033,960 2,082,080
A A2 4,000,000 Philip Morris Companies, Inc., 9%
due 1/01/2001.................... 4,071,540 4,303,480
------------ ------------
20,503,350 20,589,420
- ---------------------------------------------------------------------------------------------------------------------
Industrial-- AA Aa3 2,000,000 BP America Inc., 9.375% due
Energy--2.6% 11/01/2000....................... 2,204,960 2,200,980
AA- A1 7,000,000 Consolidated Natural Gas Co., 8.75%
due 6/01/1999.................... 7,448,861 7,361,900
A- A1 3,000,000 Dresser Industries, Inc., 7.60% due
8/15/2096........................ 2,991,270 3,062,790
A+ A1 1,500,000 Texaco Capital Inc., 9% due
12/15/1999....................... 1,731,670 1,606,110
------------ ------------
14,376,761 14,231,780
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-85-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industrial-- A- A3 6,500,000 Chrysler Finance Corporation
Manufacturing--8.2% 10.95% due 8/01/2017............. 7,380,520 7,007,260
AA- Aa3 2,950,000 du Pont (E.I.) de Nemours & Co.,
8.25% due 1/15/2022.............. 3,066,304 3,102,751
Ford Motor Credit Company:
A+ A1 3,000,000 7% due 9/25/2001................. 2,988,060 3,044,730
A+ A1 5,000,000 7.50% due 6/15/2004.............. 5,140,200 5,147,300
A+ A1 2,500,000 7.75% due 3/15/2005.............. 2,497,725 2,603,625
General Motors Acceptance Corp.:
A- A3 3,000,000 7.125% due 5/11/1998............. 3,033,840 3,045,660
A- A3 4,000,000 7.70% due 4/15/2016.............. 3,967,000 4,136,920
A- A3 3,500,000 7.40% due 9/01/2025.............. 3,471,790 3,461,290
Lockheed Martin Corp.:
BBB+ A3 7,000,000 6.625% due 6/15/1998............. 6,999,090 7,053,970
BBB+ A3 2,500,000 6.55% due 5/15/1999.............. 2,498,800 2,511,675
A- Baa2 3,000,000 McDonnell Douglas Corporation,
8.625% due 4/01/1997............. 3,050,010 3,019,710
------------ ------------
44,093,339 44,134,891
- ---------------------------------------------------------------------------------------------------------------------
Industrial-- A+ A1 2,500,000 Bass America, Inc., 8.125% due
Services--11.1% 3/31/2002........................ 2,668,930 2,656,825
A A2 4,000,000 Carnival Cruise Lines, Inc., 7.70%
due 7/15/2004.................... 4,208,480 4,159,680
Columbia/HCA Healthcare Corp.:
A- A2 5,000,000 6.41% due 6/15/2000.............. 4,997,000 4,987,400
A- A2 1,845,000 7.05% due 12/01/2027............. 1,729,946 1,756,643
A- A2 3,000,000 7.75% due 7/15/2036.............. 2,976,840 3,058,500
Dillard Department Stores, Inc.:
A+ A2 5,000,000 7.375% due 6/15/1999............. 5,305,840 5,089,200
A+ A2 3,000,000 9.125% due 8/01/2011............. 3,240,150 3,465,210
A A2 2,000,000 +Disney Enterprises Inc., 6.85% due
1/10/2007........................ 1,998,660 1,998,580
A+ A1 7,000,000 +Electronic Data Systems Corp.,
6.85% due 5/15/2000.............. 6,994,470 7,085,547
A A3 5,000,000 Hertz Corp., 6% due 1/15/2003...... 4,823,600 4,804,800
AAA Aaa 3,000,000 Johnson & Johnson Co., 8.72% due
11/01/2024....................... 3,000,000 3,338,040
A A2 2,000,000 May Department Stores Company,
10.625% due 11/01/2010........... 2,419,800 2,588,400
A- A2 7,000,000 Sears, Roebuck & Co., 6.82% due
10/17/2002....................... 7,014,280 7,009,520
AA A2 7,000,000 Wal-Mart Stores, Inc., 8.50% due
9/15/2024........................ 7,036,810 7,490,350
------------ ------------
58,414,806 59,488,695
- ---------------------------------------------------------------------------------------------------------------------
Industrial AA A1 9,500,000 Boeing Co., 6.35% due 6/15/2003.... 8,549,905 9,348,760
Transportation-- Southwest Airlines, Inc.:
3.4% A- A3 3,500,000 9.40% due 7/01/2001.............. 4,021,990 3,804,500
A- A3 4,000,000 8% due 3/01/2005................. 3,980,450 4,231,480
A- A3 1,000,000 7.875% due 9/01/2007............. 992,600 1,032,790
------------ ------------
17,544,945 18,417,530
- ---------------------------------------------------------------------------------------------------------------------
Supranational--
0.6% AAA Aaa 1,000,000 Asian Development Bank, 10.75%
due 6/01/1997...................... 1,084,890 1,019,170
AAA Aaa 2,000,000 Inter-American Development Bank
Co., 8.875% due 6/01/2009........ 2,481,700 2,330,520
------------ ------------
3,566,590 3,349,690
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-86-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Utilities-- GTE Corp.:
Communications-- BBB+ A3 1,000,000 8.85% due 3/01/1998.............. 1,143,360 1,031,020
2.5% BBB+ A3 1,500,000 9.375% due 12/01/2000............ 1,647,090 1,648,305
BBB+ A3 3,500,000 9.10% due 6/01/2003.............. 3,965,330 3,904,215
BBB+ A3 2,000,000 10.30% due 11/15/2017............ 2,187,020 2,164,900
AAA Aaa 2,500,000 Indiana Bell Telephone Co. Inc.,
7.30% due 8/15/2026.............. 2,495,725 2,537,100
Southwestern Bell Telcommunications
Corp.:
AA Aa3 1,000,000 6.125% due 3/01/2000............. 1,005,000 993,580
AA Aa3 1,000,000 6.625% due 4/01/2005............. 958,450 989,450
------------ ------------
13,401,975 13,268,570
- ---------------------------------------------------------------------------------------------------------------------
Utilities-- AA- Aa2 7,000,000 Duke Power Co., 8% due
Electric--3.8% 11/01/1999....................... 6,966,520 7,288,190
A+ A1 3,000,000 Georgia Power Co., 6.125% due
9/01/1999........................ 2,892,720 2,983,140
AA- A1 2,000,000 Northern States Power Company,
7.125% due 7/01/2025............. 2,122,360 1,960,120
A A2 7,500,000 Virginia Electric & Power Co.,
8.625% due 10/01/2024............ 7,416,540 8,114,235
------------ ------------
19,398,140 20,345,685
- ---------------------------------------------------------------------------------------------------------------------
Yankee ABN AMRO Bank (1):
Corporates*-- AA- Aa2 1,500,000 7.55% due 6/28/2006.............. 1,499,790 1,553,055
10.9% AA- Aa2 1,000,000 7.30% due 12/01/2026............. 977,900 950,800
A+ A1 6,000,000 Australia & New Zealand Banking
Group Ltd., 7.55% due 9/15/2006
(1).............................. 5,990,880 6,176,640
AA- Aa3 6,500,000 CRA Finance Ltd., 6.50% due
12/01/2003 (1)................... 6,509,920 6,333,535
A A3 2,000,000 China Light & Power Co., Ltd.,
7.50% due 4/15/2006 (5).......... 1,987,260 2,016,640
AA+ Aa1 1,000,000 Deutsche Bank Financial Inc., 6.70%
due 12/13/2006 (1)............... 996,910 981,360
Enersis S.A.(4):
A- Baa1 8,000,000 6.90% due 12/01/2006............. 7,979,360 7,807,920
A- Baa1 2,000,000 7.40% due 12/01/2016............. 1,989,440 1,940,480
A+ A1 2,000,000 Ford Capital, B.V., 9.50% due
6/01/2010 (1).................... 2,217,880 2,375,320
Grand Metropolitan Investment Corp.
(1):
A+ A2 5,500,000 6.50% due 9/15/1999.............. 5,615,810 5,503,190
A+ A2 1,000,000 8.625% due 8/15/2001............. 1,049,910 1,079,190
BBB+ A3 3,000,000 HSBC Americas Inc., 7% due
11/01/2006 (1)................... 2,974,800 2,961,600
AA- A1 6,000,000 Korea Electric Power Corporation,
8% due 7/01/2002 (5)............. 6,312,060 6,330,780
A+ A1 1,000,000 +Petronas Corp., 6.875% due
7/01/2003 (4).................... 986,480 1,001,430
BBB+ A3 3,000,000 Philips Electronics N.V., 7.20% due
6/01/2026 (4).................... 2,993,220 3,041,250
Pohang Iron & Steel Co., Ltd. (3):
A+ A2 4,500,000 7.375% due 5/15/2005............. 4,581,720 4,561,695
A+ A2 4,000,000 7.125% due 11/01/2006............ 3,995,480 3,989,080
------------ ------------
58,658,820 58,603,965
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-87-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Prime Bond Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Corporate Bonds & Notes Cost (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Yankee AAA Aaa 2,000,000 Export-Import Bank of Japan, 8.35%
Sovereign*--2.7% due 12/01/1999 (1)............... 2,113,320 2,107,060
AA- A1 3,000,000 Korea Development Bank, 6.625% due
11/21/2003 (2)................... 3,011,060 2,970,000
Metropolis of Tokyo (Japan) (2):
AAA Aaa 3,000,000 8.70% due 10/05/1999............. 3,469,410 3,184,290
AAA Aaa 250,000 9.25% due 11/08/2000............. 268,427 273,657
BBB A3 6,000,000 People's Republic of China, 6.625%
due 1/15/2003 (2)................ 5,970,960 5,839,254
------------ ------------
14,833,177 14,374,261
- ---------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds &
Notes--88.1%....................... 470,607,274 474,166,523
- ---------------------------------------------------------------------------------------------------------------------
US Government Obligations
---------------------------------------------------------------------------------------------------------------------
US Treasury Notes
AAA Aaa 2,500,000 5.875% due 6/30/2000............. 2,502,025 2,481,250
AAA Aaa 2,500,000 8.75% due 8/15/2000.............. 2,976,172 2,709,375
AAA Aaa 1,000,000 6.25% due 2/15/2003.............. 982,500 998,750
AAA Aaa 5,500,000 5.75% due 8/15/2003.............. 5,371,953 5,335,000
AAA Aaa 11,000,000 6.50% due 5/15/2005.............. 10,668,276 11,073,920
AAA Aaa 3,000,000 6.50% due 10/15/2006............. 2,985,469 3,016,410
- ---------------------------------------------------------------------------------------------------------------------
Total US Government
Obligations--4.7% 25,486,395 25,614,705
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
Commercial Paper**--0.9% 5,000,000 General Electric Capital Corp., 6%
due 1/03/1997.................... 4,997,500 4,997,500
- ---------------------------------------------------------------------------------------------------------------------
Repurchase 24,932,000 Lehman Brothers Inc., purchased on
Agreements***--4.7% 12/31/96 to yield 7.10% to
1/02/97.......................... 24,932,000 24,932,000
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities--5.6% 29,929,500 29,929,500
- ---------------------------------------------------------------------------------------------------------------------
Total Investments--98.4%........... $526,023,169 529,710,728
============
Other Assets Less
Liabilities--1.6%.................. 8,683,000
------------
Net Assets--100.0%................. $538,393,728
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Corresponding industry groups for foreign securities, which are
denominated in US dollars.
(1) Financial Institution (4) Industrial
(2) Government Entity (5) Utility
(3) Industrial Mining and Metals
** Commercial Paper is traded on a discount basis; the interest rate shown is
the discount rate paid at the time of purchase by the Fund.
*** Repurchase Agreements are fully collateralized by US Government and Agency
Obligations.
+ Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $30,056,000, representing 5.6% of
net assets.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Disney Enterprises Inc., 6.85% due 1/10/2007.................................. 12/18/1996 $ 1,998,660 $ 1,998,580
Electronic Data Systems, Corp., 6.85% due 5/15/2000 .......................... 5/26/1995 6,994,470 7,085,547
Equitable Life Assurance Society, 6.95% due 12/01/2005........................ 6/11/1996 4,110,249 4,272,168
Equitable Life Assurance Society, 7.70% due 12/01/2015........................ 10/17/1996 3,476,060 3,498,530
First Union Capital Corp., 7.85% due 1/01/2027................................ 12/27/1996 4,991,300 4,991,300
HSBC Americas Inc., 7.808% due 12/15/2026..................................... 12/04/1996 988,460 966,100
Pacific Mutual Life Insurance Company, 7.90% due 12/30/2023................... 9/24/1996 5,999,655 6,242,496
Petronas Corp., 6.875% due 7/01/2003.......................................... 8/10/1995 986,480 1,001,430
- ---------------------------------------------------------------------------------------------------------------------
Total $29,545,334 $30,056,151
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Subject to principal paydowns.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
-88-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Quality Equity Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Stocks & Warrants Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 176,000 Northrop Grumman Corp. ..... $ 11,530,816 $ 14,564,000 1.8%
190,000 United Technologies
Corp. .................... 7,831,355 12,540,000 1.6
------------ ------------ ------
19,362,171 27,104,000 3.4
- ---------------------------------------------------------------------------------------------------------------------
Automobile 205,000 General Motors Corp. ....... 10,846,146 11,428,750 1.4
- ---------------------------------------------------------------------------------------------------------------------
Automobile Parts 338,000 +Lear Corporation........... 11,323,000 11,534,250 1.5
- ---------------------------------------------------------------------------------------------------------------------
Banking 320,000 Bank of New York Co.,
Inc....................... 6,531,925 10,800,000 1.3
60,000 Bank of New York Co., Inc.
(Warrants) (c)............ 433,750 4,447,500 0.6
67,100 BankAmerica Corporation .... 6,865,310 6,693,225 0.8
121,000 Citicorp.................... 8,956,427 12,463,000 1.6
------------ ------------ ------
22,787,412 34,403,725 4.3
- ---------------------------------------------------------------------------------------------------------------------
Building & Construction 277,800 Oakwood Homes Corp.......... 6,329,367 6,354,675 0.8
- ---------------------------------------------------------------------------------------------------------------------
Chemicals 163,000 +FMC Corporation............ 11,552,704 11,430,375 1.4
240,000 PPG Industries Inc. ........ 11,911,956 13,470,000 1.7
------------ ------------ ------
23,464,660 24,900,375 3.1
- ---------------------------------------------------------------------------------------------------------------------
Communications 96,834 TCI Pacific Communications
(Convertible Preferred)... 9,353,653 8,787,686 1.1
- ---------------------------------------------------------------------------------------------------------------------
Computer Services 215,000 cisco Systems, Inc. ........ 10,373,567 13,679,375 1.7
255,000 Electronic Data Systems
Corp. .................... 11,193,379 11,028,750 1.4
86,000 International Business
Machines Corp. ........... 9,370,635 12,986,000 1.6
------------ ------------ ------
30,937,581 37,694,125 4.7
- ---------------------------------------------------------------------------------------------------------------------
Computer Technology 295,500 +Gulfstream Aerospace
Corp...................... 7,274,816 7,165,875 0.9
- ---------------------------------------------------------------------------------------------------------------------
Computers 203,000 +Compaq Computer Corp. ..... 15,028,761 15,072,750 1.9
- ---------------------------------------------------------------------------------------------------------------------
Congolomerates 100,200 AlliedSignal Inc. .......... 7,365,309 6,713,400 0.9
- ---------------------------------------------------------------------------------------------------------------------
Electrical Equipment 114,000 General Electric Co. ....... 8,855,064 11,271,750 1.4
80,300 Linear Technology
Corporation............... 3,295,002 3,513,125 0.5
------------ ------------ ------
12,150,066 14,784,875 1.9
- ---------------------------------------------------------------------------------------------------------------------
Electronics/Instruments 387,500 Corning Inc. ............... 11,485,244 17,921,875 2.3
- ---------------------------------------------------------------------------------------------------------------------
Energy & Related 690,300 Edison International........ 13,122,844 13,719,712 1.7
- ---------------------------------------------------------------------------------------------------------------------
Engineering & Construction 274,400 Foster Wheeler
Corporation............... 11,706,877 10,187,100 1.3
- ---------------------------------------------------------------------------------------------------------------------
Entertainment 245,351 Viacom, Inc. (Class B)...... 9,184,077 8,556,616 1.1
- ---------------------------------------------------------------------------------------------------------------------
Financial Services 307,000 American Express Company.... 14,499,680 17,345,500 2.2
302,800 First Data Corp............. 10,714,914.. 11,052,200 1.4
------------ ------------ ------
25,214,594 28,397,700 3.6
- ---------------------------------------------------------------------------------------------------------------------
Foods 362,000 Heinz (H.J.) Company........ 11,901,557 12,941,500 1.6
- ---------------------------------------------------------------------------------------------------------------------
Foreign--Argentina* 255,000 Yacimientos Petroliferos
Fiscales S.A. (ADR)
(a)(1).................... 5,330,905 6,438,750 0.8
- ---------------------------------------------------------------------------------------------------------------------
Foreign--Canada* 240,000 Canadian Pacific, Ltd.(2)... 4,915,307 6,360,000 0.8
118,400 Magna International, Inc.
(Class A)(3).............. 5,437,021 6,600,800 0.8
73,900 Potash Corp. of Saskatchewan
Inc.(4) .................. 5,014,349 6,281,500 0.8
------------ ------------ ------
15,366,677 19,242,300 2.4
- ---------------------------------------------------------------------------------------------------------------------
Foreign--France* 130,000 Scor SA (ADR) (a)(5)........ 4,959,500 4,468,750 0.5
111,100 +SGS-Thompson
Microelectronics N.V. (NY
Registered Shares)(6)..... 4,089,372 7,777,000 1.0
------------ ------------ ------
9,048,872 12,245,750 1.5
- ---------------------------------------------------------------------------------------------------------------------
Foreign--Mexico* 140,000 Panamerican Beverages, Inc.
(Class A) (7)............. 5,529,885 6,562,500 0.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-89-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Quality Equity Fund
Schedule of Investments as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Stocks & Warrants Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreign--South Korea* 175,700 Hyundai Engineering &
Construction Co., Ltd.
(GDR) (b)(8)++............ 2,289,371 1,098,125 0.1
- ---------------------------------------------------------------------------------------------------------------------
Foreign--Switzerland* 113,000 +Novartis AG (ADR) (a)(9)... 4,932,475 6,313,875 0.8
- ---------------------------------------------------------------------------------------------------------------------
Foreign--United Kingdom* 208,000 British Steel PLC (ADR)
(a)(10)................... 5,476,712 5,720,000 0.7
205,000 Glaxo Wellcome PLC (ADR)
(a)(9).................... 5,547,641 6,508,750 0.8
197,000 Grand Metropolitan PLC (ADR)
(a)(7).................... 5,337,393 6,230,125 0.8
47,000 Imperial Chemical Industries
PLC (ADR) (a)(11)......... 2,416,395 2,444,000 0.3
88,600 National Westminster Bank
PLC (ADR) (a)(12)......... 5,587,192 6,157,700 0.8
147,000 Vodafone Group PLC (ADR)
(a)(13)................... 5,117,125 6,082,125 0.8
------------ ------------ ------
29,482,458 33,142,700 4.2
- ---------------------------------------------------------------------------------------------------------------------
Hospital Management 417,000 +Health Management
Associates, Inc. (Class
A)........................ 9,396,499 9,382,500 1.2
- ---------------------------------------------------------------------------------------------------------------------
Hospital Supplies 305,000 Abbott Laboratories......... 12,470,021 15,478,750 2.0
- ---------------------------------------------------------------------------------------------------------------------
Insurance 103,000 Aetna Inc. ................. 6,648,424 8,240,000 1.0
285,000 Allstate Corp. ............. 9,378,920 16,494,375 2.1
196,000 UNUM Corporation............ 12,508,249 14,161,000 1.8
------------ ------------ ------
28,535,593 38,895,375 4.9
- ---------------------------------------------------------------------------------------------------------------------
Leisure 426,000 Brunswick Corporation....... 10,541,056 10,224,000 1.3
- ---------------------------------------------------------------------------------------------------------------------
Machinery 206,000 +American Standard
Companies, Inc. .......... 6,825,765 7,879,500 1.0
300,000 Deere & Co. ................ 12,310,813 12,187,500 1.5
------------ ------------ ------
19,136,578 20,067,000 2.5
- ---------------------------------------------------------------------------------------------------------------------
Manufacturing 200,000 Fisher Scientific
International, Inc. ...... 6,606,669 9,425,000 1.2
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas 330,000 Enron Corp. ................ 12,657,402 14,231,250 1.8
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas Pipelines 170,000 IMC Global, Inc. ........... 6,589,268 6,651,250 0.8
- ---------------------------------------------------------------------------------------------------------------------
Oil Service 350,000 Dresser Industries, Inc. ... 8,202,968 10,850,000 1.4
78,000 Schlumberger Ltd. .......... 6,580,141 7,790,250 1.0
------------ ------------ ------
14,783,109 18,640,250 2.4
- ---------------------------------------------------------------------------------------------------------------------
Paper 146,000 Kimberly-Clark
Corporation .............. 11,227,298 13,906,500 1.8
- ---------------------------------------------------------------------------------------------------------------------
Petroleum 261,600 Pennzoil Co. ............... 10,752,129 14,780,400 1.9
357,000 Unocal Corp. ............... 12,002,947 14,503,125 1.8
------------ ------------ ------
22,755,076 29,283,525 3.7
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 195,000 Merck & Co., Inc. .......... 11,792,491 15,453,750 1.9
- ---------------------------------------------------------------------------------------------------------------------
Railroads 154,000 Burlington Northern Santa Fe
Inc. ..................... 12,636,886 13,301,750 1.7
- ---------------------------------------------------------------------------------------------------------------------
Real Estate 279,000 Prentiss Properties Trust... 5,708,700 6,975,000 0.8
Investment Trusts 137,700 Starwood Lodging Trust...... 5,396,590 7,590,712 1.0
------------ ------------ ------
11,105,290 14,565,712 1.8
- ---------------------------------------------------------------------------------------------------------------------
Retail 591,400 Limited, Inc. (The)......... 12,739,046 10,866,975 1.4
260,000 Sears, Roebuck & Co. ....... 10,339,207 11,992,500 1.5
------------ ------------ ------
23,078,253 22,859,475 2.9
- ---------------------------------------------------------------------------------------------------------------------
Retail Specialty 347,100 Rite Aid Corporation........ 11,147,442 13,797,225 1.7
426,000 +Toys 'R' Us, Inc. ......... 13,238,973 12,780,000 1.6
------------ ------------ ------
24,386,415 26,577,225 3.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-90-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Quality Equity Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Stocks & Warrants Cost (Note 1a) Net Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software--Computer 311,600 BMC Software, Inc. ......... $ 11,552,980 $ 12,892,450 1.6%
302,750 Oracle Corp. ............... 10,052,946 12,601,969 1.6
------------ ------------ ------
21,605,926 25,494,419 3.2
- ---------------------------------------------------------------------------------------------------------------------
Steel 267,000 AK Steel Holding Corp. ..... 11,024,039 10,579,875 1.3
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications 478,000 +Airtouch Communications,
Inc. ..................... 13,584,871 12,069,500 1.5
220,000 Bell Atlantic Corp.......... 13,554,148 14,245,000 1.8
------------ ------------ ------
27,139,019 26,314,500 3.3
- ---------------------------------------------------------------------------------------------------------------------
Tobacco 71,000 Philip Morris Companies,
Inc. ..................... 6,752,180 7,996,375 1.0
- ---------------------------------------------------------------------------------------------------------------------
Travel & Lodging 453,300 Carnival Corp. (Class A).... 13,364,651 14,958,900 1.9
- ---------------------------------------------------------------------------------------------------------------------
Utilities--Gas 140,000 El Paso Natural Gas
Company .................. 6,860,804 7,070,000 0.9
- ---------------------------------------------------------------------------------------------------------------------
Total Stocks & Warrants 655,263,301 754,070,370 94.9
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Securities
---------------------------------------------------------------------------------------------------------------------
Commercial Paper** $ 5,000,000 Clipper Receivables Corp.,
5.42% due 1/09/1997....... 4,993,225 4,993,225 0.6
8,511,000 General Motors Acceptance
Corp., 7.50% due
1/02/1997................. 8,507,454 8,507,454 1.1
10,000,000 Goldman Sachs Group, L.P.,
5.42% due 1/06/1997....... 9,990,966 9,990,966 1.2
7,000,000 International Securitization
Corp., 5.75% due
1/21/1997................. 6,976,521 6,976,521 0.9
------------ ------------ ------
30,468,166 30,468,166 3.8
- ---------------------------------------------------------------------------------------------------------------------
US Government Agency 10,000,000 Federal Home Loan Mortgage
Obligations** Corp., 5.40% due
1/03/1997................. 9,995,500 9,995,500 1.3
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 40,463,666 40,463,666 5.1
- ---------------------------------------------------------------------------------------------------------------------
Total Investments........... $695,726,967 794,534,036 100.0
============
Liabilities In Excess of
Other Assets.............. (258,808) 0.0
------------ ------
Net Assets.................. $794,275,228 100.0%
============ ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
* Corresponding industry groups for foreign securities:
<TABLE>
<S> <C> <C>
(1) Petroleum (6) Semiconductors (11) Chemicals
(2) Natural Resources (7) Beverages (12) Banking
(3) Automobile Parts (8) Engineering & Construction (13) Communications
(4) Natural Gas Pipelines (9) Pharmaceuticals
(5) Insurance (10) Steel
</TABLE>
** Commercial Paper and certain US Government Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
+ Non-income producing security.
++ Restricted security as to resale, the value of the Fund's investment in
restricted securities was approximately $1,098,000, representing 0.1% of
net assets.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Acquisition Value
Issue Date Cost (Note 1a)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hyundai Engineering & Construction Co., Ltd. (GDR).................. 3/19/1996 $2,289,371 $1,098,125
-----------------------------------------------------------------------------------------------------------------
Total $2,289,371 $1,098,125
========== ===========
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-91-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Reserve Assets Fund
Schedule of Investments as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Interest Maturity Value
Amount Issue Rate* Date (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bank Notes--1.3% $ 300,000 Bank of America, Illinois...................... 5.63% 12/30/97 $ 299,850
- ---------------------------------------------------------------------------------------------------------------------
Total Bank Notes (Cost--$299,971) 299,850
- ---------------------------------------------------------------------------------------------------------------------
Certificates of 500,000 Chase Manhattan Bank USA, Delaware............. 5.60 4/01/97 500,100
Deposit--2.2%
- ---------------------------------------------------------------------------------------------------------------------
Total Certificates of Deposit (Cost--$500,000) 500,100
- ---------------------------------------------------------------------------------------------------------------------
Commercial 282,000 Allomon Funding Corp........................... 5.35 1/17/97 281,377
Paper--43.5% 587,000 Allomon Funding Corp........................... 5.33 1/21/97 585,358
364,000 Bear Stearns Companies, Inc. (The)............. 5.35 1/31/97 362,424
800,000 Beta Finance Inc............................... 5.35 4/07/97 788,558
750,000 Caisse des Depots et Consignations............. 5.30 2/03/97 746,417
500,000 Finova Capital Corp............................ 5.48 3/20/97 494,204
500,000 General Electric Capital Corp.................. 5.50 3/03/97 495,483
333,000 General Electric Capital Corp.................. 5.64 3/05/97 329,892
300,000 General Electric Capital Corp.................. 5.45 3/25/97 296,296
720,000 General Motors Acceptance Corp................. 5.34 1/23/97 717,774
400,000 General Motors Acceptance Corp................. 5.33 6/02/97 390,940
502,000 Greenwich Funding Corporation.................. 5.33 1/28/97 500,078
526,000 Korea Development Bank......................... 5.32 1/23/97 524,374
87,000 Korea Development Bank......................... 5.35 1/23/97 86,731
1,000,000 National Fleet Funding Corp.................... 5.34 1/15/97 998,072
500,000 New Center Asset Trust......................... 5.43 1/29/97 497,984
600,000 New Center Asset Trust......................... 5.50 2/25/97 595,131
500,000 Toshiba International Finance (UK) PLC......... 5.35 1/17/97 498,896
58,000 Toshiba International Finance (UK) PLC......... 5.37 1/27/97 57,787
712,000 Windmill Funding Corp.......................... 5.35 1/24/97 709,694
- ---------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost--$9,957,326) 9,957,470
- ---------------------------------------------------------------------------------------------------------------------
Corporate Notes--8.7% 1,000,000 LABS Trust Series 1996-C Senior Notes+......... 5.625 12/29/97 1,000,000
1,000,000 Short-Term Card Account Trust (1995-1)+........ 5.615 1/15/97 1,000,000
- ---------------------------------------------------------------------------------------------------------------------
Total Corporate Notes (Cost--$1,999,996) 2,000,000
- ---------------------------------------------------------------------------------------------------------------------
Funding 1,000,000 Jackson National Life Insurance Co.+........... 5.41 4/08/97 1,000,000
Agreements--4.4%
- ---------------------------------------------------------------------------------------------------------------------
Total Funding Agreements (Cost--$1,000,000) 1,000,000
- ---------------------------------------------------------------------------------------------------------------------
Master Notes--4.4% 1,000,000 Goldman Sachs Group, L.P.+..................... 5.88 8/01/97 1,000,000
- ---------------------------------------------------------------------------------------------------------------------
Total Master Notes (Cost--$1,000,000) 1,000,000
- ---------------------------------------------------------------------------------------------------------------------
US Government, Agency 70,000 Federal Farm Credit Bank....................... 5.52 1/21/97 69,796
& Instrumentality 90,000 Federal Farm Credit Bank....................... 5.50 2/13/97 89,451
Obligations-- 120,000 Federal Home Loan Bank......................... 5.62 5/05/97 117,823
Discount--5.6% 40,000 Federal National Mortgage Association.......... 5.35 3/13/97 39,582
110,000 Federal National Mortgage Association.......... 5.41 3/13/97 108,851
165,000 Federal National Mortgage Association.......... 5.38 3/14/97 163,253
300,000 Federal National Mortgage Association.......... 5.30 3/17/97 296,689
110,000 Federal National Mortgage Association.......... 5.34 3/18/97 108,769
50,000 Federal National Mortgage Association.......... 5.40 3/24/97 49,396
20,000 Federal National Mortgage Association.......... 5.28 4/03/97 19,731
15,000 Federal National Mortgage Association.......... 5.26 4/10/97 14,782
210,000 International Bank for Reconstruction and
Development.................................... 5.54 2/20/97 208,482
- ---------------------------------------------------------------------------------------------------------------------
Total US Government, Agency & Instrumentality
Obligations--Discount (Cost--$1,286,426) 1,286,605
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-92-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.--Reserve Assets Fund
Schedule of Investments as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Interest Maturity Value
Amount Issue Rate* Date (Note 1a)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Government, Agency 105,000 Federal Home Loan Bank......................... 6.12% 4/15/98 104,967
& Instrumentality 1,000,000 Federal National Mortgage Association+......... 5.85 2/14/97 1,000,494
Obligations-- 1,000,000 Federal National Mortgage Association+......... 5.70 5/19/97 1,000,000
Non-Discount--30.7% 500,000 Federal National Mortgage Association+......... 5.521 5/22/97 499,870
300,000 Federal National Mortgage Association.......... 5.47 12/30/97 299,541
500,000 Federal National Mortgage Association+......... 5.46 4/24/98 499,750
1,000,000 Federal National Mortgage Association+......... 5.75 5/14/98 1,000,000
365,000 Student Loan Marketing Association+............ 5.62 1/23/97 365,018
200,000 US Treasury Notes.............................. 6.125 5/31/97 200,500
400,000 US Treasury Notes.............................. 8.50 7/15/97 406,437
200,000 US Treasury Notes.............................. 6.00 8/31/97 200,562
250,000 US Treasury Notes.............................. 5.75 9/30/97 250,449
650,000 US Treasury Notes.............................. 5.625 10/31/97 650,406
200,000 US Treasury Notes.............................. 5.375 11/30/97 199,594
150,000 US Treasury Notes.............................. 5.25 12/31/97 149,519
200,000 US Treasury Notes.............................. 5.625 11/30/98 199,156
- ---------------------------------------------------------------------------------------------------------------------
Total US Government, Agency &
Instrumentality Obligations--
Non-Discount (Cost--$7,026,821) 7,026,263
- ---------------------------------------------------------------------------------------------------------------------
Total Investments
(Cost--$23,070,540)--100.8%.................... 23,070,288
Liabilities in Excess of Other
Assets--(0.8%)................................. (184,917)
-----------
Net Assets--100.0%............................. $22,885,371
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government, Agency & Instrumentality
Obligations are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund. Other securities
bear interest rates at the rates shown, payable at fixed dates or upon
maturity. The interest rates on variable rate securities are adjusted
periodically based upon appropriate indexes; the interest rates shown are
the rates in effect at December 31, 1996.
+ Variable Rate Notes.
See Notes to Financial Statements.
-93-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Assets and Liabilities as of December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Basic Developing Domestic
American Value Capital Money
Balanced Focus Markets Market
Fund Fund Focus Fund Fund
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments, at value* (Note 1a)........................... $210,545,210 $522,663,382 $ 96,192,191 $ 278,860,287
Cash....................................................... 993 -- 71 10,370
Foreign cash (Note 1c)..................................... -- -- 724,487 --
Receivable for securities sold............................. -- 3,242,613 435,288 --
Interest receivable........................................ 1,786,475 -- 40,392 1,069,959
Receivable for capital shares sold......................... -- 936,960 971,206 --
Dividends receivable....................................... 151,604 519,497 68,281 --
Deferred organization expenses (Note 1f)................... -- 1,440 -- --
Prepaid registration fees and other assets (Note 1f)....... 3,441 1,794 27,135 2,392
------------ ------------ ----------- ------------
Total assets............................................. 212,487,723 527,365,686 98,459,051 279,943,008
------------ ------------ ----------- ------------
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for securities purchased........................... 166,848 1,672,743 2,753,565 3,197,475
Payable for capital shares redeemed........................ 135,085 322,896 26 1,832,621
Payable to investment adviser (Note 2)..................... 103,518 273,971 27,327 114,211
Accrued expenses and other liabilities..................... 35,258 165,912 79,231 42,687
------------ ------------ ----------- ------------
Total liabilities........................................ 440,709 2,435,522 2,860,149 5,186,994
------------ ------------ ----------- ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets................................................. $212,047,014 $524,930,164 $ 95,598,902 $ 274,756,014
============ ============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------
Net Assets Consist of:
Common Stock, $0.10 par value+............................. $ 1,324,286 $ 3,562,243 $ 950,806 $ 27,477,548
Paid-in capital in excess of par........................... 174,548,138 422,337,791 92,662,419 247,297,930
Undistributed investment income--net....................... 3,604,288 3,224,622 1,752,408 --
Undistributed (accumulated) realized capital gains (losses)
on investments and foreign currency transactions--net
(Note 5)................................................. 20,595,249 52,901,365 (4,054,029) --
Unrealized appreciation (depreciation) on investments and
foreign currency transactions--net....................... 11,975,053 42,904,143 4,287,298 (19,464)
------------ ------------ ----------- ------------
Net Assets................................................. $212,047,014 $524,930,164 $ 95,598,902 $ 274,756,014
============ ============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------
Capital Shares Outstanding................................. 13,242,862 35,622,430 9,508,063 274,775,478
============ ============ =========== ============
Net Asset Value, Offering and Redemption Price Per Share... $ 16.01 $ 14.74 $ 10.05 $ 1.00
============ ============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------
* Identified cost.......................................... $198,570,157 $479,759,239 $ 91,897,323 $ 278,879,751
============ ============ =========== ============
+ Authorized shares........................................ 100,000,000 100,000,000 100,000,000 1,300,000,000
============ ============ =========== ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-94-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Assets and Liabilities as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Global Global
Equity Bond Strategy Utility
Growth Focus Focus Focus
Fund Fund++ Fund Fund
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments, at value* (Note 1a)............................ $451,805,311 $100,348,183 $867,228,567 $142,177,130
Cash........................................................ 608 10,072 194,752 25,262
Foreign cash (Note 1c)...................................... -- 60,267 15,583,973 340
Interest receivable......................................... 58,494 2,094,950 3,816,480 33,360
Receivable for forward foreign exchange contracts (Note
1b)....................................................... -- 141,607 3,709,150 --
Receivable for securities sold.............................. 1,151,250 2,666,378 -- --
Dividends receivable........................................ 312,385 -- 1,082,249 430,750
Receivable for capital shares sold.......................... 703,607 779 414 78,173
Deferred organization expenses (Note 1f).................... -- 2,367 -- 2,414
Prepaid registration fees and other assets (Note 1f)........ 2,555 642 3,600 918
------------ ------------ ------------ ------------
Total assets.............................................. 454,034,210 105,325,245 891,619,185 142,748,347
------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Unrealized depreciation on forward foreign exchange
contracts (Note 1b)....................................... -- 78,492 2,598,413 --
Payable for securities purchased............................ 561,675 11,126,689 16,114,249 --
Payable for capital shares redeemed......................... 48,793 104,824 691,642 177,446
Payable to investment adviser (Note 2)...................... 293,221 43,076 496,049 74,269
Accrued expenses and other liabilities...................... 101,256 164,790 1,434,257 58,831
Payable for forward foreign exchange contracts (Note 1b).... -- -- 81,757 --
Variation margin on stock index futures contracts (Note
1b)....................................................... -- 17,464 -- --
------------ ------------ ------------ ------------
Total liabilities......................................... 1,004,945 11,535,335 21,416,367 310,546
------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets.................................................. $453,029,265 $ 93,789,910 $870,202,818 $142,437,801
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
Net Assets Consist of:
Common Stock, $0.10 par value+.............................. $ 1,727,480 $ 960,915 $ 6,272,330 $ 1,168,693
Paid-in capital in excess of par............................ 374,280,783 94,976,976 746,052,734 117,927,335
Undistributed investment income--net........................ 1,422,632 118,851 20,579,673 1,132,021
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note
5)........................................................ 22,041,727 (1,230,690) 26,215,075 (2,628,376)
Unrealized appreciation (depreciation) on investments and
foreign currency transactions--net........................ 53,556,643 (1,036,142) 71,083,006 24,838,128
------------ ------------ ------------ ------------
Net Assets.................................................. $453,029,265 $ 93,789,910 $870,202,818 $142,437,801
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
Capital Shares Outstanding.................................. 17,274,795 9,609,151 62,723,303 11,686,930
============ ============ ============ ============
Net Asset Value, Offering and Redemption Price Per Share.... $ 26.22 $ 9.76 $ 13.87 $ 12.19
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
* Identified cost........................................... $398,248,668 $101,153,795 $793,370,058 $117,339,737
============ ============ ============ ============
+ Authorized shares......................................... 100,000,000 100,000,000 200,000,000 100,000,000
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
++ International Bond Fund was acquired by World Income Focus Fund. Subsequent
to the acquisition, World Income Focus Fund changed its name to Global Bond
Focus Fund.
See Notes to Financial Statements.
-95-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Assets and Liabilities as of December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High
Government Current International
Bond Income Index 500 Equity Focus
Fund++ Fund Fund++++ Fund
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments, at value* (Note 1a)............................ $ 87,831,280 $410,867,543 $ 10,844,116 $ 347,717,218
Options purchased, at value (premiums paid-$597,405) (Notes
1a & 1b).................................................. -- -- -- 705,275
Variation margin on stock index futures contracts (Note
1b)....................................................... -- -- -- 51,556
Cash........................................................ 776 -- -- 11,007
Foreign cash (Note 1c)...................................... -- -- -- 814,905
Receivable for options written.............................. -- -- -- 26,960
Interest receivable......................................... 1,419,180 6,689,392 -- 210
Receivable for capital shares sold.......................... 365,988 2,353 -- 287,014
Dividends receivable........................................ -- -- 7,216 306,875
Receivable for securities sold.............................. -- -- 1,881 294,641
Receivable for forward foreign exchange contracts (Note
1b)....................................................... -- -- -- 217,542
Receivable from investment adviser (Note 2)................. -- -- 1,651 --
Receivable for loaned securities (Note 6)................... 83 -- -- --
Deferred organization expenses (Note 1f).................... -- -- 14,852 --
Prepaid registration fees and other assets (Note 1f)........ 717 5,893 -- 3,416
------------ ------------ ------------ ------------
Total assets.............................................. 89,618,024 417,565,181 10,869,716 350,436,619
------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Options written, at value (premiums received-$117,250)
(Notes 1a & 1b)........................................... -- -- -- 154,869
Unrealized depreciation on forward foreign exchange
contracts (Note 1b)....................................... -- -- -- 305
Payable for custodian bank (Note 1h)........................ -- 2,604,491 -- --
Payable for securities purchased............................ -- -- 63,798 604,180
Payable to investment adviser (Note 2)...................... 12,244 172,193 -- 225,798
Payable for capital shares redeemed......................... -- 83,294 22 8,823
Variation margin on stock index futures contracts (Note
1b)....................................................... -- -- 29,200 --
Accrued expenses and other liabilities...................... 24,988 90,285 24,856 362,815
------------ ------------ ------------ ------------
Total liabilities......................................... 37,232 2,950,263 117,876 1,356,790
------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets.................................................. $ 89,580,792 $414,614,918 $ 10,751,840 $ 349,079,829
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
Net Assets Consist of:
Common Stock, $0.10 par value+.............................. $ 861,700 $ 3,638,978 $ 105,735 $ 3,002,760
Paid-in capital in excess of par............................ 87,437,337 412,111,475 10,476,301 329,573,888
Undistributed investment income--net........................ 484,603 3,786,391 16,863 4,510,300
Undistributed (accumulated) realized capital gains (losses)
on investments and foreign currency
transactions--net (Note 5)................................ (154,414) (5,478,242) (193) 192,008
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 951,566 556,316 153,134 11,800,873
------------ ------------ ------------ ------------
Net Assets.................................................. $ 89,580,792 $414,614,918 $ 10,751,840 $ 349,079,829
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
Capital Shares Outstanding.................................. 8,617,002 36,389,781 1,057,347 30,027,594
============ ============ ============ ============
Net Asset Value, Offering and Redemption Price Per Share.... $ 10.40 $ 11.39 $ 10.17 $ 11.63
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
* Identified cost........................................... $ 86,879,714 $410,311,227 $ 10,696,027 $ 335,887,786
============ ============ ============ ============
+ Authorized shares......................................... 100,000,000 100,000,000 100,000,000 100,000,000
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Formerly known as Intermediate Government Bond Fund.
++++ The Fund commenced operations on December 13, 1996.
See Notes to Financial Statements.
-96-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Assets and Liabilities as of December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Natural
Resources Prime Quality Reserve
Focus Bond Equity Assets
Fund Fund Fund Fund
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments, at value* (Note 1a)............................ $ 45,411,176 $529,710,728 $794,534,036 $ 23,070,288
Cash........................................................ 507 654 85 6,098
Interest receivable......................................... -- 8,433,549 -- 88,796
Receivable for securities sold.............................. 39,532 5,093,200 -- --
Dividends receivable........................................ 59,829 -- 1,227,381 --
Receivable for capital shares sold.......................... -- 498,018 365,270 39,787
Receivable for loaned securities (Note 6)................... -- 610 -- --
Prepaid registration fees and other assets (Note 1f)........ 403 7,494 5,695 2,561
------------ ------------ ------------ ------------
Total assets.............................................. 45,511,447 543,744,253 796,132,467 23,207,530
------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for securities purchased............................ 220,652 4,996,751 1,289,280 299,763
Payable to investment adviser (Note 2)...................... 25,855 201,657 304,791 9,534
Payable for capital shares redeemed......................... 50,989 54,060 110,758 820
Accrued expenses and other liabilities...................... 16,956 98,057 152,410 12,042
------------ ------------ ------------ ------------
Total liabilities......................................... 314,452 5,350,525 1,857,239 322,159
------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets.................................................. $ 45,196,995 $538,393,728 $794,275,228 $ 22,885,371
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
Net Assets Consist of:
Common Stock, $0.10 par value+.............................. $ 344,378 $ 4,521,158 $ 2,419,424 $ 2,288,562
Paid-in capital in excess of par............................ 36,969,567 542,786,415 651,091,058 20,597,061
Undistributed investment income--net........................ 221,415 3,129,844 5,217,038 --
Undistributed (accumulated) realized capital gains (losses) on
investments and foreign currency transactions--net (Note
5)........................................................ 2,970,842 (15,731,248) 36,740,639 --
Unrealized appreciation (depreciation) on investments and
foreign currency transactions--net........................ 4,690,793 3,687,559 98,807,069 (252)
------------ ------------ ------------ ------------
Net Assets.................................................. $ 45,196,995 $538,393,728 $794,275,228 $ 22,885,371
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
Capital Shares Outstanding.................................. 3,443,783 45,211,583 24,194,244 22,885,622
============ ============ ============ ============
Net Asset Value, Offering and Redemption Price Per Share.... $ 13.12 $ 11.91 $ 32.83 $ 1.00
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
* Identified cost........................................... $ 40,722,448 $526,023,169 $695,726,967 $ 23,070,540
============ ============ ============ ============
+ Authorized shares......................................... 100,000,000 100,000,000 100,000,000 500,000,000
============ ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-97-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Operations for the Year Ended December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Basic Developing Domestic
American Value Capital Money
Balanced Focus Markets Market
Fund Fund Focus Fund Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income (Notes 1d & 1e):
Interest and discount earned...................................... $ 6,807,063 $ 2,321,975 $ 557,486 $15,317,537
Dividends*........................................................ 1,833,183 5,869,178 2,257,621 --
----------- ----------- ---------- -----------
Total income...................................................... 8,640,246 8,191,153 2,815,107 15,317,537
----------- ----------- ---------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees (Note 2)................................. 1,186,936 2,414,605 765,718 1,386,726
Custodian fees.................................................... 27,739 39,578 192,342 17,641
Accounting services (Note 2)...................................... 47,193 94,151 17,633 49,358
Professional fees................................................. 20,794 27,988 8,370 29,810
Registration fees (Note 1f)....................................... 2,869 62,939 10,191 24
Directors' fees and expenses...................................... 5,004 7,451 1,383 6,723
Transfer agent fees (Note 2)...................................... 5,006 4,958 5,007 5,020
Pricing services.................................................. 685 232 6,224 --
Amortization of organization expenses (Note 1f)................... -- 720 2,667 1,340
Other............................................................. 4,250 5,250 -- 10,742
----------- ----------- ---------- -----------
Total expenses before reimbursement............................... 1,300,476 2,657,872 1,009,535 1,507,384
Reimbursement of expenses (Note 2)................................ -- -- (52,388) --
----------- ----------- ---------- -----------
Total expenses after reimbursement................................ 1,300,476 2,657,872 957,147 1,507,384
----------- ----------- ---------- -----------
Investment income--net............................................ 7,339,770 5,533,281 1,857,960 13,810,153
----------- ----------- ---------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Realized & Unrealized Gain (Loss) on Investments & Foreign
Currency Transactions--Net (Notes 1b, 1c, 1e & 3):
Realized gain (loss) on investments--net.......................... 21,869,723 56,406,548 (51,709) 12,359
Realized loss on foreign currency transactions--net............... -- -- (105,274) --
Change in unrealized appreciation/depreciation on
investments--net................................................ (9,430,963) 13,550,612 4,837,024 (157,747)
Change in unrealized appreciation/depreciation on foreign currency
transactions.................................................... -- -- (7,883) --
----------- ----------- ---------- -----------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net.............................. 12,438,760 69,957,160 4,672,158 (145,388)
----------- ----------- ---------- -----------
Net Increase in Net Assets Resulting from Operations.............. $19,778,530 $75,490,441 $6,530,118 $13,664,765
=========== =========== ========== ===========
- ---------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on dividends............................. $ 873 $ 159,174 $ 103,221 --
=========== =========== ========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-98-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Operations for the Year Ended December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Global Global
Equity Bond Strategy Utility
Growth Focus Focus Focus
Fund Fund Fund Fund
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income (Notes 1d & 1e):
Interest and discount earned*.................................. $ 2,906,699 $7,362,977 $ 11,236,222 $ 659,024
Dividends**.................................................... 2,359,527 68,036 8,177,095 6,059,957
Other income................................................... -- 42,863 4,675 --
----------- ---------- ------------ -----------
Total income................................................... 5,266,226 7,473,876 19,417,992 6,718,981
----------- ---------- ------------ -----------
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees (Note 2).............................. 3,010,613 518,022 3,715,122 880,959
Custodian fees................................................. 42,130 30,154 165,186 29,004
Accounting services (Note 2)................................... 90,851 18,069 107,351 31,814
Professional fees.............................................. 29,504 11,372 50,835 15,356
Registration fees (Note 1f).................................... 49,227 562 -- 19
Directors' fees and expenses................................... 8,142 1,898 12,226 3,283
Transfer agent fees (Note 2)................................... 5,002 5,002 5,006 5,007
Pricing services............................................... -- 5,093 3,930 --
Amortization of organization expenses (Note 1f)................ -- 1,578 -- 863
Other.......................................................... 5,389 2,016 17,599 4,391
----------- ---------- ------------ -----------
Total expenses................................................. 3,240,858 593,766 4,077,255 970,696
----------- ---------- ------------ -----------
Investment income--net......................................... 2,025,368 6,880,110 15,340,737 5,748,285
----------- ---------- ------------ -----------
- ---------------------------------------------------------------------------------------------------------------------
Realized & Unrealized Gain (Loss) on Investments & Foreign
Currency Transactions--Net (Notes 1b, 1c, 1e & 3):
Realized gain on investments--net.............................. 22,199,518 905,735 45,320,331 1,243,231
Realized gain (loss) on foreign currency transactions--net..... -- (75,020 ) 15,637,082 (46,439)
Change in unrealized appreciation/depreciation on
investments--net............................................. 5,970,999 (531,602 ) 37,056,845 10,440,233
Change in unrealized appreciation/depreciation on foreign
currency transactions........................................ -- (174,496 ) (12,458,193) (9,723)
----------- ---------- ------------ -----------
Total realized and unrealized gain on investments and foreign
currency transactions--net................................... 28,170,517 124,617 85,556,065 11,627,302
----------- ---------- ------------ -----------
Net Increase in Net Assets Resulting from Operations........... $30,195,885 $7,004,727 $100,896,802 $17,375,587
=========== ========== ============ ===========
- ---------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on interest.......................... $ -- $ 32,711 $ 80,349 $ --
=========== ========== ============ ===========
** Net of withholding tax on dividends......................... $ 3,500 $ -- $ 462,853 $ 350,006
=========== ========== ============ ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-99-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Operations for the Year Ended December 31, 1996 (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High International
Government Current Equity
Bond Income Index 500 Focus
Fund Fund Fund+ Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income (Notes 1d & 1e):
Interest and discount earned*..................................... $3,898,013 $37,867,841 $ 9,587 $ 3,616,175
Dividends**....................................................... -- 883,127 7,276 5,353,531
Other income...................................................... 7,464 254,493 -- --
----------- ----------- -------- -----------
Total income...................................................... 3,905,477 39,005,461 16,863 8,969,706
----------- ----------- -------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees (Note 2)................................. 297,926 1,881,541 1,638 2,358,140
Custodian fees.................................................... 12,035 38,264 500 278,327
Accounting services (Note 2)...................................... 13,454 85,714 120 68,951
Professional fees................................................. 7,193 35,064 -- 26,860
Registration fees (Note 1f)....................................... 14,717 26,617 441 27,017
Pricing services.................................................. 1,264 9,274 25 22,351
Directors' fees and expenses...................................... 1,009 8,229 -- 6,266
Transfer agent fees (Note 2)...................................... 4,991 4,960 417 4,589
Amortization of organization expenses (Note 1f)................... -- -- 148 1,383
Other............................................................. 1,191 6,439 -- 9,054
----------- ----------- -------- -----------
Total expenses before reimbursement............................... 353,780 2,096,102 3,289 2,802,938
Reimbursement of expenses (Note 2)................................ (264,214 ) -- (3,289 ) --
----------- ----------- -------- -----------
Expenses after reimbursement...................................... 89,566 2,096,102 -- 2,802,938
----------- ----------- -------- -----------
Investment income--net............................................ 3,815,911 36,909,359 16,863 6,166,768
----------- ----------- -------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Realized & Unrealized Gain (Loss) on Investments & Foreign
Currency Transactions--Net (Notes 1b, 1c, 1e & 3):
Realized gain (loss) on investments--net.......................... (154,413 ) (3,777,610) (193 ) 9,049,271
Realized gain on foreign currency transactions--net............... -- -- -- 889,867
Change in unrealized appreciation/depreciation on
investments--net................................................ (1,012,273 ) 8,565,962 153,134 3,256,180
Change in unrealized appreciation/depreciation on foreign currency
transactions.................................................... -- -- -- (745,643)
----------- ----------- -------- -----------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net.............................. (1,166,686 ) 4,788,352 152,941 12,449,675
----------- ----------- -------- -----------
Net Increase in Net Assets Resulting from Operations.............. $2,649,225 $41,697,711 $169,804 $18,616,443
=========== =========== ======== ===========
- ---------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on interest............................. $ -- $ -- $ -- $ 977
=========== =========== ======== ===========
** Net of withholding tax on dividends............................ $ -- $ -- $ -- $ 555,297
=========== =========== ======== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+The Fund commenced operations on December 13, 1996.
See Notes to Financial Statements.
-100-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Operations for the Year Ended December 31, 1996 (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Natural
Resources Prime Quality Reserve
Focus Bond Equity Assets
Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income (Notes 1d & 1e):
Interest and discount earned................................ $ 75,317 $ 35,506,054 $ 5,883,776 $ 1,323,908
Dividends*.................................................. 939,896 -- 11,052,176 --
Other income................................................ -- 58,223 3,074 --
---------- ----------- ------------ ----------
Total income................................................ 1,015,213 35,564,277 16,939,026 1,323,908
---------- ----------- ------------ ----------
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees (Note 2)........................... 297,742 2,160,063 3,136,852 118,827
Accounting services (Note 2)................................ 10,026 107,314 158,146 3,830
Custodian fees.............................................. 31,761 45,793 60,419 10,988
Professional fees........................................... 7,148 42,418 56,245 6,043
Registration fees (Note 1f)................................. 16 29,647 52,190 --
Directors' fees and expenses................................ 1,018 10,976 14,937 --
Transfer agent fees (Note 2)................................ 5,002 5,005 4,982 4,997
Pricing services............................................ 4,735 8,819 214 --
Other....................................................... 1,434 8,811 11,246 --
---------- ----------- ------------ ----------
Total expenses.............................................. 358,882 2,418,846 3,495,231 144,685
---------- ----------- ------------ ----------
Investment income--net...................................... 656,331 33,145,431 13,443,795 1,179,223
---------- ----------- ------------ ----------
- ---------------------------------------------------------------------------------------------------------------------
Realized & Unrealized Gain (Loss) on Investments & Foreign
Currency Transactions--Net (Notes 1b, 1c, 1e & 3):
Realized gain on investments--net........................... 2,970,830 215,210 36,740,673 3,049
Realized gain (loss) on foreign currency
transactions--net......................................... (13,371) -- 147 --
Change in unrealized appreciation/depreciation on
investments--net.......................................... 2,055,840 (21,044,224) 67,969,744 (14,201)
Change in unrealized appreciation/depreciation on foreign
currency transactions..................................... 2,033 -- -- --
---------- ----------- ------------ ----------
Total realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ 5,015,332 (20,829,014) 104,710,564 (11,152)
---------- ----------- ------------ ----------
Net Increase in Net Assets Resulting from Operations........ $ 5,671,663 $ 12,316,417 $118,154,359 $ 1,168,071
========== =========== ============ ==========
- ---------------------------------------------------------------------------------------------------------------------
* Net of withholding tax on dividends....................... $ 75,184 $ -- $ 262,454 $ --
========== =========== ============ ==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-101-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
American Balanced Fund
----------------------------------
For the Year Ended December 31,
----------------------------------
Increase (Decrease) in Net Assets: 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net......................................................... $ 7,339,770 $ 8,022,508
Realized gain (loss) on investments--net....................................... 21,869,723 (311,392)
Change in unrealized appreciation/depreciation on investments--net............. (9,430,963) 27,587,655
------------ ------------
Net increase in net assets resulting from operations........................... 19,778,530 35,298,771
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net......................................................... (7,882,096) (7,173,644)
Realized gain on investments--net.............................................. (328,715) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders................................................................... (8,210,811) (7,173,644)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net increase (decrease) in net assets derived from capital share
transactions................................................................. (12,432,919) 25,836,347
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase (decrease) in net assets........................................ (865,200) 53,961,474
Beginning of year.............................................................. 212,912,214 158,950,740
------------ ------------
End of year*................................................................... $212,047,014 $212,912,214
============ ============
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net.......................................... $ 3,604,288 $ 4,146,614
============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-102-
<PAGE>
==============================================================================
Basic Value Focus Fund
- ----------------------------------
For the Year Ended December 31,
----------------------------------
1996 1995
- ----------------------------------
$ 5,533,281 $ 3,967,636
56,406,548 13,595,994
13,550,612 34,077,480
- ------------ ------------
75,490,441 51,641,110
- ------------ ------------
- ----------------------------------
(4,571,085) (3,296,595)
(16,947,347) (7,106,929)
- ------------ ------------
(21,518,432) (10,403,524)
- ------------ ------------
- ----------------------------------
164,495,262 100,918,588
- ------------ ------------
- ----------------------------------
218,467,271 142,156,174
306,462,893 164,306,719
- ------------ ------------
$524,930,164 $306,462,893
============ ============
- ----------------------------------
$ 3,224,622 $ 2,262,426
============ ============
- ----------------------------------
-103-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Developing Capital
Markets Focus Fund
--------------------------------
For the Year Ended December 31,
--------------------------------
Increase (Decrease) in Net Assets: 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net.......................................................... $ 1,857,960 $ 1,186,414
Realized gain (loss) on investments and foreign currency transactions--net...... (156,983) (3,129,641)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net...................................................... 4,829,141 1,803,333
----------- -----------
Net increase (decrease) in net assets resulting from operations................. 6,530,118 (139,894)
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net.......................................................... (1,385,673) (332,002)
Realized gain on investments--net............................................... -- --
----------- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders.................................................................... (1,385,673) (332,002)
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net increase (decrease) in net assets derived from capital share transactions... 35,245,827 19,004,774
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase (decrease) in net assets......................................... 40,390,272 18,532,878
Beginning of year............................................................... 55,208,630 36,675,752
----------- -----------
End of year*.................................................................... $95,598,902 $55,208,630
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i)................................. $ 1,752,408 $ 1,184,973
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-104-
<PAGE>
==============================================================================
Domestic Money
Market Fund
- ----------------------------------
For the Year Ended December 31,
----------------------------------
1996 1995
- ----------------------------------
$ 13,810,153 $ 17,526,423
12,359 44,778
(157,747) 334,598
------------
13,664,765 17,905,799
------------
- ----------------------------------
(13,810,153) (17,526,423)
(12,359) (44,778)
------------
)
(13,822,512 (17,571,201)
------------
- ----------------------------------
(28,998,068) (59,621,869)
------------
- ----------------------------------
(29,155,815) (59,287,271)
303,911,829 363,199,100
------------
$274,756,014 $303,911,829
============
- ----------------------------------
$ -- $ --
============
- ----------------------------------
-105-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity Growth Fund
----------------------------------
For the Year Ended December 31,
----------------------------------
Increase (Decrease) in Net Assets: 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net......................................................... $ 2,025,368 $ 1,785,602
Realized gain on investments and foreign currency transactions--net............ 22,199,518 45,385,878
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net..................................................... 5,970,999 44,941,516
------------ ------------
Net increase in net assets resulting from operations........................... 30,195,885 92,112,996
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net......................................................... (1,882,603) (889,063)
Realized gain on investments--net.............................................. (43,561,906) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders................................................................... (45,444,509) (889,063)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net proceeds from issuance of capital shares................................... 128,356,735 78,653,598
Net proceeds from issuance of capital shares resulting from reorganization..... -- --
------------ ------------
Net increase in net assets derived from capital share transactions............. 128,356,735 78,653,598
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase in net assets................................................... 113,108,111 169,877,531
Beginning of year.............................................................. 339,921,154 170,043,623
------------ ------------
End of year*................................................................... $453,029,265 $339,921,154
============ ============
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i)................................ $ 1,422,632 $ 1,279,867
============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-106-
<PAGE>
==============================================================================
Global Bond Focus Fund
--------------------------------
For the Year Ended December 31,
--------------------------------
1996 1995
--------------------------------
$ 6,880,110 $ 6,952,991
830,715 510,287
(706,098) 4,502,738
------------
7,004,727 11,966,016
------------
- --------------------------------
(6,810,949) (6,851,555)
-- --
------------
)
(6,810,949 (6,851,555)
------------
- --------------------------------
(6,069,072) 1,580,255
17,820,572 --
------------
11,751,500 1,580,255
------------
- --------------------------------
11,945,278 6,694,716
81,844,632 75,149,916
------------
$93,789,910 $81,844,632
============
- --------------------------------
$ 118,851 $ 765,308
============
- --------------------------------
-107-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Strategy Focus Fund
----------------------------------
For the Year Ended December 31,
----------------------------------
Increase (Decrease) in Net Assets: 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net......................................................... $ 15,340,737 $ 17,146,054
Realized gain (loss) on investments and foreign currency transactions--net..... 60,957,413 (23,380,052)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net..................................................... 24,598,652 58,162,628
------------ ------------
Net increase in net assets resulting from operations........................... 100,896,802 51,928,630
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net......................................................... (12,699,527) (16,913,134)
In excess of realized gains on investments--net................................ -- (199,509)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders................................................................... (12,699,527) (17,112,643)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net redemptions from capital shares............................................ (52,564,882) (9,981,690)
Net proceeds from issuance of capital shares resulting from reorganization..... 294,328,812 --
------------ ------------
Net increase (decrease) in net assets derived from capital share
transactions................................................................. 241,763,930 (9,981,690)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase (decrease) in net assets........................................ 329,961,205 24,834,297
Beginning of year.............................................................. 540,241,613 515,407,316
------------ ------------
End of year*................................................................... $870,202,818 $540,241,613
============ ============
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i)................................ $ 20,579,673 $ 7,489,615
============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-108-
<PAGE>
==============================================================================
Global Utility Focus Fund
- ----------------------------------
For the Year Ended December 31,
----------------------------------
1996 1995
- ----------------------------------
$ 5,748,285 $ 5,942,408
1,196,792 (2,380,178)
10,430,510 26,090,740
------------
17,375,587 29,652,970
------------
- ----------------------------------
(6,739,387) (5,144,108)
-- --
------------
(6,739,387) (5,144,108)
------------
- ----------------------------------
16,423,676 2,526,392
-- --
------------
(16,423,676) (2,526,392)
------------
- ----------------------------------
(5,787,476) 21,982,470
148,225,277 126,242,807
------------
$142,437,801 $148,225,277
============
- ----------------------------------
$ 1,132,021 $ 2,159,534
============
- ----------------------------------
-109-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government
Bond Fund
--------------------------------
For the Year Ended December 31,
--------------------------------
Increase (Decrease) in Net Assets: 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net.......................................................... $ 3,815,911 $ 1,796,464
Realized gain (loss) on investments--net........................................ (154,413) 192,982
Change in unrealized appreciation/depreciation on investments--net.............. (1,012,273) 2,024,581
----------- -----------
Net increase in net assets resulting from operations............................ 2,649,225 4,014,027
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net.......................................................... (3,530,361) (1,670,786)
Realized gain on investments--net............................................... (137,668) --
----------- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders.................................................................... (3,668,029) (1,670,786)
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net increase in net assets derived from capital share transactions.............. 49,603,169 20,842,535
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase in net assets.................................................... 48,584,365 23,185,776
Beginning of year............................................................... 40,996,427 17,810,651
----------- -----------
End of year*.................................................................... $89,580,792 $40,996,427
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i)................................. $ 484,603 $ 199,053
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-110-
<PAGE>
==============================================================================
High Current
Income Fund
- ----------------------------------
For the Year Ended December 31,
----------------------------------
1996 1995
- ----------------------------------
$ 36,909,359 $ 30,889,361
(3,777,610) 589,358
8,565,962 16,336,511
------------
41,697,711 47,815,230
------------
- ----------------------------------
(36,130,450) (30,645,264)
-- --
------------
(36,130,450) (30,645,264)
------------
- ----------------------------------
52,695,717 83,463,234
------------
- ----------------------------------
58,262,978 100,633,200
356,351,940 255,718,740
------------
$414,614,918 $356,351,940
============
- ----------------------------------
$ 3,786,391 $ 2,822,298
============
- ----------------------------------
-111-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Index 500
Fund
---------------
For the Period
Dec. 13, 1996+
Increase (Decrease) in Net Assets: to Dec. 31, 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C>
Operations:
Investment income--net........................................................................... $ 16,863
Realized gain (loss) on investments and foreign currency transactions--net....................... (193)
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net................................................................................ 153,134
-----------
Net increase in net assets resulting from operations............................................. 169,804
-----------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net........................................................................... --
Realized gain on investments--net................................................................ --
In excess of realized gain on investments--net................................................... --
-----------
Net decrease in net assets resulting from dividends and distributions to shareholders............ --
-----------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net increase in net assets derived from capital share transactions............................... 582,036
-----------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase in net assets..................................................................... 751,840
Beginning of period.............................................................................. 10,000,000
-----------
End of period*................................................................................... $ 10,751,840
===========
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i).................................................. $ 16,863
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of Operations.
See Notes to Financial Statements.
-112-
<PAGE>
==============================================================================
International Equity
Focus Fund
- ----------------------------------
For the Year Ended December 31,
----------------------------------
1996 1995
- ----------------------------------
$ 6,166,768 $ 4,728,612
9,939,138 (7,417,463)
2,510,537 15,585,541
------------
18,616,443 12,896,690
------------
- ----------------------------------
(3,669,329) (151,930)
-- (3,904,078)
-- (5,275,618)
------------
(3,669,329) (9,331,626)
------------
- ----------------------------------
68,530,474 14,153,402
------------
- ----------------------------------
83,477,588 17,718,466
265,602,241 247,883,775
------------
$349,079,829 $265,602,241
============
- ----------------------------------
$ 4,510,300 $ 4,974,839
============
- ----------------------------------
-113-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Natural Resources
Focus Fund
--------------------------------
For the Year Ended December 31,
--------------------------------
Increase (Decrease) in Net Assets: 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net.......................................................... $ 656,331 $ 745,572
Realized gain on investments and foreign currency transactions--net............. 2,957,459 789,560
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net...................................................... 2,057,873 3,506,951
----------- -----------
Net increase in net assets resulting from operations............................ 5,671,663 5,042,083
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net.......................................................... (722,544) (719,125)
Realized gain on investments--net............................................... (740,711) (116,046)
----------- -----------
Net decrease in net assets resulting from dividends and distributions to
shareholders.................................................................... (1,463,255) (835,171)
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net increase (decrease) in net assets derived from capital share transactions... (2,113,764) (819,422)
----------- -----------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase in net assets.................................................... 2,094,644 3,387,490
Beginning of year............................................................... 43,102,351 39,714,861
----------- -----------
End of year*.................................................................... $45,196,995 $43,102,351
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income-net (Note 1i).................................. $ 221,415 $ 315,714
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-114-
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Prime Bond Fund
- ----------------------------------
For the Year Ended December 31,
----------------------------------
1996 1995
- ----------------------------------
$ 33,145,431 $ 30,681,580
215,210 2,850,926
(21,044,224) 46,631,310
------------
12,316,417 80,163,816
------------
- ----------------------------------
(32,511,472) (30,585,478)
-- --
------------
(32,511,472) (30,585,478)
------------
- ----------------------------------
68,750,815 49,025,455
------------
- ----------------------------------
48,555,760 98,603,793
489,837,968 391,234,175
------------
$538,393,728 $489,837,968
============
- ----------------------------------
$ 3,129,844 $ 2,495,885
============
- ----------------------------------
-115-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Statements of Changes in Net Assets (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Equity Fund
----------------------------------------
For the Year Ended December 31,
----------------------------------------
Increase (Decrease) in Net Assets: 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net.................................................... $ 13,443,795 $ 10,721,106
Realized gain on investments and foreign currency transactions--net....... 36,740,820 84,589,225
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net................................................ 67,969,744 17,627,851
------------ ------------
Net increase in net assets resulting from operations...................... 118,154,359 112,938,182
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Distributions to Shareholders (Note 1g):
Investment income--net.................................................... (14,235,069) (8,042,730)
Realized gain on investments--net......................................... (84,325,410) (9,959,874)
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders.............................................................. (98,560,479) (18,002,604)
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 4):
Net increase (decrease) in net assets derived from capital share
transactions............................................................ 130,130,747 85,255,141
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------
Net Assets:
Total increase (decrease) in net assets................................... 149,724,627 180,190,719
Beginning of year......................................................... 644,550,601 464,359,882
------------ ------------
End of year*.............................................................. $ 794,275,228 $ 644,550,601
============ ============
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1i)........................... $ 5,217,038 $ 6,008,129
============ ============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
-116-
<PAGE>
==============================================================================
Reserve Assets Fund
- ------------------------------------
For the Year Ended December 31,
- ------------------------------------
1996 1995
- ------------------------------------
$ 1,179,223 $ 1,572,494
3,049 10,309
(14,201) 41,873
------------
1,168,071 1,624,676
------------
- ------------------------------------
(1,179,223) (1,572,494)
(3,049) (10,309)
------------
(1,182,272) (1,582,803)
------------
- ------------------------------------
(2,650,297) (6,688,035)
------------
- ------------------------------------
(2,664,498) (6,646,162)
25,549,869 32,196,031
------------
$ 22,885,371 $ 25,549,869
============
- ------------------------------------
$ -- $ --
============
- ------------------------------------
-117-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
American Balanced Fund
The following per share data and ratios have been -----------------------------------------------------------
derived from information provided in the financial For the Year Ended December 31,
statements. -----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year...................... $ 15.17 $ 13.08 $ 14.08 $ 12.85 $ 12.82
-------- -------- -------- -------- -------
Investment income--net.................................. .53 .59 .48 .32 .31
Realized and unrealized gain (loss) on
investments--net...................................... .89 2.06 (1.06) 1.37 .37
-------- -------- -------- -------- -------
Total from investment operations........................ 1.42 2.65 (.58) 1.69 .68
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net................................ (.56) (.56) (.37) (.34) (.37)
Realized gain on investments--net..................... (.02) -- -- (.12) (.28)
In excess of realized gain on investments--net........ -- -- (.05) -- --
-------- -------- -------- -------- -------
Total dividends and distributions....................... (.58) (.56) (.42) (.46) (.65)
-------- -------- -------- -------- -------
Net asset value, end of year............................ $ 16.01 $ 15.17 $ 13.08 $ 14.08 $ 12.85
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
Based on net asset value per share...................... 9.73% 20.81% (4.19%) 13.49% 5.72%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses................................................ .60% .61% .63% .70% .97%
======== ======== ======== ======== =======
Investment income--net.................................. 3.39% 4.22% 3.95% 3.20% 3.71%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands).................. $212,047 $212,912 $158,951 $115,420 $24,918
======== ======== ======== ======== =======
Portfolio turnover...................................... 236.50% 38.40% 35.36% 12.55% 36.34%
======== ======== ======== ======== =======
Average commission rate paid**.......................... $ .0610 -- -- -- --
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
** For the 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.
See Notes to Financial Statements.
-118-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Basic Value Focus Fund
------------------------------------------------------
For the Year Ended
December 31, For the Period
The following per share data and ratios have been derived from ---------------------------------- July 1, 1993+ to
information provided in the financial statements. Increase December 31,
(Decrease) in Net Asset Value: 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period.......................... $ 13.10 $ 11.10 $ 10.95 $ 10.00
-------- -------- -------- -------
Investment income--net........................................ .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 period................................ $ 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 period (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 the 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.
See Notes to Financial Statements.
-119-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Developing Capital
Markets Focus Fund
--------------------------------------------
For the Year Ended
December 31, For the Period
The following per share data and ratios have been derived from ------------------------ May 2, 1994+ to
information provided in the financial statements. Increase (Decrease) December 31,
in Net Asset Value: 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period................................. $ 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 from investment income--net........................... (.23) (.09) --
-------- -------- --------
Net asset value, end of period....................................... $ 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 period (in thousands)............................. $ 95,599 $55,209 $ 36,676
======== ======== ========
Portfolio turnover................................................... 87.33% 62.53% 29.79%
======== ======== ========
Average commission rate paid++....................................... $ 0.0003 $ -- $ --
======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ For the 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 US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
++ Aggregate total investment return.
See Notes to Financial Statements.
-120-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Domestic Money Market Fund
----------------------------------------------------------
For the Year Ended
The following per share data and ratios have been derived December 31, For the Period
from information provided in the financial statements. ----------------------------------------- Feb. 20, 1992+
to Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net.................................... .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 period............................ $ 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 on
investments--net........................................ 4.97% 5.50% 4.02% 3.03% 3.48%*
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (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.
See Notes to Financial Statements.
-121-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity Growth Fund+
--------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year......................... $ 27.98 $ 19.26 $ 20.96 $ 17.80 $ 17.96
-------- -------- -------- -------- -------
Investment income (loss)--net.............................. .13 .17 .05 (.01) .01
Realized and unrealized gain (loss) on investments--net.... 1.84 8.64 (1.56) 3.17 (.10)
-------- -------- -------- -------- -------
Total from investment operations........................... 1.97 8.81 (1.51) 3.16 (.09)
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net................................... (.14) (.09) -- --++ (.07)
Realized gain on investments--net........................ (3.59) -- (.19) -- --
-------- -------- -------- -------- -------
Total dividends and distributions.......................... (3.73) (.09) (.19) -- (.07)
-------- -------- -------- -------- -------
Net asset value, end of year............................... $ 26.22 $ 27.98 $ 19.26 $ 20.96 $ 17.80
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
Based on net asset value per share......................... 8.11% 45.90% (7.27%) 17.78% (.53%)
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses................................................... .81% .81% .83% .96% 1.18%
======== ======== ======== ======== =======
Investment income (loss)--net.............................. .50% .72% .27% (.05%) .04%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands)..................... $453,029 $339,921 $170,044 $ 98,976 $23,167
======== ======== ======== ======== =======
Portfolio turnover......................................... 80.84% 96.79% 88.48% 131.75% 98.64%
======== ======== ======== ======== =======
Average commission rate paid++............................. $ .0598 $ -- $ -- $ -- $ --
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
++ Amount is less than $.01 per share.
++ For the 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.
See Notes to Financial Statements.
-122-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Bond Focus Fund
----------------------------------------------------
For the Year Ended
The following per share data and ratios have been derived December 31, For the Period
from information provided in the financial statements. ---------------------------------- July 1, 1993+ to
December 31,
Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period........................ $ 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 period.............................. $ 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 period (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 year.
++ Aggregate total investment return.
See Notes to Financial Statements.
-123-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Strategy Focus Fund
--------------------------------------------------------------
For the Year Ended
The following per share data and ratios have been December 31, For the Period
derived from information provided in the financial --------------------------------------------- Feb. 28, 1992+ to
statements. December 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period............... $ 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 period..................... $ 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 period (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.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
+++ For the 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 US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
++ Aggregate total investment return.
See Notes to Financial Statements.
-124-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Utility Focus Fund
-----------------------------------------------------
For the Year Ended
December 31, For the Period
The following per share data and ratios have been derived ---------------------------------- July 1, 1993+ to
from information provided in the financial statements. December 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period........................ $ 11.30 $ 9.45 $ 10.66 $ 10.00
-------- -------- -------- --------
Investment income--net...................................... .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 and distributions:
Investment income--net.................................... (.52) (.39) (.29) (.02)
In excess of realized gain on investments--net............ -- -- (.02) --
-------- -------- -------- --------
Total dividends and distributions........................... (.52) (.39) (.31) (.02)
-------- -------- -------- --------
Net asset value, end of period.............................. $ 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.................................................... .66% .66% .73% .89%*
======== ======== ======== ========
Investment income--net...................................... 3.90% 4.44% 3.68% 2.84%*
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (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.
+ Commencement of Operations.
++ For the 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 US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
++ Aggregate total investment return.
See Notes to Financial Statements.
-125-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Bond Fund
---------------------------------------------
For the Year Ended
December 31, For the Period
The following per share data and ratios have been derived from ------------------------- May 2, 1994+ to
information provided in the financial statements. December 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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--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) -- --
-------- -------- --------
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.
++ Aggregate total investment return.
See Notes to Financial Statements.
-126-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Current Income Fund
The following per share data and ratios have been -----------------------------------------------------------
derived from information provided in the financial For the Year Ended December 31,
statements. -----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996+ 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year...................... $ 11.25 $ 10.61 $ 12.06 $ 11.13 $ 10.23
-------- -------- -------- -------- -------
Investment income--net.................................. 1.08 1.09 1.05 .95 1.07
Realized and unrealized gain (loss) on
investments--net...................................... .12 .65 (1.47) .95 .90
-------- -------- -------- -------- -------
Total from investment operations........................ 1.20 1.74 (.42) 1.90 1.97
-------- -------- -------- -------- -------
Less dividends from investment income--net.............. (1.06) (1.10) (1.03) (.97) (1.07)
-------- -------- -------- -------- -------
Net asset value, end of year............................ $ 11.39 $ 11.25 $ 10.61 $ 12.06 $ 11.13
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
Based on net asset value per share...................... 11.27% 17.21% (3.59%) 17.84% 20.05%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses................................................ .54% .55% .61% .72% .89%
======== ======== ======== ======== =======
Investment income--net.................................. 9.50% 9.92% 9.73% 8.62% 10.06%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands).................. $414,615 $356,352 $255,719 $163,428 $26,343
======== ======== ======== ======== =======
Portfolio turnover...................................... 48.92% 41.60% 51.88% 35.67% 28.21%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the year.
See Notes to Financial Statements.
-127-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Index 500
Fund
-----------------
For the Period
The following per share data and ratios have been derived from information provided in the Dec. 13, 1996+ to
financial statements. Increase (Decrease) in Net Asset Value: Dec. 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value, beginning of period........................................................... $ 10.00
--------
Investment income--net......................................................................... .02
Realized and unrealized gain on investments--net............................................... .15
--------
Total from investment operations............................................................... .17
--------
Net asset value, end of period................................................................. $ 10.17
========
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
Based on net asset value per share............................................................. 1.70%++
========
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement................................................................. .00%*
========
Expenses....................................................................................... .60%*
========
Investment income--net......................................................................... 3.08%*
========
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands)....................................................... $ 10,752
========
Portfolio turnover............................................................................. .04%
========
Average commission rate paid................................................................... $ .0120
========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
-128-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Focus Fund
----------------------------------------------------
For the Year Ended
December 31, For the Period
The following per share data and ratios have been derived from -------------------------------- July 1, 1993+ to
information provided in the financial statements. Increase December 31,
(Decrease) in Net Asset Value: 1996++ 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period............................ $ 11.06 $ 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........................................................ .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 the 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 US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++ Aggregate total investment return.
See Notes to Financial Statements.
-129-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Natural Resources Focus Fund
-------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended December 31,
from information provided in the financial statements. -------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year........................ $ 11.95 $ 10.82 $ 10.82 $ 9.84 $ 10.06
------- ------- ------- ------- -------
Investment income--net.................................... .18 .20 .17 .11 .18
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... 1.40 1.15 (.02) .92 (.05)
------- ------- ------- ------- -------
Total from investment operations.......................... 1.58 1.35 .15 1.03 .13
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net.................................. (.20) (.19) (.15) (.05) (.29)
Realized gain on investments--net....................... (.21) (.03) -- -- (.06)
------- ------- ------- ------- -------
Total dividends and distributions......................... (.41) (.22) (.15) (.05) (.35)
------- ------- ------- ------- -------
Net asset value, end of year.............................. $ 13.12 $ 11.95 $ 10.82 $ 10.82 $ 9.84
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
Based on net asset value per share........................ 13.52% 12.65% 1.44% 10.47% 1.36%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement............................ .78% .78% .87% 1.13% 1.25%
======= ======= ======= ======= =======
Expenses.................................................. .78% .78% .87% 1.13% 1.27%
======= ======= ======= ======= =======
Investment income--net.................................... 1.43% 1.75% 1.91% 1.34% 2.00%
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands).................... $45,197 $43,102 $39,715 $14,778 $ 4,144
======= ======= ======= ======= =======
Portfolio turnover........................................ 31.11% 30.15% 10.94% 58.44% 22.88%
======= ======= ======= ======= =======
Average commission rate paid**............................ $ .0225 -- -- -- --
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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 US
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
See Notes to Financial Statements.
-130-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Prime Bond Fund
The following per share data and ratios have been -----------------------------------------------------------
derived from information provided in the financial For the Year Ended December 31,
statements. -----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year...................... $ 12.45 $ 11.12 $ 12.64 $ 12.04 $ 12.02
-------- -------- -------- -------- -------
Investment income--net.................................. .80 .82 .77 .70 .79
Realized and unrealized gain (loss) on
investments--net...................................... (.55) 1.34 (1.36) .71 .04
-------- -------- -------- -------- -------
Total from investment operations........................ .25 2.16 (.59) 1.41 .83
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net................................ (.79) (.83) (.76) (.70) (.81)
Realized gain on investments--net..................... -- -- -- (.11) --
In excess of realized gain on investments--net........ -- -- (.17) -- --
-------- -------- -------- -------- -------
Total dividends and distributions....................... (.79) (.83) (.93) (.81) (.81)
-------- -------- -------- -------- -------
Net asset value, end of year............................ $ 11.91 $ 12.45 $ 11.12 $ 12.64 $ 12.04
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
Based on net asset value per share...................... 2.21% 20.14% (4.80%) 12.02% 7.27%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses................................................ .49% .50% .54% .63% .78%
======== ======== ======== ======== =======
Investment income--net.................................. 6.67% 7.00% 6.74% 5.86% 6.76%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands).................. $538,394 $489,838 $391,234 $314,091 $84,810
======== ======== ======== ======== =======
Portfolio turnover...................................... 91.88% 90.12% 139.89% 115.26% 82.74%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
-131-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (continued)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Equity Fund
-------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended December 31,
from information provided in the financial statements. -------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996+ 1995+ 1994+ 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year.......................... $ 32.76 $ 27.74 $ 29.02 $ 25.48 $ 26.35
-------- -------- -------- -------- -------
Investment income--net...................................... .58 .58 .38 .24 .34
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ 4.44 5.48 (.74) 3.46 .32
-------- -------- -------- -------- -------
Total from investment operations............................ 5.02 6.06 (.36) 3.70 .66
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net.................................... (.66) (.45) (.25) (.12) (.58)
Realized gain on investments--net......................... (4.29) (.59) (.67) (.04) (.95)
-------- -------- -------- -------- -------
Total dividends and distributions........................... (4.95) (1.04) (.92) (.16) (1.53)
-------- -------- -------- -------- -------
Net asset value, end of year................................ $ 32.83 $ 32.76 $ 27.74 $ 29.02 $ 25.48
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
Based on net asset value per share.......................... 17.90% 22.61% (1.20%) 14.57% 2.69%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses.................................................... .49% .51% .54% .62% .74%
======== ======== ======== ======== =======
Investment income--net...................................... 1.89% 1.94% 1.39% 1.07% 1.54%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands)...................... $794,275 $644,551 $464,360 $309,420 $87,977
======== ======== ======== ======== =======
Portfolio turnover.......................................... 88.30% 140.32% 60.57% 88.25% 62.54%
======== ======== ======== ======== =======
Average commission rate paid++.............................. $ .0615 -- -- -- --
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding during the period.
++For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
See Notes to Financial Statements.
-132-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Financial Highlights (concluded)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reserve Assets Fund
---------------------------------------------------
The following per share data and ratios have been derived from For the Year Ended December 31,
information provided in the financial statements. ---------------------------------------------------
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------
Investment income--net........................................... .0501 .0543 .0371 .0268 .0320
Realized and unrealized gain (loss) on investments--net.......... (.0005) .0018 (.0009) .0005 .0007
-------- -------- -------- -------- -------
Total from investment operations................................. .0496 .0561 .0362 .0273 .0327
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net......................................... (.0501) (.0543) (.0362) (.0268) (.0320)
Realized gain on investments--net.............................. (.0001) (.0004) -- (.0005) (.0005)
-------- -------- -------- -------- -------
Total dividends and distributions................................ (.0502) (.0547) (.0362) (.0273) (.0325)
-------- -------- -------- -------- -------
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% 5.61% 3.79% 2.77% 3.29%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses......................................................... .61% .61% .65% .70% .79%
======== ======== ======== ======== =======
Investment income--net, and realized gain on investments--net.... 4.96% 5.47% 3.75% 2.73% 3.36%
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in thousands)........................... $22,885 $25,550 $32,196 $30,168 $26,767
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
-133-
<PAGE>
- ------------------------------------------------------------------------------
Merrill Lynch Variable Series Funds, Inc.
Notes to Financial Statements
- ---------------------------------------------------------
1. Significant Accounting Policies:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company, which is comprised of 16 separate funds
("Funds" or "Fund") offering 16 separate classes of shares to the Merrill
Lynch Life Insurance Company, ML Life Insurance Company of New York (indirect
wholly-owned subsidiaries of Merrill Lynch & Co., Inc. "ML & Co."), and other
insurance companies, which are not affiliated with ML & Co., for their
separate accounts to fund benefits under certain variable annuity contracts.
Each Fund is classified as "diversified", as defined in the Investment Company
Act of 1940, except for Developing Capital Markets Focus Fund, Global Bond
Focus Fund, Global Strategy Focus Fund, and Natural Resources Focus Fund, all
of which are classified as "non-diversified". The following is a summary of
significant accounting policies followed by the Funds.
(a) Valuation of investments--Money market securities maturing more than
sixty days after the valuation date are valued at the most recent bid price or
yield equivalent as obtained from dealers that make markets in the securities.
When such securities are valued with sixty days or less to maturity, the
difference between the valuation existing on the sixty-first day before
maturity and maturity value is amortized on a straight-line basis to maturity.
Investments maturing within sixty days from their date of acquisition are
valued at amortized cost, which approximates market value.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are
being valued, or lacking any sales, at the closing bid price. Securities
traded in the over-the-counter market are valued at the last available bid
price prior to the time of valuation. Portfolio securities which are traded
both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market, and it is expected
that for debt securities this ordinarily will be the over-the-counter market.
Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased are valued at
the last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Futures
contracts are valued at settlement price at the close of the applicable
exchange. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Company.
(b) Derivative financial instruments--Certain Funds may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the equity, debt and currency markets. Losses may
arise due to changes in the value of the contract or if the counterparty does
not perform under the contract.
- - Forward foreign exchange contracts--Certain Funds are authorized to enter
into forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Funds' records. However, the effect on operations is recorded from the date
the Funds enter into such contracts. Premium or discount is amortized over the
life of the contracts.
- - Options--Certain Funds may write and purchase call and put options. When a
Fund writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid or received is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
- - Financial futures contracts--Certain Funds may purchase or sell futures
contracts and options on such futures contracts for the pur-
-134-
<PAGE>
- ------------------------------------------------------------------------------
pose of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed delivery
of securities at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and are
recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.
- - Foreign currency options and futures--Certain Funds may also purchase or
sell listed or over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange rates. Such transactions
may be effected with respect to hedges on non-US dollar denominated securities
owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
(c) Foreign currency transactions--
Transactions denominated in foreign currencies are recorded at the exchange
rate prevailing when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets and liabilities expressed in foreign currencies into US
dollars. Realized and unrealized gains or losses from investments include the
effects of foreign exchange rates on investments.
(d) Income taxes--It is the Company's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date. Interest income
(including amortization of premium and discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are determined on
the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the
Funds are recorded on the ex-dividend dates.
(h) Custodian bank--The Fund recorded an amount payable to the custodian
bank reflecting an overnight overdraft which resulted from a failed trade
which settled the next day.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. These reclassifications have no effect on
net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Company has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML &
Co., which is the limited partner. MLAM is responsible for the management of
the Company's portfolios and provides the necessary personnel, facilities,
equipment and certain other services necessary to the operations of the Funds.
For such services, the Company pays a monthly fee based upon the average
daily value of each Funds' net assets at the following annual rates: 0.65% of
the average daily net assets of each of the Natural Resources Focus Fund and
Global Strategy Focus Fund, 0.55% of the average daily net assets of the
American Balanced Fund, 0.50% of the average daily net assets of each of the
Domestic Money Market Fund and Government Bond Fund, 0.60% of the average
daily net assets of each of the Basic Value Focus Fund, Global Bond Focus Fund
and Global Utility Focus Fund, 0.75% of the average daily net assets of each
of the Equity Growth Fund and the International Equity Focus Fund, 0.30% of
the average daily net assets of the Index 500 Fund, 1.00% of the average daily
net assets of the Developing Capital Markets Focus
-135-
<PAGE>
- ------------------------------------------------------------------------------
Fund, and at the following annual rates with respect to the other Funds:
Reserve Assets Fund
- --------------------------------------------------------------------------
Portion of average daily value of net assets of the Fund:
- --------------------------------------------------------------------------
Advisory
Fee
- --------------------------------------------------------------------------
Not exceeding $500 million...................................... 0.500%
In excess of $500 million but not exceeding $750 million........ 0.425%
In excess of $750 million but not exceeding $1 billion.......... 0.375%
In excess of $1 billion but not exceeding $1.5 billion.......... 0.350%
In excess of $1.5 billion but not exceeding $2 billion.......... 0.325%
In excess of $2 billion but not exceeding $2.5 billion.......... 0.300%
In excess of $2.5 billion....................................... 0.275%
- --------------------------------------------------------------------------
Quality Equity Fund
- --------------------------------------------------------------------------
Portion of average daily value of net assets of the Fund:
- --------------------------------------------------------------------------
Advisory
Fee
- --------------------------------------------------------------------------
Not exceeding $250 million...................................... 0.500%
In excess of $250 million but not exceeding $300 million........ 0.450%
In excess of $300 million but not exceeding $400 million........ 0.425%
In excess of $400 million....................................... 0.400%
- --------------------------------------------------------------------------
High Current Income Fund and Prime Bond Fund
- -------------------------------------------------------------------------
Portion of aggregate average daily value of net
assets of both Funds: Advisory Fee
- -------------------------------------------------------------------------
High Current Prime
Income Bond
Fund Fund
- -------------------------------------------------------------------------
Not exceeding $250 million......................... 0.55% 0.50%
In excess of $250 million but not more
than $500 million................................. 0.50% 0.45%
In excess of $500 million but not more
then $750 million................................. 0.45% 0.40%
In excess of $750 million.......................... 0.40% 0.35%
- ------------------------------------------------------------------------
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by each Fund to 1.25% of
its average daily net assets. Any expenses in excess of 1.25% of average daily
net assets will be reimbursed to the Fund by MLAM which, in turn, will be
reimbursed by MLLA.
For the year ended December 31, 1996, MLAM earned fees of $765,718 for the
Developing Capital Markets Fund of which $52,388 was waived, $297,926 for the
Government Bond Fund of which $264,214 was voluntarily waived, and $1,638 for
the Index 500 Fund, all of which was voluntarily waived. In addition, MLAM has
also reimbursed the Index 500 Fund $1,651 in additional expenses.
For the year ended December 31, 1996, Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), an affiliate of MLAM, earned commissions on the execution of
portfolio security transactions as follows:
- --------------------------------------------------------------------------
American Balanced Fund........................................... $ 5,808
Basic Value Focus Fund........................................... 24,040
Developing Capital Markets Focus Fund............................ 45,365
Equity Growth Fund............................................... 1,500
Global Bond Focus Fund........................................... 625
Global Strategy Focus Fund....................................... 51,412
Global Utility Focus Fund........................................ 6,780
High Current Income Fund......................................... 3,750
International Equity Focus Fund.................................. 55,842
Natural Resources Focus Fund..................................... 3,285
Quality Equity Fund.............................................. 67,998
- --------------------------------------------------------------------------
Accounting services are provided to the Company by MLAM at cost.
For the year ended December 31, 1996, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned fees for providing security price
quotations to compute the Fund's net asset values as follows:
- --------------------------------------------------------------------------
American Balanced Fund........................................... $ 278
Global Bond Focus Fund........................................... 3,020
Global Strategy Focus Fund....................................... 175
Global Utility Focus Fund........................................ 77
Government Bond Fund............................................. 822
High Current Income Fund......................................... 7,269
Prime Bond Fund.................................................. 5,884
- --------------------------------------------------------------------------
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Certain officers and/or directors of the Company are officers and/or
directors of MLAM, PSI, MLFDS, Merrill Lynch Funds Distributor, Inc., a
wholly-owned subsidiary of Merrill Lynch Group, Inc., which is the Funds'
distributor, and/or ML & Co.
-136-
<PAGE>
- ------------------------------------------------------------------------------
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1996 were as follows:
- ------------------------------------------------------------------------------
Purchases Sales
- -------------------------------------------------------------------------------
American Balanced Fund........................ $ 468,212,355 $448,976,551
Basic Value Focus Fund........................ 324,382,250 244,338,802
Developing Capital Markets Focus Fund......... 97,734,651 60,019,618
Domestic Money Market Fund.................... -- --
Equity Growth Fund............................ 363,579,751 282,977,363
Global Bond Focus Fund........................ 204,794,563 211,818,050
Global Strategy Focus Fund.................... 994,958,721 869,964,495
Global Utility Focus Fund..................... 15,474,733 22,987,878
Government Bond Fund.......................... 59,565,793 11,232,578
High Current Income Fund...................... 202,112,872 171,527,776
Index 500 Fund................................ 9,342,346 1,881
International Equity Focus Fund............... 181,926,488 121,558,312
Natural Resources Focus Fund.................. 13,662,240 15,112,240
Prime Bond Fund............................... 488,860,103 421,701,849
Quality Equity Fund........................... 826,913,708 523,148,231
Reserve Assets Fund........................... -- --
- --------------------------------------------------------------------------------
Transactions in options written for the year ended December 31, 1996, were
as follows:
International Equity Focus Fund
- --------------------------------------------------------------------------------
Nominal Value/
Number of Contracts
Covered by Premiums
Call Options Written Written Options Received
- --------------------------------------------------------------------------------
Outstanding call options written, beginning
of year................................... 6,800 $ 54,253
Options written............................ 9,004 685,805
Options expired............................ (15,769) (622,808)
-------- --------
Outstanding call options written, end of
year...................................... 35 $ 117,250
======== ========
- --------------------------------------------------------------------------------
International Equity Focus Fund
- --------------------------------------------------------------------------------
Nominal Value/
Number of Contracts
Covered by Premiums
Put Options Written Written Options Received
- --------------------------------------------------------------------------------
Outstanding put options written, beginning
of year.................................... 914 $ 21,437
Options written............................. 1,240,000 8,866
Options expired............................. (1,240,914) (30,303)
---------- -------
Outstanding put options written, end of
year....................................... -- $ --
========== =======
- --------------------------------------------------------------------------------
Global Bond Focus Fund
- --------------------------------------------------------------------------------
Nominal Value/
Number of Contracts
Covered by Premiums
Call Options Written Written Options Received
- --------------------------------------------------------------------------------
Outstanding call options written, beginning
of year................................... -- --
Options written............................ 17,530,792 $ 203,117
Options expired............................ (4,782,042) (84,608)
Options closed............................. (12,748,750) (118,509)
-------- --------
Outstanding call options written, end of
year...................................... -- $ --
======== ========
- -------------------------------------------------------------------------------
At December 31, 1996, net unrealized appreciation (depreciation) and
aggregate cost for Federal income tax purposes were as follows:
- ------------------------------------------------------------------------------
Basic Developing Domestic
American Value Capital Money
Balanced Focus Markets Market
Fund Fund Focus Fund Fund
- -------------------------------------------------------------------------------
Appreciated
securities......... $ 13,527,140 $ 61,508,505 $11,560,298 $ 26,805
Depreciated
securities......... (1,612,879) (19,839,815) (7,410,808) (46,269)
------------ ------------- ----------- ------------
Net unrealized
appreciation
(depreciation)..... $ 11,914,261 $ 41,668,690 $ 4,149,490 $ (19,464)
============ ============= =========== ============
Cost for Federal
income tax
purposes........... $198,630,949 $ 480,994,692 $92,042,701 $ 278,879,751
============ ============= =========== =============
- -------------------------------------------------------------------------------
Global Global Global
Equity Bond Strategy Utility
Growth Focus Focus Focus
Fund Fund Fund Fund
- -------------------------------------------------------------------------------
Appreciated
securities........ $ 83,280,830 $ 1,830,484 $ 94,154,461 $ 28,483,400
Depreciated
securities........ (29,835,984) (2,656,113) (20,709,668) (3,646,007)
Net unrealized
appreciation
(depreciation).... $ 53,444,846 $ (825,629) $ 73,444,793 $ 24,837,393
Cost for Federal
income tax
purposes.......... $398,360,465 $ 101,173,812 $793,783,774 $117,339,737
- --------------------------------------------------------------------------------
High International
Government Current Index Equity
Bond Income 500 Focus
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Appreciated
securities......... $ 1,117,721 $ 19,337,378 $ 229,986 $ 33,699,478
Depreciated
securities......... (166,155) (19,093,901) (81,897) (22,707,701)
---------- ------------ ----------- ------------
Net unrealized
appreciation....... $ 951,566 $ 243,477 $ 148,089 $ 10,991,777
========== ============ =========== ============
Cost for Federal
income tax
purposes*.......... $ 86,879,714 $ 410,624,066 $10,696,027 $336,658,090
========== ============ =========== ============
- --------------------------------------------------------------------------------
Natural
Resources Prime Quality Reserve
Focus Bond Equity Assets
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Appreciated
securities........ $ 7,011,676 $ 8,898,661 $109,167,111 $ 2,247
Depreciated
securities........ (2,329,143) (5,291,507) (10,826,689) (2,499)
------------ ------------ ------------ ------------
Net unrealized $ 4,682,533 $ 3,607,154 $ 98,340,422 $ (252)
appreciation
(depreciation).... $ 4,682,533 $ 3,607,154 $ 98,340,422 $ (252)
============ ============ ============ ============
Cost for Federal
income tax
purposes.......... $ 40,728,643 $ 526,103,574 $696,193,614 $ 23,070,540
============ ============ ============ ============
- -------------------------------------------------------------------------------
*Net of premiums received on options written.
-137-
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1996, net realized and unrealized gains (losses) were as
follows:
- --------------------------------------------------------------------------------
American Basic Value
Balanced Fund Focus Fund
-------------------------- -------------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Gains Gains
- -------------------------------------------------------------------------------
Long-term investments.. $21,874,118 $ 11,975,053 $56,406,548 $42,904,143
Short-term
investments........... (4,395) -- -- --
----------- ----------- ----------- -----------
$21,869,723 $ 11,975,053 $56,406,548 $42,904,143
=========== =========== =========== ===========
- -------------------------------------------------------------------------------
Developing Capital Domestic Money
Markets Fund Market Fund
---------------------- ------------------
Realized Unrealized
Gains Gains Realized Unrealized
(Losses) (Losses) Gains Losses
- --------------------------------------------------------------------------------
Long-term investments............ $ (51,802) $4,294,868 -- --
Short-term investments........... 93 -- $12,359 $(19,464)
Foreign currency transactions.... (105,274) (7,570) -- --
--------- ---------- ------- --------
$(156,983) $4,287,298 $12,359 $(19,464)
========= ========== ======= ========
- --------------------------------------------------------------------------------
Equity Growth Global Bond
Fund Focus Fund
------------------------- ------------------------
Realized Realized Unrealized
Gains Unrealized Gains Gains
(Losses) Gains (Losses) (Losses)
- --------------------------------------------------------------------------------
Long-term investments.... $22,199,566 $53,556,643 $1,224,648 $ (805,740)
Short-term investments... (48) -- 168 128
Financial futures
contracts............... -- -- (321,503) (70,548)
Options written.......... -- -- 2,422 --
Currency options
purchased............... -- -- (59,398) --
Currency options
written................. -- -- (119,980) --
Foreign currency
transactions............ -- -- 483,430 (81,490)
Forward foreign exchange
contracts............... -- -- (379,072) (78,492)
----------- ----------- --------- -----------
$22,199,518 $53,556,643 $ 830,715 $(1,036,142)
=========== =========== ========= ===========
- --------------------------------------------------------------------------------
Global Strategy Global Utility
Focus Fund Focus Fund
------------------------- ------------------------
Realized Unrealized Realized
Gains Gains Gains Unrealized
(Losses) (Losses) (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments.... $45,325,716 $73,858,509 $1,243,303 $24,837,393
Short-term investments... (5,385) -- (72) --
Foreign currency
transactions............ 105,281 (177,090) (46,439) 735
Forward foreign exchange
contracts............... 15,531,801 (2,598,413) -- --
----------- ----------- --------- -----------
$60,957,413 $71,083,006 $1,196,792 $24,838,128
=========== =========== ========= ===========
- --------------------------------------------------------------------------------
Government High Current
Bond Fund Income Fund
-------------------- ----------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Losses Gains
- --------------------------------------------------------------------------------
Long-term investments.......... $(155,827) $951,566 $(3,777,593) $556,316
Short-term investments......... 1,414 -- (17) --
--------- -------- ----------- --------
$(154,413) $951,566 $(3,777,610) $556,316
========= ======== =========== ========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Index 500 International Equity
Fund Focus Fund
------------------- ------------------------
Realized Unrealized
Realized Unrealized Gains Gains
Losses Gains (Losses) (Losses)
- --------------------------------------------------------------------------------
Long-term investments.......... $(193) $148,089 $6,741,641 $11,550,686
Short-term investments......... -- -- 9,058 278,746
Stock index futures
contracts..................... -- 5,045 2,000,430 (87,011)
Options purchased.............. -- -- (71,729) (136,324)
Options written................ -- -- 104,705 (37,619)
Foreign currency
transactions.................. -- -- (170,376) (11,494)
Forward foreign exchange
contracts..................... -- -- 89,755 (305)
Currency options written....... -- -- 8,866 --
Currency options purchased..... -- -- 1,226,788 244,194
---- -------- ---------- -----------
$(193) $153,134 $9,939,138 $11,800,873
==== ======== ========== ===========
- --------------------------------------------------------------------------------
Natural Resources
Focus Fund Prime Bond Fund
----------------------- -----------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Gains Gains
- --------------------------------------------------------------------------------
Long-term investments....... $2,970,799 $4,688,728 $ 215,210 $3,687,559
Short-term investments...... 31 -- -- --
Foreign currency
transactions............... (13,371) 2,065 -- --
--------- ---------- ------- --------
$2,957,459 $4,690,793 $ 215,210 $3,687,559
========= ========== ======= ========
- --------------------------------------------------------------------------------
Quality Equity Fund Reserve Assets Fund
------------------------- --------------------
Realized
Gains Unrealized Realized Unrealized
(Losses) Gains Gains Losses
- -------------------------------------------------------------------------------
Long-term investments...... $36,744,079 $98,807,069 -- --
Short-term investments..... (3,406) -- $3,049 $ (252)
Foreign currency
transactions.............. 147 -- -- --
----------- ----------- ------ -----
$36,740,820 $98,807,069 $3,049 $ (252)
=========== =========== ====== =====
- --------------------------------------------------------------------------------
4. Capital Share Transactions:
Transactions in capital shares were as follows:
American Balanced Fund
- --------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- --------------------------------------------------------------------------------
Shares sold..................................... 578,134 $ 8,724,352
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 554,530 8,210,811
---------- ------------
Total issued.................................... 1,132,664 16,935,163
Shares redeemed................................. (1,921,234) (29,368,082)
---------- ------------
Net decrease.................................... (788,570) $(12,432,919)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
- --------------------------------------------------------------------------------
Shares sold..................................... 2,201,026 $ 30,814,364
Shares issued to shareholders in reinvestment of
dividends...................................... 529,259 7,173,644
--------- ------------
Total issued.................................... 2,730,285 37,988,008
Shares redeemed................................. (850,020) (12,151,661)
--------- ------------
Net increase.................................... 1,880,265 $ 25,836,347
========= ============
- -------------------------------------------------------------------------------
Basic Value Focus Fund
- -------------------------------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
- -------------------------------------------------------------------------------
Shares sold..................................... 11,000,199 $149,832,843
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 1,724,353 21,518,432
---------- ------------
Total issued.................................... 12,724,552 171,351,275
Shares redeemed................................. (493,551) (6,856,013)
---------- ------------
Net increase.................................... 12,231,001 $164,495,262
========== ============
- -------------------------------------------------------------------------------
-138-
<PAGE>
- ------------------------------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold........................................ 7,762,209 $ 98,591,635
Shares issued to shareholders in reinvestment of
dividends and distributions....................... 1,538,264 10,403,524
--------- ------------
Total issued....................................... 9,300,473 108,995,159
Shares redeemed.................................... (711,444) (8,076,571)
--------- ------------
Net increase....................................... 8,589,029 $100,918,588
========= ============
---------------------------------------------------------
Developing Capital Markets Focus Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold....................................... 4,462,492 $ 44,124,402
Shares issued to shareholders in reinvestment of
dividends........................................ 151,274 1,385,673
----------- ------------
Total issued...................................... 4,613,766 45,510,075
Shares redeemed................................... (1,027,712) (10,264,248)
----------- ------------
Net increase...................................... 3,586,054 $ 35,245,827
=========== ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold......................................... 2,555,725 $23,265,598
Shares issued to shareholders in reinvestment of
dividends.......................................... 36,009 332,002
----------- ------------
Total issued........................................ 2,591,734 23,597,600
Shares redeemed..................................... (525,636) (4,592,826)
----------- ------------
Net increase........................................ 2,066,098 $19,004,774
=========== ============
---------------------------------------------------------
Domestic Money Market Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold.................................... 103,681,145 $ 103,681,145
Shares issued to shareholders in reinvestment
of dividends and distributions................ 13,824,990 13,824,990
------------ -------------
Total issued................................... 117,506,135 117,506,135
Shares redeemed................................ (146,504,203) (146,504,203)
------------ -------------
Net decrease................................... (28,998,068) $ (28,998,068)
============ =============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold..................................... 111,267,159 $111,267,159
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 17,571,280 17,571,280
------------ ------------
Total issued.................................... 128,838,439 128,838,439
Shares redeemed................................. (188,460,308) (188,460,308)
------------ ------------
Net decrease.................................... (59,621,869) $(59,621,869)
============ ============
---------------------------------------------------------
Equity Growth Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold........................................ 3,897,758 $ 99,038,352
Shares issued to shareholders in reinvestment of
dividends and distributions....................... 1,870,190 45,444,509
--------- ------------
Total issued....................................... 5,767,948 144,482,861
Shares redeemed.................................... (639,891) (16,126,126)
--------- ------------
Net increase....................................... 5,128,057 $128,356,735
========= ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold..................................... 3,628,361 $ 86,301,010
Shares issued to shareholders in reinvestment of
dividends...................................... 41,296 889,063
------------ ------------
Total issued.................................... 3,669,657 87,190,073
Shares redeemed................................. (353,757) (8,536,475)
------------ ------------
Net increase.................................... 3,315,900 $ 78,653,598
============ ============
---------------------------------------------------------
Global Bond Focus Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold..................................... 844,095 $ 8,236,250
Shares issued to shareholders in reinvestment of
dividends...................................... 704,764 6,810,949
Shares issued resulting from reorganization..... 1,883,889 17,820,572
---------- ------------
Total issued.................................... 3,432,748 32,867,771
Shares redeemed................................. (2,183,963) (21,116,271)
---------- ------------
Net increase.................................... 1,248,785 $ 11,751,500
========== ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold..................................... 481,318 $ 4,592,255
Shares issued to shareholders in reinvestment of
dividends...................................... 727,949 6,851,555
---------- ------------
Total issued.................................... 1,209,267 11,443,810
Shares redeemed................................. (1,045,651) (9,863,555)
---------- ------------
Net increase.................................... 163,616 $ 1,580,255
========== ============
---------------------------------------------------------
Global Strategy Focus Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
- ---------------------------------------------------------
Shares sold....................................... 1,190,964 $ 14,964,723
Shares issued to shareholders in reinvestment of
dividends........................................ 1,034,164 12,699,527
Shares issued resulting from reorganization....... 23,634,508 294,328,812
---------- ------------
Total issued...................................... 25,859,636 321,993,062
Shares redeemed................................... (6,200,613) (80,229,132)
---------- ------------
Net increase...................................... 19,659,023 $241,763,930
========== ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold....................................... 2,383,467 $ 28,913,701
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 1,452,481 17,112,643
---------- ------------
Total issued...................................... 3,835,948 46,026,344
Shares redeemed................................... (4,725,965) (56,008,034)
---------- ------------
Net decrease...................................... (890,017) $ (9,981,690)
========== ============
---------------------------------------------------------
Global Utility Focus Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold....................................... 858,704 $ 9,800,413
Shares issued to shareholders in reinvestment of
dividends........................................ 595,856 6,739,387
---------- ------------
Total issued...................................... 1,454,560 16,539,800
Shares redeemed................................... (2,881,155) (32,963,476)
---------- ------------
Net decrease...................................... (1,426,595) $(16,423,676)
========== ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold....................................... 782,432 $ 7,896,815
Shares issued to shareholders in reinvestment of
dividends........................................ 517,492 5,144,108
---------- ------------
Total issued...................................... 1,299,924 13,040,923
Shares redeemed................................... (1,545,955) (15,567,315)
---------- ------------
Net decrease...................................... (246,031) $ (2,526,392)
========== ============
---------------------------------------------------------
-139-
<PAGE>
- ------------------------------------------------------------------------------
Government Bond Fund
- ---------------------------------------------------------
Dollar
For the Year Ended December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold......................................... 4,677,811 $48,169,342
Shares issued to shareholders in reinvestment of
dividends and distributions........................ 354,243 3,668,029
--------- -----------
Total issued........................................ 5,032,054 51,837,371
Shares redeemed..................................... (215,188) (2,234,202)
--------- -----------
Net increase........................................ 4,816,866 $49,603,169
========= ===========
---------------------------------------------------------
- --------------------------------------------------------- Dollar
For the Year Ended December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold........................................ 2,173,331 $ 22,410,622
Shares issued to shareholders in reinvestment of
dividends......................................... 161,544 1,670,786
--------- -----------
Total issued....................................... 2,334,875 24,081,408
Shares redeemed.................................... (321,060) (3,238,873)
--------- -----------
Net increase....................................... 2,013,815 $ 20,842,535
========= ===========
---------------------------------------------------------
High Current Income Fund
- ---------------------------------------------------------
Dollar
For the Year Ended December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold....................................... 3,441,094 $ 38,643,510
Shares issued to shareholders in reinvestment of
dividends........................................ 3,229,888 36,130,450
---------- ------------
Total issued...................................... 6,670,982 74,773,960
Shares redeemed................................... (1,968,366) (22,078,243)
---------- ------------
Net increase...................................... 4,702,616 $ 52,695,717
========== ============
---------------------------------------------------------
- --------------------------------------------------------- Dollar
For the Year Ended December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold....................................... 5,980,682 $ 65,910,048
Shares issued to shareholders in reinvestment of
dividends........................................ 2,792,967 30,645,264
----------- ------------
Total issued...................................... 8,773,649 96,555,312
Shares redeemed................................... (1,184,474) (13,092,078)
----------- ------------
Net increase...................................... 7,589,175 $ 83,463,234
=========== ============
---------------------------------------------------------
Index 500 Fund
---------------------------------------------------------
For the Period December 13, 1996+ to December 31, Dollar
1996 Shares Amount
---------------------------------------------------------
Shares sold......................................... 57,357 $ 582,138
Shares redeemed..................................... (10) (102)
----------- ------------
Net increase........................................ 57,347 $ 582,036
=========== ============
---------------------------------------------------------
+Prior to December 13, 1996 (commencement of operations), the Fund issued
1,000,000 shares to MLLA for $10,000,000.
International Equity Focus Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold.................................. 6,562,205 $ 75,036,616
Shares issued to shareholders in reinvestment
of dividends................................ 334,488 3,669,329
--------- ------------
Total issued................................. 6,896,693 78,705,945
Shares redeemed.............................. (886,963) (10,175,471)
--------- ------------
Net increase................................. 6,009,730 $ 68,530,474
========= ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold.................................. 2,540,187 $ 26,767,717
Shares issued to shareholders in reinvestment
of dividends and distributions.............. 898,135 9,331,626
-------- ---------
Total issued................................. 3,438,322 36,099,343
Shares redeemed.............................. (2,161,108) (21,945,941)
-------- ---------
Net increase................................. 1,277,214 $ 14,153,402
============
---------------------------------------------------------
Natural Resources Focus Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold.................................... 450,602 $ 5,663,127
Shares issued to shareholders in reinvestment
of dividends and distributions................ 122,221 1,463,255
------- ---------
Total issued................................... 572,823 7,126,382
Shares redeemed................................ (737,357) (9,240,146)
------- ---------
Net decrease................................... (164,534) $ (2,113,764)
============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold.......................................... 474,971 $ 5,198,076
Shares issued to shareholders in reinvestment of
dividends and distributions......................... 63,806 835,171
-------- -----------
Total issued......................................... 538,777 6,033,247
Shares redeemed...................................... (601,388) (6,852,669)
-------- -----------
Net decrease......................................... (62,611) $ (819,422)
======== ===========
---------------------------------------------------------
Prime Bond Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold........................................ 5,521,436 $65,068,417
Shares issued to shareholders in reinvestment of
dividends......................................... 2,739,002 32,511,472
---------- ------------
Total issued....................................... 8,260,439 97,579,889
Shares redeemed.................................... (2,399,918) (28,829,074)
---------- ------------
Net increase....................................... 5,860,520 $68,750,815
========== ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold........................................ 3,880,829 $45,621,465
Shares issued to shareholders in reinvestment of
dividends......................................... 2,612,921 30,585,478
---------- ------------
Total issued....................................... 6,493,750 76,206,943
Shares redeemed.................................... (2,316,349) (27,181,488)
---------- ------------
Net increase....................................... 4,177,401 $49,025,455
========== ============
---------------------------------------------------------
Quality Equity Fund
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold........................................ 1,934,738 $ 58,210,337
Shares issued to shareholders in reinvestment of
dividends and distributions....................... 3,478,605 98,560,479
--------- ------------
Total issued....................................... 5,413,343 156,770,816
Shares redeemed.................................... (895,337) (26,640,069)
--------- ------------
Net increase....................................... 4,518,006 $130,130,747
========= ============
---------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold........................................ 2,793,165 $ 82,433,320
Shares issued to shareholders in reinvestment of
dividends and distributions....................... 651,881 18,002,604
--------- ------------
Total issued....................................... 3,445,046 100,435,924
Shares redeemed.................................... (509,752) (15,180,783)
--------- ------------
Net increase....................................... 2,935,294 $ 85,255,141
========= ============
---------------------------------------------------------
Reserve Assets Fund
- ---------------------------------------------------------
Dollar
For the Year EndedDecember 31, 1996 Shares Amount
---------------------------------------------------------
Shares sold...................................... 6,967,844 $ 6,967,844
Shares issued to shareholders in reinvestment of
dividends and distributions..................... 1,182,349 1,182,349
----------- -----------
Total issued..................................... 8,150,193 8,150,193
Shares redeemed.................................. (10,800,490) (10,800,490)
----------- -----------
Net decrease..................................... (2,650,297) $ (2,650,297)
=========== ===========
---------------------------------------------------------
-140-
<PAGE>
- ------------------------------------------------------------------------------
- ---------------------------------------------------------
For the Year Ended Dollar
December 31, 1995 Shares Amount
---------------------------------------------------------
Shares sold...................................... 6,811,139 $ 6,811,139
Shares issued to shareholders in reinvestment of
dividends and distributions..................... 1,582,801 1,582,801
----------- -----------
Total issued..................................... 8,393,940 8,393,940
Shares redeemed.................................. (15,081,975) (15,081,975)
----------- -----------
Net decrease..................................... (6,688,035) $ (6,688,035)
=========== ===========
---------------------------------------------------------
5. Capital Loss Carryforward:
At December 31, 1996, the Company had net capital loss carryforwards of
approximately $3,909,000 in the Developing Capital Markets Focus Fund, of
which $91,000 expires in 2003 , $3,728,000 expires in 2003 and $90,000 expires
in 2004; $514,000 in the Global Bond Focus Fund, all of which expires in 2002;
$2,331,000 in the Global Utility Focus Fund, of which $121,000 expires in 2002
and $2,210,000 expires in 2003; $71,000 in the Government Bond Fund, all of
which expires in 2004; $295,000 in the High Current Income Fund, all of which
expires in 2003; $15,651,000 in the Prime Bond Fund, of which $14,796,000
expires in 2002 and $855,000 expires in 2003. These amounts will be available
to offset like amounts of any future taxable gains.
6. Loaned Securities:
At December 31, 1996, the Government Bond Fund, the Prime Bond Fund and the
Quality Equity Fund held US Treasury bonds having aggregate values of
approximately $2,600,000, $6,798,000 and $6,514,000, respectively, as
collateral for portfolio securities loaned having market values of
approximately $2,514,000, $6,515,000 and $6,579,000, respectively.
7. Commitments:
At December 31, 1996, the following Portfolios had entered into foreign
exchange contracts, in addition to the contracts listed on the Schedules of
Investments, under which they agreed to purchase and sell various foreign
currencies with values of approximately:
- ---------------------------------------------------------
Purchase Sell
---------------------------------------------------------
Development Capital Markets.......... $1,282,000 $ 79,000
Global Bond Focus Fund............... 4,107,000 2,659,000
International Equity Focus Fund...... -- 298,000
Natural Resources Focus Fund......... 222,000 39,000
---------------------------------------------------------
8. Acquisition of Flexible Strategy Fund
and International Bond Fund:
On December 9, 1996, Global Strategy Focus Fund acquired all the net assets
of Flexible Strategy Fund pursuant to a plan of reorganization. The
acquisition was accomplished by a tax-free exchange of 23,634,508 Common Stock
shares of Global Strategy Focus Fund for 20,765,107 Common Stock shares of
Flexible Strategy Fund. Flexible Strategy Fund's net assets on that date of
$325,430,454, including $30,966,642 of unrealized appreciation, were combined
with those of Global Strategy Focus Fund. The aggregate net assets of Global
Strategy Focus Fund after the acquisition amounted to $874,098,755.
On December 9, 1996, World Income Focus Fund acquired all the net assets of
International Bond Fund pursuant to a plan of reorganization. The acquisition
was accomplished by a tax-free exchange of 1,883,889 Common Stock shares of
World Income Focus Fund for 1,788,555 Common Stock shares of International
Bond Fund. International Bond Fund's net assets on that date of $18,188,183,
including $232,608 of unrealized appreciation, were combined with those of
World Income Focus Fund. The aggregate net assets of World Income Focus Fund
after the acquisition amounted to $97,534,880. Subsequent to the acquisition,
World Income Focus Fund changed its name to Global Bond Focus Fund.
9. Subsequent Event:
On January 2, 1997, the Board of Directors declared ordinary income
dividends and capital gains distributions per share payable on January 9, 1997
to shareholders of record as of December 31, 1996 as follows:
- ---------------------------------------------------------
Ordinary Capital
Fund Income Gains
---------------------------------------------------------
American Balanced Fund.......................... $ .603285 $1.228672
Basic Value Focus Fund.......................... .665501 .943093
Developing Capital Markets Focus Fund........... .182600 --
Equity Growth Fund.............................. .533168 .831606
Global Strategy Focus Fund...................... .432947 .289873
Global Utility Focus Fund....................... .096870 --
Index 500 Fund.................................. .017480 .002863
International Equity Focus Fund................. .214967 .087059
Natural Resources Focus Fund.................... .205662 .723589
Quality Equity Fund............................. 1.195788 .557701
---------------------------------------------------------
-141-
<PAGE>
UNAUDITED FINANCIAL STATEMENTS FOR THE INDEX 500 FUND
142
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
General Electric Company++................................... 21,366 $ 2,120,576
Coca-Cola Co. ............................................... 32,289 1,804,148
Exxon Corp.++................................................ 16,114 1,736,284
Intel Corporation............................................ 10,658 1,482,794
+Microsoft Corporation++..................................... 15,612 1,431,425
Merck & Co., Inc. ........................................... 15,643 1,317,923
Royal Dutch Petroleum Co. N.V. (NY Shares) (ADR)*............ 6,957 1,217,475
Phillip Morris Companies, Inc. .............................. 10,569 1,206,187
Procter & Gamble Co. ........................................ 8,851 1,017,865
International Business Machines Corp. ....................... 6,716 922,611
Johnson & Johnson Co. ....................................... 17,282 913,786
Wal-Mart Companies, Inc. .................................... 29,767 829,755
du Pont (E.I.) de Nemours & Co. ............................. 7,306 774,436
Bristol-Myers Squibb Co. .................................... 12,996 766,764
American Telephone & Telegraph Co. .......................... 21,026 730,654
American International Group, Inc. .......................... 6,094 715,283
Pfizer, Inc. ................................................ 8,366 703,790
Hewlett-Packard Co. ......................................... 13,196 702,687
Mobil Corporation............................................ 5,113 667,886
PepsiCo, Inc. ............................................... 20,161 657,753
Citicorp..................................................... 6,005 650,041
Walt Disney Co............................................... 8,802 642,546
Chevron Corp. ............................................... 8,468 589,585
Lilly (Eli) & Co. ........................................... 7,160 588,910
GTE Corp. ................................................... 12,481 581,927
Abbott Laboratories.......................................... 10,081 565,796
Amoco Corp. ................................................. 6,453 558,991
NationsBank Corp. ........................................... 9,970 552,089
BellSouth Corporation........................................ 12,893 544,729
General Motors Corp. ........................................ 9,811 543,284
Chase Manhattan Corp. ....................................... 5,695 533,194
Gillette Co.................................................. 7,198 522,755
Federal National Mortgage Association........................ 14,170 511,891
American Home Products Corporation........................... 8,289 497,340
Ford Motor Company........................................... 15,384 482,673
BankAmerica Corp. ........................................... 4,657 469,193
Motorola, Inc. .............................................. 7,693 464,465
Boeing Co. .................................................. 4,650 458,606
Minnesota Mining & Manufacturing Co. ........................ 5,424 458,328
Ameritech Corp. ............................................. 7,128 438,372
Lucent Technologies, Inc. ................................... 8,262 435,820
McDonald's Corp. ............................................ 9,055 427,849
SBC Communications Inc. ..................................... 7,834 412,264
+Cisco Systems, Inc. ........................................ 8,533 410,651
Standard & Poors Depositary Receipts......................... 5,300 399,984
Travelers Corporation........................................ 8,311 397,889
Unilever N.V. (ADR)*......................................... 2,077 386,841
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
Texaco Inc. .................................................. 3,432 $ 375,804
American Express Company...................................... 6,150 368,231
Kimberly-Clark Corp. ......................................... 3,666 364,309
Schering-Plough Corp. ........................................ 4,794 348,763
Bell Atlantic Corporation..................................... 5,681 345,831
Schlumberger, Ltd. ........................................... 3,197 342,878
Allstate Corp. ............................................... 5,770 342,594
Wells Fargo & Company......................................... 1,201 341,234
+Oracle Corp. ................................................ 8,778 338,502
Home Depot, Inc. ............................................. 6,233 333,466
Eastman Kodak Co. ............................................ 4,324 328,084
Time Warner Inc. ............................................. 7,379 319,142
MCI Communications Corp. ..................................... 8,895 316,884
Warner-Lambert Co. ........................................... 3,520 304,480
First Union Corporation....................................... 3,681 298,621
Columbia/HCA Healthcare Corp. ................................ 8,713 292,975
Monsanto Co. ................................................. 7,631 291,886
Atlantic Richfield Company.................................... 2,087 281,745
Campbell Soup Co. ............................................ 6,068 281,404
Chrysler Corp. ............................................... 9,121 273,630
Anheuser-Busch Companies, Inc. ............................... 6,482 273,054
+Compaq Computer Corp. ....................................... 3,515 269,337
Emerson Electric Co. ......................................... 5,820 261,900
AlliedSignal Inc. ............................................ 3,670 261,488
NYNEX Corp. .................................................. 5,710 260,519
Sears, Roebuck & Co. ......................................... 5,081 255,320
Sara Lee Corporation.......................................... 6,279 254,299
Sprint Corporation............................................ 5,586 254,163
Federal Home Loan Mortgage Corp. ............................. 9,284 252,989
Dow Chemical Company (The).................................... 3,154 252,320
+WorldCom, Inc. .............................................. 11,211 246,642
Pharmacia & Upjohn Inc. ...................................... 6,594 241,505
Xerox Corp. .................................................. 4,212 239,557
Morgan (J.P.) & Company, Inc. ................................ 2,419 237,667
United Technologies Corp. .................................... 3,120 234,780
Nike, Inc. (Class B).......................................... 3,739 231,818
First Chicago Corp. .......................................... 4,138 223,969
Norwest Corporation........................................... 4,806 222,277
BancOne Corp. ................................................ 5,547 220,493
Northern Telecom Ltd. ........................................ 3,354 219,268
US West Communications Group.................................. 6,198 210,732
Lockheed Martin Corp. ........................................ 2,500 210,000
Pacific Telesis Group......................................... 5,559 209,852
Caterpillar, Inc. ............................................ 2,485 199,421
First Data Corp. ............................................. 5,808 196,746
Fleet Financial Group Inc. ................................... 3,404 194,879
Medtronic, Inc. .............................................. 3,109 193,535
WMX Technologies.............................................. 6,296 192,815
Amgen, Inc. .................................................. 3,415 190,813
Colgate-Palmolive Co. ........................................ 1,906 189,885
Heinz (H.J.) Company.......................................... 4,772 188,494
</TABLE>
143
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
Bank of New York Company, Inc. .............................. 5,091 $ 187,094
Seagram Company Ltd. ........................................ 4,842 185,206
Southern Company (The)....................................... 8,742 184,675
Texas Instruments, Inc. ..................................... 2,465 184,567
Computer Associates International Inc. ...................... 4,734 184,034
Rockwell International Corp. ................................ 2,836 183,985
Kellogg Co. ................................................. 2,735 183,929
Merrill Lynch & Co., Inc.,................................... 2,138 183,601
Union Pacific Corp. ......................................... 3,178 180,351
PNC Bank Corp. .............................................. 4,324 172,960
ConAgra Inc. ................................................ 3,124 169,477
General Re Corporation....................................... 1,072 169,376
McDonnell Douglas Corporation................................ 2,753 167,933
Aetna Inc. .................................................. 1,955 167,886
Automatic Data Processing Inc. .............................. 3,768 157,785
+Dell Computer Corp. ........................................ 2,327 157,363
Gannett Co., Inc. ........................................... 1,829 157,065
Aluminum Co. of America...................................... 2,251 153,068
CPC International, Inc. ..................................... 1,866 153,012
Baxter International, Inc. .................................. 3,542 152,749
Penney (J.C.) Co. ........................................... 3,195 152,162
+Viacom, Inc. (Class B)...................................... 4,592 152,110
International Paper Co. ..................................... 3,895 151,418
+US West Media Group ,Inc. .................................. 8,106 150,974
+Airtouch Communications, Inc. .............................. 6,508 149,684
Burlington Northern Santa Fe Inc. ........................... 1,986 146,964
+Seagate Technology, Inc. ................................... 3,254 146,023
Deere & Co. ................................................. 3,353 145,856
Dean Witter, Discover & Co. ................................. 4,171 145,464
May Department Stores Co. ................................... 3,169 144,189
KeyCorp...................................................... 2,925 142,594
+Boston Scientific Corp. .................................... 2,309 142,581
CIGNA Corporation............................................ 975 142,472
Phillips Petroleum Company................................... 3,416 139,629
+Sun Microsystems, Inc. ..................................... 4,816 139,062
Westinghouse Electric Corporation............................ 7,832 139,018
Norfolk & Southern Corp. .................................... 1,624 138,446
Raytheon Company............................................. 3,063 138,218
CoreStates Financial Corp. .................................. 2,889 137,228
National City Corporation.................................... 2,879 134,233
SunTrust Banks, Inc. ........................................ 2,894 134,209
Walgreen Co. ................................................ 3,193 133,707
Bank of Boston Corp. ........................................ 1,986 133,062
Loews Corporation............................................ 1,493 132,690
Corning, Inc. ............................................... 2,985 132,459
Illinois Tool Works Inc. .................................... 1,608 131,253
CSX Corp. ................................................... 2,815 130,898
General Mills, Inc. ......................................... 2,096 130,214
PPG Industries, Inc. ........................................ 2,379 128,466
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
First Bank Systems, Inc.. ................................... 1,745 $ 127,385
Edison International......................................... 5,622 126,495
Archer-Daniels-Midland Co. .................................. 7,061 126,215
Pennsylvania Gas & Electric Corporation...................... 5,350 125,725
Enron Corp. ................................................. 3,302 125,476
Unocal Corp. ................................................ 3,249 123,868
Mellon Bank Corp. ........................................... 1,680 122,220
Chubb Corporation............................................ 2,259 121,704
MONA Corp. .................................................. 4,336 120,866
Gap, Inc. ................................................... 3,580 119,930
Tyco International, Ltd. .................................... 2,162 118,910
Barnett Banks, Inc. ......................................... 2,532 117,738
Dayton Hudson Corporation (Class A).......................... 2,812 117,401
Conrail, Inc. ............................................... 1,038 117,035
Wachovia Corp. .............................................. 2,144 116,848
Morgan Stanley Group Inc. ................................... 1,977 116,149
+CUC International Inc. ..................................... 5,149 115,853
Duke Power Company........................................... 2,617 115,475
Weyerhaeuser Co. ............................................ 2,573 114,820
United Healthcare Corporation................................ 2,388 113,728
+EMC Corporation............................................. 3,190 113,245
Pitney Bowes, Inc. .......................................... 1,927 113,211
Textron Inc. ................................................ 1,073 112,665
American Brands, Inc. ....................................... 2,209 111,831
Honeywell, Inc. ............................................. 1,641 111,383
Albertson's Inc. ............................................ 3,270 111,180
Halliburton Company.......................................... 1,625 110,094
Barrick Gold Corporation..................................... 4,634 110,058
ITT Hartford Group Inc. ..................................... 1,524 109,919
Micron Technology, Inc. ..................................... 2,711 109,795
Household Interntional, Inc. ................................ 1,257 108,259
+Applied Materials, Inc. .................................... 2,324 107,776
American General Corp. ...................................... 2,639 107,539
Ralston Purina Co. .......................................... 1,375 107,422
Fifth Third Bank............................................. 1,377 106,718
Marsh & McLennan Companies, Inc. ............................ 932 105,549
+Toys "R' Us, Inc. .......................................... 3,769 105,532
Goodyear Tire & Rubber Co. .................................. 2,016 105,336
Occidental Pete Corp. ....................................... 4,268 105,099
FPL Group, Inc. ............................................. 2,375 104,797
USX Marathon Group, Inc. .................................... 3,732 104,029
TCI Communications, Inc. (Class A)........................... 8,662 103,944
USBANCORP., Inc. ............................................ 1,922 102,827
American Electric Power Company, Inc. ....................... 2,433 100,361
Texas Utilities Company...................................... 2,914 99,804
Hershey Foods Corporation.................................... 1,992 99,600
Alcan Aluminum, Ltd. ........................................ 2,936 99,457
+HFS Inc. ................................................... 1,670 98,321
Air Products and Chemicals, Inc. ............................ 1,447 98,215
</TABLE>
144
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
AMP, Inc. ................................................... 2,851 $ 98,003
+AMR Corp. .................................................. 1,181 97,433
+Tenet Healthcare Corp. ..................................... 3,911 96,308
Consolidated Edison Company of New York...................... 3,050 91,500
Praxair, Inc. ............................................... 2,030 91,096
Service Corporation.......................................... 3,059 91,005
Williams Companies, Inc. .................................... 2,036 90,602
Avon Products, Inc. ......................................... 1,725 90,563
Mattel, Inc. ................................................ 3,747 89,928
+ITT Corp. .................................................. 1,511 88,960
+Federated Department Store, Inc. ........................... 2,697 88,664
Wrigley (WM) Jr. Co. (Class B)............................... 1,508 88,029
Bankers Trust New York Corp. ................................ 1,061 87,002
Union Pacific Resources Group................................ 3,242 86,723
Tenneco, Inc. ............................................... 2,216 86,424
Aon Corporation.............................................. 1,405 86,056
Georgia Pacific Corp. ....................................... 1,186 85,985
Crown Company, Inc. ......................................... 1,664 85,904
TRW Inc. .................................................... 1,649 85,336
Dominion Resources, Inc. .................................... 2,338 85,045
Panenergy Corporation........................................ 1,960 84,525
American Stores Company...................................... 1,890 84,105
+Tellabs, Inc. .............................................. 2,319 83,774
Lowe's Companies, Inc. ...................................... 2,241 83,757
+Kroger Co. (The)............................................ 1,636 83,027
Marriott International, Inc. ................................ 1,660 82,585
PacifiCorp................................................... 3,825 81,759
Delta Air Lines, Inc. ....................................... 969 81,517
Public Service Enterprise Group, Inc. ....................... 3,094 81,217
ALLTEL Corp. ................................................ 2,461 79,983
Browning-Ferris Industries, Inc. ............................ 2,758 79,637
Sysco Corporation............................................ 2,321 79,204
Comerica Inc. ............................................... 1,395 78,643
Morton International, Inc. .................................. 1,849 78,120
Milton Hotels Corporation.................................... 3,207 77,770
Conseco, Inc. ............................................... 2,183 77,769
+HealthSouth Corp. .......................................... 4,058 77,609
+Federal Express Corp. ...................................... 1,479 77,093
Transamerica Corporation..................................... 860 76,970
Dover Corp. ................................................. 1,460 76,650
Freeport-McMoRan Copper & Gold Inc. (Class B)................ 2,509 76,211
+K Mart Corp. ............................................... 6,279 76,133
Clorox Company............................................... 670 75,124
+COSTCO Companies Inc. ...................................... 2,711 74,891
Masco Corporation............................................ 2,083 74,467
+3Com Corp. ................................................. 2,271 74,375
+Advanced Micro Devices Inc. ................................ 1,773 73,580
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
Entergy Corp. ............................................... 2,997 $ 73,427
Union Carbide Corp. ......................................... 1,653 73,145
Genuine Parts Company........................................ 1,563 72,875
Becton, Dickinson and Company................................ 1,616 72,720
Lincoln National Corp. ...................................... 1,355 72,492
Great Western Financial Corp. ............................... 1,788 72,191
Baker Hughes, Inc. .......................................... 1,876 71,992
Inco Ltd. ................................................... 2,185 71,286
Carolina Power & Light Company............................... 1,965 71,231
Comcast Corporation.......................................... 4,207 70,993
Eaton Corp. ................................................. 1,001 70,946
Salomon Inc. ................................................ 1,415 70,573
Times Mirror Co. ............................................ 1,283 70,084
CINERGY Corp. ............................................... 2,046 69,820
St. Paul Companies, Inc. .................................... 1,076 69,805
UNUM Corporation............................................. 949 69,277
Burlington Resources Inc. ................................... 1,619 69,212
Newell Co. .................................................. 2,061 69,043
Dresser Industries, Inc. .................................... 2,280 68,970
Donnelley (R.R.) & Sons Company.............................. 1,951 68,041
UST, Inc. ................................................... 2,416 67,346
Pioneer Hi-Bred International, Inc. ......................... 1,068 67,150
Rite Aid Corporation......................................... 1,589 66,738
McGraw-Hill, Inc. ........................................... 1,291 66,002
Coastal Corp. ............................................... 1,366 65,568
Providian Corporation........................................ 1,216 65,056
Winn-Dixie Stores, Incorporated.............................. 1,962 64,746
Tribune Co. ................................................. 1,598 64,719
Cognizant Corporation........................................ 2,220 64,658
Limited, Inc. (The).......................................... 3,517 64,625
Quaker Oats Company.......................................... 1,764 64,386
SAFECO Corporation........................................... 1,603 64,120
Amerada Hess Corp. .......................................... 1,208 64,024
Allegheny Teledyne Inc. ..................................... 2,262 63,619
Houston Industries Inc. ..................................... 3,041 63,481
CVS Corporation.............................................. 1,371 63,237
Republic New York Corporation................................ 717 63,186
International Flavors & Fragrances Inc. ..................... 1,436 62,825
Rohm & Haas Co. ............................................. 830 62,146
Consolidated Natural Gas Co. ................................ 1,231 62,012
Ingersoll-Rand Company....................................... 1,420 61,948
Phelps Dodge Corporation..................................... 841 61,498
Sonat Inc. .................................................. 1,119 60,985
+Computer Sciences Corporation............................... 985 60,824
Cooper Industries, Inc. ..................................... 1,401 60,768
Greentree Financial Corp. ................................... 1,783 60,176
</TABLE>
145
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
Sherwin-Williams Company .................................... 2,228 $ 60,156
+Thermo Electron Corporation................................. 1,935 59,743
+Cabletron Systems, Inc. .................................... 2,027 59,290
Guidant Corp. ............................................... 962 59,163
PECO Energy Co. ............................................. 2,887 58,823
IKON Office Solutions, Inc. ................................. 1,748 58,558
Central and South West Corp. ................................ 2,736 58,482
+LSI Logic Corporation....................................... 1,671 58,067
Fluer Corporation............................................ 1,085 56,963
Northrop Grumman Corp. ...................................... 749 56,643
Champion International Corp. ................................ 1,240 56,420
Placer Dome Inc. ............................................ 3,108 56,332
Hercules Incorporated........................................ 1,328 56,108
Dun & Bradstreet Corp. ...................................... 2,209 56,053
Laidlaw Inc. ................................................ 4,074 56,017
Interpublic Group of Companies, Inc. ........................ 1,053 55,546
New York Times Co. .......................................... 1,256 55,421
VF Corporation............................................... 826 55,239
General Dynamic Corporation.................................. 819 55,180
+Digital Equipment Corporation............................... 2,010 55,024
Unicom Corp. ................................................ 2,798 54,561
East Chemical Co. ........................................... 1,008 54,180
MGIC Investment Corp. ....................................... 765 54,124
MBIA, Inc. .................................................. 560 53,690
Nucor Corporation............................................ 1,138 52,063
Avery Dennison Corporation................................... 1,352 52,052
Baltimore Gas & Electric Company............................. 1,916 51,253
Reynolds Metals Company...................................... 826 51,212
Grace (W.R.) & Co. .......................................... 1,078 51,070
Grainger (W.W.) Inc. ........................................ 689 50,986
Dow Jones & Company, Inc. ................................... 1,253 50,903
DTE Energy Holdings Company.................................. 1,883 50,606
Torchmark Corporation........................................ 913 50,557
General Public Utilities Corp. .............................. 1,565 50,276
Jefferson Pilot Corp. ....................................... 924 50,242
Newmont Mining Corporation................................... 1,293 50,104
Ahmanson (H.P.) & Co. ....................................... 1,369 49,969
+National Semiconductor Corporation.......................... 1,797 49,417
Union Electric Company....................................... 1,325 48,859
Knight-Ridder, Inc. ......................................... 1,218 48,568
Rubbermaid Inc. ............................................. 1,944 48,357
Case Corp. .................................................. 952 48,314
Raychem Corporation.......................................... 581 47,860
Golden West Financial Corporation, Com....................... 744 46,686
+Humana Inc. ................................................ 2,110 46,420
Dillard Department Stores Inc. .............................. 1,473 46,400
Whirlpool Corporation........................................ 965 45,958
Hasbro, Inc. ................................................ 1,677 45,908
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
+Bay Networks Inc. .......................................... 2,561 $ 45,778
Willamette Industries, Inc. ................................. 725 45,312
Beneficial Corp. ............................................ 697 45,044
+Silicon Graphics, Inc. ..................................... 2,270 44,265
+Autozone, Inc. ............................................. 1,947 43,808
Stanley Works................................................ 1,154 43,708
Dana Corp. .................................................. 1,321 43,428
Johnson Controls, Inc. ...................................... 537 43,228
+Novell, Inc. ............................................... 4,536 43,092
TJX Companies Inc. .......................................... 1,008 43,092
Harcourt General Inc. ....................................... 923 42,920
Brown-Forman Corp. (Class B)................................. 896 42,784
PP&L Resources Inc. ......................................... 2,107 42,667
Union Camp Corp. ............................................ 904 42,601
Northern Status Power Company................................ 896 42,448
Circuit City Stores, Inc. ................................... 1,271 42,420
+Western Atlas, Inc. ........................................ 697 42,256
Andrew Corporation........................................... 1,167 42,158
Ohio Edison Company.......................................... 1,981 41,849
Southwest Airlines Co. ...................................... 1,882 41,639
Columbia Gas System, Inc. ................................... 716 41,439
+Fruit of the Loom, Inc. .................................... 998 41,417
Parker Mannifin Corp. ....................................... 965 41,254
+General Instrument Corp. ................................... 1,777 40,649
+Woolworth Corp. ............................................ 1,733 40,509
Liz Claiborne, Incorporated.................................. 928 40,484
Nordstrom, Inc. ............................................. 1,060 40,147
Block (H&R), Inc. ........................................... 1,349 39,627
Mallinckradt Group Inc. ..................................... 959 39,439
Sigma-Aldrich Corporation.................................... 1,275 39,366
Black & Decker
Corporation................................................. 1,224 39,321
Engelhard Corporation........................................ 1,867 39,207
Kerr-Mogee Corporation....................................... 630 38,981
Harris Corp. ................................................ 505 38,822
Frontier Corp. .............................................. 2,123 37,949
Tandy Corp. ................................................. 757 37,945
Temple-Inland Inc. ......................................... 720 37,800
Great Lakes Chemical Corporation............................. 821 37,766
Pall Corporation............................................. 1,628 37,647
Parkin-Elmer Corporation..................................... 560 36,050
Mead Corp. .................................................. 679 35,987
+St. Jude Medical, Inc. ..................................... 1,051 35,077
Armstrong World Industries, Inc. ............................ 536 34,706
Wendy's International, Inc. ................................. 1,679 34,629
Deluxe Corporation........................................... 1,068 34,577
PACCAR Inc. ................................................. 515 34,376
Brunswick Corporation........................................ 1,277 34,319
ITT Industries Inc. ......................................... 1,532 34,279
Ashland Oil Inc. ............................................ 836 33,649
Pacific Enterprises.......................................... 1,103 33,366
</TABLE>
146
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MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
Westvaco Corporation......................................... 1,322 $ 33,215
Whitman Corporation.......................................... 1,346 32,977
Nalco Chemical Company....................................... 874 32,666
James River Corp. of Virginia................................ 1,117 32,533
Reebok International Ltd. ................................... 721 32,355
USF&G Corporation............................................ 1,501 32,271
+Ceridian Corp. ............................................. 896 32,144
+DSC Communications Corp. ................................... 1,526 31,951
Ecolab Inc. ................................................. 838 31,844
Pennzoil Company............................................. 605 31,309
American Greetings Corp. (Class A)........................... 979 31,267
Ryder System, Inc. .......................................... 1,063 31,093
Snap-On, Inc. ............................................... 790 30,612
+ALZA Corp. ................................................. 1,099 30,223
Harnischreger Industries, Inc. .............................. 637 29,621
+FMC Corporation............................................. 482 29,523
Thomas & Betts Corporation................................... 688 29,412
Louisiana-Pacific Corp. ..................................... 1,410 29,257
USX-US Steel Group, Inc. .................................... 1,095 29,154
+Apple Computer Inc. ........................................ 1,590 29,018
Homestake Mining Company..................................... 1,904 28,798
Cyprus Amax Minerals Co. .................................... 1,211 28,761
Bausch & Lomb, Incorporated.................................. 720 28,440
Santa Fe Pacific Gold Corp. ................................. 1,705 28,132
Echlin Inc. ................................................. 804 27,336
Bemis Company, Inc. ......................................... 679 27,160
Tupperware Corporation....................................... 808 27,068
Owens Corning Fiberglass Corp. .............................. 669 26,927
Maytag Corp. ................................................ 1,300 26,812
Cummins Engine Company, Inc. ................................ 513 26,291
+Oryx Energy Co. ............................................ 1,360 26,180
Noram Energy Corp. .......................................... 1,782 26,062
Super Valu, Inc. ............................................ 873 25,972
Moore Corp Ltd. ............................................. 1,297 25,940
Goodrich (B.F.) Comp. ...................................... 697 25,528
Biomet, Incorporated......................................... 1,512 25,515
General Signal Corporation................................... 647 25,314
+Rowan Companies, Inc. ...................................... 1,109 25,091
United States Surgical Corporation........................... 814 24,827
Giant Food, Inc. (Class A)................................... 775 24,800
Allergan, Inc. .............................................. 850 24,756
Sun Company, Inc. ........................................... 947 24,740
Pep Boys-Manny, Moe & Jack................................... 811 24,330
National Service Industries, Inc. ........................... 617 24,140
Millipore Corporation........................................ 561 23,772
Polaroid Corp. .............................................. 590 23,452
Worthington Industries, Inc. ................................ 1,217 23,275
+Harrah's Entertainment, Inc. ............................... 1,335 22,862
Mercantile Stores Company, Inc. ............................. 478 22,167
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 12)
- --------------------------------------------------------------------------------
<S> <C> <C>
Timken Company (The)......................................... 406 $ 21,721
Tektronix, Inc. ............................................. 426 21,513
Bard (C.R.) Inc. ............................................ 740 21,090
Louisiana Land & Exploration Co. ............................ 443 20,987
USLIFE Corporation........................................... 448 20,944
NICOR Inc. .................................................. 646 20,672
+USAir Group, Inc. .......................................... 834 20,433
Manor Care, Inc. ............................................ 814 19,841
Cooper Tire & Rubber Company................................. 1,068 19,758
Battle Mountain Gold Company................................. 2,915 19,312
Boise Cascade Corporation.................................... 629 19,185
Alberto-Culver Company (Class B)............................. 724 18,915
Crane Co..................................................... 596 18,700
Foster Wheeler Corp. ........................................ 527 18,643
ENSERCH Corporation.......................................... 905 18,553
+Beverly Enterprises, Inc.................................... 1,288 18,354
+Tandem Computers, Inc....................................... 1,534 18,216
Autodesk, Inc................................................ 574 17,794
+King World Productions, Inc. ............................... 485 17,702
Russell Corp. ............................................... 495 17,696
Briggs & Stratton Corporation................................ 375 16,828
+Santa Fe Energy Resources, Inc. ............................ 1,177 16,331
Darden Restaurants, Inc. .................................... 2,046 16,112
Meredith Corporation......................................... 694 16,049
+Niagara Mohawk Power Corp. ................................. 1,874 15,929
ASARCO, Inc. ................................................ 556 15,638
Potlatch Corporation......................................... 374 15,381
Scientific-Atlanta, Inc. .................................... 1,004 15,311
McDermott International, Inc. ............................... 712 15,219
Peoples Energy Corporation................................... 453 15,006
Helmerich & Payne, Inc. ..................................... 323 14,939
+Amdahl Corporation.......................................... 1,574 14,756
+Unisys Corp. ............................................... 2,269 14,465
Stone Container Corp. ....................................... 1,287 14,318
Shared Medical Systems Corporation........................... 305 14,182
Caliber Systems, Inc. ....................................... 508 13,462
Centex Acceptance Corp. ..................................... 369 13,007
EG&G, Inc. .................................................. 615 12,838
Great Atlantic & Pacific Tea Co., Inc. ...................... 495 12,561
Inland Steel Co. ............................................ 636 12,402
Trinova Corporation.......................................... 363 12,160
Echo Bay Mines Ltd. ......................................... 1,807 11,971
+Bethlehem Steel Corporation................................. 1,450 11,963
Longs Drug Stores Corp. ..................................... 507 11,914
Springs Industries, Inc. .................................... 262 11,724
Fleetwood Enterprises, Inc. ................................. 462 11,550
Jostens, Inc. ............................................... 503 11,380
Safety-Kleen Corp. .......................................... 756 11,151
</TABLE>
147
<PAGE>
- -------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS HELD (NOTE 1A)
- --------------------------------------------------------------------------------
<S> <C> <C>
Ball Corporation............................................. 397 $ 10,521
Coors (Adolph) Company,
(Class B)................................................... 482 10,243
Cincinnati Milacron, Inc..................................... 518 9,713
Stride Rite Corp. ........................................... 643 9,645
Harland John H. Company (The)................................ 402 9,548
ONEOK, Inc. ................................................. 354 9,204
+Navistar International Corporation.......................... 956 8,962
Pulte Corporation............................................ 302 8,833
+Data General Corporation.................................... 509 8,653
Fleming Companies, Inc. ..................................... 490 8,575
Eastern Enterprises.......................................... 264 8,151
+Charming Shoppes, Inc. ..................................... 1,342 7,213
Kaufman and Broad Home Corp. ................................ 505 6,691
Giddings & Lewis, Inc. ...................................... 440 6,545
+Armco, Inc. ................................................ 1,384 5,536
Nacco Industries Incorporation, (Class A).................... 107 5,270
+Intergraph Corporation...................................... 592 4,588
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST--78,189,988)--76.4% 75,633,792
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE VALUE
SHORT-TERM OBLIGATIONS--COMMERCIAL PAPER** AMOUNT (NOTE 1A)
- -------------------------------------------------------------------------------
<S> <C> <C>
American Home Products Corporation, 5.42% due
4/11/1997............................................ $2,500,000 $ 2,496,236
CSW Credit, Inc., 5.55% due 4/14/1997................. 4,300,000 4,291,382
International Securitization Corp., 5.40% due
4/14/1997............................................ 5,000,000 4,990,250
McKenna Triangle National Corp., 5.57% due 4/04/1997.. 2,500,000 2,498,840
-----------
14,276,708
- -------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM OBLIGATIONS--US GOVERNMENT AGENCY
OBLIGATIONS**
- -------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Banks, 5.40% due 4/01/1997.......... 6,965,000 6,965,000
Federal Home Loan Mortgage Corp., 5.26% due
4/18/1997............................................ 3,000,000 2,992,548
-----------
9,957,548
- -------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS (COST--24,234,256)--24.5% 24,234,256
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$102,424,244)--101.1%........ 99,868,048
VARIATION MARGIN ON STOCK INDEX FUTURES CONTRACTS***--
(1.2)%............................................... (1,229,855)
OTHER ASSETS LESS LIABILITIES--0.1%................... 112,968
-----------
NET ASSETS--100.0%.................................... $98,751,161
===========
</TABLE>
- -------------------------------------------------------------------------------
+ Non-income producing security.
++ Portion of holdings pledged as collateral for open stock index futures
contracts.
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government Agency Obligations are traded on
a discount basis; the interest rate shown is the discount rate paid at the
time of purchase by the Fund.
*** Stock index futures contracts purchased as of March 31, 1997 were as
follows:
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE DATE (NOTE 1B)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
67 S&P 500 Stock Index June 1997 $25,393,000
- ------------------------------------------------------------------------------------------
TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED
(CONTRACT PRICE--$26,906,070).......................... $25,393,000
===========
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
148
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX 500
FUND
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--
$102,424,244) (Note 1a)........................... $ 99,868,048
Cash............................................... 703,472
Receivables:
Securities sold................................... $ 5,555,000
Capital shares sold............................... 695,078
Dividends......................................... 135,600 6,385,678
------------
Deferred organization expenses (Note 1f)........... 14,852
Prepaid registration fees and other assets (Note
1f)............................................... 7,910
------------
Total assets...................................... 106,979,960
------------
- -------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased.............................. 6,975,453
Variation margin on stock index futures contracts
(Note 1b)........................................ 1,229,855
Investment adviser (Note 2)....................... 5,066
Capital shares redeemed........................... 34 8,210,408
------------
Accrued expenses and other liabilities............. 18,391
------------
Total liabilities................................. 8,228,799
------------
- -------------------------------------------------------------------------------
NET ASSETS......................................... $ 98,751,161
============
- -------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Stock, $0.10 par value, 100,000,000 shares
authorized........................................ $ 950,821
Paid-in capital in excess of par................... 101,025,846
Undistributed investment income--net............... 452,226
Undistributed realized capital gains on invest-
ments--net........................................ 391,534
Unrealized depreciation on investments--net........ (4,069,266)
------------
NET ASSETS--Equivalent to $10.39 per share based on
9,508,208 shares outstanding...................... $ 98,751,161
============
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
149
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENT OF OPERATIONS FOR THE PERIOD JANUARY 1, 1997 TO MARCH 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX 500
FUND
- ------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends (net of $366 foreign withholding tax)..... $ 245,433
Interest and discount earned........................ 218,743
-----------
Total income........................................ $ 464,176
-----------
- ------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)................... 45,906
Registration fees (Note 1f)......................... 4,096
Accounting services (Note 2)........................ 2,699
Custodian fees...................................... 2,280
Amortization of organization expenses (Note 1f)..... 1,962
Professional fees................................... 970
Transfer agent fees (Note 2)........................ 727
Directors' fees and expenses........................ 133
Pricing services.................................... 93
Other............................................... 173
-----------
Total expenses before reimbursement................. 59,039
Reimbursement of expenses (Note 2).................. (47,099)
-----------
Expenses after reimbursement........................ 11,940
-----------
Investment income--net.............................. 452,236
-----------
- ------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--
NET (NOTES 1b, 1e, & 3):
Realized gain on investment--net.................... 396,577
Change in unrealized appreciation--net.............. (4,222,400)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERA-
TIONS.............................................. $(3,373,587)
===========
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
150
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX 500
FUND
------------------------------------
FOR THE PERIOD
JANUARY 1, 1997 TO FOR THE PERIOD
MARCH 31, DEC. 13, 1996+ TO
1997 DEC. 31,
INCREASE (DECREASE) IN NET ASSETS: (UNAUDITED) 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net................... $ 452,236 $ 16,863
Realized gain (loss) on investments--
net..................................... 396,577 (193)
Change in unrealized appreciation on in-
vestments--net.......................... (4,222,400) 153,134
----------- -----------
Net increase (decrease) in net assets re-
sulting from operations................. (3,373,587) 169,804
----------- -----------
- -------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS
(NOTE 1g):
Investment income--net................... (16,873) --
Realized gain on investments--net........ (4,850) --
----------- -----------
Net decrease in net assets resulting from
dividends and distributions to
shareholders............................ (21,723) --
----------- -----------
- -------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from
capital share transactions.............. 91,394,631 582,036
----------- -----------
- -------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets............. 87,999,321 751,840
Beginning of period...................... 10,751,840 10,000,000
----------- -----------
End of period*........................... $98,751,161 $10,751,840
=========== ===========
- -------------------------------------------------------------------------------
* Undistributed investment income--net... $ 452,226 $ 16,863
=========== ===========
- -------------------------------------------------------------------------------
+ Commencement of Operations.
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
151
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS
HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL INDEX 500 FUND
STATEMENTS. ------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1997 TO DEC. 13, 1996+ TO
MARCH 31, 1997 DEC. 31, 1996
INCREASE (DECREASE) IN NET ASSET VALUE: (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.17 $ 10.00
------- -------
Investment income--net.................... .05 .02
Realized and unrealized gain on invest-
ments--net............................... .19 .15
------- -------
Total from investment operations.......... .24 .17
------- -------
Less dividends and distributions:
Investment income--net................... (.02) --
Realized gain on investments--net........ -- ## --
------- -------
Total dividends and distributions......... (.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.
See Notes to Financial Statements.
152
<PAGE>
- -------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
NOTES TO FINANCIALS STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end man-
agement investment company, which is comprised of 16 separate funds ("Funds"
or "Fund") offering 16 separate classes of shares to the Merrill Lynch Life
Insurance Company, ML Life Insurance Company of New York (indirect wholly-
owned subsidiaries of Merrill Lynch & Co., Inc. "ML & Co."), and other insur-
ance companies, which are not affiliated with ML & Co., for their separate ac-
counts to fund benefits under certain variable annuity contracts. These unau-
dited financial statements reflect all adjustments which are, in the opinion
of management, necessary to a fair statement of the results for the interim
period presented. All such adjustments are of a normal recurring nature. Each
Fund is classified as "diversified", as defined in the Investment Company Act
of 1940, except for Developing Capital Markets Focus Fund, Global Bond Focus
Fund, Global Strategy Focus Fund, and Natural Resources Focus Fund, all of
which are classified as "non-diversified". The following is a summary of sig-
nificant accounting policies followed by the Funds.
(a) Valuation of investments--Money market securities maturing more than
sixty days after the valuation date are valued at the most recent bid price or
yield equivalent as obtained from dealers that make markets in the securities.
When such securities are valued with sixty days or less to maturity, the dif-
ference between the valuation existing on the sixty-first day before maturity
and maturity value is amortized on a straight-line basis to maturity. Invest-
ments maturing within sixty days from their date of acquisition are valued at
amortized cost, which approximates market value.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are be-
ing valued, or lacking any sales, at the closing bid price. Securities traded
in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the over-the-counter market. Options writ-
ten are valued at the last sale price in the case of exchange-traded options
or, in the case of option traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in the case
of exchange-traded options or, in the case of options traded in the over-the-
counter market, the last bid price. Futures contracts are valued at settlement
price at the close of the applicable exchange. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Company.
(b) Derivative financial instruments--Certain Funds may engage in various
portfolio strategies to seek to increase their returns by hedging its portfo-
lio against adverse movements in the equity, debt and currency markets. Losses
may arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
. Forward foreign exchange contracts--Certain Funds are authorized to enter
into forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Funds' records. However, the effect on operations is recorded from the date
the Funds enter into such contracts. Premium or discount is amortized over the
life of the contracts.
. Options--Certain Funds may write and purchase call and put options. When a
Fund writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid or received is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a clos-
ing transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
. Financial futures contracts--Certain Funds may purchase or sell futures con-
tracts and options on such futures contracts for the purpose
153
<PAGE>
- --------------------------------------------------------------------------------
of hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into
a contract, the Fund deposits and maintains as collateral such initial margin
as required by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a re-
alized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
. Foreign currency options and futures--Certain Funds may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar denominated securities owned
by the Fund, sold by the Fund but not yet delivered, or committed or antici-
pated to be purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign curren-
cies are recorded at the exchange rate prevailing when recognized. Assets and
liabilities denominated in foreign currencies are valued at the exchange rate
at the end of the period. Foreign currency transactions are the result of set-
tling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Company's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are re-
corded on the dates the transactions are entered into (the trade dates). Divi-
dend income is recorded on the ex-dividend dates. Dividends from foreign secu-
rities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis. Real-
ized gains and losses on security transactions are determined on the identified
cost basis.
(f) Deferred organization expenses and prepaid registration fees--Deferred or-
ganization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Funds
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. MLAM is responsible for the management of the Company's
portfolios and provides the necessary personnel, facilities, equipment and cer-
tain other services necessary to the operations of the Funds.
For such services, the Company pays a monthly fee based upon the average daily
value of each Funds' net assets at the following annual rates: 0.30% of the av-
erage daily net assets of the Index 500 Fund.
MLAM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an agree-
ment which limits the operating expenses paid by each Fund to 1.25% of its av-
erage daily net assets. Any expenses in excess of 1.25% of average daily net
assets will be reimbursed to the Fund by MLAM which, in turn, will be reim-
bursed by MLLA.
For the period January 1, 1997 to March 31, 1997, MLAM earned fees of $45,906
for the Index 500 Fund, all of which was voluntarily waived. In addition, MLAM
has also reimbursed the Index 500 Fund $1,193 in additional expenses.
Accounting services are provided to the Company by MLAM at cost.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidi-
ary of ML & Co., is the Company's transfer agent.
154
<PAGE>
- -------------------------------------------------------------------------------
Certain officers and/or directors of the Company are officers and/or direc-
tors of MLAM, PSI, MLFDS, Merrill Lynch Funds Distributor, Inc., a wholly-
owned subsidiary of Merrill Lynch Group, Inc., which is the Funds' distribu-
tor, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period January 1, 1997 to March 31, 1997 were as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PURCHASES SALES
- --------------------------------------------------------------------------------
<S> <C> <C>
Index 500 Fund.............................................. $68,915,885 $70,709
- --------------------------------------------------------------------------------
</TABLE>
Transactions in options written for the period January 1, 1997 to March 31,
1997 were as follows:
<TABLE>
<CAPTION>
INDEX 500 FUND
- ------------------------------------------------------------------------------
NOMINAL VALUE/
NUMBER OF
CONTRACTS
COVERED BY PREMIUMS
PUT OPTIONS WRITTEN WRITTEN OPTIONS RECEIVED
- ------------------------------------------------------------------------------
<S> <C> <C>
Outstanding put options written, beginning of peri-
od.................................................. -- --
Options written...................................... 300 $ 5,541
Options closed....................................... (300) (5,541)
---- -------
Outstanding put options written, end of period....... -- --
==== =======
- ------------------------------------------------------------------------------
</TABLE>
At March 31, 1997, net unrealized appreciation/depreciation and aggregate
cost for Federal income tax purposes were as follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
INDEX
500
FUND
- -------------------------------------------------------------------------------
<S> <C>
Appreciated securities........................................... $ 988,294
Depreciated securities........................................... (3,544,490)
------------
Net unrealized depreciation...................................... $ (2,556,196)
============
Cost for Federal income tax purposes............................. $102,424,244
============
- -------------------------------------------------------------------------------
</TABLE>
At March 31, 1997, net realized and unrealized gains (losses) were as fol-
lows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
INDEX 500
FUND
---------------------
REALIZED
GAINS UNREALIZED
(LOSSES) (LOSSES)
- -------------------------------------------------------------------------------
<S> <C> <C>
Long-term investments................................... $ 4,539 $(2,556,196)
Short-term Investments.................................. (936) --
Financial futures contracts............................. 383,535 (1,513,070)
Investment options purchased............................ 5,707 --
Investment options written.............................. 3,732 --
-------- -----------
$396,577 $(4,069,266)
======== ===========
- -------------------------------------------------------------------------------
</TABLE>
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
INDEX 500 FUND
- --------------------------------------------------------------------------------
FOR THE PERIOD JANUARY 1, 1997 TO DOLLAR
MARCH 31, 1997 (UNAUDITED) SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold........................................... 9,436,509 $102,247,743
Shares issued to shareholders in reinvestment of divi-
dends and distributions.............................. 1,829 18,482
--------- ------------
Total issued.......................................... 9,438,338 102,266,225
Shares redeemed....................................... (987,477) (10,871,594)
--------- ------------
Net increase.......................................... 8,450,861 $ 91,394,631
========= ============
- --------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIOD DECEMBER 13, 1996+ DOLLAR
TO DECEMBER 31, 1996 SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold........................................... 57,357 $ 582,138
Shares redeemed....................................... (10) (102)
--------- ------------
Net increase.......................................... 57,347 $ 582,036
========= ============
- --------------------------------------------------------------------------------
</TABLE>
+ Prior to December 13, 1996 (commencement of operations), the Fund issued
1,000,000 shares to MLA for $10,000,000.
155
<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.
Equity Growth 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:
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.
C-1
<PAGE>
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.
Equity Growth 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.
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.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of Registrant (a)
1(b) --Form of Articles Supplementary of Registrant (b)
1(c) --Form of Articles of Amendment of Registrant (c)
1(d) --Form of Articles Supplementary of Registrant (d)
1(e) --Form of Articles Supplementary of Registrant (e)
1(f) --Form of Articles Supplementary of Registrant (f)
1(g) --Articles Supplementary to Registrant's Articles of Incorporation
relating to the redesignation of shares of common stock as Merrill
Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World
Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus
Fund Common Stock and Merrill Lynch International Equity Focus Fund
Common Stock (s)
1(h) --Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of shares of common stock as Merrill
Lynch Developing Capital Markets Focus Fund Common Stock, Merrill
Lynch International Bond Fund Common Stock and Merrill Lynch
Intermediate Government Bond Fund Common Stock (u)
1(i) --Articles Supplementary to Registrant's Articles of Incorporation
relating to the designation of shares of common stock as Merrill
Lynch Index 500 Fund Common Stock (w)
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 of Class A and Class B shares*
2 --By-Laws of Registrant, as amended (g)
3 --None
4 --Specimen certificate for shares of common stock of Registrant (h)
5(a) --Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund
(i)
5(b) --Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund,
Merrill Lynch High Current Income Fund, Merrill Lynch Quality Equity
Fund and Merrill Lynch Equity Growth Fund (j)
5(c) --Form of Investment Advisory Agreement for Merrill Lynch Index 500
Fund (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 (t)
5(g) --Form of Investment Advisory Agreement for Merrill Lynch Developing
Capital Markets Focus Fund and Merrill Lynch Government Bond Fund (u)
5(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*
7 --None
8(a) --Form of Custodian Agreement (o)
8(b) --Form of Custodian Agreement with Brown Brothers Harriman & Co.*
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 ,
1997)
11 --Consent of Deloitte & Touche llp*
12 --None
13 --None
14 --None
15 --Form of Distribution Plan relating to Class B shares*
16 --Calculation of Performance Data (r)
24 --Power of Attorney for Robert S. Salomon, Jr. (v)
27 --Financial Data Schedules*
</TABLE>
C-3
<PAGE>
- --------
(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.
(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 Registration Statement.
(x) Incorporated by reference to Exhibit 1(j) to Post-Effective Amendment No.
27 to the Registration Statement.
(y) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No.
27 to the Registration Statement.
* Filed herewith.
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<PAGE>
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 1993 1996
------------------- ------------
<S> <C>
Common stock, par value $0.10 per share, Merrill Lynch
Domestic Money Market Fund Class............................. 3
Common stock, par value $0.10 per share, Merrill Lynch Reserve
Assets Fund Class............................................ 8
Common stock, par value $0.10 per share, Merrill Lynch Prime
Bond Fund Class.............................................. 4
Common stock, par value $0.10 per share, Merrill Lynch High
Current Income Fund Class.................................... 10
Common stock, par value $0.10 per share, Merrill Lynch Quality
Equity Fund Class............................................ 9
Common stock, par value $0.10 per share, Merrill Lynch Equity
Growth Fund Class............................................ 13
Common stock, par value $0.10 per share, Merrill Lynch Natural
Resources Focus Fund Class................................... 8
Common stock, par value $0.10 per share, Merrill Lynch
American Balanced Fund Class................................. 9
Common stock, par value $0.10 per share, Merrill Lynch Global
Strategy Focus Fund Class.................................... 12
Common stock, par value $0.10 per share, Merrill Lynch Basic
Value Focus Fund Class....................................... 8
Common stock, par value $0.10 per share, Merrill Lynch Global
Bond Focus Fund Class........................................ 14
Common stock, par value $0.10 per share, Merrill Lynch Global
Utility Focus Fund Class..................................... 7
Common stock, par value $0.10 per share, Merrill Lynch
International Equity Focus Fund Class........................ 7
Common stock, par value $0.10 per share, Merrill Lynch
Developing Capital Markets Focus Fund Class.................. 7
Common stock, par value $0.10 per share, Merrill Lynch
Government Bond Fund Class................................... 3
Common stock, par value $0.10 per share, Merrill Lynch Index
500 Fund Class............................................... 1
</TABLE>
- --------
The number of holders shown above includes holders of record plus beneficial
owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner and
Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Under Section 2-418 of the Maryland General Corporation Law, with respect to
any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
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
C-5
<PAGE>
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
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch 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 investment companies: Convertible Holdings, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of
MLAM, acts as the investment adviser for the following open-end investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc. Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc. and The Municipal Fund Accumulation Program, Inc.; and the following
closed-end investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
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
C-6
<PAGE>
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 February 1, 1993 for his own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn
is Executive Vice President, and Mr. Richard is Treasurer of all or
substantially all of the investment companies described in the preceding
paragraph. Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are
directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------------ ----------------------------------
<S> <C> <C>
ML&Co................... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and Director of
Princeton Services; Director of Merrill
Lynch Funds Distributors, Inc. ("MLFD");
Executive Vice President of ML&Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; President
President and Director of MLFD; Executive Vice
President and Director of Princeton
Services; President of Princeton
Administrators, L.P.; Director of MLFDS.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Michael J. Senior Vice President Senior Vice President of FAM; Senior Vice
Hennewinkel............ President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel and
General Counsel, Secretary of FAM; Senior Vice President,
Director and General Counsel, Director and Secretary of
Secretary Princeton Services; Director of MLFD.
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of
and Controller FAM; Senior Vice President and Controller
of Princeton Services.
Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------------ ----------------------------------
<S> <C> <C>
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;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD.
Ronald Welburn.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Anthony Wiseman......... Senior Vice President Senior Vice President of Princeton
Services.
</TABLE>
(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.
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 July 1,
1994, 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:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME MLAM U.K. 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 Vice President of the Manager
Director
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
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME MLAM U.K. OR EMPLOYMENT
---- ------------- ---------------------------
<S> <C> <C>
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 investment companies referred to in the first paragraph of Item 28
except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Fund, MuniYield Arizona Fund, MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield 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., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holdings, Inc. and Worldwide DollarVest, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Officers Crook,
Aldrich, Brady, Breen, Fatseas and Wasel, is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- ---- --------------------- ------------------------
<S> <C> <C>
Terry K. Glenn................... President Executive Vice President
Arthur Zeikel.................... Director President and Director
Philip L. Kirstein............... Director None
William E. Aldrich............... Senior Vice None
President
Robert W. Crook.................. Senior Vice None
President
Kevin Boman...................... Vice President None
Michael J. Brady................. Vice President None
William M. Breen................. Vice President None
Michael Clark.................... Vice President
Mark A. DeSario.................. Vice President None
James T. Fatseas................. Vice President None
Debra W. Landsman-Yaros.......... Vice President None
Michelle T. Lau.................. Vice President None
Gerald M. Richard................ Vice President Treasurer
and Treasurer
Sal Venezia...................... Vice President None
William Wasel.................... Vice President None
Robert Harris.................... Secretary None
</TABLE>
(c) Not applicable.
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<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of the Registrant, its Investment Adviser and its
Custodian and Transfer Agent.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "Directors" and "Investment
Adviser" in the Prospectus constituting Part A of the Registration Statement
and under the captions "Management of the Company" and "Investment Advisory
Arrangements" in the Statement of Additional Information constituting Part B
of the Registration Statement, Registrant is not a party to any management-
related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request, and without charge.
The Company hereby undertakes to comply with the restrictions on
indemnification set forth in Investment Company Act Release No. IC-11330,
September 2, 1980.
C-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS AMENDMENT PURSUANT TO ARTICLE
485(B) UNDER THE SECURITIES ACT OF 1933 AND 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 25 DAY OF APRIL, 1997.
Merrill Lynch Variable Series Fund,
Inc.
(Registrant)
/s/ Arthur Zeikel
By: _________________________________
(ARTHUR ZEIKEL, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------- Director (Principal April 25, 1997
(ARTHUR ZEIKEL) Executive Officer)
* Treasurer (Principal
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
* Director
- -------------------------------------
(WALTER MINTZ)
* Director
- -------------------------------------
(MELVIN R. SEIDEN)
* Director
- -------------------------------------
(STEPHEN B. SWENSRUD)
* Director
- -------------------------------------
(JOE GRILLS)
* Director
- -------------------------------------
(ROBERT S. SALOMON, JR.)
/s/ Arthur Zeikel
By: _________________________________ April 25, 1997
(ARTHUR ZEIKEL) Attorney-in-Fact
C-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
1(k) --Form of Articles of Amendment to Registrant's Articles
of Incorporation relating to designation of Class A and
Class B shares.
5(h) --Form of Sub-Advisory Agreement between Merrill Lynch
Asset Management L.P. and Merrill Lynch Asset Management
U.K. Limited.*
6(b) --Form of Distribution Agreement relating to the Class B
shares.
8(b) --Form of Custodian Agreement with Brown Brother Harriman
& Co.
11 --Consent of Deloitte & Touche llp*
15 --Form of Distribution Plan relating to Class B shares.*
27 --Financial Data Schedules*
</TABLE>
- --------
* Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. AMERICAN BALANCED FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 210545210
<RECEIVABLES> 1938079
<ASSETS-OTHER> 4434
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212487723
<PAYABLE-FOR-SECURITIES> 166848
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 273861
<TOTAL-LIABILITIES> 440709
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<PAID-IN-CAPITAL-COMMON> 175872424
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<SHARES-COMMON-PRIOR> 14031432
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<ACCUMULATED-NET-GAINS> 20595249
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. BASIC VALUE FOCUS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
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<SHARES-COMMON-PRIOR> 23391429
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<ACCUMULATED-NET-GAINS> 52901365
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42904143
<NET-ASSETS> 524930164
<DIVIDEND-INCOME> 5869178
<INTEREST-INCOME> 2321975
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<REALIZED-GAINS-CURRENT> 56406548
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<NUMBER-OF-SHARES-REDEEMED> (493551)
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<PER-SHARE-NAV-BEGIN> 13.10
<PER-SHARE-NII> .17
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<EXPENSE-RATIO> .66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
DEVELOPING CAPITAL MARKETS FOCUS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 91897323
<INVESTMENTS-AT-VALUE> 96192191
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<TOTAL-ASSETS> 98459051
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<SHARES-COMMON-PRIOR> 5922009
<ACCUMULATED-NII-CURRENT> 1752408
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<ACCUMULATED-NET-GAINS> (4054029)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4287298
<NET-ASSETS> 95598902
<DIVIDEND-INCOME> 2257621
<INTEREST-INCOME> 557486
<OTHER-INCOME> 0
<EXPENSES-NET> (957147)
<NET-INVESTMENT-INCOME> 1857960
<REALIZED-GAINS-CURRENT> (156983)
<APPREC-INCREASE-CURRENT> 4829141
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<DISTRIBUTIONS-OF-INCOME> (1385673)
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<NUMBER-OF-SHARES-SOLD> 4462492
<NUMBER-OF-SHARES-REDEEMED> (1027712)
<SHARES-REINVESTED> 151274
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<ACCUMULATED-NII-PRIOR> 1184973
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<GROSS-EXPENSE> 1009535
<AVERAGE-NET-ASSETS> 76155616
<PER-SHARE-NAV-BEGIN> 9.32
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> .76
<PER-SHARE-DIVIDEND> (.23)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.05
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. DOMESTIC MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 278879751
<INVESTMENTS-AT-VALUE> 278860287
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<TOTAL-ASSETS> 279943008
<PAYABLE-FOR-SECURITIES> 3197475
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (19464)
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<DIVIDEND-INCOME> 0
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<EXPENSES-NET> (1507384)
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<NUMBER-OF-SHARES-REDEEMED> (146504203)
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<GROSS-EXPENSE> 1507384
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<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. EQUITY GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 398248668
<INVESTMENTS-AT-VALUE> 451805311
<RECEIVABLES> 2225736
<ASSETS-OTHER> 3163
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<TOTAL-ASSETS> 454034210
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GLOBAL BOND FOCUS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GLOBAL STRATEGY FOCUS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GLOBAL UTILITY FOCUS FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
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<PER-SHARE-NAV-END> 12.19
<EXPENSE-RATIO> .66
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. GOVERNMENT BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 86879714
<INVESTMENTS-AT-VALUE> 87831280
<RECEIVABLES> 1785251
<ASSETS-OTHER> 1493
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89618024
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37232
<TOTAL-LIABILITIES> 37232
<SENIOR-EQUITY> 0
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<SHARES-COMMON-PRIOR> 3800136
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<ACCUMULATED-NET-GAINS> (154414)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 951566
<NET-ASSETS> 89580792
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3898013
<OTHER-INCOME> 7464
<EXPENSES-NET> (89566)
<NET-INVESTMENT-INCOME> 3815911
<REALIZED-GAINS-CURRENT> (154413)
<APPREC-INCREASE-CURRENT> (1012273)
<NET-CHANGE-FROM-OPS> 2649225
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3530361)
<DISTRIBUTIONS-OF-GAINS> (137668)
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<NUMBER-OF-SHARES-SOLD> 4677811
<NUMBER-OF-SHARES-REDEEMED> (215188)
<SHARES-REINVESTED> 354243
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<ACCUMULATED-NII-PRIOR> 199053
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<PER-SHARE-NAV-BEGIN> 10.79
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. HIGH CURRENT INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 410867543
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<ASSETS-OTHER> 5893
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 417565181
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<OTHER-ITEMS-LIABILITIES> 2950263
<TOTAL-LIABILITIES> 2950263
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<PAID-IN-CAPITAL-COMMON> 415750453
<SHARES-COMMON-STOCK> 36389781
<SHARES-COMMON-PRIOR> 31687165
<ACCUMULATED-NII-CURRENT> 3786391
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5478242)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 556316
<NET-ASSETS> 414614918
<DIVIDEND-INCOME> 883127
<INTEREST-INCOME> 37867841
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<REALIZED-GAINS-CURRENT> (3777610)
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<NUMBER-OF-SHARES-REDEEMED> (1968366)
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<GROSS-EXPENSE> 2096102
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. INDEX 500 FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 10844116
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<TOTAL-ASSETS> 10869716
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<OTHER-ITEMS-LIABILITIES> 54078
<TOTAL-LIABILITIES> 117876
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<SHARES-COMMON-PRIOR> 1000000
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<ACCUMULATED-NET-GAINS> (193)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 153134
<NET-ASSETS> 10751840
<DIVIDEND-INCOME> 7276
<INTEREST-INCOME> 9587
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<NET-INVESTMENT-INCOME> 16863
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<APPREC-INCREASE-CURRENT> 153134
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<NUMBER-OF-SHARES-REDEEMED> (10)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
INTERNATIONAL EQUITY FOCUS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
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<NUMBER-OF-SHARES-SOLD> 6562205
<NUMBER-OF-SHARES-REDEEMED> (886963)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. NATURAL RESOURCES FOCUS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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<GROSS-EXPENSE> 358882
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<PER-SHARE-NAV-END> 13.12
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. PRIME BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<ACCUMULATED-NET-GAINS> (15731248)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3687559
<NET-ASSETS> 538393728
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 35506054
<OTHER-INCOME> 58223
<EXPENSES-NET> (2418846)
<NET-INVESTMENT-INCOME> 33145431
<REALIZED-GAINS-CURRENT> 215210
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<GROSS-EXPENSE> 2418846
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<PER-SHARE-NAV-BEGIN> 12.45
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<PER-SHARE-NAV-END> 11.91
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. QUALITY EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<PAYABLE-FOR-SECURITIES> 1289280
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 794275228
<DIVIDEND-INCOME> 11052176
<INTEREST-INCOME> 5883776
<OTHER-INCOME> 3074
<EXPENSES-NET> (3495231)
<NET-INVESTMENT-INCOME> 13443795
<REALIZED-GAINS-CURRENT> 36740820
<APPREC-INCREASE-CURRENT> 67969744
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<DISTRIBUTIONS-OF-GAINS> (84325410)
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<NUMBER-OF-SHARES-SOLD> 1934738
<NUMBER-OF-SHARES-REDEEMED> (895337)
<SHARES-REINVESTED> 3478605
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> MERRILL LYNCH VARIABLE SERIES FUNDS, INC. RESERVE ASSETS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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<TOTAL-LIABILITIES> 322159
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22885623
<SHARES-COMMON-STOCK> 22885622
<SHARES-COMMON-PRIOR> 25535919
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (252)
<NET-ASSETS> 22885371
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1323908
<OTHER-INCOME> 0
<EXPENSES-NET> (144685)
<NET-INVESTMENT-INCOME> 1179223
<REALIZED-GAINS-CURRENT> 3049
<APPREC-INCREASE-CURRENT> (14201)
<NET-CHANGE-FROM-OPS> 1168071
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1179223)
<DISTRIBUTIONS-OF-GAINS> (3049)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6967844
<NUMBER-OF-SHARES-REDEEMED> (10800490)
<SHARES-REINVESTED> 1182349
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<ACCUMULATED-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 144685
<AVERAGE-NET-ASSETS> 23572806
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .61
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</TABLE>
<PAGE>
Exhibit 99.1(k)
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
designates all issued and unissued shares of the following funds as Class A
Shares:
Aggregate Number
Funds of Class B Shares
Merrill Lynch American Balanced Fund Common Stock 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000
Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000
Merrill Lynch Developing Capital Markets Focus Fund
Common Stock 100,000,000
Merrill Lynch Equity Growth Fund Common Stock 100,000,000
Merrill Lynch Global Bond Focus Fund Common Stock 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock 200,000,000
Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000
Merrill Lynch Government Bond Fund Common Stock 100,000,000
Merrill Lynch High Current Income Fund Common Stock 100,000,000
Merrill Lynch Index 500 Fund Common Stock 100,000,000
<PAGE>
Merrill Lynch International Equity Focus Fund Common Stock 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000
Merrill Lynch Prime Bond Fund Common Stock 100,000,000
Merrill Lynch Quality Equity Fund Common Stock 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock 500,000,000
(b) The Board of Directors of the Corporation, acting in accordance with
Section 2-105(c) of the General Corporation Law of the State of Maryland, hereby
increases the number of authorized shares of capital stock of the Corporation by
3,400,000,000, all of which shall be designated as Class B Shares and shall be
classified as follows:
Aggregate Number
Funds of Class A Shares
Merrill Lynch American Balanced Fund Common Stock 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000
Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common Stock 100,000,000
Merrill Lynch Equity Growth Fund Common Stock 100,000,000
Merrill Lynch Global Bond Focus Fund Common Stock 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock 200,000,000
Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000
Merrill Lynch Government Bond Fund Common Stock 100,000,000
Merrill Lynch High Current Income Fund Common Stock 100,000,000
Merrill Lynch Index 500 Fund Common Stock 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000
Merrill Lynch Prime Bond Fund Common Stock 100,000,000
Merrill Lynch Quality Equity Fund Common Stock 100,000,000
2
<PAGE>
Merrill Lynch Reserve Assets Fund Common Stock 500,000,000
(c) All of the Class B Shares, 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 3,400,000,000 shares of stock as follows:
Number of
Authorized
Funds Shares
Merrill Lynch American Balanced Fund Common Stock 100,000,000
Merrill Lynch Basic Value Focus Fund Common Stock 100,000,000
Merrill Lynch Domestic Money Market Fund Common Stock 1,300,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common Stock 100,000,000
Merrill Lynch Equity Growth Fund Common Stock 100,000,000
Merrill Lynch Global Bond Focus Fund Common Stock 200,000,000
Merrill Lynch Global Strategy Focus Fund Common Stock 200,000,000
Merrill Lynch Global Utility Focus Fund Common Stock 100,000,000
Merrill Lynch Government Bond Fund Common Stock 100,000,000
Merrill Lynch High Current Income Fund Common Stock 100,000,000
Merrill Lynch Index 500 Fund Common Stock 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock 100,000,000
Merrill Lynch Prime Bond Fund Common Stock 100,000,000
Merrill Lynch Quality Equity Fund Common Stock 100,000,000
Merrill Lynch Reserve Assets Fund Common Stock 500,000,000
3
<PAGE>
(b) All shares of the Corporation's capital stock have a par value of $0.10
per share. The aggregate par value of all the shares of all classes of the
Corporation's capital stock is currently Three Hundred Forty Million Dollars
($340,000,000).
(c) After the redesignation of all of the Corporation's issued and unissued
shares of Common Stock contemplated in Article THIRD(a) hereof and the increase
in the number of authorized shares of capital stock of the Corporation and
classification and designation of such shares pursuant to Article THIRD(b)
hereof, the Corporation will have authority to issue 6,800,000,000 shares of the
Corporation as follows:
Number of
Authorized
Funds Shares
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 Domestic Money Market Fund Common Stock -- 1,300,000,000
Class A
Merrill Lynch Developing Capital Markets Focus Fund Common
Stock -- Class A 100,000,000
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
- -- Class A 200,000,000
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
- -- Class A 100,000,000
Merrill Lynch Index 500 Fund Common Stock -- Class A 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock
- -- Class A 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock
- -- Class A 100,000,000
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
4
<PAGE>
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 Domestic Money Market Fund Common Stock -- Class B 1,300,000,000
Merrill Lynch Developing Capital Markets Focus Fund Common
Stock -- Class B 100,000,000
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 -- Class B 200,000,000
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 -- Class B 100,000,000
Merrill Lynch Index 500 Fund Common Stock -- Class B 100,000,000
Merrill Lynch International Equity Focus Fund Common Stock
- -- Class B 100,000,000
Merrill Lynch Natural Resources Focus Fund Common Stock -- Class B 100,000,000
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
FIFTH: All of the shares of Class A and Class B Common Stock shall have a
par value of $0.10 per share. After this increase in the number of authorized
shares of capital stock of the Corporation and designation of those shares as
Class B Shares, 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 amendments 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.
5
<PAGE>
SEVENTH: The foregoing amendments to the charter of the Corporation set
forth in Article THIRD (b) hereof have been approved by the Board of Directors
and the amendments are limited to changes expressly permitted by the Maryland
General Corporation Law to be made without action by the stockholders.
6
<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: Name:
Title: Title.
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
7
<PAGE>
Exhibit 99.5(h)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the _____ day of __________, 1997, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH VARIABLE SERIES FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as an open-end management investment
company with separate portfolios (the "Portfolios") and is registered under the
Investment Company Act of 1940, as amended (hereinafter referred to as the
"Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into investment advisory agreements (the
"Advisory Agreements") pursuant to which MLAM provides management and investment
and advisory services to the Fund; and
<PAGE>
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of MLAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall
provide MLAM with such investment research, advice and supervision as the latter
may from time to time consider necessary for the proper supervision of the
assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the
2
<PAGE>
assets of each Portfolio of the Fund shall be held in the various
securities in which the Portfolio invests, options, futures, options on futures
or cash; all of the foregoing subject always to the restrictions of the Articles
of Incorporation and By-Laws of the Fund, as they may be amended and/or restated
from time to time, the provisions of the Investment Company Act and the
statements relating to the Portfolio's investment objective(s), investment
policies and investment restrictions as the same are set forth in the currently
effective prospectus and statement of additional information relating to the
shares of the Fund under the Securities Act of 1933, as amended (the
"Prospectus" and "Statement of Additional Information", respectively). MLAM U.K.
shall make recommendations and effect transactions with respect to foreign
currency matters, including foreign exchange contracts, foreign currency
options, foreign currency futures and related options on foreign currency
futures and forward foreign currency transactions. MLAM U.K. shall also make
recommendations or take action as to the manner in which voting rights, rights
to consent to corporate action and any other rights pertaining to the portfolio
securities of the Fund shall be exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of MLAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof
3
<PAGE>
and shall pay all compensation of officers of the Fund and all Directors of
the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by MLAM and MLAM U.K. but in no event in excess of the amount that
MLAM actually receives for providing services to the Fund pursuant to the
Advisory Agreements.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of subadvisory services rendered with respect to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of
MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM
U.K.(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It
4
<PAGE>
is understood that Directors, officers, employees and shareholders of the
Fund are or may become interested in MLAM U.K. and its affiliates, as directors,
officers, employees and shareholders or otherwise and that directors, officers,
employees and shareholders of MLAM U.K. and its affiliates are or may become
similarly interested in the Fund, and that MLAM U.K. and directors, officers,
employees, partners and shareholders of its affiliates may become interested in
the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO
directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
5
<PAGE>
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective with respect to each Portfolio as of
the date first above written and shall remain in force until the date of
termination of the Advisory Agreement relating to such Portfolio (but not later
than two years after the date hereof) and thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the Directors of
the Fund or by the vote of a majority of the outstanding voting securities of
such Portfolio and (ii) a majority of those Directors who are not parties to
this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement may be terminated with respect to a Portfolio at any time,
without the payment of any penalty, by MLAM or by vote of a majority of the
outstanding voting securities of such Portfolio, or by MLAM U.K., on sixty days'
written notice to the other party. This Agreement shall automatically terminate
with respect to each Portfolio in the event of its assignment or in the event of
the termination of the Advisory Agreement relating to such Portfolio. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the Directors of the Fund or by the
vote of a majority of outstanding voting securities of each Portfolio and (ii) a
majority of those Directors who are not parties to
6
<PAGE>
this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the lnvestment
Company Act, the latter shall control.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.,
its General Partner
By:
-----------------------------
Name:
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED
By:
-----------------------------
Name:
Title:
8
<PAGE>
Exhibit 99.6(b)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made this day of , ,
------ ------------------ ----
between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corporation organized under
the laws of Maryland (the "Company"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC.,
a Delaware corporation ("MLFD");
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is registered under the Investment
Company Act of 1940, as amended to date (the "Investment Company Act"), as a
diversified open-end investment company and it is affirmatively in the interest
of the Company to offer its shares for sale continuously to the separate
accounts (the "Separate Accounts") of insurance companies (the "Insurance
Companies") pursuant to a currently effective prospectus (the "Prospectus")
under the Securities Act of 1933 (the "Securities Act"); and
WHEREAS, the Company comprises sixteen separate funds (the
"Funds"), each of which pursues its own investment objective through separate
investment policies, and may in the future comprise one or more additional
funds; and
WHEREAS, MLFD is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Company and MLFD wish to enter into an agreement
with each other with respect to the continuous offering to the Insurance
Companies for their Separate Accounts of shares of the Class B Common Stock, par
value $.10 per share, of each Fund
<PAGE>
(the "Class B Shares"), in order to promote the growth of the Funds and
facilitate the distribution of their Class B Shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of MLFD. The Company hereby appoints MLFD as
-------------------
the principal underwriter and distributor of the Funds to sell their Class B
Shares to the Insurance Companies for their Separate Accounts and MLFD hereby
accepts such appointment. The Company, during the term of this Agreement, shall
sell its Class B Shares to MLFD upon the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties. MLFD shall be the exclusive
--------------------------
representative of the Company to act as principal underwriter and distributor of
the Class B Shares.
Section 3. Purchase of Class B Shares from the Company.
-------------------------------------------
(a) The Company will offer its Class B Shares and MLFD shall have the
right to buy from the Company the Class B Shares needed, but not more than the
Class B Shares needed (except for clerical errors in transmission) to fill
unconditional orders for the Class B Shares placed with MLFD by the Insurance
Companies for their Separate Accounts. The price which MLFD shall pay for the
Class B Shares so purchased from the Company shall be the net asset value per
share, determined as set forth in Section 3(c) hereof.
(b) The Class B Shares are to be resold by MLFD to the Insurance
Companies for their Separate Accounts at the net asset value per share.
(c) The net asset value of the Class B Shares shall be determined as
of fifteen minutes following the close of trading on
2
<PAGE>
each day the New York Stock Exchange is open for business, in accordance with
the method set forth in the Prospectus of the Company and guidelines established
by the Board of Directors of the Company. The Company may also cause the net
asset value of the Class B Shares to be determined in substantially the same
manner or estimated in such manner and as of such other hour or hours as may
from time to time be agreed upon in writing by the Company and MLFD. All
payments to the Company hereunder shall be made in the manner set forth in
Section 3(e).
(d) The Company shall have the right to suspend the sale of the Class
B Shares at times when redemption of any Class B Shares is suspended pursuant to
the condition set forth in Section 4(b) hereof. The Company shall also have the
right to suspend the sale of the Class B Shares if trading on the New York Stock
Exchange shall have been suspended, if a banking moratorium shall have been
declared by Federal or New York authorities, or if there shall have been some
other extraordinary event which, in the judgment of the Company, makes it
impracticable to sell Class B Shares.
(e) The Company, or any agent of the Company designated in writing by
the Company, shall be promptly advised of all purchase orders for the Class B
Shares received by MLFD. The Company (or its agent) will confirm orders upon
their receipt, will make appropriate book entries and, upon receipt by the
Company (or its agent) of payment therefor, will deliver deposit receipts or
certificates for such Class B Shares pursuant to the instructions of MLFD.
Payment shall be made to the Company in New York Clearing
3
<PAGE>
House funds. MLFD agrees to cause such payment and such instructions to be
delivered promptly to the Company (or its agent).
Section 4. Repurchase or Redemption of Class B Shares by the Company.
---------------------------------------------------------
(a) Any of the outstanding Class B Shares may be tendered for
redemption at any time, and the Company agrees to repurchase or redeem any such
Class B Shares so tendered in accordance with its obligations as set forth in
Article VII of its Articles of Incorporation, as amended from time to time, and
in accordance with the applicable provisions set forth in the Prospectus of the
Company. The price to be paid to redeem or repurchase Class B Shares shall be
equal to the net asset value per share calculated in accordance with the
provisions of Section 3(c) hereof. All payments by the Company hereunder shall
be made in the manner set forth below.
The Company shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of MLFD in
New York Clearing House funds on or before the third business day subsequent to
its having received the notice of redemption in proper form.
(b) Redemption of Class B Shares of a Fund or payment therefor may be
suspended for any period during which trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission or such
Exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Securities and
4
<PAGE>
Exchange Commission as a result of which disposal of securities or determination
of the net asset value of such Fund is not reasonably practicable, and for such
other periods as the Securities and Exchange Commission may by order permit for
the protection of shareholders of the Fund.
Section 5. Duties of the Company.
(a) The Company shall furnish to MLFD copies of all information,
financial statements and other papers which MLFD may reasonably request for use
in connection with the distribution of Class B Shares of the Company, and this
shall include one certified copy, upon request by MLFD, of all financial
statements prepared for the Company by independent public accountants. The
Company shall make available to MLFD such number of copies of its Prospectus as
MLFD shall reasonably request.
(b) The Company shall take, from time to time, but subject to the
necessary approval of its shareholders, all necessary action to fix the number
of its authorized Class B Shares and to register Class B Shares under the
Securities Act, to the end that there will be available for sale such number of
Class B Shares as investors may reasonably be expected to purchase.
(c) The Company shall use its best efforts to qualify and maintain
the qualification of an appropriate number of the Class B Shares for sale under
the securities laws of such states as MLFD and the Company may approve, if such
qualification is required by such securities laws. Any such qualification may
be withheld, terminated or withdrawn by the Company at any time in its
discretion. As provided in Section 7(b) hereof, the expense of
5
<PAGE>
qualification and maintenance of qualification of the Class B Shares shall be
borne by the Company for the account of each Fund. MLFD shall furnish such
information and other material relating to its affairs and activities as may be
required by the Company in connection with such qualification.
(d) The Company will furnish, in reasonable quantities upon request
by MLFD, copies of annual and interim reports of the Company.
Section 6. Duties of MLFD.
(a) MLFD shall devote reasonable time and effort to effect sales of
Class B Shares of the Company, but shall not be obligated to sell any specific
number of Class B Shares. The services of MLFD hereunder are not to be deemed
exclusive and nothing herein contained shall prevent MLFD from entering into
distribution arrangements with other investment companies so long as the
performance of its obligations hereunder is not impaired thereby.
(b) In selling the Class B Shares of the Company, MLFD shall use its
best efforts in all respects duly to conform with the requirements of all
federal and state laws and regulations and the regulations of the National
Association of Securities Dealers, Inc. (the "NASD"), relating to the sale of
such securities. Neither MLFD nor any Insurance Company nor any other person is
authorized by the Company to give any information or to make any
representations, other than those contained in the registration statement or
related Prospectus and any sales literature specifically approved by the
Company.
6
<PAGE>
(c) MLFD shall require each Insurance Company to which it sells, and
which purchases, Class B Shares to enter into a Sub-Agreement with the Company
substantially in the form attached to the Distribution Plan agreed to by MLFD in
accordance with Rule 12b-1 under the Investment Company Act, which authorizes
the payment of a distribution fee to such Insurance Company.
Section 7. Payment of Expenses.
-------------------
(a) The Company shall bear all costs and expenses of the Company
relating to the Funds, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
registration statements and prospectuses under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and the expense of
preparing, printing, mailing and otherwise, distributing prospectuses, annual or
interim reports to shareholders and proxy materials.
(b) The Company shall bear, for the account of the Funds, the costs
and expenses of qualification of the Class B Shares for sale, and, if necessary
or advisable in connection Therewith, the Company shall bear the cost and
expense of qualifying the Company as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Company and
MLFD pursuant to Section 5(c) hereof and the cost and expenses payable to each
such state for continuing qualification therein until the Company decides to
discontinue such qualification pursuant to Section 5(c) hereof.
Section 8. Indemnification.
---------------
7
<PAGE>
(a) The Company shall, for the account of the Funds, indemnify and
hold harmless MLFD and each person, if any, who controls MLFD against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or expense
and reasonable counsel fees incurred in connection therewith) arising by reason
of any person acquiring any Class B Shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that the
registration statement or related prospectus, as from time to time amended and
supplemented, or the annual or interim reports to shareholders of the Company
relating to the Funds, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, unless such statement or omission
was made in reliance upon, and in conformity with, information furnished to the
Company in connection therewith by or on behalf of MLFD; provided, however that
--------- -------
in no case (i) is the indemnity of the Company in favor of MLFD and any such
controlling persons to be deemed to protect MLFD or any such controlling persons
thereof against any liability to the Company or its security holders to which
MLFD or any such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of reckless disregard of its obligations and duties under
this Agreement; or (ii) is the Company to be liable under its indemnity
agreement contained in this paragraph with respect to any claim made against
MLFD or any such controlling persons, unless
8
<PAGE>
MLFD or such controlling persons, as the case may be, shall have notified the
Company in writing within a reasonable time after the summons or other first
legal process giving information or the nature of the claim shall have been
served upon MLFD or such controlling persons (or after MLFD or such controlling
persons shall have received notice of such service on any designated agent), but
failure to notify the Company of any such claim shall not relieve it from any
liability which it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in this
paragraph. The Company will be entitled to participate at its own expense in
the defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Company elects to assume the defense,
such defense shall be conducted by counsel chosen by it and satisfactory to MLFD
or such controlling person or persons, defendant or defendants in the suit. In
the event the Company elects to assume the defense of any such suit and retain
such counsel, MLFD or such controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Company does not elect to assume the
defense of any such suit, it will reimburse MLFD or such controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Company shall promptly notify
MLFD of the commencement of any litigation or proceedings against it or any of
its officers or directors in connection with the issuance or sale of the Class B
Shares.
9
<PAGE>
(b) MLFD shall indemnify and hold harmless the Company and each of its
directors and officers and each person, if any, who controls the Company against
any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect
to statements or omissions made in reliance upon, and in conformity with,
information furnished to the Company with respect to the Funds in writing by or
on behalf of MLFD for use in connection with the registration statement or
related prospectus, as from time to time amended, or the annual or interim
reports to shareholders. In case any action shall be brought against the
Company or any person so indemnified, in respect of which indemnity may be
sought against MLFD, MLFD shall have the rights and duties given to the Company,
and the Company and each person so indemnified shall have the rights and duties
given to MLFD by the provisions of subsection (a) of this Section 8.
Section 9. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first above written and shall remain in
force as to each Fund until the second anniversary and thereafter, but only so
long as such continuance is specifically approved at least annually by (i) the
Board of Directors of the Company, or by the vote of a majority of the
outstanding voting securities of the Fund, cast in person or by proxy, and (ii)
a majority of those directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting upon such approval.
10
<PAGE>
This Agreement may be terminated at any time as to a Fund, without the
payment of any penalty, by the Board of Directors of the Company or by vote of a
majority of the outstanding voting securities of the Fund, or by the Adviser, on
sixty days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 10. Amendments of this Agreement. This Agreement may be
-------------------------------
amended by the parties only if such amendment is specifically approved by (i)
the Board of Directors of the Company, or by the vote of a majority of
outstanding voting securities of the Funds affected by the amendment, and (ii) a
majority of those directors of the Company who are not parties to this Agreement
or interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
Section 11. Governing Law. This Agreement shall be construed in
-------------
accordance with the laws of the State of New York and the applicable provisions
of the Investment Company Act. To the extent the applicable law of the State of
New York, or any of the
11
<PAGE>
provisions herein, conflicts with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written in New York, New York.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
By
--------------------------------
President
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
BY
----------------------------------
President
12
<PAGE>
EXHIBIT 99.8b
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. -
DEVELOPING CAPITAL MARKETS FOCUS FUND
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this 10th day of July, 1996, between MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.-DEVELOPING CAPITAL MARKETS FOCUS FUND (the "Fund") and Brown
Brothers Harriman & Co. (the "Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as a custodian for
the term and subject to the provisions of this Agreement. The Custodian shall
not be under any duty or obligation to require the Fund to deliver to it any
securities or funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so delivered. The Fund
will deposit with the Custodian copies of the Certificate of Incorporation and
By-Laws (or comparable documents) of the Fund and all amendments thereto, and
copies of such votes and other proceedings of the Fund as may be necessary for
or convenient to the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed pursuant
to the provisions of Section 3 hereof, the Custodian shall have and perform the
following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund that have been
-----------
delivered to the Custodian and from time to time
-1-
<PAGE>
to receive delivery of securities for safekeeping.
-2-
<PAGE>
B. Manner of Holding Securities - To hold securities of tbe Fund (1)
----------------------------
by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form, or (2) in
book-entry form by a Securities System (as said term is defined in Section
2S).
C. Registered Name; Nominee - To hold registered securities of the
------------------------
Fund (l) in the name or any nominee name of the Custodian or the Fund, or in
the name or any nominee name of any agent appointed pursuant to Section 5E, or
(2) in street certificate form, so-called, and in any case with or without any
indication of fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section V
---------
on Page 14, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2S) of the Custodian maintained with such Securities System or
Subcustodian, so long
-3-
<PAGE>
as such payment instructions to Securities System or Subcustodian include a
requirement that delivery is only against payment of securities, and (ii) in the
case of time deposits, call account, deposits, currency deposits, and other
deposits, contracts or options pursuant to Sections 2K, 2L and 2M, the Custodian
may make payment therefor without receiving an instrument evidencing said
deposit so long as such payment inetructions detail specific securities to be
acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange securities
---------
held by it for the account of the Fund for other securities in connection with
any reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without such instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian and further provided custodian shall at the time of
surrendering securities or instruments receive a receipt or other evidence of
ownership thereof.
F. Sales of Securities - Upon receipt of proper
-------------------
-4-
<PAGE>
instructions, to make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor (1) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer, or
(2) by credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the Custodian with a
Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct a
-------------------
subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor
-5-
<PAGE>
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Riqhts, Etc. - To receive and collect all stock
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Borrowings - Upon receipt of proper instructions, to deliver securities
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
K. Demand Deposit Bank Accounts - To open and operate an
-6-
<PAGE>
account or accounts in the name of the Fund on the Custodian's books subject
only to draft or order by the Custodian. All funds received by the Custodian
from or for the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U. S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open and
operate an additional account(s) in such other banks or trust companies as may
be designated by the Fund in such instructions (any such bank or trust company
so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) shall be in the name of the
Custodian for account of the Fund and subject only to the Custodian's draft or
order. Such accounts may be opened with Banking Institutions in the United
States and in other countries and may be denominated in either U. S. Dollars or
other currencies as the Fund may determine. All such deposits shall be deemed to
be portfolio securities of the Fund and accordingly the responsibility of the
Custodian therefore shall be the same as and neither lesser nor greater than the
Custodian's responsibility in respect of other portfolio securities of the Fund.
L. Interest Bearing Call or Time Deposits - To place interest bearing fixed term
and call deposits with such banks and
-7-
<PAGE>
in such amounts as the Fund may authorize pursuant to proper instructions. Such
deposits may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U. S.
Dollars or other currencies and need not be evidenced by the issuance or
delivery of a certificate to the Custodian, provided that the Custodian shall
include in its records with respect to the assets of the Fund, appropriate
notation as to the amount and currency of each such deposit, the accepting
Banking Institution, and other appropriate details. Such deposits, other than
those placed with the Custodian, shall be deemed portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks, as described in
Section K of this agreement. The responsibility of the Custodian for such
deposits accepted on the Custodian's books shall be that of a U. S. bank for a
similar deposit.
M. Foreign Exchange Transactions and Futures Contracts - Pursuant to proper
---------------------------------------------------
instructions, to enter into foreign exchange contracts or options to purchase
and sell foreign currencies for spot and future delivery on behalf and for the
account of the Fund. Such transactions may be undertaken by the Custodian with
such Banking Institutions, including the Custodian and Subcustodian(s) as
principals, as approved and authorized by the Fund. Foreign exchange contracts
and options other than those
-8-
<PAGE>
executed with the custodian, shall be deemed to be portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks as described in
Section 2-K of this agreement. Upon receipt of proper instructions, to receive
and retain confirmations evidencing the purchase or sale of a futures contract
or an option on a futures contract by the Fund; to deposit and maintain in a
segregated account, for the benefit of any futures commission merchant or to pay
to such futures commission merchant, assets designated by the fund as initial,
maintenance or variation "margin" deposits intended to secure the Fund's
performance of its obligations under any futures contracts purchased or sold or
any options on futures contracts written by the Fund, in accordance with the
provisions of any agreement or agreements among any of the Fund, the Custodian
and such futures commission merchant, designated to comply with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding such margin deposits; and to release
and/or transfer assets in such margin accounts only in accordance with any such
agreements or rules.
N. Stock Loans - Upon receipt of proper instructions to deliver securities
-----------
of the Fund, in connection with loans of securities by the Fund, to the borrower
thereof upon the receipt of the cash collateral, if any, for such borrowing. In
the event
-9-
<PAGE>
U.S. Government securities are to be used as collateral, the Custodian will not
release the securities to be loaned until it has received confirmation that such
collateral has been delivered to the Custodian. The Custodian and Fund
understand that the timing of receipt of such confirmation will normally require
that the delivery of securities to be loaned will be made one day after receipt
of the U. S. Government collateral.
O. Collections - To collect, receive and deposit in said account or
-----------
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund or in connection with transfer
of securities, and pursuant to proper instructions to take such other actions
with respect to collection or receipt of funds or transfer of securities which
involve an investment decision.
P. Dividends, Distributions and Redemptions - Upon receipt of proper
----------------------------------------
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or
-10-
<PAGE>
securities, insofar as available, for the payment of dividends or other
distributions to Fund shareholders. Upon receipt of proper instructions from the
Fund, or upon receipt of instructions from the Shareholder Servicing Agent
(given by such person or persons and in such manner on behalf of the Shareholder
Servicing Agent as the Fund shall have authorized), the Custodian shall release
funds or securities, insofar as available, to the Shareholder Servicing Agent or
as such Agent shall otherwise instruct for payment to Fund shareholders who have
delivered to such Agent a request for repurchase or redemption of their shares
of capital stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
----------------------
forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
R. Bills - Upon receipt of proper instructions from the Administrator, to
-----
pay or cause to be paid, insofar as funds are available for the purpose, bills,
statements, or other obligations of the Fund.
-11-
<PAGE>
S. Deposit of Fund Assets in Securities Systems - The Custodian may deposit
--------------------------------------------
and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 which acts
as a securities depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in accordance
with applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
-12-
<PAGE>
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of the
Fund upon (i) receipt of advice from the Securities System that such securities
have been transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the account of
the Fund. The Custodian shall Transfer securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian or an Agent as referred to above, and
be provided to the Fund at its request. The Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the Securities System
for the account of the Fund on the next business day;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on
-13-
<PAGE>
the Securities System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the Securities System; and
the Custodian and such Agents shall send to the Fund such reports on their own
systems of internal accounting control as the Fund may reasonably request from
time to time.
5) At the written request of the Fund, the Custodian will terminate the use
of any such Securities System on behalf of the Fund as promptly as practicable.
T. Other Transfers - Upon receipt of Proper Instructions, to deliver
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made.
U. Investment Limitations - In performing its duties generally, and more
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, the Custodian may assume unless and until notified in
writing to the contrary that proper instructions received by it are not in
-14-
<PAGE>
conflict with or in any way contrary to any provisions of the Fund's Certificate
of Incorporation or By-Laws (or comparable documents) or votes or proceedings of
the shareholders or Directors of the Fund. The Custodian shall in no event be
liable to the Fund and shall be indemnified by the Fund for any violation which
occurs in the course of carrying out instructions given by the Fund of any
investment limitations to which the Fund is subject or other limitations with
respect to the Fund's powers to make expenditures, encumber securities, borrow
or take similar actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a tested telex from
the Fund or a written request, direction, instruction or certification signed or
initialled on behalf of the Fund by two or more persons as the Board of
Directors of the Fund shall have from time to time authorized, provided,
however, that no such instructions directing the delivery of securities or the
payment of funds to an authorized signatory of the Fund shall be signed by such
person. Those persons authorized to give proper instructions may be identified
by the Board of Directors by name, title or position and will include at least
one officer empowered by the Board to name other individuals who are authorized
to give proper instructions on behalf of the Fund. Telephonic or other oral
instructions given by any one of the above persons will be considered proper
instructions if the Custodian reasonably believes them to have been given by a
person
-15-
<PAGE>
authorized to give such instructions with respect to the transaction involved.
Oral instructions will be confirmed by tested telex or in writing in the manner
set forth above but the lack of such confirmation shall in no way affect any
action taken by the Custodian in reliance upon such oral instructions. The Fund
authorizes the Custodian to tape record any and all telephonic or other oral
instructions given to the Custodian by or on behalf of the Fund (including any
of its officers, Directors, employees or agents) and will deliver to the
Custodian a similar authorization from any investment manager or adviser or
person or entity with similar reponsibilities which is authorized to give proper
instructions on behalf of the Fund to the Custodian. Proper instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
Proper instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
3. Securities, funds and other property of the Fund may be held by
subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and
-16-
<PAGE>
regulations thereunder) to act as a Subcustodian for the Fund, provided that the
Fund shall have approved in writing (1) any such bank or trust company and the
subcustodian agreement to be entered into between such bank or trust company and
the Custodian, and (2) if the subcustodian is a bank organized under the laws of
a country other than the United States, the holding of securities, cash and
other property of the Fund in the country in which it is proposed to utilize the
services of such subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to notify each Subcustodian of its appointment
as such. The Custodian may, at any time in its discretion, remove any bank or
trust company that has been appointed as a Subcustodian but will promptly notify
the Fund of any such action.
Those Subcustodians, their offices or branches which the Fund has approved
to date are set forth on Appendix A hereto. Such Appendix shall be amended from
time to time as Subcustodians, branches or offices are changed, added or
deleted. The Fund shall be responsible for informing the Custodian sufficiently
in advance of a proposed investment which is to be held at a location not listed
on Appendix A, in order that there shall be sufficient time for the Fund to give
the approval required by the preceding paragraph and for the Custodian to put
the appropriate arrangements in place with such Subcustodian pursuant to such
subcustodian agreement.
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<PAGE>
Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, in the event that an investment is
made prior to approval, if practical, such security shall be removed to an
approved location or if not practical such security shall be held by such agent
as the Custodian may appoint. In such event, the Custodian shall be liable to
the Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent and provided that the Custodian shall pursue its rights against such
agent.
In the event that any Subcustodian appointed pursuant to the provisions of
this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian and, if necessary or desirable, appoint
another subcustodian in accordance with the provisions of this Section 3. At the
election of the Fund, it shall have the right to enforce, to the extent
permitted by the subcustodian agreement and applicable law, the Custodian's
rights against any such Subcustodian for loss or damage caused the Fund by such
Subcustodian.
At the written request of the Fund, the Custodian will
-18-
<PAGE>
terminate any subcustodian Appointed pursuant to the provisions of this Section
3 in accordance with the termination provisions under the applicable
subcustodian agreement. The Custodian will not amend any subcustodian agreement
or agree to change or permit any changes thereunder except upon the prior
written approval of the Fund.
In the event the Custodian receives a claim from a Subcustodian under the
indemnification provisions of any subcustodian agreement, the Custodian shall
promptly give written notice to the Fund of such claim. No more than thirty days
after written notice to the Fund of the Custodian's intention to make such
payment, the Fund will reimburse the Custodian the amount of such payment except
in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to Fund
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
5. A. The Custodian shall not be liable for any action taken or omitted in
reliance upon proper instructions believed by it to be genuine or upon any other
written notice, request, direction, instruction, certificate or other instrument
believed by it to be genuine and signed by the proper party or parties.
The Chairman of the Board of the Fund shall certify to the Custodian the
names, signatures and scope of authority of all persons authorized to give
proper instructions or any other such
-19-
<PAGE>
notice, request, direction instruction, certificate or instrument on behalf of
the Fund, the names and signatures of the officers of the Fund, the name and
address of the Shareholder Servicing Agent, and any resolutions, votes,
instructions or directions of the Fund's Board of Directors or shareholders.
Such certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and may be considered in full force and
effect until receipt of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund, (but only to
the extent such expenses are reasonable) to receive and act upon advice of
counsel (who may be counsel for the Fund) on all matters, and the Custodian
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
B. With respect to the portfolio securities, cash and other property of the
Fund held by a Securities System, the Custodian shall be liable to the Fund only
for any loss or damage to the Fund resulting from use of the Securities System
if caused by any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from any
-20-
<PAGE>
failure of the Custodian or any such agent to enforce effectively such rights as
it may have against the Securities System.
C. The Custodian shall be liable to the Fund for any loss or damage to the
Fund caused by or resulting from the acts or omissions of any Subcustodian if
such acts or omissions would be deemed to be negligence, gross negligence or
willful misconduct hereunder if such acts or omissions were those of the
Custodian taken or omitted by the Custodian in the country in which the
Subcustodian is operating. The Custodian shall also be liable to the Fund for
its own negligence in transmitting any instructions received by it from the Fund
and for its own negligence in connection with the delivery of any securities or
funds held by it to any Subcustodian.
D. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein shall
exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and its
nominees from all claims and liabilities (including reasonable counsel fees)
incurred or assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its
-21-
<PAGE>
or its nominee's breach of the relevant standard of conduct set forth in this
Agreement. Without limiting the foregoing indemnification obligation of the
Fund, the Fund agrees to indemnify the Custodian and its nominees against any
liability the Custodian or such nominee may incur by reason of taxes assessed to
the Custodian or such nominee or other costs, liability or expense incurred by
the Custodian or such nominee resulting directly or indirectly from the fact
that portfolio securities or other property of the Fund is registered in the
name of the Custodian or such nominee.
In order that the indemnification provisions contained in this Paragraph
5-C shall apply, however, it is understood that if in any case the Fund may be
asked to indemnify or hold the Custodian harmless, the Fund shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
against the Fund. The Fund shall have the option to defend the Custodian against
any claim which may be the subject of this indemnification, and in the event
that the Fund so elects it will so notify the Custodian, and thereupon the Fund
shall take over complete defense of the claim, and the Custodian shall in such
situation initiate no further legal or other expenses for which
-22-
<PAGE>
it shall seek indemnification under this Paragraph 5-C. The Custodian shall in
no case confess any claim or make any compromise in any case in which the Fund
will be asked to indemnify the Custodian except with the Fund's prior written
consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalizaton, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution; or any
other similar act or event beyond the Custodian's control.
E. The Custodian shall be entitled to receive reimbursement from the Fund on
demand, in the manner provided in Section 6, for its cash disbursements,
expenses and charges (including the fees and expenses of any Subcustodian or any
Agent) in connection with this Agreement, but excluding salaries and usual
overhead expenses.
-23-
<PAGE>
F. The Custodian may at any time or times in its discretion appoint (and may
at any time remove) any other bank or trust company as its agent (an "Agent") to
carry out such of the provisions of this Agreement as the Custodian may from
time to time direct, provided, however, that the appointment of such Agent
(other than an Agent appointed pursuant to the third paragraph of Section 3)
shall not relieve the Custodian of any of its responsibilities under this
agreement.
G. Upon request, the Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or desirable
in connection with the performance by the Custodian or any Subcustodian of their
respective obligations under this Agreement or any applicable subcustodian
agreement.
6. The Fund shall pay the Custodian a custody fee based on such fee schedule
as may from time to time be agreed upon in writing by the Custodian and the
Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 5D, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the Custodian.
7. This Agreement shall continue in full force and effect until terminated by
either party by an instrument in writing delivered or mailed, postage prepaid,
to the other party, such termination to take effect not sooner than seventy five
(75) days
-24-
<PAGE>
after the date of such delivery or mailing. In the event of termination the
Custodian shall be entitled to receive prior to delivery of the securities,
funds and other property held by it all accrued fees and unreimbursed expenses
the payment of which is contemplated by Sections 5D and 6, upon receipt by the
Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
8. This Agreement constitutes the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof. No provision of this
Agreement may be amended or terminated except by a statement in writing signed
by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and the Fund
may agree in writing from time to time on such provisions interpretative of or
in addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the
-25-
<PAGE>
preceding sentence shall be deemed to be an amendment of this Agreement.
9. This instrument is executed and delivered in The Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
10. Notices and other writings delivered or mailed postage prepaid to the Fund
addressed to the Fund in care of Merrill Lynch Asset Management, Inc., 800
Scudders Mill Road, Plainsboro, New Jersey 08536, Mailing address: Post Office
Box 9011, Princeton, New Jersey 08543, Attention: Mr. Gerald M. Richard, Senior
Vice President/Treasurer, or to such other address as the Fund may have
designated to the Custodian in writing, or to the Custodian at 40 Water Street,
Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to
such other address as the Custodian may have designated to the Fund in writing,
shall be deemed to have been properly delivered or given hereunder to the
respective addressee.
11. This Agreement shall be binding on and shall inure to the benefit of the
Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
12. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when
one or more counterparts have been signed and delivered by each of the parties.
-26-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.-
DEVELOPING CAPITAL MARKETS
FOCUS FUND BROWN BROTHERS HARRIMAN & CO.
By /s/ Gerald M. Richard per/pro /s/ Stockley P. Towles
------------------------------ ------------------------------
GERALD M. RICHARD, TREASURER Partner
Stokley P. Towles, Partner
-27-
<PAGE>
AMENDMENT TO THE CUSTODIAN AGREEMENT
AMENDMENT entered into as of this lOth day of July, 1996 to the
Custodian Agreement between MERRILL LYNCH VARLABLE SERIES FUNDS, INC.- MERRILL
LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND. (the "Fund") and BROWN BROTHERS
HARRIMAN & CO. (the "Custodian") dated as of July 10, 1996 (the "Agreement").
In consideration of the Custodian's offering custodial services to
the Fund in Russia, the Fund and the Custodian agree that the Agreement is
hereby amended as follows:
1. Section 2.A, Safekeeping, is amended by the addition of the following at
the end of said Section:
"provided, however, that the Custodian's responsibility for safekeeping
equity securities of Russian issuers ("Russian Equities") hereunder shall be
limited to the safekeeping of relevant share extracts from the share
registration books maintained by the entities providing share registration
services to issuers of Russian Equities (each a "Registrar") indicating an
investor's ownership of such securities (each a "Share Extract"). In the
event the Fund purchases corporate debt instruments or other forms of
securities other than those referred to herein, such instruments or other
securities will be held in accordance with market practice or as otherwise
agreed upon by the Fund and the Custodian."
2. Section 2.C, Registered Name; Nominee, is amended by the addition of the
following at the end of said Section:
"However, with respect to Russian Equities, the Custodian shall
instruct a Subcustodian to confirm that registration thereof shall be
reflected on the books of the issuer's Registrar, subject to the following
conditions, but shall in no event be liable for losses or costs incurred as
a result of delays or failures in the registration process not caused by the
negligence of the Custodian, Subcustodian, affiliated Russian Agent or
l
<PAGE>
other affiliate of the Custodian (it being understood that an affiliated entity
as used herein shall mean an entity in which the Custodian or Russian Agent has
majority ownership), including without limitation the inability to obtain or
enforce relevant Share Extracts. Such registration may be in the name of a
nominee of a Subcustodian. In the event registration is in the name of the Fund
such entity hereby acknowledges that only the Subcustodian may give instructions
to the Registrar to transfer or engage in other transactions involving the
Russian Equities so registered.
A Subcustodian may from time to time enter into contracts with Registrars with
respect to the registration of Russian Equities ("Registrar Contracts"). Such
Registrar Contracts may provide for (i) regular share confirmations by the
Subcustodian, (ii) reregistrations within set timeframes, (iii) use of a
Subcustodian's nominee name, (iv) direct access by auditors of the Subcustodian
or its clients to share registers, and (v) specification of the Registrar's
responsibilities and liabilities. The Custodian does not represent or warrant
that such Registrar Contracts are enforceable.
If the Fund instructs the Custodian to settle a purchase of a Russian Equity,
the Custodian will instruct a Subcustodian to reregister the Russian Equity and
obtain a Share Extract in a timely manner.
After completion of reregistration of a Russian Equity in respect of which a
Subcustodian has entered into a Registrar Contract, the Custodian shall instruct
the Subcustodian to monitor such registrar and to notify the Custodian upon the
Subcustodian's obtaining knowledge of the occurrence of any of the following
events ("Registrar Events"): (i) a Registrar has eliminated a shareholder from
the register or has altered registration records; (ii) a Registrar has refused
to register securities in the name of a particular purchaser and the purchaser
or seller has alleged that the Registrar's refusal to so register was unlawful;
(iii) a Registrar holds for its own account shares of an issuer for which it
serves as Registrar; (iv) if a Registrar Contract is in effect with a Registrar,
the Registrar notifies the Subcustodian that it will no longer be able
materially to comply with the terms of the Registrar Contract; or (v) if a
Registrar Contract is in effect with a Registrar, the Registrar has materially
breached such Contract. The Custodian shall inform the Fund of the occurrence of
a Registrar Event provided the Custodian has in fact received actual notice
thereof from the Subcustodian.
It shall be the responsibility of the Fund to contact the Custodian prior to
executing any transaction in a Russian Equity to determine whether a Registrar
Contract exists in respect of such issuer. The Custodian shall send to the Fund
a list of issuers in respect of which a Registrar Contract has been executed and
thereafter the Custodian shall notify the Fund promptly upon the execution of
additional Registrar Contracts.
If the Fund instructs the Custodian by Proper Instruction to settle a purchase
of a Russian Equity in respect of which the Subcustodian has not entered into a
Registrar Contract, then the Custodian shall instruct the Subcustodian to settle
such transaction in accordance with the Proper Instruction and with the
provisions of Section 2.D of this Agreement, notwithstanding the absence of any
such Registrar Contract and without the Custodian being required to notify the
Fund that no such Registrar Contract is then in effect, and it being understood
that neither the Custodian nor the Subcustodian shall be required to follow the
procedure set forth in the second preceding paragraph."
2
<PAGE>
3. Section 2.D, Purchases, is amended by the addition of the following at the
----------------------
end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of purchases of securities
in Russia. Unless otherwise instructed by Proper Instructions acceptable to
the Custodian, the Custodian shall only authorize a Subcustodian to make
payment for purchases of Russian Equities upon receipt of the relevant Share
Extract in respect of the Fund's purchases. With respect to securities other
than Russian Equities, settlement of purchases shall be made in accordance
with securities processing or settlement practices which the Custodian in
its discretion determines to be a market practice. The Custodian shall only
be responsible for securities purchased upon actual receipt of such
securities at the premises of its Subcustodian, provided that the
Custodian's responsibility for securities represented by Share Extracts
shall be limited to the safekeeping of the relevant Share Extract upon
actual receipt of such Share Extract at the premises of the Subcustodian."
4. Section 2.E, Exchanges, is amended by inserting after the word "exchange"
----------------------
in the second line thereof, the following phrase:
", in accordance with the registration procedures described in Section 2.C of
this Agreement,"
5. Section 2.F, Sales of Securities, is amended by the addition of the
--------------------------------
following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of sales of securities in
Russia. Unless otherwise expressly instructed by Proper Instructions
acceptable to the Custodian, settlement of sales of securities shall be made
in accordance with securities processing or settlement practices which the
Custodian in its discretion determines to be a market practice. The Fund
hereby expressly acknowledges that such market practice might require
delivery of securities prior to receipt of payment and that the Fund bears
the risk of payment in instances where delivery of securities is made prior
to receipt of payment therefor in accordance with Proper Instructions
received by the Custodian or pursuant to the Custodian's determination in its
discretion that such delivery is in accordance with market practice. The
Custodian shall not be responsible for any securities delivered from the
premises of the Subcustodian from the time they leave such premises."
3
<PAGE>
6. Section 2.H, Exercise of Rights; Tender Offers, is amended by the addition
----------------------------------------------
of the following paragraph at the end of the present Section 2.H:
-----------
With respect to Russia, upon timely receipt of Proper Instructions,
the Custodian shall take any lawful action required by the terms of a
rights offer, tender offer, put, call, merger, consolidation,
reorganization or other corporate action affecting securities held on
behalf of the Fund, provided however that the Custodian will not be held
liable for any losses or costs incurred as a result of such actions or as a
result of the Custodian's or Subcustodian's inability for reasons beyond
its control to take the actions requested by such Proper Instructions."
7. Section 2.I, Stock Dividends, Rights, Etc., is modified by the addition of
----------- -----------------------------
the following paragraph at the end of said Section:
"With respect to Russian Equities, to request a Subcustodian to obtain
a Share Extract with respect to all Russian Equities issued by reason of a
stock dividend, bonus issue or other distribution resulting from a corporate
action not requiring instructions from the shareholder of the security,
provided that the Custodian shall not be responsible for its inability to
obtain any such Share Extract or for the failure of a non-affiliated
Registrar or non-affiliated Russian Agent (it being understood that non-
affiliated as used herein shall mean less than majority ownership) or any
agent thereof to record the Fund's ownership on the issuer's records."
8. Section 3 is modified by the insertion of the following at the end of the
---------
first paragraph of said Section:
"With respect to Russia, the Fund hereby expressly acknowledges that a
Subcustodian for Russian securities may from time to time delegate any of
its duties and responsibilities to a sub-subcustodian (collectively,
"Russian Agent") in Russia, including without limitation Rosvneshtorgbank
(also called Vneshtorgbank RF) ("VTB"). The Fund acknowledges that the
rights of the Subcustodian against any such Russian Agent may consist only
of a contractual claim against the Russian Agent. In the event of a loss of
securities, which loss is not caused in whole or in significant part by the
negligent act or omission of the Custodian or Subcustodian or an affiliate
of the Custodian, held on behalf
4
<PAGE>
of the Fund through any Russian Agent whose use is required or customary by
law or by market practice including without limitation the VTB, the
Custodian shall be responsible to the Fund with respect to such losses to
the extent it or the Subcustodian in fact recovers from the Russian Agent,
provided that, notwithstanding the foregoing, the Custodian shall be
responsible to the Fund to the extent provided herein for losses due to its
own negligence or the negligence of the Subcustodian or that of an
affiliate of the Custodian. In the event of such loss, the Custodian shall
use, or shall cause the Subcustodian to use, reasonable care under the
circumstances to seek recovery of such loss from the Russian Agent."
9. Section 5.C is amended by the addition of the following paragraphs at the
-----------
end of the present first paragraph of said Section:
"With respect to securities issued by Russian issuers or settlement in
Russia of securities transactions, reasonable care shall mean reasonable
practices under the circumstances as measured by custodial practices among
international financial institutions in Russia, and negligence as used
herein shall mean the failure to exercise reasonable care as defined in this
sentence. The Custodian shall in no event be liable for consequential or
indirect losses or from loss of goodwill.
"It is understood that no Registrar, whether or not any such Registrar
has entered into a contract or other arrangement with a Subcustodian, is or
shall be considered or deemed to be an agent of the Custodian or any
Subcustodian, and accordingly neither the Custodian nor the Subcustodian
shall be responsible for or liable to the Fund for the acts or omissions of
any such non-affiliated Registrar."
10. Section 5.C is amended by the addition of the following paragraph at the
-----------
end of the present Section:
"Notwithstanding the foregoing, the Custodian shall have no liability
in respect of any loss, damage or expense suffered by the Fund or any
shareholder of the Fund insofar as such loss, damage or expense arises from
investment risk inherent in investing in capital markets or in holding assets
in a particular country or jurisdiction, including without limitation, (i)
political, legal, economic, settlement and custody infrastructure, and
currency and exchange rate risks; (ii) investment and repatriation
restrictions; (iii) a Fund's inability to protect and enforce any local legal
rights including rights of title and beneficial ownership; (iv) corruption
and crime in the local market; (v) unreliable information which emanates from
the local market; (vi) volatility of banking and financial systems and
infrastructure; (vii) bankruptcy and insolvency risks of any and all non-
affiliated local banking agents, counterparties to cash and securities
transactions or
5
<PAGE>
non-affiliated registrars or non-affiliated transfer agents; and (vii) risk
of issuer insolvency or default.
11. A new Section 5.H as follows is added of the last paragraph of the present
-----------
Section 5.G:
- -----------
"H. It is also agreed that the Fund shall be responsible for
preparation and filing of tax returns, reports and other documents on any
activities it undertakes in Russia which are to be filed with any relevant
governmental or other authority and for the payment of any taxes, levies,
duties or similar liability the Fund incurs in respect of property held or
sold in Russia or of payments or distributions received in respect thereof
in Russia. Accordingly, the Fund hereby agrees to indemnify and hold
harmless the Custodian from any loss, cost or expense resulting from the
imposition or assessment of any such tax, duty, levy or liability or any
expenses related thereto."
12. A new Section 13, Risk Disclosure Acknowledgment, is added at the end of
---------- ------------------------------
the present Section 12:
----------
"The Fund hereby acknowledges that it has received, has read and has
understood the Custodian's Risk Disclosure Statement, a copy of which is
attached hereto and is incorporated herein by reference. The Fund
acknowledges that the Risk Disclosure Statement is not comprehensive. The
parties hereto acknowledge that the Custodian's offering sub-custodial
services in Russia is not intended to and shall not be construed to be a
recommendation by the Custodian that investment in Russia is appropriate or
inappropriate for the Fund or is consistent or inconsistent with legal or
regulatory requirements pertaining to the establishment or administration of
mutual funds, with the Fund's prospectus or constitutive documents or with
the Fund's duties to shareholders."
Except as amended above, all the provisions of the Agreement as heretofore in
effect shall remain in full force and effect.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.-MERRILL LYNCH
DEVELOPING CAPITAL MARKETS FOCUS
FUND BROWN BROTHERS HARRIMAN & CO.
/s/ Gerald M. Richard /s/ Stokley P. Towles
- ---------------------------------- ------------------------------
Name: Gerald M. Richard Name: Stokley P. Towles
Title: Treasurer Title: Partner
7
<PAGE>
RISK DISCLOSURE STATEMENT
In connection with your consideration of investment in Russia, we bring to
your attention the following risks which, although they exist in many markets
around the world, we believe deserve special consideration in Russia. This list
is not comprehensive and is intended only to highlight some of the risks
inherent in investing in Russia which appear to be greater than those in other
established markets. These risks include, without limitation:
POLITICAL AND ECONOMIC RISKS
There is no history of stability in this market and no guarantee of future
stability. The emerging nature of the Russian political system in its current
democratic form leaves it more vulnerable to break down in the event of economic
instability or popular unrest. The recent resurgence of the Communists and the
beginnings of a trend away from privatization highlights the risk of a reversal
of democratic reforms and reacquisition, nationalization or expropriation of
foreign-owned assets. The dynamic nature of the political environment makes the
future uncertain. The economic infrastructure is poor, and the country maintains
a high level of external and internal debt. Tax regulations are ambiguous and
unclear, and there is a risk of imposition of arbitrary or onerous taxes due to
the lack of a fair and economically-rational tax regime.
COMMERCIAL AND CREDIT RISKS
Banks and other financial systems are not well developed or regulated, and as a
result tend to be untested and have low credit ratings. Organized crime and
corruption are a feature of the business environment, and bankruptcy and
insolvency are commonplace as businesses are learning how to cope in new
conditions. In terms of cash, securities and other investment transactions, the
risk of broker, counterparty and other third party default is high. The same
holds true for issuers, where the risk of default is high. Insurance is
expensive and difficult to obtain in light of the volatility of the commercial
environment.
LIQUIDITY RISKS
Foreign investment is affected by restrictions in terms of repatriation and
convertibility of the currency. The ruble is only convertible internally, and
the value of investments may be affected by fluctuations in available currency
rates and exchange control regulations. The repatriation of profits may be
restricted in some cases. For example, proceeds from the sale of some government
bonds cannot be repatriated. Due to the undeveloped nature of the banking
system, considerable delays can occur in transferring funds, converting rubles
into other currencies and remitting funds out of Russia.
LEGAL AND REGULATORY RISKS
Russia's legal system is evolving and is not as developed as that of a western
country. It is based on a civil code with no system of judicial precedents. The
regulatory environment is sometimes uncertain since the total law can encompass
the civil code, legislative laws, presidential decrees, and ministry
resolutions. The code, laws, decrees, and resolutions ("Regulations") are
promulgated at separate times and are not necessarily consistent. The issuance
of Regulations
<PAGE>
does not always keep pace with market developments, thereby creating ambiguities
and inconsistencies.
Regulations governing securities investment may not exist or may be interpreted
and applied in an arbitrary or inconsistent manner. There may be a risk of
conflict between the rules and regulations of the local, regional, and national
governments. The concept of share ownership rights and controls may not be in
place or be enforceable. The independence of the courts from economic,
political, or national influence is basically untested and the courts and judges
are not experienced in business and corporate law. Foreign investors cannot be
guaranteed redress in a court of law for a breach of local laws, regulations or
contracts.
The securities market regulatory body, the Federal Commission on Securities and
Capital Markets, was established in 1995 and is responsible for overseeing
market participants, including registrars. However, the monitoring of and
enforcement of the obligations of registrar companies is difficult due to
geographic dispersion and inconsistent interpretation and application of
regulations.
OPERATIONAL RISKS
Shareholder Title to Securities: Shareholder risk is a major risk for equity
investment in Russia. For example, shares are dematerialized and the only legal
evidence of ownership is the shareholder's name entered in the register of the
company. The concept of fiduciary duty on the part of companies' management is
generally non-existent. Therefore, shareholders may suffer a dilution or loss of
investment, due to arbitrary changes in the shareholder register, with little or
no recourse or redress available. Local laws and regulations may not prohibit or
restrict a company's management from materially changing the company's structure
without the consent of shareholders. Legislation prohibiting insider trading
activities is rudimentary.
Clearing and Settlement: Settlements in Russia are non-DVP. For equity
settlements, the payments are usually handled offshore in USD after the shares
are reregistered on the books of the company or its registrar. However, the only
evidence of the registration is a company "extract" which is a photocopy of the
appropriate page from the register reflecting the new shareholder's name. The
extract does not have a legal basis for establishing ownership in the event of a
loss.
For Ministry of Finance (MinFin) bond settlements, payments are made offshore in
USD upon settlement of the bearer bonds at Vneshtorgbank's (VTB) office in
Moscow. The bonds are transported between the local subcustodian and VTB.
Therefore, the investor is exposed to transportation risk as the MinFins are
bearer bonds and are not replaceable in the event they are lost, stolen, or
destroyed.
Foreign investors can also invest in treasury issues with maturities greater
than one year through the Moscow Interbank Currency Exchange (MICEX). These
issues settle book-entry at MICEX in rubles only and at present, proceeds from
MICEX instruments are not able to be repatriated.
<PAGE>
Transparency: The rules regulating corporate governance may not exist or are
underdeveloped and offer little protection to minority shareholders. Disclosure
and reporting requirements are not to the expected level of most developed
western nations. The accounting standards generally used in Russia are not
international standards and in many cases may be a cash based, nonaccrual method
of accounting. The quality, reliability, and availability of information on
companies in Russia is lower than in most western markets.
Because of these and other risks inherent in Russia, the custody services
available in Russia are not of the same standard as those available in developed
markets. As with all markets, the fund must consider and accept these risks when
it decides to invest in the market. As you know, the risks associated with
investing in emerging markets deserve special attention as they are considerably
higher than those in more developed markets. This Risk Disclosure Statement
should not be the sole source of information for risk with respect to the
Russian market. We suggest that you review the market independently and consult
with your own legal advisors.
10th day of July 1996
Acknowledged:
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
DEVELOPING CAPITAL MARKETS FOCUS FUND
/s/ Gerald M. Richard
- -------------------------------------
Name: Gerald M. Richard
Title: Treasurer
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Variable Series Funds, Inc.:
We consent to the use in Post-Effective Amendment No. 27 to Registration
Statement No. 2-74452 of our report dated February 21, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which is also a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1997
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EXHIBIT 99.15
DISTRIBUTION PLAN
OF
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the _____ day of __________, 1997, by and
between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a Maryland corporation (the
"Company"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation
("MLFD").
W I T N E S S E T H:
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WHEREAS, the Company engages in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Company comprises sixteen separate funds (the "Funds"),
each of which pursues its own investment objective through separate investment
policies, and may in the future comprise one or more additional funds; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Company has entered into a Distribution Agreement with
MLFD, pursuant to which MLFD acts as the exclusive distributor and
representative of the Company in the offer and sale of shares of the Class B
Common Stock of each Fund (collectively, the "Class B Shares") of the Company;
and
WHEREAS, the Company desires to adopt this Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act, pursuant to which the Company
will pay a distribution fee to, or at the direction of, MLFD in connection with
the distribution of Class B Shares of each Fund; and
WHEREAS, Class B Shares of the Company's Funds are sold to the
separate accounts ("Separate Accounts") of various insurance companies (the
"Insurance Companies") that issue variable annuity or variable life contracts;
and
WHEREAS, the Directors of the Company have determined that there is a
reasonable likelihood that adoption of this Distribution Plan will benefit the
Company and its Class B shareholders.
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NOW, THEREFORE, the Company hereby adopts, and the Distributor hereby
agrees to the terms of, this Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the Investment Company Act on the following terms and
conditions:
1. The Company hereby authorizes MLFD to arrange for the Company to
enter into Sub-Agreements substantially in the form attached hereto with
Insurance Companies (the "Participating Insurance Companies"). Such Sub-
Agreement shall provide that the Participating Insurance Companies shall provide
MLFD with such information as is reasonably necessary to permit MLFD to comply
with the reporting requirements set forth in Paragraph 3 hereof.
2. Upon effectiveness of the this Plan with respect to the Class B
Shares of a Fund, the Company, on behalf of such Fund, shall pay to each of the
Participating Insurance Companies a distribution fee under the Plan at the end
of each [month] equal to 0.15% of the average daily net asset value of the Class
B Shares of such Fund held by such Participating Insurance Company. Such
distribution fee shall be paid to the Participating Insurance Companies as
compensation for providing distribution related services to the Company's
shareholders, including, but not limited to the following:
(a) printing and mailing of Company prospectuses, statements of
additional information, any supplements thereto and shareholder reports for
existing and prospective Separate Account 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 Participating Insurance Company, or for broker-
dealer only use or retail use;
(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 Separate
Account 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 to the 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
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(h) financing any other activity that the Company's Board of Directors
determines is primarily intended to result in the sale of the Class B
Shares.
Only distribution expenditures properly attributable to the sale of Class B
Shares of a Fund will be used to justify any fee paid by the Company with
respect to that Fund pursuant to this Plan, and, to the extent that such
expenditures relate to more than one Fund, the expenditures will be allocated
between or among the affected Funds in a manner deemed appropriate by the Board
of Directors of the Company.
3. MLFD shall provide the Company for review by the Board of
Directors, and the Directors shall review, at least quarterly, a written report
complying with the requirements of Rule 12b-1 regarding the disbursement of the
distribution fee during such period.
4. This Plan shall not take effect until it has been approved,
together with the provisions of any related agreements, by votes of a majority
of both (a) the Directors of the Company and (b) those Directors of the Company
who are not "interested persons" of the Company, as defined in the Investment
Company Act, and have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast
in person at a meeting or meetings called for the purpose of voting on this Plan
and such related agreements.
5. This Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the manner provided
for approval of this Plan in Paragraph 4.
6. This Plan may be terminated with respect to a Fund at any time by
vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the
outstanding Class B voting securities of that Fund.
7. This Plan may not be amended to increase materially the rate of
distribution payments provided for in Paragraph 2 hereof unless such amendment
is approved in the manner provided for initial approval in Paragraph 4 hereof
and by a vote of at least a majority, as defined in the Investment Company Act,
of the outstanding Class B voting securities of each Fund affected by the
amendment, and no material amendment to the Plan shall be made unless approved
in the manner provided for approval and annual renewal of Paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Company shall be committed to the discretion of the Directors who
are not interested persons [and a majority of the Directors shall be Rule 12b-1
Directors.]
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9. The Company shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 3 hereof, for a period of
not less than six years from the date of this Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
By:______________________________________
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By:_____________________________________
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