<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999
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. [ ]
POST-EFFECTIVE AMENDMENT NO. 32 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 33 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
TERRY K. GLENN
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. LEONARD B. MACKEY, JR., ESQ.
MERRILL LYNCH ASSET MANAGEMENT, L.P. ROGERS & WELLS LLP
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on (April 16, 1999) 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-ended
management investment company that has a wide range of investment objectives
among its eighteen separate funds (hereinafter referred to as the "Funds" or
individually as a "Fund"). Two separate classes of common stock ("Common
Stock"), Class A Common Stock and Class B Common Stock, are offered for each
Fund. This document consists of eighteen prospectuses for the Funds (one
prospectus for each Fund), and an Appendix for the Class A Common Stock of the
Funds and a separate Appendix for the Class B Common Stock of the Funds, each of
which constitutes a part of the prospectus for either the Class A Common Stock
of a Fund or the Class B Common Stock of a Fund, as appropriate. A table of
contents may be found in each prospectus.
The investment advisor of each Fund is Merrill Lynch Asset Management, L.P.
(the "Investment Advisor"), a subsidiary of Merrill Lynch & Co., Inc., a
publicly held corporation. The distributor of each Fund is Merrill Lynch Funds
Distributor, Inc. ("MLFD"), a subsidiary of Princeton Funds Distributor, Inc.
Both the Class A and Class B shares of the Funds are sold to separate
accounts ("Separate Accounts") of certain insurance companies to fund benefits
under variable annuity contracts ("Variable Annuity Contracts") and/or variable
life insurance contracts (together with the Variable Annuity Contracts, the
"Contracts") issued by such companies. The Company's Funds are currently sold to
Merrill Lynch Life Insurance Company ("MLLIC"), ML Life Insurance Company of New
York ("ML of New York"), indirect wholly owned subsidiaries of Merrill Lynch &
Co. Inc., Hartford Life Insurance Company ("Hartford"), Annuity Investors Life
Insurance Company ("AILIC"), Family Life Insurance Company ("Family Life"), The
AIG Life Companies (U.S.)("AIG Life"), American International Life Assurance
Company of New York, ("Hartford of NY"), American Fidelity Assurance Company
("American Fidelity"), Annuity Investors SM Life Insurance Company ("Annuity
Investors"), PFL Life Insurance Company ("PFL Life"), AUSA Life Insurance
Company ("AUSA"), Hartford Life and Annuity Insurance Company ("Hartford Life
and Annuity"), Manulife Financial ("Manulife"), Manufacturers Life Insurance
Company of New York ("Manufacturers of New York"), Monarch Life Insurance
Company ("Monarch and, together with ML of New York, MLLIC, Hartford, Family
Life, AIG Life, Hartford of NY, Annuity Investors, PFL Life, AUSA, Hartford Life
and Annuity, Manulife, Manufacturers of New York and AILIC, the "Insurance
Companies"). The Separate Accounts invest in shares of the Funds in accordance
with instructions received from Contract owners. The Contracts, other than
Contracts issued by AILIC, are offered by agents of Merrill Lynch Life Agency,
Inc. ("MLLA"), an affiliate of the Investment Adviser, and Contracts issued by
any Insurance Company may be offered by agents associated with that Insurance
Company. MLLIC and ML of New York are also affiliates of the Investment Adviser.
<PAGE> 3
Prospectus
[MERRILL LYNCH LOGO]
Merrill Lynch Variable Series Funds
[MERRILL LYNCH ARTWORK]
April 16, 1999
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
INVESTING, INCLUDING INFORMATION ABOUT RISKS. PLEASE READ
IT BEFORE YOU INVEST AND KEEP IT FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
TABLE OF CONTENTS
Merrill Lynch American Balanced Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch American Balanced Fund at a Glance........ 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 8
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH AMERICAN BALANCED FUND
<PAGE> 5
KEY FACTS [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
EQUITIES -- Securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
DEBT -- Securities representing an obligation to pay specified amounts at
specified times such as bonds.
FIXED-INCOME INVESTMENTS -- Instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as preferred stock
that carries a promised level of dividend payments.
VOLATILITY -- the frequency and amount of changes to the Fund's net asset value.
THE MERRILL LYNCH AMERICAN BALANCED FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the American Balanced Fund is to seek a level of
current income and degree of stability of principal not normally available from
an investment solely in EQUITY SECURITIES, as well as the opportunity for
capital appreciation greater than is normally available from an investment
solely in DEBT SECURITIES.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose a mix of investments including some that will increase
in value, some that provide current income through interest or dividends, and
some that may do both. The Fund tries to blend these investments to create a
portfolio that produces more current income with less VOLATILITY than an all
stock fund would, but also produces more capital growth than an all bond fund
would. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a balanced portfolio of U.S. equities and debt securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising or
falling. Changes in the value of the Fund's FIXED-INCOME INVESTMENTS may occur
in response to interest rate movements -- generally, when interest rates go up,
the value of fixed-income instruments goes down. Changes in the value of both
the Fund's equity and fixed-income investments may also occur as the result of
specific factors that affect particular investments. If the value of the Fund's
investments goes down, you may lose money.
MERRILL LYNCH AMERICAN BALANCED FUND 3
<PAGE> 6
[KEY FACTS ICON] KEY FACTS
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are willing to accept the risk of short-term changes in the
Fund's share value in exchange for the potential of higher
long-term returns than available from a fund invested only in
fixed-income securities.
- are looking for an investment that provides some current income
with less volatility than a fund invested only in equity
securities and the potential for higher long-term returns than
available from a money market fund.
4 MERRILL LYNCH AMERICAN BALANCED FUND
<PAGE> 7
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns of the Fund's Class A shares for
the periods shown with those of the S&P 500 Index and the Weighted Index. How
the Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future. The bar chart and table do not reflect separate
account fees and expenses, which, if reflected, would lower the returns shown
below.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
18.11% 1.22% 20.65% 5.72% 13.49% -4.19% 20.81% 9.73% 17.11% 13.56%
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 10.79% (quarter ended December 31, 1998) and the lowest return for a
quarter was -8.03% (quarter ended September 30, 1998). The year-to-date return
as of March 31, 1999 was 0.34%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS PAST TEN YEARS
- --------------------------------------------------------------------------
<S> <C> <C> <C>
VS: American Balanced Fund 13.56% 11.05% 11.32%
- --------------------------------------------------------------------------
S&P 500* 28.58% 24.05% 19.20%
- --------------------------------------------------------------------------
Weighted Index** 14.64% 12.14% 11.48%
- --------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance
is not predictive of future performance.
** This unmanaged index, which is an equally weighted blend of the Three-Month
Treasury Bill Index, The Merrill Lynch U.S. Corporate & Government Master
Index, and the S&P 500 Index, is comprised of US Treasury Bills maturing in
up to 3 months, investment-grade bonds and common stocks. Past performance is
not predictive of future performance.
MERRILL LYNCH AMERICAN BALANCED FUND 5
<PAGE> 8
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
AMERICAN BALANCED FUND (CLASS A)
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $16.59 $16.01 $15.17 $13.08 $14.08
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .40 .54 .53 .59 .48
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- 1.60 1.87 .89 2.06 (1.06)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.00 2.41 1.42 2.65 (.58)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.54) (.27) (.56) (.56) (.37)
Realized gain on investments -- net (1.31) (1.56) (.02) -- --
In excess of realized gain on
investments -- net -- -- -- -- (.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.85) (1.83) (.58) (.56) (.42)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $16.74 $16.59 $16.01 $15.17 $13.08
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 13.56% 17.11% 9.73% 20.81% (4.19%)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .62% .60% .60% .61% .63%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.37% 3.17% 3.39% 4.22% 3.95%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, end of year (in thousands) $187,084 $194,747 $212,047 $212,912 $158,951
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102.47% 136.71% 236.50% 38.40% 35.36%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total Investment returns exclude insurance-related fees and expenses.
6 MERRILL LYNCH AMERICAN BALANCED FUND
<PAGE> 9
Details About The Fund [DETAILS ABOUT THE FUND ICON]
INVESTMENT GRADE -- any of the four highest debt obligation ratings of a
recognized rating agency such as: Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group or Fitch IBCA, Inc.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest at least 25% of its assets in fixed-income securities. The
fixed-income securities in which the Fund invests consist of:
- short-intermediate- and long-term U.S. government debt
securities
- short-, intermediate- and long-term corporate debt securities
issued by U.S. companies and rated INVESTMENT GRADE
- term preferred stock (that is, preferred stock which returns
principal at a set time) issued by U.S. companies
- corporate debt securities convertible into common stock
- money market securities
The Fund will also normally invest a portion of its assets in equity securities.
The equity securities in which the Fund invests will primarily be common stocks
of large and medium-sized U.S. companies. The Fund will limit its investments in
equity securities to 65% of Fund assets at the time of purchase of any equity
security. The Fund's investment in equity securities may from time to time
exceed 65% of Fund assets as the result of changes in the value of its holdings,
but in this circumstance the Fund will not purchase additional equity securities
until the percentage of its holdings of equity securities has been reduced below
65% of Fund assets. In unusual market or economic conditions, the Fund may
significantly reduce or eliminate its equity investments to seek to reduce risk.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH AMERICAN BALANCED FUND 7
<PAGE> 10
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson has served as the Portfolio Manager of the Fund since
November 1995. He has served as a First Vice President of MLAM since 1997 and as
a Senior Portfolio Manager of MLAM from November 1995 to 1997. From 1989 to
1995, he served as Manager of International Strategy for Merrill Lynch & Co.
Global Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed.
Numbers in this table show maximum allowable use only; for actual use, consult
the Fund's annual/semi-annual reports.
[American Balanced Fund Chart]
[American Balanced Fund Chart]
THE MERRILL LYNCH AMERICAN BALANCED FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options - x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information about this Fund is discussed in the Appendix which is
part of this Prospectus.
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
8 MERRILL LYNCH AMERICAN BALANCED FUND
<PAGE> 11
TABLE OF CONTENTS
Merrill Lynch Basic Value Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Basic Value Focus Fund at a Glance........ 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 8
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH BASIC VALUE FOCUS FUND
<PAGE> 12
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
COMMON STOCK -- shares of ownership of a corporation.
THE MERRILL LYNCH BASIC VALUE FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Basic Value Focus Fund is to seek capital
appreciation and, secondarily, income.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose investments that will increase in value. The Fund also
seeks current income by looking for some investments that pay dividends.
However, the Fund's investments emphasize growth of capital more than current
income. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in stocks that Fund management believes are
undervalued, which means the stock price is less than Fund management believes
the stock is worth. Fund management places particular emphasis on companies with
below-average price/earnings ratios that pay above-average dividends. The Fund
purchases primarily COMMON STOCKS of U.S. companies in trying to meet its goals.
The Fund may also invest in securities issued by foreign companies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may fluctuate. These changes may occur because
the stock market is rising or falling. At other times, specific factors may
affect the value of a particular investment. The Fund faces additional risks
when it invests in foreign companies, including the possibility of substantial
volatility due to adverse political, economic or other developments. If the
value of the Fund's investments goes down, you may lose money.
MERRILL LYNCH BASIC VALUE FOCUS FUND 3
<PAGE> 13
[KEY FACTS ICON] KEY FACTS
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with long-term goals in mind, such as retirement
- want a professionally managed and diversified portfolio
- are willing to accept the risk of declines in investment value
in exchange for potentially higher long-term returns.
4 MERRILL LYNCH BASIC VALUE FOCUS FUND
<PAGE> 14
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for each class of the Fund's
shares for the periods shown with those of the S&P 500 Index. How the Fund
performed in the past is not necessarily an indication of how the Fund will
perform in the future. The bar chart and table do not reflect separate account
fees and expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
2.36% 25.49% 20.69% 20.62% 9.44%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
15.56% (quarter ended March 31, 1998) and the lowest return for a quarter was
- -12.60% (quarter ended September 30, 1998). The year-to-date return as of March
31, 1999 was 6.94%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Basic Value Focus Fund -- Class A 9.44% 15.40% 15.80%+
- -------------------------------------------------------------------------------------
S&P 500 Index* 28.58% 24.05% 22.79%
- -------------------------------------------------------------------------------------
VS: Basic Value Focus Fund -- Class B 9.28% N/A 7.67%++
- -------------------------------------------------------------------------------------
S&P 500 Index* 28.58% N/A 28.14%
- -------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance
is not predictive of future performance.
+ Inception date is July 1, 1993.
++ Inception date is November 3, 1997.
MERRILL LYNCH BASIC VALUE FOCUS FUND 5
<PAGE> 15
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS -- CLASS A
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND (CLASS A)
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998+ 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $15.84 $14.74 $13.10 $11.10 $10.95
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .19 .19 .17 .18 .17
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain on
investments -- net 1.10 2.52 2.37 2.49 .08
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.29 2.71 2.54 2.67 .25
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.19) (.09) (.18) (.19) (.10)
Realized gain on investments -- net (2.27) (1.52) (.72) (.48) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.46) (1.61) (.90) (.67) (.10)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $14.67 $15.84 $14.74 $13.10 $11.10
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 9.44% 20.62% 20.69% 25.49% 2.36%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .66% .65% .66% .66% .72%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.26% 1.36% 1.37% 1.68% 2.08%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $754,519 $671,325 $524,930 $306,463 $164,307
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 113.44% 95.52% 68.41% 74.10% 60.55%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH BASIC VALUE FOCUS FUND
<PAGE> 16
FINANCIAL HIGHLIGHTS -- CLASS B (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BASIC VALUE FOCUS FUND (CLASS B)
----------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD NOVEMBER 3, 1997+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1998# DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.84 $15.89
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .16 .01
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net 1.10 (.06)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.26 (.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.18) --
Realized gain on investments -- net (2.27) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.45) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.65 $15.84
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 9.28% (0.31%)++
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .82% .82%*
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.12% 1.27%*
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $3,385 $ 348
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 113.44% 95.52%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of operations.
++ Aggregate total investment return.
# Based on average shares outstanding.
</TABLE>
MERRILL LYNCH BASIC VALUE FOCUS FUND 7
<PAGE> 17
Details About The Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Kevin Rendino is the Fund's portfolio manager since July 1993. He is First Vice
President of MLAM since 1997; Vice President from 1993 to 1997; Senior Research
Analyst from 1990 to 1992; and Corporate Analyst from 1988 to 1990.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund tries to choose investments for capital appreciation -- that is,
investments that will increase in value. The Fund also pursues income, but its
investments emphasize growth of capital more than income. The Fund invests
primarily in common stocks. In selecting securities, Fund management emphasizes
stocks that it believes are undervalued. Fund management places particular
emphasis on stocks with statistical characteristics associated with
undervaluation, such as stocks with below-average price/earnings ratios that pay
above-average dividends. Fund management may consider a stock undervalued if the
stock's price/book value ratio is below-average, or its price/earnings ratio is
less than historical levels. Fund management may also determine a company is
undervalued if its stock price is down because of temporary factors from which
Fund management believes the company will recover.
The Fund follows a basic contrary opinion, out-of-favor investment style. Fund
management believes that favorable changes in market prices are more likely to
occur when:
- Stocks are out of favor.
- Company earnings are depressed.
- Price/earnings ratios are relatively low.
- Investment expectations are limited.
- There is no general interest in a security or industry.
On the other hand, Fund 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.
- An industry or security continues to become popular among
investors.
8 MERRILL LYNCH BASIC VALUE FOCUS FUND
<PAGE> 18
MARKET CAPITALIZATION -- The number of shares in the market of a company's
stock, multiplied by the price per share of that stock, is the company's market
capitalization.
EQUITIES -- Securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
In other words, Fund management believes that stocks with relatively high
price/earnings ratios are more vulnerable to price declines from unexpected
adverse developments. At the same time, stocks with relatively low price/
earnings ratios are more likely to benefit from favorable but generally
unanticipated events. Thus, the Fund may invest a large part of its net assets
in stocks that have weak research ratings.
The Fund may also invest a substantial portion of its assets in companies with
MARKET CAPITALIZATIONS below the largest companies. Fund management believes
that large institutional investors may overlook these companies, making them
undervalued.
The Fund may buy EQUITIES other than common stock, and may invest up to 10% of
its total assets in securities of foreign companies.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below.
MERRILL LYNCH BASIC VALUE FOCUS FUND 9
<PAGE> 19
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Basic Value Focus Fund Chart]
The Merrill Lynch Basic Value Focus Fund
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities 10 x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information about this Fund is discussed in the Appendix which is
part of this Prospectus.
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
10 MERRILL LYNCH BASIC VALUE FOCUS FUND
<PAGE> 20
TABLE OF CONTENTS
Merrill Lynch Capital Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Capital Focus Fund at a Glance............ 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 6
Investment Strategies....................................... 9
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH CAPITAL FOCUS FUND
<PAGE> 21
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
TOTAL INVESTMENT RETURN -- the combination of capital appreciation (from
increases or decreases in market value) and current income (from dividends or
interest).
EQUITIES -- Securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
DEBT -- securities representing an obligation to pay specified amounts at
specified times.
MERRILL LYNCH CAPITAL FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Capital Focus Fund is to seek high TOTAL
INVESTMENT RETURN.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose some investments that will increase in value and others
that pay dividends or interest. We cannot guarantee that the Fund will achieve
its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in EQUITIES and DEBT SECURITIES (including short-term
securities). Fund management shifts the allocation among these securities types.
The proportion the Fund invests in each category at any given time depends on
Fund management's view of how attractive that category appears relative to the
others. Fund management expects that usually a significant portion of the Fund's
assets will be stocks of large companies. The Fund purchases primarily U.S.
securities, but can also buy foreign securities, including securities
denominated in foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising or
falling. Changes in the value of the Fund's debt investments may occur in
response to interest rate movements -- generally, when interest rates go up, the
value of debt securities goes down. For certain debt investments, these specific
factors include the possibility that the issuer may default on its obligations.
Changes in the value of both the Fund's equity and debt investments may also
occur as the result of specific factors that affect particular investments. If
the value of the Fund's investments goes down, you may lose money.
The Fund can invest a significant portion of its assets in foreign securities.
Foreign investing involves special risks, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
MERRILL LYNCH CAPITAL FOCUS FUND 3
<PAGE> 22
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with long-term goals in mind, such as retirement
- want a professionally managed and diversified portfolio
- are willing to accept the risk of short-term fluctuations in
exchange for the potential of higher long-term returns
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
Performance information is not available for the Fund because the Fund has been
in operation for less than one full fiscal year.
4 MERRILL LYNCH CAPITAL FOCUS FUND
<PAGE> 23
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
CAPITAL FOCUS FUND (CLASS A)
-----------------------------
FOR THE PERIOD JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00
- -------------------------------------------------------------------------------------------
Investment income -- net .09
- -------------------------------------------------------------------------------------------
Realized and unrealized loss on investments and foreign
currency transactions -- net (.33)
- -------------------------------------------------------------------------------------------
Total from investment operations (.24)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $9.76
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- -------------------------------------------------------------------------------------------
Based on net asset value per share (2.40%)++
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------------------
Expenses 86%*
- -------------------------------------------------------------------------------------------
Investment income -- net 2.54%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $27,065
- -------------------------------------------------------------------------------------------
Portfolio turnover 29.48%
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
MERRILL LYNCH CAPITAL FOCUS FUND 5
<PAGE> 24
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Kurt Schansinger is the Senior Portfolio Manager of the Fund. He has served as
First Vice President of MLAM since 1997 and Vice President of MLAM from January
1996 to 1997. Prior to MLAM, he was a Senior Vice President of Oppenheimer
Capital L.P.
Walter Cuje is the Associate Portfolio Manager of the Fund. Mr. Cuje has been an
Associate Portfolio Manager of MLAM since October 1993; First Vice President
since 1997; Vice President from July 1991 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund can invest in both equity securities and fixed-income securities
(including short-term securities). The Fund may invest entirely in equity
securities, entirely in fixed-income securities, or partly in equity securities
and partly in fixed-income securities. Fund management expects that usually a
significant portion of the Fund's assets will be stocks of large companies.
The Fund's management will select the percentages of the total portfolio
invested in equity securities and fixed-income securities based on its
perception of the relative valuation of each asset class compared with that
asset class' historical valuation levels. When Fund management believes equity
securities generally are reasonably valued or undervalued, Fund management will
focus on equity investments. When Fund management believes equity securities
generally are valued at high levels, however, Fund management may increase the
percentage of the Fund's portfolio invested in debt securities. Fund management
may increase the Fund's investments in debt securities whenever it believes that
it is prudent to do so in order to reduce the level of risk in the Fund's
portfolio or that investments in debt securities could potentially provide
higher total returns than equity investments.
The equity securities in which the Fund invests will primarily be common stocks
of large companies. The Fund's management chooses equity securities using a
fundamental, value-oriented investment style. This means that the Fund seeks to
invest in companies that the Fund's management believes to be undervalued. A
company's stock is undervalued when the stock's current price is less than what
the Fund believes a share of the company is worth. A company's worth can be
assessed by several factors, such as financial resources, value of tangible
assets, sales and earnings growth, rate of return on capital, product
development, quality of management, and overall business prospects. A company's
stock may become undervalued when most investors fail to perceive the company's
strengths in one or more of these areas. Fund management may also determine a
company is undervalued if its stock price is down because of temporary factors
from which Fund management believes the company will recover. The Fund will seek
to invest in the stock of large, "quality" companies with strong financial
resources, reasonable rates of return on capital and experienced management
whenever Fund management believes such stocks are undervalued.
6 MERRILL LYNCH CAPITAL FOCUS FUND
<PAGE> 25
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid.
INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc. Standard &
Poor's or Fitch IBCA, Inc.
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents the security's current expected rate
of return.
VOLATILITY -- the frequency and amount of changes in a security's market value.
LIQUIDITY -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence, greater
volatility.
The debt securities in which the Fund may invest include:
- U.S. and foreign government debt securities
- corporate debt securities
- mortgage-backed securities and asset-backed securities
- corporate debt securities convertible into common stock
- money market securities
The Fund may invest in debt securities of any MATURITY. Changes in the value of
debt securities may occur in response to interest rate movements -- generally,
when interest rates go up, the value of most debt securities goes down. In most
cases, when interest rates go up, the value of debt securities with longer-term
maturities goes down more than the value of debt securities with shorter
maturities. Because the Fund may invest a substantial portion of its assets in
debt securities with long-term maturities, rising interest rates may cause the
value of the Fund's debt investments to decline significantly.
Although Fund management anticipates that the Fund will focus on debt securities
that are rated INVESTMENT GRADE, the Fund may invest up to 35% of its assets in
low-rated debt securities, which are commonly called "junk bonds." Although junk
bonds generally have higher YIELDS than fixed-income security's with higher
credit ratings, they are high risk investments that may not pay interest or
return principal as scheduled. Junk bonds generally are less LIQUID and
experience more price VOLATILITY than higher rated fixed-income securities.
Issuers of junk bonds frequently have large amounts of outstanding debt relative
to their assets and their outstanding equity, which means that issuers of junk
bonds generally have more difficulty making payments in the event of adverse
business circumstances than issuers of more highly rated fixed-income
securities. Junk bonds may be unsecured and subordinated to an issuer's other
debt, which means that in the event the issuer defaults claims of other
creditors may receive priority over the claims of holders of junk bonds. In such
circumstances, there may be few or no assets available to repay holders of junk
bonds. The Fund may suffer a loss of expected future income or a loss of
principal if its junk bond holdings default. The Fund will not purchase
securities that are in default.
The Fund may invest a portion of its assets in various types of mortgage-backed
securities. Mortgage-backed securities represent the right to receive a portion
of principal and/or interest payments made on a pool of residential or
commercial mortgage loans. Mortgage-backed securities frequently react
differently to changes in interest rates than other debt securities. When
MERRILL LYNCH CAPITAL FOCUS FUND 7
<PAGE> 26
[DETAILS ABOUT THE FUND ICON] Details About the Fund
interest rates fall, borrowers may refinance or otherwise repay principal on
their mortgages earlier than scheduled. If this happens, certain types of
mortgage-backed securities will be paid off more quickly than originally
anticipated and owners of these securities have to invest the proceeds in
securities with lower yields. This risk is known as "prepayment risk." When
interest rise, however, fewer borrowers refinance and certain types of
mortgage-backed securities are paid off more slowly than originally anticipated,
which causes the value of these securities to fall. This risk is known as
"extension risk." Because of prepayment risk and extension risk, small movements
in interest rates (both increases and decreases) may significantly reduce the
value of certain mortgage-backed securities.
The Fund may invest up to 25% of its assets in securities of foreign issuers.
The Fund may invest in issuers from any country. The Fund's management, however,
anticipates that a substantial portion of the Fund's foreign equity and debt
investments will be in issuers in the developed countries of Europe and the Far
East. The Fund may also invest in equity and debt securities of issuers in
emerging markets, but the Fund's management anticipates that a greater portion
of the Fund's foreign investments will be in issuers in developed countries.
Foreign investing involves special risks, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
8 MERRILL LYNCH CAPITAL FOCUS FUND
<PAGE> 27
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed.
Numbers in this table show maximum allowable use only; for actual use, consult
the Fund's annual/semi-annual reports.
[High Current Income Fund Chart]
THE MERRILL LYNCH CAPITAL FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities 35 x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities 25 x x x x x X x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 X x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + X x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - X X X X X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH CAPITAL FOCUS FUND 9
<PAGE> 28
TABLE OF CONTENTS
Merrill Lynch Developing
Capital Markets Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Developing Capital Markets Focus Fund at a 3
Glance......................................................
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 8
Investment Strategies....................................... 11
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND
<PAGE> 29
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
EQUITIES -- Securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
THE MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
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.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose investments that will increase in value. We cannot
guarantee that the Fund will achieve its goal.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in EQUITIES of companies in countries with smaller
capital markets, which currently means all countries except the U.S., United
Kingdom, Japan, and Germany. The Fund can also buy fixed-income securities of
companies and governments in these countries. The Fund normally invests in at
least three countries at any given time. The Fund's management anticipates that
under most circumstances the Fund will have substantial investments in emerging
markets. The Fund can invest in securities denominated in either U.S. dollars or
foreign currencies. The Fund's management anticipates that under most
circumstances the Fund's investments will primarily be denominated in foreign
currencies. The Fund is a non-diversified Fund, which means that it can invest
more of its assets in fewer companies than most other funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising or
falling or as the result of specific factors that affect particular investments.
If the value of the Fund's investments goes down, you may lose money.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but hurts the Fund's
performance when its investments are unsuccessful.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND 3
<PAGE> 30
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are looking for capital appreciation for long-term goals, such
as retirement
- want a professionally managed and diversified portfolio
- want to diversify the types of investment funding their contract
- are looking for exposure to a variety of foreign markets
- are willing to accept the risks of foreign investing in exchange
for potentially higher long-term returns
- are not looking for current income
4 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND
<PAGE> 31
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for each class of the Fund's
shares for the periods shown with those of the Morgan Stanley Capital
International ("MSCI") EAFE Index. How the Fund performed in the past is not
necessarily an indication of how the Fund will perform in the future. The bar
chart and table do not reflect separate account fees and expenses, which, if
reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
-1.08% 10.59% -6.53% -29.39%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
12.02% (quarter ended December 31, 1998) and the lowest return for a quarter was
- -23.77% (quarter ended September 30, 1998). The year-to-date return as of March
31, 1999 was 7.91%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED PAST ONE
DECEMBER 31, 1998) YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C>
VS: Developing Capital Markets Focus--Class A -29.39% -7.74%+
- --------------------------------------------------------------------------------------------
MSCI EAFE Index* 20.00% 8.10%++
- --------------------------------------------------------------------------------------------
VS: Developing Capital Markets Focus--Class B -29.51% -26.60%+++
- --------------------------------------------------------------------------------------------
MSCI EAFE Index* 20.00% 16.75%#
- --------------------------------------------------------------------------------------------
</TABLE>
* This unmanaged index measures the total returns of developed foreign stock
markets in Europe, Asia, and the Far East, calculated in US dollars. Past
performance is not predictive of future performance.
# Since October 31, 1997.
+ Inception date is May 2, 1994.
++ Since April 30, 1994.
+++ Inception date is November 3, 1997.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND 5
<PAGE> 32
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS -- CLASS A
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
DEVELOPING CAPITAL MARKETS FOCUS FUND (CLASS A)
------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN ------------------------------------------------------------
NET ASSET VALUE: 1998++ 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.22 $10.05 $9.32 $9.51
- ---------------------------------------------------------------------------------------------------------------------
Investment income -- net .18 .11 .20 .20
- ---------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments
and foreign currency transactions -- net (2.86) (.75) .76 (.30)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations (2.68) (.64) .96 (.10)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends from investment income -- net (.11) (.19) (.23) (.09)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.43 $9.22 $10.05 $9.32
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (29.39%) (6.53%) 10.59% (1.08%)
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.25% 1.25% 1.25% 1.25%
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.42% 1.42% 1.31% 1.36%
- ---------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.30% 1.15% 2.42% 2.73%
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 64,312 $ 141,451 $ 95,599 $ 55,209
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 121.06% 93.62% 87.33% 62.53%
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
DEVELOPING CAPITAL
MARKETS FOCUS FUND
(CLASS A)
-----------------
FOR THE PERIOD
MAY 2, 1994+
INCREASE (DECREASE) IN TO DECEMBER 31,
NET ASSET VALUE: 1994
<S> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------
Net asset value, beginning of period $10.00
- ---------------------------------------------------------------------
Investment income -- net .09
- ---------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments
and foreign currency transactions -- net (.58)
- ---------------------------------------------------------------------
Total from investment operations (.49)
- ---------------------------------------------------------------------
Less dividends from investment income -- net --
- ---------------------------------------------------------------------
Net asset value, end of period $9.51
- ---------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ---------------------------------------------------------------------
Based on net asset value per share (4.90%)#
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------
Expenses, net of reimbursement 1.29%*
- ---------------------------------------------------------------------
Expenses 1.35%*
- ---------------------------------------------------------------------
Investment income -- net 2.18%*
- ---------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------
Net assets, end of period (in thousands) $ 36,676
- ---------------------------------------------------------------------
Portfolio turnover 29.79%
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
</TABLE>
6 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND
<PAGE> 33
FINANCIAL HIGHLIGHTS -- CLASS B (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING CAPITAL MARKETS FOCUS FUND (CLASS B)
-----------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED NOVEMBER 3, 1997+
DECEMBER 31, TO DECEMBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998++ 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.22 $9.30
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net .17 .01
- --------------------------------------------------------------------------------------------------------------------
Realized and unrealized loss on investments
and foreign currency transactions -- net (2.86) (.09)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations (2.69) (.08)
- --------------------------------------------------------------------------------------------------------------------
Less dividends from investment income -- net (.11) --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.42 $9.22
- --------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (29.51%) (.86%)#
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.40% 1.39%*
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.72% 1.58%*
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.37% 1.16%*
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $241 $32
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 121.06% 93.62%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
</TABLE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND 7
<PAGE> 34
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Grace Pineda is the Portfolio Manager of the Fund since May 1994. She has served
as First Vice President of MLAM since 1997 and Vice President from 1989 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in a portfolio primarily consisting of equity securities of
companies in smaller capital markets. The Fund will generally invest at least
65% of its assets in equity securities. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as options and futures, the value of
which is based on a common stock or group of common stocks
The Fund will focus on investments in common stock.
The Fund considers "smaller capital markets" to be all markets other than the
four largest (by equity market capitalization). This currently precludes the
Fund from investing in companies in the United States, Japan, Germany and the
United Kingdom (except for short-term cash positions). There are no other limits
on the geographic allocation of the Fund's investments. The Fund's management,
however, anticipates that a substantial portion of the Fund's investments will
be in companies in emerging markets. The Fund may also invest in companies in
developed markets, but the Fund's management anticipates that a greater portion
of the Fund's investments will be in companies in emerging markets. The Fund
normally invests in securities from at least three countries at any time.
The Fund's management chooses equity securities using a combination of "top
down" and "bottom up" investment styles. "Top down" means that the Fund seeks to
allocate its investments to equity markets Fund's management believes have the
potential to outperform other equity markets due to economic factors such as
government fiscal policies and the direction of interest and currency movements.
"Bottom up" means that the Fund also selects investments based on management's
assessment of the earnings prospects of individual companies. When assessing
individual companies, the Fund's management seeks to identify companies engaged
in businesses with attractive earnings prospects, sound management and a record
of creating value for investors. Fund management then further considers which of
the companies that meet its criteria would be most likely to benefit from the
economic circumstances anticipated by Fund management. Because of the difficulty
of investing substantial sums in many smaller capital markets, however, in
certain markets Fund management believes to be attractive on a "top down" basis
the Fund may limit its investments to a relatively small number of large,
actively-traded companies.
8 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND
<PAGE> 35
INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.
LIQUIDITY -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence, greater
volatility.
VOLATILITY -- the frequency and amount of changes to a security's value.
The Fund may also invest up to 35% of its assets in non-convertible debt
securities. The Fund's investments in non-convertible debt securities will
generally be longer-term securities with the potential for capital appreciation
through changes in interest rates, exchange rates or the general perception of
the creditworthiness of issuers in certain countries. The Fund may also invest
in non-convertible debt securities for income, but this will not be a focus of
the Fund's investments. The Fund may invest in debt securities that are not
rated INVESTMENT GRADE, which are commonly known as "junk bonds." Junk bonds are
high risk investments, and may result in the Fund losing both income and
principal. Junk bonds generally are less LIQUID and experience more price
VOLATILITY than higher-rated fixed-income securities.
Because the Fund will invest primarily in foreign securities, it offers the
potential for more diversification than an investment only in the U.S. Foreign
securities have often (although not always) performed differently than U.S.
securities. However, foreign securities involve special risks not present in
U.S. investments than can increase the chances that the Fund will lose money.
The risks of foreign securities are typically much greater for smaller capital
markets and emerging market securities. Smaller capital markets usually have low
trading volumes and limited liquidity in comparison with larger capital markets.
Emerging market countries are often less politically and economically stable
than developed countries, and more likely to suffer from serious adverse
economic circumstances such as hyperinflation, currency devaluation or extremely
high interest rate levels. In addition, reliable information about individual
companies may be difficult to obtain in many emerging markets. Smaller capital
markets, including emerging markets, are more susceptible to sharp and frequent
price movements as the result of capital movements than larger capital markets.
Because of these factors, the Fund is not intended as a complete investment
program but is designed for long-term investors seeking to diversify their
investments and who are prepared to experience above-average volatility.
The Fund will invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates.
The Fund may also invest in securities the potential return of which is based on
the change in a specified interest rate or equity index (an "indexed note"). For
example, the Fund may invest in a security that pays a variable amount of
interest or principal based on the current level of the Brazilian or Korean
stock markets. The Fund may also invest in indexed securities the potential
return of which is based inversely on the change in a specified
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND 9
<PAGE> 36
[DETAILS ABOUT THE FUND ICON] Details About the Fund
interest rate or equity index (an "inverse note"). Inverse notes generally
change in value in a manner that is opposite to most fixed-income
securities -- that is, interest rates or principal payments on inverse notes
increase when the underlying interest rate or equity index decreases and
decrease when the underlying interest rate or equity index increases. Certain
indexed notes and inverse notes have greater sensitivity to changes in interest
rates or equity index levels than other securities, and the Fund's investments
in such instruments may decline in value significantly if interest rates or
equity index levels move in a manner not anticipated by Fund management. For
more information regarding these securities and other types of derivatives in
which the Fund may invest, please see the table on the next page and the
Appendix to this Prospectus.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
10 MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND
<PAGE> 37
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed.
Numbers in this table show maximum allowable use only; for actual use, consult
the Fund's annual/semi-annual reports.
[Developing Capital Markets Focus Fund Chart]
THE MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities 35 x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call option + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities + x x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options + x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts + x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS FUND 11
<PAGE> 38
TABLE OF CONTENTS
Merrill Lynch Domestic Money Market Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Domestic Money Market Fund at a Glance.... 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 6
Investment Strategies....................................... 8
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH DOMESTIC MONEY MARKET FUND
<PAGE> 39
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
LIQUIDITY -- the ease with which a security can be traded. Securities that
are less liquid have fewer potential buyers.
THE MERRILL LYNCH DOMESTIC MONEY MARKET FUND
AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Domestic Money Market Fund is to seek to
preserve capital, maintain LIQUIDITY, and achieve the highest possible current
income consistent with the foregoing.
WHAT ARE THE FUND'S GOALS?
The Fund's goals are to produce current income while attempting to maintain a
share value of $1.00. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in short-term U.S. money market instruments. These instruments
are generally debt securities that mature within 13 months (25 months if the
U.S. government or a government agency has issued or guaranteed the debt). Other
than U.S. government and government agency securities, the Fund only invests in
money market instruments of issuers with one of the two highest short-term
ratings from a nationally recognized credit rating organization or unrated
instruments which, in the opinion of the Fund's management, are of similar
credit quality.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
MERRILL LYNCH DOMESTIC MONEY MARKET FUND
3
<PAGE> 40
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with short-term goals in mind
- are looking for preservation of capital
- are looking for current income and liquidity
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. How
the Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future. The bar chart and table do not reflect separate
account fees and expenses, which, if reflected, would lower the returns shown
below.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
3.10% 3.94% 5.65% 5.00% 5.11% 5.05%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
1.42% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.73% (quarter ended December 31, 1993). The year-to-date return as of March 31,
1999 was 1.10%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Domestic Money Market Fund 5.20% 5.02% 4.57%+
- -------------------------------------------------------------------------------
</TABLE>
+ Inception date is February 20, 1992.
4 MERRILL LYNCH DOMESTIC MONEY MARKET FUND
<PAGE> 41
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
DOMESTIC MONEY MARKET FUND (CLASS A)
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<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 .0506 .0511 .0504 .0547 .0386
- ------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net --+ .0001 (.0005) .0012 (.0007)
- ------------------------------------------------------------------------------------------------------
Total from investment operations .0506 .0512 .0499 .0559 .0379
- ------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.0508) (.0511) (.0504) (.0547) (.0386)
Realized gain on investments -- net --+ --+ (.0001) (.0002) --
- ------------------------------------------------------------------------------------------------------
Total dividends and distributions (.0508) (.0511) (.0505) (.0549) (.0386)
- ------------------------------------------------------------------------------------------------------
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 5.20% 5.24% 5.13% 5.64% 3.93%
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .56% .54% .54% .55% .50%
- ------------------------------------------------------------------------------------------------------
Expenses .56% .54% .54% .55% .57%
- ------------------------------------------------------------------------------------------------------
Investment income -- net, and realized gain on
investments -- net 5.03% 5.12% 4.97% 5.50% 4.02%
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $408,517 $318,052 $274,756 $303,912 $363,199
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Amount is less than $.0001 per share.
</TABLE>
MERRILL LYNCH DOMESTIC MONEY MARKET FUND 5
<PAGE> 42
Details About the Fund [DETAILS ABOUT THE FUND ICON]
MATURITY -- the time at which the full principal amount of a fixed-income
security is scheduled to be repaid.
AGENCIES -- entities that are part of or sponsored by the federal government,
such as the Government National Mortgage Administration ("Ginnie Mae"), the
Tennessee Valley Authority or the Federal Housing Administration.
GOVERNMENT SPONSORED ENTERPRISES -- private corporations sponsored by the
federal government which have the legal status of
government agencies, such as the
(continued on next page)
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund invests all its assets in money market instruments. These instruments
are generally fixed-income securities that MATURE or reset to a new interest
rate within 13 months (25 months if the U.S. government or a government agency
has issued or guaranteed the debt). Other than U.S. government and government
agency securities, the Fund only invests in money market instruments of issuers
with one of the two highest short-term ratings from a nationally recognized
credit rating organization or unrated instruments which, in the opinion of the
Fund's management, are of similar credit quality.
The money market instruments in which the Fund may invest include:
- United States Government Securities -- Debt securities issued or
guaranteed as to principal and interest by the U.S. government
that are supported by the full faith and credit of the United
States.
- United States Government Agency Securities -- Debt securities
issued or guaranteed as to principal and interest by U.S.
government AGENCIES, GOVERNMENT SPONSORED ENTERPRISES and
government INSTRUMENTALITIES. Agency securities may be supported
only by the credit of the issuer, not the full faith and credit
of the United States.
- Bank Money Instruments -- Obligations of commercial banks or
other depository institutions, such as certificates of deposit,
time deposits, bank notes and bankers' acceptances.
- Commercial Paper -- Obligations, usually of nine months or less,
issued by corporations and other businesses for short-term
funding.
- Short-Term Obligations -- Corporate debt and ASSET-BACKED
SECURITIES with a period of 397 days or less remaining to
maturity.
- Floating Rate Obligations -- Obligations of government agencies,
corporations, depository institutions or other issuers which
periodically reset their interest rate to reflect a current
market rate, such as the federal funds rate or a bank's prime
rate, or the level of an interest rate INDEX, such as LIBOR (a
well-known short-term interest rate index).
6 MERRILL LYNCH DOMESTIC MONEY MARKET FUND
<PAGE> 43
(continued from previous page)
Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student Loan
Marketing Association ("Sallie Mae") or Fannie Mae.
INSTRUMENTALITIES -- supranational entities sponsored by the U.S. and other
governments, such as the World Bank or the Inter-American Development Bank.
ASSET-BACKED SECURITY -- fixed- income securities issued by a trust or other
legal entity established for the purpose of issuing securities and holding
certain assets, such as credit card receivables or auto leases, that pay down
over time and generate sufficient cash to pay holders of the securities.
INDEX -- a measure of value or rates.
ABOUT THE PORTFOLIO MANAGER
Jacqueline Rogers is the Portfolio Manager of the Fund since October 1996. She
has served as Vice President of MLAM since January 1986.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
- Insurance Company Obligations -- Short-term funding agreements
and guaranteed insurance contracts with fixed or floating
interest rates.
- Master Notes -- Variable principal amount demand instruments
issued by securities firms and other corporate issuers.
- Other Eligible Investments -- Other money market instruments
permitted by SEC rules governing money market funds.
The Fund may also engage in the following investment practices:
- Repurchase Agreements -- Repurchase agreements are transactions
in which the Fund purchases a class of securities with the
obligation to resell the securities shortly thereafter at a
specified price which reflects interest payable to the Fund. The
Fund may engage in repurchase agreements involving any of the
above instruments (without regard to the instrument's maturity).
- Reverse Repurchase Agreements -- Reverse repurchase agreements
are transactions in which the Fund sells a security with the
obligation to repurchase the security shortly thereafter at a
specified price which reflects a payment by the Fund. The Fund
profits from entering into a reverse repurchase agreement by
reinvesting the proceeds of the sale at a higher return than it
has to pay to repurchase its security.
The Fund's management will vary the types of money market instruments in the
Fund's portfolio, as well as the Fund's average maturity, in response to its
assessment of the relative value of different securities and future short-term
interest rates.
The Fund will only invest in money market obligations of U.S. issuers. For this
purpose, the Fund may consider an obligation of a foreign subsidiary of a U.S.
company to be an obligation of a U.S. issuer if the obligation is fully
guaranteed by the U.S. parent company.
MERRILL LYNCH DOMESTIC MONEY MARKET FUND 7
<PAGE> 44
[DETAILS ABOUT THE FUND ICON] Details About the Fund
The Fund's management will attempt to maintain a share value of $1.00, but there
is no guarantee that it will be able to do so. The Fund could lose money if
- the issuer of an instrument held by the Fund defaults, or
- short-term interest rates move sharply in a manner not
anticipated by Fund management,
although the risk of loss is minimized by the high credit quality and short-
term maturity of the Fund's investments. In order to maintain a share value of
$1.00, the Fund may reduce the number of shares held by its shareholders.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/ semi-annual reports.
8 MERRILL LYNCH DOMESTIC MONEY MARKET FUND
<PAGE> 45
[Domestic Money Market Fund Chart]
THE MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments - x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 10 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities - x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH DOMESTIC MONEY MARKET FUND 9
<PAGE> 46
TABLE OF CONTENTS
Merrill Lynch Global Bond Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Global Bond Focus Fund at a Glance........ 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GLOBAL BOND FOCUS FUND
<PAGE> 47
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
TOTAL INVESTMENT RETURN -- the combination of capital appreciation (from
increases or decreases in the market value of investments) and current income
(from interest or dividends).
INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a debt instrument may be short-term (two
years or under), intermediate-term (two to ten years) or long-term (over ten
years).
MULTI-NATIONAL CURRENCY UNIT -- a measure of value consisting of specified
amounts of various underlying currencies.
SUPRANATIONAL ENTITIES -- international organizations sponsored by the U.S. and
other governments, such as the World Bank and the Inter-American Development
Bank.
THE MERRILL LYNCH GLOBAL BOND FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high TOTAL INVESTMENT RETURN.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose a mix of fixed-income investments including some that
will increase in value, some that provide current income through interest, and
some that may do both. The Fund tries to blend these investments to create a
portfolio that produces a high total return. We cannot guarantee that the Fund
will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of INVESTMENT GRADE fixed-income securities
denominated in various currencies, including MULTI-NATIONAL CURRENCY UNITS. The
Fund may purchase securities of all MATURITIES issued by corporations,
governments and SUPRANATIONAL ENTITIES. The Fund will normally invest most of
its assets in securities denominated in foreign currencies, and may invest in
securities linked to an interest rate or other index. The Fund is a non-
diversified fund, which means that it can invest more of its assets in fewer
securities than most other funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. These changes in the value of the
Fund's investments may occur in response to interest rate movements, currency
movements or other factors that may affect a particular issuer or security.
Generally, when interest rates go up, the value of fixed-income securities goes
down, and when a currency appreciates (or depreciates) versus the U.S. dollar,
fixed-income securities denominated in that currency appreciate (or depreciate)
in U.S. dollar terms. In addition, the value of a fixed income security is also
affected by perception of the issuer's ability to satisfy its obligations -- if
the issuer may not satisfy its obligations, the value of the security goes down.
If the value of the Fund's investments goes down, you may lose money.
The Fund will normally invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may be less liquid and harder to value
than U.S. securities.
MERRILL LYNCH GLOBAL BOND FOCUS FUND 3
<PAGE> 48
[KEY FACTS ICON] Key Facts
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but hurts the Fund's
performance when its investments are unsuccessful.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing for long-term goals, such as retirement
- want a professionally managed and diversified portfolio
- want to diversify the types of investment funding their contract
- are looking for exposure to a variety of fixed-income markets
- are willing to accept the risk that the value of their
investment may decline in exchange for potentially higher
long-term returns
4 MERRILL LYNCH GLOBAL BOND FOCUS FUND
<PAGE> 49
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for the Fund's Class A shares
for the periods shown with those of the Merrill Lynch (ML) US Treasuries
Agencies 1-10 years and JP Morgan Global Government Bond Index. How the Fund
performed in the past is not necessarily an indication of how the Fund will
perform in the future. The bar chart and table do not reflect separate account
fees and expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
-4.21% 16.69% 8.02% 1.95% 12.62%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
4.77% (quarter ended June 30, 1995) and the lowest return for a quarter was
- -4.82% (quarter ended March 31, 1997). The year-to-date return as of March 31,
1999 was -3.42%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED PAST PAST
DECEMBER 31, 1998) ONE YEAR FIVE YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Global Bond Focus 12.62% 6.75% 7.23%+
- -----------------------------------------------------------------------------------------
ML US Treasuries Agencies 1-10 yrs* 8.51% 6.51% 6.33%
- -----------------------------------------------------------------------------------------
JP Morgan Global Government
Bond Index* 15.31% 8.08% 8.17%
- -----------------------------------------------------------------------------------------
</TABLE>
* This unmanaged Index is comprised of intermediate-term government bonds
maturing in one to ten years. Past performance is not predictive of future
performance.
** This unmanaged Index is comprised of government bonds in the 13 largest bond
markets, including the United States. Past performance is not predictive of
future performance.
+ Inception date is July 1, 1993
5 MERRILL LYNCH GLOBAL BOND FOCUS FUND
<PAGE> 50
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
GLOBAL BOND FOCUS FUND# (CLASS A)
------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998+ 1997+ 1996+ 1995+ 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year $9.32 $9.76 $9.79 $9.17 $10.38
- --------------------------------------------------------------------------------------------------
Investment income -- net .55 .56 .78 .85 .76
- --------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .58 (.40) (.03) .61 (1.19)
- --------------------------------------------------------------------------------------------------
Total from investment operations 1.13 .16 .75 1.46 (.43)
- --------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.47) (.29) (.78) (.84) (.76)
In excess of investment income -- net -- (.28) -- -- --
Return of Capital (.08) (.03) -- -- --
In excess of realized gain on
investments -- net -- -- -- -- (.02)
- --------------------------------------------------------------------------------------------------
Total dividends and distributions (.55) (.60) (.78) (.84) (.78)
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $9.90 $9.32 $9.76 $9.79 $9.17
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- --------------------------------------------------------------------------------------------------
Based on net asset value per share 12.62% 1.95% 8.02% 16.69% (4.21%)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------------------------
Expenses .75% .73% .69% .68% .75%
- --------------------------------------------------------------------------------------------------
Investment income -- net 5.72% 6.11% 7.95% 8.99% 8.01%
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 69,416 $76,107 $93,790 $81,845 $75,150
- --------------------------------------------------------------------------------------------------
Portfolio turnover 127.93% 568.76% 267.13% 132.57% 117.58%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH GLOBAL BOND FOCUS FUND
<PAGE> 51
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Harry Escobar is Portfolio manager of the Fund since December 1998. Mr. Escobar
has served as Director of MLAM since 1998. Previously, he was a Senior Vice
President at Lehman Brothers, Inc. from 1991 to 1998.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in U.S. and foreign fixed-income securities that have a
long-term credit rating of A or better by Standard & Poor's Ratings Group
("S&P") or by Moody's Investors Service, Inc. ("Moody's") or a short-term credit
rating in the highest category of either S&P or Moody's. Fixed-income securities
include:
- short-, intermediate- and long-term U.S. and foreign government
debt securities
- short-, intermediate- and long-term corporate debt securities
issued by U.S. companies and foreign companies
- term preferred stock (that is, preferred stock which returns
principal at a set time) issued by U.S. and foreign companies
- corporate debt securities convertible into common stock
- money market securities
Under normal circumstances, the Fund will invest at least 90% of its assets in
such securities.
The Fund may invest in fixed-income securities denominated in any currency or
multinational currency unit. The Fund's management currently anticipates that
substantially all of the Fund's assets will be denominated in the currencies of
the United States, Canada, Western European nations, Australia, New Zealand,
Japan and other developed countries. Under normal circumstances, the Fund's
investments will be denominated in at least three currencies or multi-national
currency units. Changes in the value of fixed-income securities denominated in a
foreign currency may occur in response to movements in the value of that
currency versus the U.S. dollar -- generally, when a currency appreciates (or
depreciates) versus the U.S. dollar, fixed-income securities denominated in that
currency appreciate (or depreciate) in U.S. dollar terms. Because the Fund will
invest a substantial portion of its assets in fixed-income securities
denominated in foreign currencies, appreciation of the U.S. dollar may cause the
value of the Fund's investments to decline significantly.
Many Western European countries have adopted a common currency (the Euro). Other
countries maintain systems that fix the value of their currency at specified
amounts of another currency or seek to maintain the value of their currency
within specified limits, or "bands", relative to other currencies.
MERRILL LYNCH GLOBAL BOND FOCUS FUND 7
<PAGE> 52
[DETAILS ABOUT THE FUND ICON] Details About the Fund
In the event a common currency or currency valuation system is not maintained,
currency markets may be extremely volatile and certain of the Fund's holdings
may rise or decrease sharply in value as the affected currencies return to
market levels.
Under normal circumstances, the Fund will maintain a dollar-weighted average
maturity of no greater than ten years. The Fund, however, may invest in
fixed-income securities of any maturity. Changes in the value of fixed-income
securities may occur in response to interest rate movements -- generally, when
interest rates go up, the value of most fixed-income securities goes down. In
most cases, when interest rates go up, the value of fixed-income securities with
longer-term maturities goes down more than the value of fixed-income securities
with shorter maturities. Because the Fund may invest a substantial portion of
its assets in fixed-income securities with long-term maturities, rising interest
rates may cause the value of the Fund's investments to decline significantly.
The Fund's management will seek investments for the Fund with the potential for
high total return. When selecting investments, the Fund's management will
consider the current yield of a security; the likelihood that the currency in
which the security is denominated will appreciate or depreciate versus the U.S.
dollar; and that the likelihood that interest rates in that currency will
change. The Fund may invest in securities with relatively high current yields
but little potential for capital appreciation, and also may invest in securities
with relatively low current yields but higher potential for capital appreciation
as a result of interest or currency movements. The Fund may also invest in a
security with a relatively high current yield but the potential for loss of
capital through currency depreciation if, in the opinion of the Fund's
management, the security offers high potential total return. The Fund may engage
in currency transactions to seek to hedge against the risk of loss from changes
in currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective.
The Fund may invest in securities the potential return of which is based on the
change in a specified interest rate, index or currency (an "indexed security").
For example, the Fund may invest in an indexed security that pays a variable
amount of interest at each payment based on the current level of LIBOR (a
well-known short-term interest rate index) or in an
8 MERRILL LYNCH GLOBAL BOND FOCUS FUND
<PAGE> 53
indexed security that returns an amount of principal based on changes in the
value of a currency versus the U.S. dollar. Certain indexed securities have
greater sensitivity to changes in interest rates than typical fixed-income
securities, and the Fund's investments in such instruments may decline in value
significantly if interest rates or currencies move in a manner not anticipated
by Fund management. For more information regarding these securities and other
types of derivatives in which the Fund may invest, please see the table below
and the Appendix to this Prospectus.
The Fund has no minimum holding period for investments and will buy or sell
securities or other assets whenever the Fund's management sees an appropriate
opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH GLOBAL BOND FOCUS FUND 9
<PAGE> 54
[DETAILS ABOUT THE FUND ICON] Details About The Fund
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Global Bond Focus Fund Chart]
THE MERRILL LYNCH GLOBAL BOND FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities - x x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information about this Fund is discussed in the Appendix which is
part of this Prospectus.
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
10 MERRILL LYNCH GLOBAL BOND FOCUS FUND
<PAGE> 55
Table of Contents
Merrill Lynch Global Growth Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Global Growth Focus Fund at a Glance...... 3
Risk/Return Chart........................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 6
Investment Strategies....................................... 8
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GLOBAL GROWTH FOCUS FUND
<PAGE> 56
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
EQUITIES -- securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
THE MERRILL LYNCH GLOBAL GROWTH FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Global Growth Focus Fund is to seek long-term
growth of capital.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose investments that will increase in value. We cannot
guarantee that the Fund will achieve its goal.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in EQUITIES of companies that have shown above-
average earnings growth. The Fund will purchase securities of U.S. and foreign
companies, and normally invests in at least three countries at any given time.
The Fund can buy securities denominated in foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's investments may occur because the stock market is rising or falling or as
the result of specific factors that affect particular investments. If the value
of the Fund's investments goes down, you may lose money.
The Fund can invest a significant portion of its assets in foreign securities.
Foreign investing involves special risks, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with long-term goals in mind, such as retirement
- want a professionally managed and diversified portfolio
- are looking for exposure to a variety of equity markets and are
willing to accept the risks of international investing
- are willing to accept the risk of short-term fluctuations in
exchange for the potential of higher long-term returns
- are not looking for a significant amount of current income.
MERRILL LYNCH GLOBAL GROWTH FOCUS FUND 3
<PAGE> 57
RISK/RETURN CHART
- --------------------------------------------------------------------------------
Performance information is not available for the Fund because the Fund has been
in operation for less than one full fiscal year.
4 MERRILL LYNCH GLOBAL GROWTH FOCUS FUND
<PAGE> 58
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
GLOBAL GROWTH FOCUS FUND (CLASS A)++
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: FOR THE PERIOD JUNE 5, 1998+ TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00
- --------------------------------------------------------------------------------------------------------------
Investment income -- net .03
- --------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
on investments and foreign currency transactions -- net .79
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .82
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.82
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- --------------------------------------------------------------------------------------------------------------
Based on net asset value per share 8.20%#
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS: --
- --------------------------------------------------------------------------------------------------------------
Expenses 1.03%*
- --------------------------------------------------------------------------------------------------------------
Investment income -- net .63%*
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $19,657
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover 15.25%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
</TABLE>
MERRILL LYNCH GLOBAL GROWTH FOCUS FUND, INC. 5
<PAGE> 59
Details About the Fund [DETAILS ABOUT THE FUND ICON]
MARKET CAPITALIZATION - the number of shares of a company's stock, multiplied
by the price per share of that stock. Market capitalization is a measure of a
company's size.
LIQUIDITY - the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, consequently, greater volatility.
VOLATILITY - the frequency and amount of changes to a security's value.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund tries to choose investments for capital appreciation -- that is,
investments that will increase in value. The Fund will invest in a diversified
portfolio primarily consisting of equity securities of U.S. and non-U.S.
companies. The Fund will generally invest at least 65% of its assets in equity
securities. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as options and futures, the values
of which are based on a common stock or group of common stocks
The Fund will focus on investments in common stock of large and mid-size
companies. These companies typically have stock MARKET CAPITALIZATIONS of $2
billion or more. However, the Fund may invest in some companies with lower
market capitalization.
Fund management emphasizes stocks of companies that Fund management believes
have a high potential for above-average growth rates in earnings. Fund
management looks for companies that are leaders in their industries and that
have the ability to achieve above-average earnings growth by capitalizing on
favorable economic trends that favor those industries. Fund management also
looks for companies that are introducing promising new products, achieving
strong growth in sales of existing products through improved pricing or
increasing sales volume, developing operating efficiencies or increasing market
share. Companies with a high potential for above-average earnings growth
frequently provide the opportunity for above average stock market returns, but
also frequently have above-average price/ earnings ratios, above-average
price/book value ratios, below-average dividends or other statistical
characteristics associated with high relative valuation. As a result, their
shares may be more vulnerable to price declines from unexpected adverse
developments.
The Fund may invest a significant portion of its assets in securities of foreign
issuers, and will normally invest in securities from at least three countries at
any given time. The Fund may invest in securities from any country. The Fund's
management, however, anticipates that a substantial portion of the Fund's
foreign investments will be in issuers in the developed markets of Europe and
the Far East. The Fund may also invest in stocks of companies in emerging
markets, but the Fund's management anticipates that a greater
6 MERRILL LYNCH GLOBAL GROWTH FOCUS FUND
<PAGE> 60
ABOUT THE PORTFOLIO MANAGER
Lawrence R. Fuller is the Portfolio Manager of the Global Growth Focus Fund. Mr.
Fuller has been a First Vice President of the Investment Adviser since 1997, a
Vice President from 1992 to 1997, and is responsible for the day-to-day
management of the Fund's investment portfolio.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
portion of the Fund's foreign investments will be in issuers in developed
markets. Foreign investing involves special risks, including foreign currency
risk and the possibility of substantial VOLATILITY due to adverse political,
economic or other developments. Foreign securities may also be less LIQUID and
harder to value than U.S. securities. These risks are greater for investments in
emerging markets.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH GLOBAL GROWTH FOCUS FUND 7
<PAGE> 61
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Global Bond Focus Fund Chart]
THE MERRILL LYNCH GLOBAL BOND FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 33 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities + x x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options + x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
8 MERRILL LYNCH GLOBAL GROWTH FOCUS FUND
<PAGE> 62
TABLE OF CONTENTS
Merrill Lynch Global Strategy Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Global Strategy Focus Fund at a Glance.... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
<PAGE> 63
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
TOTAL INVESTMENT RETURN - the combination of capital appreciation (from
increases or decreases in the market value of investments) and current income
(from interest or dividends)
EQUITIES - Securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
FIXED-INCOME SECURITIES - Instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as preferred stock
that carries a promised level of dividend payments.
INVESTMENT GRADE - any of the four highest debt obligation ratings by recognized
rating agencies such as Moody's Investors Service, Inc., Standard & Poor's or
Fitch IBCA, Inc.
THE MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Global Strategy Focus Fund is to seek high TOTAL
INVESTMENT RETURN.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose some investments that will increase in value and others
that pay dividends or interest. We cannot guarantee that the Fund will achieve
its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in U.S. and foreign equity and fixed-income securities. There
are no limits on the Fund's ability to invest in specific geographic regions. At
the present time, the Fund focuses on investments in Canada, Western Europe, the
Far East, and Latin America, as well as in the U.S. The Fund normally invests in
at least three countries at any given time. The Fund usually invests more in
EQUITIES than in FIXED-INCOME securities. When it invests in fixed-income
securities, the Fund will select INVESTMENT GRADE corporate securities, and
obligations of U.S. or foreign governments and agencies or international
organizations. The Fund can invest in securities denominated in foreign
currencies. The Fund is non-diversified, which means that the Fund can invest
more of its assets in fewer securities than most other funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may fluctuate. These changes in the value of the
Fund's equity investments may occur because one or more stock markets around the
world are generally rising or falling. Changes in the value of the Fund's
fixed-income securities may occur in response to interest rate movements
generally when interest rates go up, the value of fixed-income securities goes
down. Changes in the value of both the Fund's equity and fixed-income
investments may also occur as the result of specific factors that affect the
value of a particular investment. For certain debt investments, these specific
factors include the possibility that the issuer may default on its obligations.
If the value of the Fund's investments goes down, you may lose money.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but hurts the Fund's
performance when its investments are unsuccessful.
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 3
<PAGE> 64
[KEY FACTS ICON] Key Facts
The Fund can invest a significant portion of its assets in foreign securities.
Foreign investing involves special risks, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing for long-term goals, such as retirement
- want a professionally managed and diversified portfolio
- are looking for exposure to a variety of asset classes,
including investments in foreign markets
- are willing to accept higher risk in exchange for potentially
higher long-term returns
- are not looking for a significant amount of current income.
4 MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
<PAGE> 65
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns of the Fund's Class A shares for
the periods shown with those of the Morgan Stanley Capital International
("MSCI") World Index and the Weighted Index. How the Fund performed in the past
is not necessarily an indication of how the Fund will perform in the future. The
bar chart and table do not reflect separate account fees and expenses, which, if
reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<S> <C>
1993 21.03%
1994 -1.46%
1995 10.60%
1996 13.17%
1997 11.94%
1998 8.87%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
12.22% (quarter ended June 30, 1997) and the lowest return for a quarter was
- -12.04% (quarter ended September 30, 1998). The year-to-date return as of March
31, 1999 was 0.73%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST SINCE
DECEMBER 31, 1998 ONE YEAR FIVE YEARS INCEPTION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Global Strategy Focus 8.87% 8.49% 9.56%+
- ---------------------------------------------------------------------------
MSCI World Index* 24.34% 15.67% 14.30%
- ---------------------------------------------------------------------------
Weighted Index** 16.63% 9.59% 9.48%
- ---------------------------------------------------------------------------
</TABLE>
* This unmanaged market capitalization-weighted index is comprised of a
representative sampling of stocks of large-, medium-, and
small-capitalization companies in 22 countries, including the United States.
Past performance is not predictive of future performance.
** This unmanaged index, which is an equally weighted blend of the Morgan
Stanley World Index, the Salomon Brothers World Government Bond Index and the
Salomon Brothers World Money Market Index, is comprised of a representative
sampling of stocks of large-, medium-, and
small-capitalization companies in 22 countries, government bonds and money
market securities in the major markets, including the United States. Past
performance is not predictive of future performance.
+ Inception date is February 28, 1992.
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 5
<PAGE> 66
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
GLOBAL STRATEGY FOCUS FUND (CLASS A)
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $14.71 $13.87 $12.55 $11.73 $12.17
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .34 .35 .28 .39 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and
foreign currency transactions -- net .76 1.21 1.33 .82 (.48)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.10 1.56 1.61 1.21 (.18)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.55) (.30) (.29) (.39) (.21)
Realized gain on investments -- net (1.70) (.42) -- --+ (.04)
In excess of realized gain on
investments -- net (.15) -- -- -- (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.40) (.72) (.29) (.39) (.26)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $13.41 $14.71 $13.87 $12.55 $11.73
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 8.87% 11.94% 13.17% 10.60% (1.46%)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .72% .73% .71% .72% .77%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.40% 2.33% 2.68% 3.33% 2.85%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, end of year (in thousands) $766,026 $869,647 $870,203 $540,242 $515,407
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 120.59% 108.66% 173.44% 27.23% 21.03%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Amount is less than $.01 per share.
</TABLE>
6 MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
<PAGE> 67
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson is the Portfolio Manager of the Fund since November 1995. He
has served as a First Vice President of MLAM since 1997 and as a Senior
Portfolio Manager of MLAM from November 1995 to 1997. From 1989 to 1995, he
served as Manager of International Strategy for Merrill Lynch & Co. Global
Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund can invest in both equity securities and fixed-income securities. The
Fund may invest entirely in equity securities, entirely in fixed-income
securities, or partly in equity securities and partly in fixed-income
securities. The Fund will usually hold at least some equity securities and some
fixed-income securities.
There are no limits on the Fund's ability to invest in any country or geographic
region. The Fund can invest primarily in U.S. securities, primarily in foreign
securities, or partly in U.S. securities and partly in foreign securities. At
the present time, the Fund focuses on investments in Canada, Western Europe, the
Far East, and Latin America, as well as in the U.S. The Fund normally invests in
at least three countries at any given time.
The Fund's management will select the percentages of the total portfolio
invested in equity securities and fixed-income securities, as well as the
geographic allocation of the Fund's investments, based on its views of general
economic and financial trends in various countries and industries, such as
inflation, commodity prices, the direction of interest and currency movements,
estimates of growth in industrial output and profits, and government fiscal
policies. The Fund's management will seek to allocate the Fund's investments
among the various types of securities in which the Fund may invest in a manner
that it believes will best capitalize on the economic and financial trends that
it perceives. For example, if the Fund's management believes that falling
commodity prices and decreasing estimates of industrial output globally signal
low growth and limited returns from equity securities, the Fund may emphasize
fixed-income investments. Similarly, if the Fund's management believes that low
inflation, new technologies and improvements in economic productivity in a
country or region signal a promising environment for equity securities in that
country or region, the Fund may emphasize equity investments in that country or
region. There is no guarantee that Fund management will be able to correctly
forecast economic or financial trends or be able to select investments that will
benefit from the trends perceived by Fund management.
The Fund may invest a significant portion of its assets in equity securities.
The equity securities in which the Fund invests will primarily be common stocks
of large companies. The Fund may invest in equity securities of companies
throughout the world. The Fund's management, however, anticipates that the
Fund's equity investments will primarily be in companies
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 7
<PAGE> 68
[DETAILS ABOUT THE FUND ICON] Details About the Fund
MATURITY -- The time at which the full principal amount of a debt security is
scheduled to be repaid.
in the United States, Canada, the Far East, Latin America and the developed
markets of Europe. The Fund may invest in companies in emerging markets, but the
Fund's management anticipates that a substantially greater portion of the Fund's
equity investments will be in companies in developed markets.
The Fund may also invest in fixed-income securities, including U.S. and foreign
government securities and corporate debt securities. The Fund will only invest
in debt securities that are rated investment grade by Standard & Poor's Ratings
Group or Moody's Investor's Service, Inc., or unrated securities which, in the
opinion of Fund management, are of comparable quality. The Fund may invest in
fixed-income securities of any MATURITY. Changes in the value of fixed-income
securities may occur in response to interest rate movements -- generally, when
interest rates go up, the value of most fixed-income securities goes down. In
most cases, when interest rates go up, the value of fixed-income securities with
longer-term maturities goes down more than the value of fixed-income securities
with shorter maturities. Because the Fund may invest a substantial portion of
its assets in fixed-income securities with long-term maturities, rising interest
rates may cause the value of the Fund's fixed-income investments to decline
significantly.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective.
The Fund may also invest in securities the potential return of which is based on
the change in a specified interest rate or equity index (an "indexed note"). For
example, the Fund may invest in a security that pays a variable amount of
interest or principal based on the current level of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500"). The Fund may also invest in indexed
securities the potential return of which is based inversely on the change in a
specified interest rate or equity index (an "inverse note"). Inverse notes
generally change in value in a manner that is opposite to most fixed-income
securities -- that is, interest rates or principal payments on inverse notes
increase when the underlying interest or equity
8 MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
<PAGE> 69
index decreases and decrease when the underlying interest rate or equity index
increases. Certain indexed notes and inverse notes have greater sensitivity to
changes in interest rates or equity index levels than other securities, and the
Fund's investments in such instruments may decline in value significantly if
interest rates or equity index levels move in a manner not anticipated by Fund
management. For more information regarding these securities and other types of
derivatives in which the Fund may invest, please see the table below and the
Appendix to this Prospectus.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND 9
<PAGE> 70
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Global Strategy Focus Fund Chart]
THE MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities + x x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
10 MERRILL LYNCH GLOBAL STRATEGY FOCUS FUND
<PAGE> 71
TABLE OF CONTENTS
MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Global Utility Focus Fund at a Glance..... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 9
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
<PAGE> 72
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
UTILITY COMPANIES -- companies that are primarily engaged in owning or operating
facilities that generate, transmit, or distribute electricity,
telecommunications, gas or water.
COMMON STOCK -- shares of ownership of a Corporation.
PREFERRED STOCK -- a type of equity security that typically pays dividends at a
fixed rate and gives holders priority over common stock holders with respect to
dividend payments and liquidation rights.
BONDS -- a fixed income security issued by either a corporation or by a
government agency or instrumentality.
THE MERRILL LYNCH GLOBAL UTILITY FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
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 Fund management, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose some investments that will increase in value and others
that pay dividends or interest. We cannot guarantee that the Fund will achieve
its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified portfolio of securities issued by UTILITY
COMPANIES. Except during temporary defensive periods, the Fund invests at least
65% of its total assets in equity and debt securities issued by domestic and
foreign utility companies. The Fund may invest in COMMON STOCK, PREFERRED STOCKS
and BONDS. Fund management changes its allocation among these types of
investments as it sees appropriate to seek to meet the Fund's objective. The
Fund normally invests in at least three countries at any given time. The Fund
can buy securities that are denominated in foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may fluctuate. Changes in the value of the Fund's equity
investments may occur because a particular stock market is rising or falling.
The value of the Fund's fixed income investments may change in response to
overall interest rate changes. Generally, when interest rates go up, the value
of utility company securities, and the value of fixed income securities overall,
goes down. At other times, specific factors may affect the value of a particular
equity or fixed-income investment. If the value of the Fund's investments goes
down, you may lose money.
As a sector fund investing in utility companies, the Fund is subject to the
risks associated with investments in utility companies, in addition to the
general risks of the stock and bond markets. This means the Fund is more
MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
3
<PAGE> 73
[KEY FACTS ICON] Key Facts
LIQUID -- the ease with which a security can be traded. Securities that are less
liquid have fewer potential buyers and, as a consequence, greater volatility.
vulnerable to price fluctuations of utility companies and other factors that
particularly affect the utilities industry than a more broadly diversified
mutual fund. In addition, the value of common stock issued by utility companies
have historically been correlated with changes in interest rates. Generally,
when interest rates go up, stocks of utility companies go down. There is no
guarantee that this relationship will continue in the future.
The Fund may invest most of its assets in non-U.S. securities. Foreign investing
involves special risks, including foreign currency risk and the possibility of
substantial volatility due to adverse political, economic and other
developments. Foreign securities may also be less LIQUID and harder to value
than U.S. securities. These risks are greater for investments in emerging
markets.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing for long-term goals, such as retirement, but also
seek some current income
- want to diversify their portfolio to include utility companies
- are looking for exposure to a variety of foreign markets
- are willing to accept the higher risks of foreign investments in
exchange for potentially higher long-term returns.
4 MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
<PAGE> 74
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns of the Fund's Class A shares for
the periods shown with those of the Financial Times/Standard &
Poor's -- Actuaries World and World Utility Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future. The bar chart and table do not reflect separate account fees and
expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<S> <C> <C> <C> <C>
1994 1995 1996 1997 1998
- -8.51% 24.33% 12.96% 25.90% 24.06%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
14.72% (quarter ended December 31, 1998) and the lowest return for a quarter was
- -6.69% (quarter ended March 31, 1994). The year-to-date return as of March 31,
1999 was -4.47%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR
THE
CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Global Utility Focus 24.06% 14.95% 14.87%+
- -------------------------------------------------------------------------------------
FT/S&P -- Actuaries World Utility
Index** 36.67% 16.30% 15.63%
- -------------------------------------------------------------------------------------
FT/S&P -- Actuaries World Index* 23.04% 15.27% 14.98%
- -------------------------------------------------------------------------------------
</TABLE>
* This unmanaged market capitalization-weighted Index is comprised of nearly
2,307 equities from 29 countries in 17 regions, including the United States.
Past performance is not predictive of future performance.
** This unmanaged market capitalization-weighted Index is comprised of utility
stocks from any of the 24 countries that make up the Financial Times/Standard
& Poor's -- Actuaries Index. Past performance is not predictive of future
performance.
+ Inception date is July 1, 1993.
MERRILL LYNCH GLOBAL UTILITY FOCUS FUND 5
<PAGE> 75
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
GLOBAL UTILITY FOCUS FUND (CLASS A)
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998+ 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $14.84 $12.19 $11.30 $9.45 $10.66
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .36 .43 .46 .45 .35
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net 2.99 2.66 .95 1.79 (1.25)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.35 3.09 1.41 2.24 (.90)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.40) (.44) (.52) (.39) (.29)
Realized gain on investments -- net (.71) -- -- -- --
In excess of realized gain on
investments -- net -- -- -- -- (.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.11) (.44) (.52) (.39) (.31)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $17.08 $14.84 $12.19 $11.30 $9.45
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 24.06% 25.90% 12.96% 24.33% (8.51%)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .68% .67% .66% .66% .73%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 2.39% 3.21% 3.90% 4.44% 3.68%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $144,978 $138,206 $142,438 $148,225 $126,243
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 5.20% 7.70% 11.39% 11.05% 9.52%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
<PAGE> 76
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Walter Rogers is the Portfolio Manager of the Fund since July 1993. He has
served as First Vice President of MLAM since 1997 and a Vice President from 1987
to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
DIVIDEND YIELD -- a common stock's annualized dividend stream divided by the
stock's current price, which represents the stock's current expected rate of
current income.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund can invest in both equity securities and fixed-income securities. The
Fund may invest entirely in equity securities, entirely in fixed-income
securities, or partly in equity securities and partly in fixed-income
securities. Fund management anticipates that under normal circumstances a
substantial portion of the Fund's investments will be in common stocks.
There are no limits on the Fund's ability to invest in any country or geographic
region. The Fund can invest primarily in U.S. securities, primarily in foreign
securities, or partly in U.S. securities and partly in foreign securities. The
Fund normally invests in at least three countries at any given time. The Fund
may invest in companies in emerging markets, but the Fund's management
anticipates that a substantially greater portion of the Fund's equity
investments will be in companies in developed countries. At the present time,
Fund management anticipates that the Fund will invest more, of its assets in
U.S. securities than in securities of any other single country.
In selecting securities for the Fund's portfolio, Fund management emphasizes
securities of utility companies that have strong financial characteristics. Fund
management assesses the financial strength of a utility company by considering
such factors as financial resources, quality of management, regulatory
environment and overall business prospects for the company.
To meet its objective of current income, the Fund may invest in United States
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 U.S. utility companies historically have significantly exceeded those
of industrial companies' common stocks.
The Fund may also look for utility companies that may prosper in a deregulated
environment. Historically, utility companies have been highly regulated.
Currently, there is a growing movement worldwide to deregulate utility
companies, particularly electric utility and telecommunications companies, and
permit greater competition among them. Deregulation may allow certain utility
companies to increase earnings at a faster rate than was allowed in a regulated
environment. Deregulation, however, presents both risks and opportunities for
investors in utility company securities. For example, in recent years, changes
in regulation in the United States increasingly have allowed utility companies
to provide services and products
MERRILL LYNCH GLOBAL UTILITY FOCUS FUND 7
<PAGE> 77
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT GRADE -- any of the four highest debt obligation ratings of a
recognized rating agency such as: Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group or Fitch IBCA, Inc.
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 emergence of
competition and deregulation may 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
therefore be less profitable.
The Fund may also invest in fixed-income securities, including debt securities
issued by the U.S. and foreign utility companies. The Fund will generally invest
in debt securities that are rated INVESTMENT GRADE by Standard & Poor's Ratings
Group or Moody's Investor's Service, Inc., or unrated securities which, in the
opinion of Fund management, are of comparable quality, but the Fund may invest
up to 5% of its assets in lower rated debt securities, also known as "junk
bonds." The Fund may invest in fixed-income securities of any maturity. Changes
in the value of fixed-income securities may occur in response to interest rate
movements -- generally, when interest rates go up, the value of most
fixed-income securities goes down. In most cases, when interest rates go up, the
value of fixed-income securities with longer-term maturities goes down more than
the value of fixed-income securities with shorter maturities.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
8 MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
<PAGE> 78
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Global Utility Focus Fund Chart]
THE MERRILL LYNCH GLOBAL UTILITY FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities 5 x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities + x x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information about this Fund is discussed in the Appendix which is
part of this Prospectus.
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH GLOBAL UTILITY FOCUS FUND 9
<PAGE> 79
TABLE OF CONTENTS
Merrill Lynch Government Bond Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Government Bond Fund at a Glance.......... 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 6
Investment Strategies....................................... 8
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH GOVERNMENT BOND FUND
<PAGE> 80
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a debt instrument may be short-term (two
years or under), intermediate-term (two to ten years) or long-term (over ten
years).
AGENCIES -- entities that are part of or sponsored by the federal government,
such as the Government National Mortgage Administration ("Ginnie Mae"), the
Tennessee Valley Authority or the Federal Housing Administration.
INSTRUMENTALITIES -- supranational entities sponsored by the U.S. and other
governments, such as the Inter-American Development Bank.
GOVERNMENT SPONSORED ENTERPRISES -- private corporations sponsored by the
federal government which have the legal status of government agencies, such as
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student Loan
Marketing Association ("Sallie Mae") or Fannie Mae.
THE MERRILL LYNCH GOVERNMENT BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek the highest possible current income
consistent with the protection of capital.
WHAT ARE THE FUND'S OBJECTIVE AND GOALS?
The Fund tries to provide current income from an actively managed portfolio of
U.S. treasury and agency securities of all MATURITIES. We cannot guarantee that
the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of bonds and other debt securities that are
issued or guaranteed by the U.S. treasury or U.S. government AGENCIES AND
INSTRUMENTALITIES. The Fund may invest a substantial portion of its portfolio in
mortgage-backed securities issued or guaranteed by GOVERNMENT SPONSORED
ENTERPRISES. The Fund may also invest in securities linked to an interest rate
or other index. Under normal circumstances, the Fund will maintain a dollar-
weighted average maturity of six to fifteen years.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Although government securities
involve minimal credit risk, changes in the value of government securities may
occur in response to interest rate movements -- generally, when interest rates
go up, the value of most government securities, like other fixed income
investments, goes down. If the value of the Fund's investments goes down, you
may lose money.
The Fund may invest a substantial portion of its portfolio in mortgage-backed
securities. MORTGAGE-BACKED SECURITIES involve special risks, including
prepayment risk and extension risk, and may be more VOLATILE than other
fixed-income securities of similar maturities.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are looking for an investment that provides current income with
minimal credit risk
- are willing to accept the risk that the value of the Fund's
shares may decline as the result of interest rate movements.
MERRILL LYNCH GOVERNMENT BOND FUND 3
<PAGE> 81
[KEY FACTS ICON] Key Facts
MORTGAGE-BACKED SECURITIES -- securities backed by pools of mortgages that in
many cases are guaranteed by government agencies such as Ginnie Mae.
VOLATILITY -- the amount and frequency of changes to a security's value.
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for the Fund's Class A shares
for the periods shown with those of the Merrill Lynch (ML) US Treasuries 7-10
years and Merrill Lynch (ML) US Treasuries Agency Master. How the Fund performed
in the past is not necessarily an indication of how the Fund will perform in the
future. The bar chart and table do not reflect separate account fees and
expenses, which, if reflected, would lower the returns shown below.
<TABLE>
<CAPTION>
1995 1996 1997 1998
------ ------ ------ ------
<S> <C> <C> <C>
14.83% 2.86% 8.88% 8.76%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
6.37% (quarter ended June 30, 1995) and the lowest return for a quarter was
- -1.98% (quarter ended March 31, 1996). The year-to-date return as of March 31,
1999 was -1.37%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED PAST
DECEMBER 31, 1998) ONE YEAR SINCE INCEPTION
- --------------------------------------------------------------------
<S> <C> <C>
VS: Government Bond Fund 8.76% 7.87%+
- --------------------------------------------------------------------
ML US Treasuries 7-10 years* 12.39% 9.83%
- --------------------------------------------------------------------
ML US Treasury/Agency Master** 9.84% 8.65%
- --------------------------------------------------------------------
</TABLE>
* This unmanaged Index is comprised of intermediate-term US Government Bonds
and US Treasury Securities maturing in 7-10 years. Past performance is not
predictive of future performance.
** This unmanaged Index is comprised of all US Government agency notes and bonds
and US Treasury Securities of more than one year. Past performance is not
predictive of future performance.
+ Inception date is May 2, 1994.
4
MERRILL LYNCH GOVERNMENT BOND FUND
<PAGE> 82
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND (CLASS A)
-------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, MAY 2, 1994+
INCREASE (DECREASE) IN ----------------------------------------------------- TO DECEMBER 31,
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $10.60 $10.40 $10.79 $9.97 $10.00
- ----------------------------------------------------------------------------------------------------------
Investment income -- net .59 .63 .65 .62 .25
- ----------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net .31 .25 (.36) .81 (.07)
- ----------------------------------------------------------------------------------------------------------
Total from investment
operations .90 .88 .29 1.43 .18
- ----------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income -- net (.60) (.63) (.64) (.61) (.21)
Realized gain on
investments -- net (.02) (.05) (.04) -- --
In excess of realized gain
on investments -- net -- --++ -- -- --
- ----------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.62) (.68) (.68) (.61) (.21)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.88 $10.60 $10.40 $10.79 $9.97
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- ----------------------------------------------------------------------------------------------------------
Based on net asset value per
share 8.76% 8.88% 2.86% 14.83% 1.79%#
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .56% .51% .15% .00% .00%*
- ----------------------------------------------------------------------------------------------------------
Expenses .56% .57% .59% .66% .80%*
- ----------------------------------------------------------------------------------------------------------
Investment income -- net 5.66% 6.26% 6.39% 6.28% 4.66%*
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $350,416 $179,820 $89,581 $40,996 $17,811
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover 43.10% 117.65% 21.23% 45.39% 103.03%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
</TABLE>
MERRILL LYNCH GOVERNMENT BOND FUND 5
<PAGE> 83
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Christopher G. Ayoub is the Portfolio Manager of the Fund since February 1999
and was Co-Portfolio Manager from April 1998 to January 1999. Mr. Ayoub has
served as First Vice President of MLAM since 1998 and as Vice President of MLAM
from 1985 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in a variety of U.S. government securities. Certain
securities, such as U.S. Treasury obligations, are direct obligations of the
U.S. Government. The Fund also invests in securities that are issued by
government-sponsored enterprises or agencies but are not direct obligations of
the U.S. Government. These securities are, however, backed by the credit of the
particular agency or government-sponsored enterprise that issued the securities
and are generally considered to have a low risk of default.
Tax regulations require that the Fund diversify its investments among securities
of different government issuers. These regulations specify maximum percentages
of the Fund's total assets that can be invested in the securities of the Fund's
largest, two largest and three largest issuers at certain times. The U.S.
Treasury and each government agency or instrumentality is considered a different
issuer for this purpose. Accordingly, the Fund will diversify its investments
among U.S. Treasury securities and the securities of government agencies and
instrumentalities to the extent necessary to comply with these tax regulations.
Under normal circumstances, the Fund will maintain a dollar-weighted average
maturity of six to fifteen years. The Fund, however, may invest in government
securities of any maturity. Although government securities involve minimal risk
of default, changes in the value of government securities may occur in response
to interest rate movements -- generally, when interest rates go up, the value of
most government securities, like other fixed-income securities, goes down. In
most cases, when interest rates go up, the value of fixed-income securities with
longer-term maturities goes down more than the value of fixed-income securities
with shorter maturities. Because the Fund will invest a substantial portion of
its assets in government securities with long-term maturities, rising interest
rates may cause the value of the Fund's investments to decline significantly.
Government agency securities, like other fixed-income securities, may have
redemption features that permit the government agency to repurchase the security
from the Fund at certain times prior to maturity at a specified price, which is
generally equal to or greater than the amount due at maturity. In many cases,
when interest rates go down, government agencies redeem fixed-income securities
that allow for redemption. When a government agency redeems fixed-income
securities, the Fund may receive less than the market value of the securities
prior to redemption. In addition, the Fund may have
6 MERRILL LYNCH GOVERNMENT BOND FUND
<PAGE> 84
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents the security's current expected rate
of return.
to invest the proceeds in new fixed-income securities with lower YIELDS and
therefore lose expected future income.
The Fund may invest a portion of its assets in various types of mortgage-backed
securities issued or guaranteed by government-sponsored enterprises such as
Fannie Mae or Freddie Mac. Mortgage-backed securities represent the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. Mortgage-backed securities frequently
react differently to changes in interest rates than other fixed-income
securities. When interest rates fall, borrowers may refinance or otherwise repay
principal on their mortgages earlier than scheduled. If this happens, certain
types of mortgage-backed securities will be paid off more quickly than
originally anticipated and owners of these securities have to invest the
proceeds in securities with lower yields. This risk is known as "prepayment
risk." When interest rise, however, fewer borrowers refinance and certain types
of mortgage-backed securities are paid off more slowly than originally
anticipated, which causes the value of these securities to fall. This risk is
known as "extension risk." Because of prepayment risk and extension risk, small
movements in interest rates (both increases and decreases) may significantly
reduce the value of certain mortgage-backed securities. Although mortgage-backed
securities issued by government-sponsored enterprises have low risk of default,
neither the U.S. government nor government-sponsored enterprises guarantee
mortgage-backed securities against declines in market value as the result of
prepayment risk or extension risk.
The Fund may also invest in securities the potential return of which is based on
the change in a specified interest rate or interest rate index (an "indexed
floater"). For example, the Fund may invest in a security that pays a variable
amount of interest at each payment based on the current level of LIBOR (a
well-known short-term interest rate index). Certain indexed floaters have
greater sensitivity to changes in interest rates than typical fixed-income
securities, and the Fund's investments in such instruments may decline in value
significantly if interest rates move in a manner not anticipated by Fund
management. For more information regarding these securities and other types of
derivatives in which the Fund may invest, please see the table below and the
Appendix to this Prospectus.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an opportunity to do so.
MERRILL LYNCH GOVERNMENT BOND FUND 7
<PAGE> 85
[DETAILS ABOUT THE FUND ICON] Details About the Fund
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Government Bond Fund Chart]
THE MERRILL LYNCH GOVERNMENT BOND FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities - x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
8 MERRILL LYNCH GOVERNMENT BOND FUND
<PAGE> 86
[DETAILS ABOUT THE FUND ICON] Details About the Fund
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH GOVERNMENT BOND FUND 9
<PAGE> 87
TABLE OF CONTENTS
MERRILL LYNCH HIGH CURRENT INCOME FUND
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch High Current Income Fund at a Glance...... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH HIGH CURRENT INCOME FUND
<PAGE> 88
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
FIXED-INCOME SECURITIES -- Instruments that pay a stated rate of interest or
other repayment, including regular debt obligations as well as convertible
securities and preferred stock that carries a promised level of dividend
payments.
THE MERRILL LYNCH HIGH CURRENT INCOME FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE FUND'S STATED INVESTMENT OBJECTIVES?
The primary investment objective of the High Current Income Fund is to obtain a
high level of current income. As a secondary objective, the High Current Income
Fund seeks capital appreciation when consistent with its primary objective.
WHAT ARE THE FUND'S GOALS?
The Fund's main goal is current income -- it looks for securities that pay
interest or dividends. The Fund may also seek growth of capital by looking for
investments that will increase in value. However, the Fund's investments
emphasize current income more than growth of capital. We cannot guarantee that
the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in FIXED-INCOME SECURITIES with lower credit quality,
which means credit quality equivalent to or below the fourth highest rating
level of recognized rating agencies. Securities with credit quality below the
fourth highest rating category are known as "junk bonds." Junk bonds are
high-risk investments, and may result in the Fund losing both income and
principal. The Fund will invest most of its assets in securities issued by U.S.
companies, but may also invest a portion of its assets in securities issued by
foreign companies if they are denominated in U.S. dollars.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur in response to
interest rate changes or in response to other factors that may affect a
particular issuer or obligation. Generally, when interest rates go up, the value
of fixed-income instruments goes down. The Fund should be considered high risk
because it invests in junk bonds. Investing in junk bonds is riskier than
investing in higher quality fixed income securities -- price fluctuations may be
larger and more frequent, and there is greater risk of losing both income and
principal. The Fund faces additional risks when it invests in securities of
foreign companies or governments, including the possibility of substantial
volatility due to adverse political, economic or other developments. If the
value of the Fund's investments goes down, you may lose money.
MERRILL LYNCH HIGH CURRENT INCOME FUND 3
<PAGE> 89
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or variable life insurance contract for contract owners who:
- Have long-term goals in mind, such as retirement.
- Are looking for income, with higher returns than money market
funds.
- Are willing to accept the risk of greater loss of income and
principal in return for the possibility of receiving higher
current income.
4 MERRILL LYNCH HIGH CURRENT INCOME FUND
<PAGE> 90
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for the Fund's Class A shares
for the periods shown with those of the Credit Suisse First Boston High Yield
Index. How the Fund performed in the past is not necessarily an indication of
how the Fund will perform in the future. The bar chart and table do not reflect
separate account fees and expenses, which, if reflected, would lower the returns
shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6.14% -7.63% 43.00% 20.05% 17.84% -3.59% 17.21% 11.27% 11.00%
<CAPTION>
1998
------
<S> <C>
-3.09%
</TABLE>
During the year period shown in the bar chart, the highest return for a quarter
was 17.77% (quarter ended March 31, 1991) and the lowest return for a quarter
was -8.44% (quarter ended September 30, 1998). The year-to-date return as of
March 31, 1999 was 2.35%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE
CALENDAR YEAR ENDED PAST PAST PAST
DECEMBER 31, 1998) ONE YEAR FIVE YEARS TEN YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: High Current Income Fund -3.09% 6.23% 10.37%
- --------------------------------------------------------------------------------
Credit Suisse First Boston High
Yield Index* 0.58% 8.16% 10.74%
- --------------------------------------------------------------------------------
</TABLE>
* This unmanaged market-weighted Index of high-yield debt securities is
comprised of 423 securities rated BBB or lower. Past performance is not
predictive of future performance.
MERRILL LYNCH HIGH CURRENT INCOME FUND 5
<PAGE> 91
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
HIGH CURRENT INCOME FUND (CLASS A)
---------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) IN ---------------------------------------------------------
NET ASSET VALUE: 1998+ 1997+ 1996+ 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $11.52 $11.39 $11.25 $10.61 $12.06
- -----------------------------------------------------------------------------------------------------------
Investment income -- net 1.05 1.05 1.08 1.09 1.05
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (1.40) .14 .12 .65 (1.47)
- -----------------------------------------------------------------------------------------------------------
Total from investment operations (.35) 1.19 1.20 1.74 (.42)
- -----------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (1.02) (1.04) (1.06) (1.10) (1.03)
Realized gain on
investments -- net -- (.02) -- -- --
in excess of realized
gain on investments -- net (.04) -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.06) (1.06) (1.06) (1.10) (1.03)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.11 $11.52 $11.39 $11.25 $10.61
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -----------------------------------------------------------------------------------------------------------
Based on net asset value per share (3.09%) 11.00% 11.27% 17.21% (3.59%)
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------------------------------------------
Expenses .53% .54% .54% .55% .61%
- -----------------------------------------------------------------------------------------------------------
Investment income -- net 9.52% 9.11% 9.50% 9.92% 9.73%
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 521,900 $ 553,946 $ 414,615 $ 356,352 $ 255,719
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover 33.63% 53.63% 48.92% 41.60% 51.88%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH HIGH CURRENT INCOME FUND
<PAGE> 92
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Robert F. Murray is the portfolio manager of the Fund since April 1998. He has
served as Vice President of MLAM since 1993 and employee of MLAM since 1989.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents the security's current expected rate
of return.
VOLATILITY -- the frequency and amount
of changes in a security's market value.
(continued on next page)
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund normally expects to invest over 90% of its assets in fixed-income
securities. Most of the Fund's investments will be corporate or foreign
government debt securities, but the Fund may also buy preferred stocks. The Fund
will not buy equity securities other than preferred stocks, but may acquire and
hold equity securities offered as part of a unit in conjunction with a
fixed-income security, received as the result of a conversion or exchange of a
fixed-income security, or obtained in connection with the bankruptcy or workout
of a distressed fixed-income security.
The Fund buys primarily securities that are rated Baa or lower by Moody's
Investor's Service, Inc. ("Moody's), rated BBB or lower by Standard & Poor's
Ratings Group ("S&P") or unrated but have quality comparable to these ratings
levels. The Fund may also buy securities that are:
- Rated higher quality, but only when Fund management believes the
Fund can gain a substantial reduction in its risk of losing
income and principal, with only a small decrease in YIELD.
- Rated Ca or lower by Moody's or rated CC or lower by S&P, but
only if Fund management believes the security or the issuer is
showing a stronger financial position than the low rating
usually indicates.
Securities rated below Baa or BBB are commonly called "junk bonds." The Fund may
invest up to 100% of its assets in junk bonds. Although junk bonds generally
have higher yields than fixed-income securities with higher credit ratings, they
are high risk investments that may not pay interest or return principal as
scheduled. Junk bonds generally are less LIQUID and experience more price
VOLATILITY than higher rated fixed-income securities. Issuers of junk bonds
frequently have large amounts of outstanding debt relative to their assets and
their outstanding equity, which means that issuers of junk bonds generally have
more difficulty making payments in the event of adverse business circumstances
than issuers of more highly rated fixed-income securities. Junk bonds may be
unsecured and subordinated to an issuer's other debt, which means that in the
event the issuer defaults claims of other creditors may receive priority over
the claims of holders of junk bonds. In such circumstances, there may be few or
no assets available to repay holders of junk bonds. The Fund may suffer a
significant loss of expected future income or a significant loss of principal if
its holdings default.
MERRILL LYNCH HIGH CURRENT INCOME FUND 7
<PAGE> 93
[DETAILS ABOUT THE FUND ICON] Details About the Fund
(continued from previous page)
LIQUIDITY -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence, greater
volatility.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a high yield debt instrument may be
short-term (two years or under), intermediate-term (two to five years) or
long-term (over five years).
ZERO-COUPON BONDS -- bonds that are sold at a substantial discount to
their value at maturity and do not pay current interest.
The Fund will not purchase defaulted securities. If the Fund buys a security and
the security defaults or the issuer goes into bankruptcy, the Fund may continue
to hold the security.
The Fund may invest in junk bonds of any MATURITY. In addition to the risk of
default, changes in the value of junk bonds, like other fixed-income securities,
may occur in response to interest rate movements -- generally, when interest
rates go up, the value of most fixed-income securities goes down. In most cases,
when interest rates go up, the value of ZERO-COUPON BONDS and fixed-income
securities with longer-term maturities goes down more than the value of
fixed-income securities with shorter maturities. Because the Fund will invest a
substantial portion of its assets in zero-coupon bonds and fixed-income
securities with longer-term maturities, rising interest rates may cause the
value of the Fund's investments to decline significantly.
Junk bonds, like other fixed-income securities, frequently have redemption
features that permit an issuer to repurchase the security from the Fund at
certain times prior to maturity at a specified price, which is generally equal
to or greater than the amount due at maturity. In many cases, when interest
rates go down, issuers redeem bonds that allow for redemption. When an issuer
redeems junk bonds, the Fund may receive less than the market value of the bonds
prior to redemption. In addition, the Fund may have to invest the proceeds in
new bonds with lower yields and therefore lose expected future income.
To analyze a security, Fund management looks at both the issuer and at general
business conditions. Fund management looks at the issuer's:
- Financial condition
- Cash flow and borrowing needs. For new companies, or companies
with minimal revenues, management may look at whether the
company has attracted reputable equity investors or sponsors.
- Management strength
- Ability to respond to changes in business conditions
- Results of operations
- Visibility in the market, because securities of companies that
are less well known may be less liquid
8
MERRILL LYNCH HIGH CURRENT INCOME FUND
<PAGE> 94
Fund management looks at general business conditions, including:
- Expected changes in the general economy and interest rates
- Economic outlook for specific industries
- The availability of new investment opportunities
The Fund may invest up to 25% of its assets in fixed-income securities of
issuers outside the U.S. The Fund's management anticipates that the Fund's
investments in foreign companies will primarily be in issuers in Canada,
Australia and the developed countries of Europe, although the Fund may also
invest in issuers in emerging markets. The Fund will invest in securities of
foreign issuers that are denominated in U.S. dollars. Foreign investing involves
special risks, including the possibility of substantial volatility due to
adverse political, economic or other developments. Foreign securities may also
be less liquid and harder to value than U.S. securities. These risks are greater
for investments in emerging markets.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH HIGH CURRENT INCOME FUND 9
<PAGE> 95
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[High Current Income Fund Chart]
THE MERRILL LYNCH HIGH CURRENT INCOME FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments - x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment -
grade securities x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities 10* x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund may invest up to 25% of its total assets in securities
issued, assumed or guaranteed by foreign governments or political
subdivisions or insturmentalities of foreign governments and
certain other foreign securities.
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
10 MERRILL LYNCH HIGH CURRENT INCOME FUND
<PAGE> 96
TABLE OF CONTENTS
Merrill Lynch Index 500 Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Index 500 Fund at a Glance................ 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 8
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH INDEX 500 FUND
<PAGE> 97
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
THE MERRILL LYNCH INDEX 500 FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Index 500 Fund is to seek 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").
WHAT ARE THE FUND'S GOALS?
The Fund tries to match the performance of the S&P 500 as closely as possible
before the deduction of Fund expenses. The S&P 500 is a market-weighted index
composed of 500 common stocks issued by large-capitalization U.S. companies in a
wide range of businesses and which collectively represent a substantial portion
of all common stocks publicly traded in the U.S. We cannot guarantee the Fund
will achieve its goal.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in the common stocks represented in the S&P 500 and in
derivative instruments linked to the S&P 500. The Fund employs a "passive"
approach that attempts to remain invested at all times in a portfolio of assets
the performance of which is expected to match approximately that of the S&P 500.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising or
falling or as the result of specific factors that affect particular investments.
If the value of the Fund's investments goes down, you may lose money.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but also hurts the Fund's
performance when its investments are unsuccessful.
MERRILL LYNCH INDEX 500 FUND 3
<PAGE> 98
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with long-term goals, such as retirement
- want to invest in large U.S. companies
- want to ensure that all or a portion of their assets match the
performance of a broad equity market index
- are willing to accept the risk that the value of their
investment may decline in exchange for potentially higher
long-term returns
- are not looking for a significant amount of current income.
4 MERRILL LYNCH INDEX 500 FUND
<PAGE> 99
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns of the Fund's Class A shares for
the periods shown with those of the S&P 500 Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future. The bar chart and table do not reflect separate account fees and
expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
32.81% 28.28%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
21.29% (quarter ended December 31, 1998) and the lowest return for a quarter was
- -10.01% (quarter ended September 30, 1998). The year-to-date return as of March
31, 1999 was 4.79%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE
CALENDAR YEAR ENDED PAST
DECEMBER 31, 1998) ONE YEAR SINCE INCEPTION
- --------------------------------------------------------------------
<S> <C> <C>
VS: Index 500 Fund 28.28% 30.76%+
- --------------------------------------------------------------------
S&P 500 Index* 28.58% 31.20%
- --------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance is
not predictive of future performance.
+ Inception date is December 13, 1996.
MERRILL LYNCH INDEX 500 FUND 5
<PAGE> 100
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
INDEX 500 FUND (CLASS A)
---------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD
----------------------- DECEMBER 13, 1996+
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 TO DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $13.48 $10.17 $10.00
- -----------------------------------------------------------------------------------------------------------------
Investment income -- net .18 .17 .02
- -----------------------------------------------------------------------------------------------------------------
Realized and unrealized gain on investments -- net 3.40 3.16 .15
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 3.58 3.33 .17
- -----------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.17) (.02) --
Realized gain on investments -- net (.66) --++ --
- -----------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.83) (.02) --
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.23 $13.48 $10.17
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- -----------------------------------------------------------------------------------------------------------------
Based on net asset value per share 28.28% 32.81% 1.68%#
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .36% .34% .00%*
- -----------------------------------------------------------------------------------------------------------------
Expenses .36% .40% .60%*
- -----------------------------------------------------------------------------------------------------------------
Investment income -- net 1.36% 2.01% 3.08%*
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $403,217 $215,234 $10,752
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 11.92% 36.85% .04%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
</TABLE>
6 MERRILL LYNCH INDEX 500 FUND
<PAGE> 101
Details About the Fund [DETAILS ABOUT THE FUND ICON]
MARKET-WEIGHTED INDEX -- an index in which the weighting of each security is
based on its market capitalization.
MARKET CAPITALIZATION -- the number of shares of a company's stock, multiplied
by the price per share of the stock. Market Capitalization is a measure of a
company's size.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The S&P 500 is composed of 500 common stocks. The stocks represented in the
index are issued by large-capitalization U.S. 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 S&P 500 is generally considered broadly
representative of the performance of publicly traded U.S. large capitalization
stocks. The S&P 500 is a MARKET-WEIGHTED INDEX, which means that the largest
stocks represented in the index have the most effect on the index's performance.
Currently, the largest stocks in the S&P 500 have many times the effect of most
other stocks in the index. The stocks in the S&P 500 are chosen by Standard &
Poor's Rating Group ("S&P"), a division of the McGraw-Hill Companies, Inc. S&P
chooses stocks for inclusion in the S&P 500 based on market capitalization,
trading activity and the overall mix of industries represented in the index,
among other factors. S&P's selection of a stock for the S&P 500 does not mean
that S&P believes the stock to be an attractive investment.
The Fund will not attempt to buy or sell securities based on Fund management's
economic, financial or market analysis, but will instead employ a "passive"
investment approach. This means that Fund management will attempt to remain
invested at all times in a portfolio of assets the performance of which is
expected to match approximately that of the S&P 500. The Fund will only buy or
sell securities when Fund management believes it is necessary to do so in order
to match the performance of the S&P 500. Accordingly, it is anticipated that the
Fund's portfolio turnover and trading costs will be lower than actively managed
funds.
The Fund will generally invest in all 500 stocks in the S&P 500 in roughly the
same proportions as their weightings in the S&P 500. For example, if 5% of the
S&P 500 is made up of the stock of a particular company, the Fund will normally
invest approximately 5% of its assets in that company. This strategy is known as
"full replication." However, when Fund management believes it would be cost
efficient, Fund management is authorized to deviate from full replication and to
instead invest in a statistically selected sample of the 500 stocks in the S&P
500 which has aggregate investment characteristics, such as average MARKET
CAPITALIZATION and industry weightings, similar to the S&P 500 as a whole.
MERRILL LYNCH INDEX 500 FUND 7
<PAGE> 102
[DETAILS ABOUT THE FUND ICON] Details About the Fund
ABOUT THE PORTFOLIO MANAGER
Eric Mitofsky is the portfolio manager of the Fund since December 1996. He has
served as a First Vice President of MLAM since 1997, a Vice President of MLAM
from 1992 to 1997 and was an employee of Merrill Lynch's Equity Trading group
from 1987 to 1992.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
Fund management may also purchase stocks not included in the S&P 500 when it
believes that it would be a cost efficient way of approximating the S&P 500's
performance to do so. If Fund management uses these techniques, the Fund may not
track the S&P 500 as closely as it would if it were fully replicating the S&P
500.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to the
performance of the S&P 500. Derivatives allow the Fund to increase or decrease
its exposure to the S&P 500 quickly and at less cost than buying or selling
stocks. The Fund will invest in options, futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. The Fund will also invest in short-term money market
instruments as cash reserves. The Fund will not invest in options, futures,
other derivative instruments or short-term money market instruments in order to
lessen the Fund's exposure to common stocks as a defensive strategy, but will
instead attempt to remain fully invested at all times.
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
8 MERRILL LYNCH INDEX 500 FUND
<PAGE> 103
[Quality Equity Fund Chart]
THE MERRILL LYNCH QUALITY EQUITY FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading + x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities + x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities + x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options - x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH INDEX 500 FUND 9
<PAGE> 104
TABLE OF CONTENTS
Merrill Lynch International Equity Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch International Equity Focus Fund at a
Glance...................................................... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND
<PAGE> 105
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
EQUITY SECURITIES -- securities representing ownership of a company, such as
common stock or preferred stock, as well as derivative instruments the value of
which is based on a common stock or group of common stocks, such as options and
futures.
THE MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the International Equity Fund is to seek capital
appreciation and, secondarily, income.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose investments that will increase in value. The Fund also
seeks current income by looking for some investments that pay interest or
dividends. However, the Fund's investments emphasize growth of capital more than
current income. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in EQUITY SECURITIES of companies outside the U.S. The Fund
normally invests in a diversified portfolio consisting of companies from a
variety of different countries, and except for unusual circumstances will at all
times be invested in securities from at least three countries. The Fund can
invest in securities denominated in either U.S. dollars or foreign currencies.
The Fund's management anticipates that under most circumstances the Fund's
investments will primarily be denominated in foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising or
falling or as the result of specific factors that affect particular investments.
If the value of the Fund's investments goes down, you may lose money.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND 3
<PAGE> 106
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- Are looking for capital appreciation for long-term goals, such
as retirement.
- Want a professionally managed and diversified portfolio.
- Are looking for broad exposure to foreign equity markets.
- Are willing to accept the risks of foreign investing in exchange
for potentially higher long-term returns.
- Are not looking for a significant amount of current income.
4 MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND
<PAGE> 107
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for the Fund's Class A shares
for the periods shown with those of the Morgan Stanley Capital International
("MSCI") World (Ex-US) Index. How the Fund performed in the past is not
necessarily an indication of how the Fund will perform in the future. The bar
chart and table do not reflect separate account fees and expenses, which, if
reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
0.55% 5.48% 6.62% -4.55% 7.80%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
19.06% (quarter ended December 31, 1998) and the lowest return for a quarter was
- -18.16% (quarter ended September 30, 1998). The year-to-date return as of March
31, 1999 was 3.87%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED PAST PAST
DECEMBER 31, 1998) ONE YEAR FIVE YEARS SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: International Equity Focus
Fund 7.80% 3.07% 4.64%+
- ------------------------------------------------------------------------------
MSCI World (Ex-US) Index* 18.76% 9.19% 9.76%++
- ------------------------------------------------------------------------------
</TABLE>
* This unmanaged market capitalization-weighted index is comprised of a
representative sampling of stocks of 1,178 companies in 22 countries,
excluding The United States. Past performance is not predictive of future
performance.
+ Inception date is July 1, 1993.
++ Since June 30, 1993.
MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND 5
<PAGE> 108
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FOCUS FUND (CLASS A)
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998+ 1997+ 1996+ 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.80 $11.63 $11.06 $10.90 $11.03
- ------------------------------------------------------------------------------------------------------
Investment income -- net .21 .20 .23 .20 .19
- ------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .56 (.71) .49 .37 (.13)
- ------------------------------------------------------------------------------------------------------
Total from investment operations .77 (.51) .72 .57 .06
- ------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.09) (.23) (.15) (.01) (.18)
Realized gain on investments -- net (.03) (.09) -- (.17) (.01)
In excess of realized gain on
investments -- net (.77) -- -- (.23) --
- ------------------------------------------------------------------------------------------------------
Total dividends and distributions (.89) (.32) (.15) (.41) (.19)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.68 $10.80 $11.63 $11.06 $10.90
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ------------------------------------------------------------------------------------------------------
Based on net asset value per share 7.80% (4.55)% 6.62% 5.48% .55%
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------------------------------------
Expenses .89% .90% .89% .89% .97%
- ------------------------------------------------------------------------------------------------------
Investment income -- net 2.03% 1.69% 1.96% 1.95% 1.09%
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $193,457 $425,223 $349,080 $265,602 $247,884
- ------------------------------------------------------------------------------------------------------
Portfolio turnover 126.23% 127.96% 49.87% 100.02% 58.84%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND
<PAGE> 109
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Clive D. Lang is the Portfolio Manager of the Fund since April 1998. Mr. Lang
has been associated with MLAM U.K. and has served as a Senior Quantitative
Analyst for the Fund since 1996, and prior to that was the Chief Investment
Officer of Panagora Asset Management Limited.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in a diversified portfolio primarily consisting of equity
securities of non-U.S. companies. The Fund will generally invest at least 65% of
its assets in equity securities. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as options and futures, the value of
which is based on a common stock or group of common stocks
The Fund will focus on investments in COMMON STOCK.
The Fund may invest in equity securities of companies throughout the world.
There are no limits on the geographic allocation of the Fund's investments. The
Fund's management, however, anticipates that a substantial portion of the Fund's
investments will be in companies in the developed countries of Europe and the
Far East. The Fund may also invest in companies in emerging markets, but the
Fund's management anticipates that a greater portion of the Fund's investments
will be in companies in developed countries. The Fund normally invests in a
diversified portfolio consisting of companies from a variety of different
countries, and will at all times be invested in securities from at least three
countries.
The Fund's management chooses investments using a "top down" investment style.
This means that the Fund chooses investments primarily based on Fund
management's views of general economic and financial trends rather than Fund
management's opinion of individual companies. The Fund's management seeks to
achieve gains principally by allocating the Fund's investments to equity markets
that will benefit from the economic and financial trends perceived by the Fund's
management and therefore outperform other equity markets. The Fund's management
believes such allocation decisions can play a more important role in investment
results than other factors. The Fund's management attempts to identify equity
markets with the best potential to outperform other equity markets based on
analysis of economic factors such
MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND 7
<PAGE> 110
[DETAILS ABOUT THE FUND ICON] Details About the Fund
COMMON STOCKS -- are shares of ownership of a corporation. Preferred stock is a
class of stock that often pays dividends at a specified rate and has preference
over common stock in dividend payments and liquidation of assets. Preferred
stock may also be convertible into common stock.
TECHNICAL ANALYSIS -- a method of predicting the direction of future price
movement of an asset based on identifying significant recurring patterns from
the asset's historic prices.
INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.
LIQUIDITY -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence, greater
volatility.
VOLATILITY -- the frequency and amount of changes in a securities market value.
as inflation, commodity prices, the direction of interest and currency
movements, estimates of growth in industrial output and profits, and government
fiscal policies. The Fund's management also uses market TECHNICAL ANALYSIS. The
Fund's management chooses individual securities that will benefit from the
economic circumstances anticipated by Fund management or that are representative
of a particular equity market. The Fund's management therefore does not depend
heavily on security selection techniques involving fundamental analysis of
individual companies.
The Fund may also invest up to 35% of its assets in non-convertible debt
securities. The Fund's investments in non-convertible debt securities will
generally be longer-term securities with the potential for capital appreciation
through changes in interest rates, exchange rates or the general perception of
the creditworthiness of issuers in certain countries. The Fund may also invest
in non-convertible debt securities for income, but this will not be a focus of
the Fund's investments. The Fund may invest in debt securities that are not
rated INVESTMENT GRADE, which are commonly known as "junk bonds." Junk bonds are
high risk investments, and may result in the Fund losing both income and
principal. Junk bonds are generally less LIQUID and experience more price
VOLATILITY than higher-rated fixed-income securities.
Because the Fund will invest primarily in foreign securities, it offers the
potential for more diversification than an investment only in the U.S. Foreign
securities have often (although not always) performed differently than U.S.
securities. Foreign investing involves special risks, including foreign currency
risk and the possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may also be less liquid and
harder to value than U.S. securities. These risks are greater for investments in
emerging markets.
The Fund will invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such
8 MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND
<PAGE> 111
transactions will be effective. The Fund may also engage in other types of
transactions involving derivatives, as set forth in the table below and
described in detail in the Appendix to this Prospectus.
The Fund may also invest in securities the potential return of which is based on
the change in a specified interest rate or equity index (an "indexed note"). For
example, the Fund may invest in a security that pays a variable amount of
interest or principal based on the current level of the French or Korean stock
markets. The Fund may also invest in indexed securities the potential return of
which is based inversely on the change in a specified interest rate or equity
index (an "inverse note"). Inverse notes generally change in value in a manner
that is opposite to most fixed-income securities -- that is, interest rates or
principal payments on inverse notes increase when the underlying interest rate
or equity index decreases and decrease when the underlying interest rate or
equity increases. Certain indexed notes and inverse notes have greater
sensitivity to changes in interest rates or equity index levels than other
securities, and the Fund's investments in such instruments may decline in value
significantly if interest rates or equity index levels move in a manner not
anticipated by Fund management. For more information regarding these securities
and other types of derivatives in which the Fund may invest, please see the
table and the Appendix to this Prospectus.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND 9
<PAGE> 112
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[International Equity Focus Fund Chart]
THE MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political
risk risk risk risk risk risk
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -------------------------------------------------------------------------------------------
Short-term Trading - x
- -------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x
- -------------------------------------------------------------------------------------------
Non-investment
grade securities 35 x x x x x
- -------------------------------------------------------------------------------------------
Foreign Securities - x x x x x
- -------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x
- -------------------------------------------------------------------------------------------
Covered call options - x
- -------------------------------------------------------------------------------------------
Indexed derivative
securities - x x x x x
- -------------------------------------------------------------------------------------------
Futures and Options - x x x x x
- -------------------------------------------------------------------------------------------
Currency contracts - x x x x x
- -------------------------------------------------------------------------------------------
<CAPTION>
Currency Liquidity Correlation Selection
risk risk risk risk
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borrowing
- -----------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements
- -----------------------------------------------------------------------
Securities Lending
- -----------------------------------------------------------------------
Short-term Trading x
- -----------------------------------------------------------------------
When-issued securities/
forward commitments x
- -----------------------------------------------------------------------
Non-investment
grade securities x x x
- -----------------------------------------------------------------------
Foreign Securities x x x
- -----------------------------------------------------------------------
Restricted and Illiquid
Securities x x
- -----------------------------------------------------------------------
Covered call options x x x
- -----------------------------------------------------------------------
Indexed derivative
securities x x x x
- -----------------------------------------------------------------------
Futures and Options x x x
- -----------------------------------------------------------------------
Currency contracts x x x
- -----------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
10 MERRILL LYNCH INTERNATIONAL EQUITY FOCUS FUND
<PAGE> 113
TABLE OF CONTENTS
Merrill Lynch Natural Resources Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Natural Resources Focus Fund at a
Glance...................................................... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
<PAGE> 114
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
NATURAL RESOURCE ASSETS -- materials with economic value that are derived from
natural sources either directly or indirectly, such as metals, fuels, timber,
undeveloped land and agricultural products.
EQUITY SECURITIES -- securities representing ownership of a company, such as
common stock or preferred stock or group of common stocks such as options
and futures.
THE MERRILL LYNCH NATURAL RESOURCES FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Natural Resources Focus Fund is to seek capital
appreciation and to protect the purchasing power of shareholders' capital by
investing primarily in a portfolio of equity securities of companies with
substantial NATURAL RESOURCE ASSETS.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose investments that will increase in value and that,
during inflationary periods, will increase in value at a rate that is at least
approximately equal to the rate of inflation. We cannot guarantee that the Fund
will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in EQUITY SECURITIES of companies with substantial natural
resources assets. The Fund normally invests in a portfolio consisting of
companies in a variety of natural resource-related sectors, such as mining,
energy, chemicals, paper, steel, or agriculture. Under certain economic
circumstances, however, the Fund may concentrate its investments in one or more
of these sectors (although the Fund will not invest more than 25% of its assets
in any one industry within a sector). The Fund is a non-diversified fund, which
means that it can invest more of its assets in fewer companies than other funds.
The fund can invest in both U.S. and non-U.S. companies, and in securities
denominated in either U.S. dollars or foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual Fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising or
falling or as the result of specified factors that affect particular
investments. If the value of the Fund's investments goes down, you may lose
money.
As a sector fund investing in companies with natural resource assets, the Fund
is subject to the risks associated with natural resource investments, in
addition to the general risk of the stock market. This means the Fund is more
vulnerable to the price movements of natural resources and factors that
particularly affect the mining, energy, chemicals, paper, steel or agriculture
sectors more than a more broadly diversified mutual fund. Because the Fund
invests primarily in companies with natural resource assets, there is the risk
that the Fund will perform poorly during a downturn in natural resource
MERRILL LYNCH NATURAL RESOURCES FOCUS FUND 3
<PAGE> 115
[KEY FACTS ICON] Key Facts
prices. The Fund should be considered a vehicle for diversification and should
not be considered a balance investment program by itself.
The Fund may invest most of its assets in non-U.S. securities. Foreign investing
involves special risks, including foreign currency risk and the possibility of
substantial volatility due to adverse political, economic or other developments.
Foreign securities may also be less liquid and harder to value than U.S.
securities. These risks are greater for investments in emerging markets.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but hurts the Fund's
performance when its investments are unsuccessful.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are looking for capital appreciation for long-term goals, such
as retirement
- want a professionally managed and diversified portfolio
- want to diversify the types of investment funding their contract
- are looking for exposure to companies with natural resource
assets
- are willing to accept the risks of foreign investing in exchange
for potentially higher long-term returns
- are not looking for current income
4 MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
<PAGE> 116
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares since the Fund's inception. The table compares the average annual
total returns of the Fund's Class A shares for the periods shown with the S&P
Industrials Index, Lipper Natural Resources Avg. and the Consumer Price Index.
How the Fund performed in the past is not necessarily an indication of how the
Fund will perform in the future. The bar chart and table do not reflect separate
account fees and expenses, which, if reflected, would lower the returns shown
below.
[BAR CHART]
<TABLE>
<S> <C>
1989 18.23%
1990 -6.21%
1991 1.36%
1992 1.36%
1993 10.47%
1994 1.44%
1995 12.65%
1996 13.52%
1997 -12.52%
1998 -15.30%
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 10.77% (quarter ended March 31, 1993) and the lowest return for a
quarter was -20.39% (quarter ended December 31, 1997). The year-to-date return
as of March 31, 1999 was 6.02%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Natural Resources Focus
Fund -15.30% -0.79% 1.92%
- ------------------------------------------------------------------------
S&P Industrials Index* 33.74% 24.67% 19.28%
- ------------------------------------------------------------------------
Lipper Natural Resources Avg** -23.92% 3.05% 6.32%
- ------------------------------------------------------------------------
Consumer Price Index*** 1.98% 2.36% 3.13%
- ------------------------------------------------------------------------
</TABLE>
* This unmanaged Index measures the pattern of movements of the common stocks
of 400 large industrial companies and their weighting by capitalization.
Past performance is not predictive of future performance.
** This unmanaged Index is comprised of all US mutual funds classified by
Lipper Analytical Services as natural resource-related funds. Past
performance is not predictive of future performance.
*** This unmanaged Index is the most widely used Index of price changes over
time and is designed to measure changes in the typical market basket of
purchases by urban consumers. Past performance is not predictive of future
performance.
MERRILL LYNCH NATURAL RESOURCES FOCUS FUND 5
<PAGE> 117
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
NATURAL RESOURCES FOCUS FUND (CLASS A)
-----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998+ 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.66 $13.12 $11.95 $10.82 $10.82
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .12 .14 .18 .20 .17
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and
foreign currency transactions -- net (1.50) (1.68) 1.40 1.15 (.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (1.38) (1.54) 1.58 1.35 .15
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.18) (.06) (.20) (.19) (.15)
Realized gain on investments -- net (.55) (.86) (.21) (.03) --
In excess of realized gain on
investments -- net (.90) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.63) (.92) (.41) (.22) (.15)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.65 $10.66 $13.12 $11.95 $10.82
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (15.30%) (12.52)% 13.52% 12.65% 1.44%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .88% .81% .78% .78% .87%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.36% .99% 1.43% 1.75% 1.91%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $15,540 $26,979 $45,197 $43,102 $39,715
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 29.65% 20.93% 31.11% 30.15% 10.94%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
<PAGE> 118
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Robert M. Shearer is the Portfolio Manager of the Fund since December 1997. Mr.
Shearer is a First Vice President of MLAM since January 1998 and was an
Associate Portfolio Manager of the Fund from September 1997 to December 1997.
From 1996 to 1997 he was a Vice President and an Assistant Portfolio Manager at
David L. Babson and Company, Incorporated. From 1993 to 1996 he was a Vice
President/Sector Manager at Concert Capital Management.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in a diversified portfolio primarily consisting of equity
securities of non-U.S. companies. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as options and futures, the values
of which are based on a common stock or group of common stocks
The Fund will focus on investments in common stock.
The Fund invests in companies with substantial natural resource assets. Fund
management will consider a company to have substantial natural resource assets
when, in the opinion of Fund management, the company's market value or
profitability is significantly affected by changes in the value of a natural
resource. The Fund will not invest directly in natural resource assets but may
invest in derivative securities, such as futures and options, the value of which
are tied to the value of a natural resource asset or natural resource-related
index (a measure of value or rate). Under normal circumstances, the Fund will
invest at least 65% of its assets in companies with substantial natural resource
assets and natural resource-related derivatives.
The Fund's management chooses equity securities using a combination of "top
down" and "bottom up" investment styles. "Top down" means that the Fund seeks to
allocate its investments to natural resource-related economic sectors the Fund's
management believes have the potential to outperform other economic sectors due
to factors such as supply-and-demand trends and global economic conditions.
"Bottom up" means that the Fund also selects investments based on management's
assessment of the earnings prospects of individual companies. When assessing
individual companies, the Fund seeks to invest in companies that the Fund's
management believes to be undervalued. A company's stock is undervalued when the
stock's current price is less than what the Fund believes a share of the company
is worth. A company's worth can be assessed by several factors, such as
financial resources, value of tangible assets, rate of return on capital,
quality or management, and overall business prospects. A company's stock may
become undervalued when most investors fail to perceive the company's strengths
in one or more of these areas. Fund management may also determine a company is
undervalued if its stock price is down because of temporary factors from which
Fund management believes the company will recover.
MERRILL LYNCH NATURAL RESOURCES FOCUS FUND 7
<PAGE> 119
[DETAILS ABOUT THE FUND ICON] Details About the Fund
COMMODITY -- a tangible asset such as copper, heating oil, coffee, natural gas
or wheat.
The Fund will focus on attempting to identify companies that are undervalued
relative to the value of their underlying natural resource assets. In seeking to
identify such companies, Fund management considers which of the companies that
meet its criteria would be most likely to benefit from the economic
circumstances anticipated by Fund management.
The Fund's concentration in the securities of companies with substantial natural
resource assets will expose the Fund to the price movements of natural resources
to a greater extent than a more broadly diversified mutual Fund. The Fund is
vulnerable to the price movements of natural resources and factors that
particularly affect the mining, energy, chemicals, paper, steel or agriculture
sectors. Because the Fund invests primarily in these economic sectors, there is
the risk that the Fund will perform poorly during an economic downturn or a
slump in demand for natural resources. The Fund should be considered a vehicle
for diversification and should not be considered a balanced investment program
by itself.
The Fund may also invest in securities the potential return of which is based on
the change in a specified equity index or commodity price (an "indexed note").
For example, the Fund may invest in a debt security that pays a variable amount
of interest or principal based on the current level of a securities index, such
as the AMEX Oil & Gas Index, or of a natural resource COMMODITY, such as gold or
oil. The Fund may also invest in indexed securities the potential return of
which is based inversely on the change in a specified equity index or commodity
price (an "inverse note"). Inverse notes generally change in a value in a manner
that is opposite to most fixed-income securities -- that is, interest rates or
principal payments on inverse notes increase when the underlying equity index or
commodity increases. Certain indexed notes and inverse notes have greater
sensitivity to changes in equity index levels or commodity prices than other
securities, and the Fund's investments in such instruments may decline in value
significantly in the event that equity index or commodity levels move in a
manner not anticipated by Fund management. For more information regarding these
securities and other types of derivatives in which the Fund may invest, please
see the table below and the Appendix to the Prospectus.
The Fund can invest primarily in U.S. securities, primarily in foreign
securities, or partly in U.S. securities and partly in foreign securities. The
8 MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
<PAGE> 120
Fund may invest in foreign companies in developed markets, such as Canada and
Australia, or in emerging markets, such as South Africa, Russia or Latin
American countries. Foreign securities involve special risks not present in U.S.
investments than can increase the chances that the Fund will lose money. The
risks of foreign securities are typically much greater for emerging markets.
Emerging market countries are often less politically and economically stable
than developed countries, and more likely to suffer from serious adverse
economic circumstances such as hyperinflation, currency devaluation or extremely
high interest rate levels. In addition, reliable information about individual
companies may be difficult to obtain in many emerging markets.
The Fund will invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be effected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective. The Fund may also engage in other types of transactions involving
derivatives, as set forth in the table below and described in detail in the
Appendix to this Prospectus.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH NATURAL RESOURCES FOCUS FUND 9
<PAGE> 121
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Natural Resources Focus Fund Chart]
THE MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments - x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options - x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities - x x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
10 MERRILL LYNCH NATURAL RESOURCES FOCUS FUND
<PAGE> 122
TABLE OF CONTENTS
Merrill Lynch Prime Bond Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Prime Bond Fund at a Glance............... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH PRIME BOND FUND
<PAGE> 123
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
FIXED-INCOME SECURITIES -- instruments that pay a stated rate of interest or
other form of scheduled payment, including regular debt obligations as well as
preferred stock that carries a promised level of dividend payments.
MATURITY -- the time at which the full principal amount of a debt security is
scheduled to be repaid. The maturity of a debt instrument may be short-term (two
years or under), intermediate-term (two to ten years) or long-term (over ten
years).
THE MERRILL LYNCH PRIME BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE FUND'S STATED INVESTMENT OBJECTIVES?
The primary investment objective of the Prime Bond Fund is to obtain a high
level of current income. As a secondary objective, the Prime Bond Fund seeks
capital appreciation when consistent with its primary objective.
WHAT ARE THE FUND'S GOALS?
The Fund tries to provide current income -- it looks for securities that pay
interest or dividends. The Fund may also seek growth of capital by looking for
investments that will increase in value. However, the Fund's investments
emphasize current income more than growth of capital. We cannot guarantee that
the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in FIXED-INCOME SECURITIES of all MATURITIES rated A
or higher by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("S&P"). A rating of "A" is the third highest rating these
agencies give to long-term fixed-income securities. Fixed-income securities in
any of the four highest rating categories can be called "investment grade." The
Fund will invest most of its assets in securities issued by U.S. companies, but
may also invest in securities issued by foreign companies if they are
denominated in U.S. dollars.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. These changes may occur in response to
interest rate changes or in response to other factors that may affect a
particular issuer or obligation. Generally, when interest rates go up, the value
of fixed-income instruments goes down. The value of a fixed income security is
also affected by perception of the issuer's ability to satisfy its
obligations -- if the issuer may not satisfy its obligations, the value of the
security goes down. The Fund faces additional risks when it invests in foreign
securities, including the possibility of substantial volatility due to adverse
political, economic or other developments. If the value of the Fund's
investments goes down, you may lose money.
MERRILL LYNCH PRIME BOND FUND 3
<PAGE> 124
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or variable life insurance contract for contract owners who:
- Are investing with long-term goals in mind, such as retirement
- Are looking for a steady stream of income, with higher returns
over time than money market funds
- Are willing to accept the risk of loss of income and principal
in return for the possibility of receiving higher current
income.
4 MERRILL LYNCH PRIME BOND FUND
<PAGE> 125
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for the Fund's Class A shares
for the periods shown with those of the Merrill Lynch (ML) US Corporate Master.
How the Fund performed in the past is not necessarily an indication of how the
Fund will perform in the future. The bar chart and table do not reflect separate
account fees and expenses, which, if reflected, would lower the returns shown
below.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
13.29% 7.13% 16.41% 7.27% 12.02% -4.8% 20.14% 2.21% 8.64% 7.85%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
7.77% (quarter ended June 30, 1989) and the lowest return for a quarter was
- -3.98% (quarter ended March 31, 1994). The year-to-date total return as of
March 31, 1999 was -0.81%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (AS OF THE
CALENDAR YEAR ENDED PAST PAST PAST
DECEMBER 31, 1998) ONE YEAR FIVE YEARS TEN YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Prime Bond Fund 7.85% 6.50% 8.81%
- -----------------------------------------------------------------------------
ML US Corporate Master* 8.72% 7.83% 9.98%
- -----------------------------------------------------------------------------
</TABLE>
* This unmanaged Index is comprised of all corporate bonds rated BBB3 or
higher, of all maturities. Past performance is not predictive of future
performance.
MERRILL LYNCH PRIME BOND FUND 5
<PAGE> 126
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
PRIME BOND FUND (CLASS A)
---------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.11 $11.91 $12.45 $11.12 $12.64
- --------------------------------------------------------------------------------------------------
Investment income -- net .77 .78 .80 .82 .77
- --------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .15 .20 (.55) 1.34 (1.36)
- --------------------------------------------------------------------------------------------------
Total from investment operations .92 .98 .25 2.16 (.59)
- --------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.78) (.78) (.79) (.83) (.76)
In excess of realized
gain on investments -- net -- -- -- -- (.17)
- --------------------------------------------------------------------------------------------------
Total dividends and distributions (.78) (.78) (.79) (.83) (.93)
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $12.25 $12.11 $11.91 $12.45 $11.12
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- --------------------------------------------------------------------------------------------------
Based on net asset value per share 7.85% 8.64% 2.21% 20.14% (4.80%)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------------------------
Expenses .48% .47% .49% .50% .54%
- --------------------------------------------------------------------------------------------------
Investment income -- net 6.35% 6.62% 6.67% 7.00% 6.74%
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 594,301 $ 527,770 $ 538,394 $ 489,838 $ 391,234
- --------------------------------------------------------------------------------------------------
Portfolio turnover 103.24% 89.22% 91.88% 90.12% 139.89%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
</TABLE>
6 MERRILL LYNCH PRIME BOND FUND
<PAGE> 127
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ASSET-BACKED SECURITIES -- fixed-income securities issued by a trust or other
legal entity established for the purpose of issuing securities and holding
certain assets, such as credit card receivables or auto leases, that pay down
over time and generate sufficient cash to pay holders of the securities.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund normally expects to invest over 90% of its assets in fixed-income
securities. The fixed-income securities in which the Fund invests consist of:
- short-, intermediate- and long-term U.S. government debt
securities
- short-, intermediate- and long-term corporate debt securities
issued by U.S. and foreign companies
- ASSET-BACKED SECURITIES
- mortgage-backed securities
- term preferred stock (that is, preferred stock which returns
principal at a set time) issued by U.S. and foreign companies
- corporate debt securities and preferred stock convertible into
common stock
- money market securities
The Fund will not buy equity securities other than preferred stocks.
Under normal circumstances the Fund will invest at least 65% of its assets in
corporate, asset-backed and mortgage-backed securities that are rated A or
higher by Moody's or S&P. Moody's and S&P are two of the most widely recognized
independent credit rating services for fixed-income securities, and a
substantial majority of high credit quality fixed-income securities carry a
credit rating from at least one of these two services. A rating of "A" is the
third highest rating these agencies give to long-term corporate debt, and
indicates that the issuer has a strong current capacity to pay principal and
interest but may be susceptible to some weakening in future adverse economic
conditions, although risk of default is low. Fixed-income securities in any of
the four highest rating categories can be called "investment grade."
The Fund may invest up to 35% of its assets in securities that are unrated or
rated below A by both Moody's and S&P. Except for U.S. government securities,
the Fund will only invest in such securities when
- either Moody's has rated the security Baa or S&P has rated the
security BBB (each credit-rating service's fourth
MERRILL LYNCH PRIME BOND FUND 7
<PAGE> 128
[DETAILS ABOUT THE FUND ICON] Details About the Fund
ABOUT THE PORTFOLIO MANAGER
Christopher G. Ayoub is the Portfolio Manager of the Fund since February 1999
and was Co-Portfolio Manager from April 1998 to January 1999. Mr. Ayoub has
served as First Vice President of MLAM since 1998 and as Vice President of MLAM
from 1985 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
YIELD -- a fixed income security's annualized income stream divided by the
security's current price, which represents the
security's current expected rate of return.
highest rating category and the lowest rating category
considered investment grade), or
- a security has not been rated by either Moody's or S&P and the
Fund's management believes the security's credit quality is
equivalent to securities rated investment grade by these
credit-rating services.
The Fund will not invest in securities rated below investment grade by both S&P
and Moody's. The Fund, however, may continue to hold securities that have been
downgraded below investment grade if Fund management believes the risk of
default is low.
The Fund may invest in fixed-income securities of any maturity. Although
investment grade fixed-income securities generally involve low risk of default,
changes in the value of fixed-income securities may occur in response to
interest rate movements -- generally, when interest rates go up, the value of
most fixed-income securities goes down. In most cases, when interest rates go
up, the value of fixed-income securities with longer-term maturities goes down
more than the value of fixed-income securities with shorter maturities. Because
the Fund will invest a substantial portion of its assets in fixed-income
securities with long-term maturities, rising interest rates may cause the value
of the Fund's investments to decline significantly.
Fixed-income securities frequently have redemption features that permit an
issuer to repurchase the security from the Fund at certain times prior to
maturity at a specified price, which is generally equal to or greater than the
amount due at maturity. In many cases, when interest rates go down, issuers
redeem fixed-income securities that allow for redemption. When an issuer redeems
fixed-income securities, the Fund may receive less than the market value of the
securities prior to redemption. In addition, the Fund may have to invest the
proceeds in new fixed-income securities with lower YIELDS and therefore lose
expected future income.
The Fund may invest in fixed-income securities of issuers outside the U.S. The
Fund's management anticipates that the Fund's investment in foreign securities
will primarily be in issuers in Canada, the developed countries of Europe,
Australia, New Zealand, and certain Caribbean countries, although the Fund may
also invest in issuers elsewhere, including high credit-quality sovereign and
corporate issuers in emerging markets. The Fund will invest in
8 MERRILL LYNCH PRIME BOND FUND
<PAGE> 129
securities of foreign issuers that are denominated in U.S. dollars. Foreign
investing involves special risks, including the possibility of substantial
volatility due to adverse political, economic or other developments. Foreign
securities may also be less liquid and harder to value than U.S. securities.
These risks are greater for investments in emerging markets.
The Fund may invest a portion of its assets in various types of mortgage-backed
securities. Mortgage-backed securities represent the right to receive a portion
of principal and/or interest payments made on a pool of residential or
commercial mortgage loans. Mortgage-backed securities frequently react
differently to changes in interest rates than other fixed-income securities.
When interest rates fall, borrowers may refinance or otherwise repay principal
on their mortgages earlier than scheduled. If this happens, certain types of
mortgage-backed securities will be paid off more quickly than originally
anticipated and owners of these securities have to invest the proceeds in
securities with lower yields. This risk is known as "prepayment risk." When
interest rise, however, fewer borrowers refinance and certain types of
mortgage-backed securities are paid off more slowly than originally anticipated,
which causes the value of these securities to fall. This risk is known as
"extension risk." Because of prepayment risk and extension risk, small movements
in interest rates (both increases and decreases) may significantly reduce the
value of certain mortgage-backed securities. Although high credit-quality
mortgage-backed securities have low risk of default, mortgage-backed securities
are subject to declines in market value as the result of prepayment risk or
extension risk.
The Fund may also invest in securities the potential return of which is based on
the change in a specified interest rate or interest rate index (an "indexed
floater"). For example, the Fund may invest in a security that pays a variable
amount of interest at each payment based on the current level of LIBOR (a
well-known short-term interest rate index). Certain indexed floaters have
greater sensitivity to changes in interest rates than typical fixed-income
securities, and the Fund's investments in such instruments may decline in value
significantly if interest rates move in a manner not anticipated by Fund
management. For more information regarding these securities and other types of
derivatives in which the Fund may invest, please see the table below and the
Appendix to this Prospectus.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an appropriate opportunity.
MERRILL LYNCH PRIME BOND FUND 9
<PAGE> 130
[DETAILS ABOUT THE FUND ICON] Details About the Fund
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Prime Bond Fund Chart]
THE MERRILL LYNCH PRIME BOND FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities ++*
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities 10** x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund may continue to hold securities downgraded to non-investment grade
after purchase
** The Fund may invest up to 25% of its total assets in securities issued,
assumed or guaranteed by foreign governments or political subdivisions or
instrumentalities of foreign governments and certain other foreign
securities.
10 MERRILL LYNCH PRIME BOND FUND
<PAGE> 131
TABLE OF CONTENTS
MERRILL LYNCH QUALITY EQUITY FUND
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Quality Equity Fund at a Glance........... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Strategies....................................... 9
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH QUALITY EQUITY FUND
<PAGE> 132
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
TOTAL INVESTMENT RETURN -- The combination of capital appreciation (from
increases or decreases in the market value of investments) and current income
(from interest or dividends).
VOLATILITY -- The frequency and amount of changes to the Fund's net asset value.
INVESTMENT GRADE -- Fixed income securities rated in one of the four
highest ratings categories by a major credit rating agency.
THE MERRILL LYNCH QUALITY EQUITY FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Quality Equity Fund is to seek high TOTAL
INVESTMENT RETURN.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose a mix of investments including some that will increase
in value, some that provide current income through interest or dividends, and
some that may do both. The Fund tries to blend these investments to create a
portfolio that produces a high total return while maintaining a low level of
VOLATILITY during periods when equity markets are declining. We cannot guarantee
that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in equities of large capitalization companies. The
Fund invests primarily in equities of U.S. companies, but at times may invest a
substantial portion of its assets in equities of non-U.S. companies. The Fund
may also invest in convertible securities and INVESTMENT GRADE fixed-income
securities. The Fund can buy securities denominated in foreign currencies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's equity investments may occur because the stock market is rising and
falling, or as the result of specific factors that affect particular
investments. If the value of the Fund's investments goes down, you may lose
money.
The Fund may invest a substantial portion of its assets in non-U.S. securities.
Foreign investing involves special risks, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities.
MERRILL LYNCH QUALITY EQUITY FUND 3
<PAGE> 133
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing for long-term goals, such as retirement
- want to invest in large companies' equity securities
- want a professionally managed and diversified portfolio
- are willing to accept the risk that the value of their
investment may decline in exchange for potentially higher
long-term returns.
- are not looking for significant amount of current income.
4 MERRILL LYNCH QUALITY EQUITY FUND
<PAGE> 134
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for the Fund's Class A shares
for the periods shown with those of the S&P 500 Index. How the Fund performed in
the past is not necessarily an indication of how the Fund will perform in the
future. The bar chart and table do not reflect separate account fees and
expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30.77% 0.66% 30.18% 2.69% 14.57% -1.2% 22.61% 17.90% 23.70% 15.58%
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 21.67% (quarter ended December 31, 1998) and the lowest return for a
quarter was -17.29% (quarter ended September 30, 1998). The year-to-date total
return as of March 31, 1999 was 3.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- ---------------------------------------------------------------------
<S> <C> <C> <C>
VS: Quality Equity Fund 15.58% 15.35% 15.20%
- ---------------------------------------------------------------------
S&P 500 Index* 28.58% 24.05% 19.20%
- ---------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance is
not predictive of future performance.
MERRILL LYNCH QUALITY EQUITY FUND 5
<PAGE> 135
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
QUALITY EQUITY FUND (CLASS A)+
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $38.42 $32.83 $32.76 $27.74 $29.02
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .34 .41 .58 .58 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net 4.80 6.94 4.44 5.48 (.74)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.14 7.35 5.02 6.06 (.36)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.35) (.22) (.66) (.45) (.25)
Realized gain on investments -- net (5.09) (1.54) (4.29) (.59) (.67)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (5.44) (1.76) (4.95) (1.04) (.92)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $38.12 $38.42 $32.83 $32.76 $27.74
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 15.58% 23.70% 17.90% 22.61% (1.20%)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .49% .48% .49% .51% .54%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .95% 1.16% 1.89% 1.94% 1.39%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $862,897 $875,064 $794,275 $644,551 $464,360
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 100.29% 100.08% 88.30% 140.32% 60.57%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
+ Based on average shares outstanding.
* Total investment returns exclude insurance-related fees and
expenses.
</TABLE>
6 MERRILL LYNCH QUALITY EQUITY FUND
<PAGE> 136
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Thomas R. Robinson is the Portfolio Manager of the Fund since November 1995. He
has served as a First Vice President of MLAM since 1997 and as a Senior
Portfolio Manager of MLAM from November 1995 to 1997. From 1989 to 1995, he
served as Manager of International Strategy for Merrill Lynch & Co. Global
Securities Research & Economics Group.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in a diversified portfolio primarily consisting of equity
securities of large capitalization companies. The Fund will generally invest at
least 65% of its assets in equity securities. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock.
The Fund will focus on investments in common stocks of large capitalization
companies, which are companies with market capitalizations in excess of $1
billion.
The Fund's management chooses equity securities using a fundamental,
value-oriented investment style. This means that the Fund seeks to invest in
companies that the Fund's management believes to be undervalued. A company's
stock is undervalued when the stock's current price is less than what the Fund
believes a share of the company is worth. A company's worth can be assessed by
several factors, such as financial resources, value of tangible assets, sales
and earnings growth, rate of return on capital, product development, quality of
management, and overall business prospects. A company's stock may become
undervalued when most investors fail to perceive the company's strengths in one
or more of these areas. Fund management will seek to invest in undervalued
common stocks that it believes have the potential for capital appreciation, as
well as convertible securities and dividend-paying common stocks that it
believes have the potential to produce attractive total returns.
The Fund may invest in equity securities of companies throughout the world.
There are no limits on the geographical allocation of the Fund's investments.
The Fund's management, however, anticipates that the Fund's investments will
primarily be in companies in the United States, and that the Fund's investments
in foreign companies will primarily be in companies in Canada, Japan and the
developed markets of Europe. The Fund may also invest in companies in emerging
markets, but the Fund's management anticipates that a substantially greater
portion of the Fund's investments will be in companies in developed countries.
MERRILL LYNCH QUALITY EQUITY FUND 7
<PAGE> 137
[DETAILS ABOUT THE FUND ICON] Details About the Fund
INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.
LIQUIDITY -- the ease with which a security can be traded. Securities that
are less liquid have fewer potential buyers.
The Fund may also invest up to 35% of its assets in nonconvertible INVESTMENT
GRADE debt securities. The Fund's investments in nonconvertible debt securities
will generally be longer-term securities purchased for less than par value with
the potential for capital appreciation through changes in interest rates,
exchange rates or the general perception of the creditworthiness of issuers in
certain countries. The Fund may also invest in nonconvertible debt securities
and money market securities for income, to provide LIQUIDITY and to reduce
volatility during periods when Fund management is defensive, but this will not
be a focus of the Fund's investments during normal circumstances.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
8 MERRILL LYNCH QUALITY EQUITY FUND
<PAGE> 138
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Quality Equity Chart]
THE MERRILL LYNCH QUALITY EQUITY FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options + x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options +
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH QUALITY EQUITY FUND 9
<PAGE> 139
TABLE OF CONTENTS
MERRILL LYNCH RESERVE ASSETS FUND
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Reserve Assets Fund at a Glance........... 3
Risk/Return Bar Chart....................................... 4
Financial Highlights........................................ 5
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 6
Investment Strategies....................................... 9
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH RESERVE ASSETS FUND
<PAGE> 140
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
LIQUIDITY -- the ease with which a security can be traded. Securities that
are less liquid have fewer potential buyers.
THE MERRILL LYNCH RESERVE ASSETS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Reserve Assets Fund is to seek to preserve
capital, maintain LIQUIDITY, and achieve the highest possible current income
consistent with the foregoing.
WHAT ARE THE FUND'S GOALS?
The Fund's goals are to produce current income while attempting to maintain a
share value of $1.00. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in short-term money market instruments. These instruments are
generally debt securities that mature within 13 months (25 months if the U.S.
government or a government agency has issued or guaranteed the debt). Other than
U.S. government and government agency securities, the Fund only invests in money
market instruments of issuers with one of the two highest short-term ratings
from a nationally recognized credit rating organization or unrated instruments
which, in the opinion of the Fund's management, are of similar credit quality.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with short-term goals in mind.
- are looking for preservation of capital
- are looking for current income and liquidity.
MERRILL LYNCH RESERVE ASSETS FUND 3
<PAGE> 141
[KEY FACTS ICON] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for the past ten calendar years. The table shows the average
annual total returns for one, five and ten years. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future. The bar chart and table do not reflect separate account fees and
expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.64% 7.61% 5.68% 3.28% 2.77% 3.8% 5.63% 4.99% 5.07% 4.96%
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 2.28% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.65% (quarter ended June 30, 1993). The year-to-date total return
as of March 31, 1999 was 1.08%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
- ---------------------------------------------------------------------
<S> <C> <C> <C>
VS: Reserve Assets Fund 5.10% 4.96% 5.27%
- ---------------------------------------------------------------------
</TABLE>
4 MERRILL LYNCH RESERVE ASSETS FUND
<PAGE> 142
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
RESERVE ASSETS FUND (CLASS A)
-----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<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 .0496 .0506 .0501 .0543 .0371
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .0003 .0001 (.0005) .0018 (.0009)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .0499 .0507 .0496 .0561 .0362
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.0496) (.0506) (.0501) (.0543) (.0362)
Realized gain on investments -- net (.0003) (.0001) (.0001) (.0004) --+
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.0499) (.0507) (.0502) (.0547) (.0362)
- ---------------------------------------------------------------------------------------------------------------------------------
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 5.10% 5.19% 5.13% 5.61% 3.79%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .68% .62% .61% .61% .65%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net, and realized gain on
investments -- net 4.96% 5.06% 4.96% 5.47% 3.75%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $21,338 $21,102 $22,885 $25,550 $32,196
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Amount is less than $.0001 per share.
</TABLE>
MERRILL LYNCH RESERVE ASSETS FUND, INC. 5
<PAGE> 143
Details About the Fund [DETAILS ABOUT THE FUND ICON]
MATURITY -- the time at which the full principal amount of a fixed-income
security is scheduled to be repaid.
AGENCIES -- entities that are part of or sponsored by the federal government,
such as the Government National Mortgage Administration ("Ginnie Mae"), the
Tennessee Valley Authority or the Federal Housing Administration.
(continued on next page)
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund invests all its assets in money market instruments. These instruments
are generally fixed-income securities that MATURE or reset to a new interest
rate within 13 months (25 months if the U.S. government or a government agency
has issued or guaranteed the debt). Other than U.S. government and government
agency securities, the Fund only invests in money market instruments of issuers
with one of the two highest short-term ratings from a nationally recognized
credit rating organization or unrated instruments which, in the opinion of the
Fund's management, are of similar credit quality.
The money market instruments in which the Fund may invest include:
- United States Government Securities -- Debt securities issued or
guaranteed as to principal and interest by the U.S. government
that are supported by the full faith and credit of the United
States.
- United States Government Agency Securities -- Debt securities
issued or guaranteed as to principal and interest by U.S.
government AGENCIES, GOVERNMENT SPONSORED ENTERPRISES and
government INSTRUMENTALITIES. Agency Securities may be supported
only by the credit of the issuer, not the full faith and credit
of the United States.
- Bank Money Instruments -- Obligations of commercial banks or
other depository institutions, such as certificates of deposit,
time deposits, bank notes and bankers' acceptances.
- Commercial Paper -- Obligations, usually of nine months or less,
issued by corporations and other businesses for short-term
funding.
- Short-Term Obligations -- Corporate or foreign government debt
and ASSET-BACKED securities with a period of 397 days or less
remaining to maturity.
- Floating Rate Obligations -- Obligations of government agencies,
corporations, depository institutions or other issuers which
periodically reset their interest rate to reflect a current
market rate, such as the federal funds rate or a bank's prime
rate, or the level of an interest rate INDEX, such as LIBOR (a
well-known short-term interest rate index).
6 MERRILL LYNCH RESERVE ASSETS FUND
<PAGE> 144
(continued. . .)
GOVERNMENT SPONSORED ENTERPRISES -- private corporations sponsored by the
federal government which have the legal status of government agencies, such as
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student Loan
Marketing Association ("Sallie Mae") or Fannie Mae.
INSTRUMENTALITIES -- supranational entities sponsored by the U.S. and other
governments, such as the World Bank or the Inter-American Development Bank.
ASSET-BACKED SECURITY -- fixed-income securities issued by a trust or other
legal entity established for the purpose of issuing securities and holding
certain assets, such as credit card receivables or auto leases, that pay down
over time and generate sufficient cash to pay holders of the securities.
INDEX -- a measure of value or rates.
ABOUT THE PORTFOLIO MANAGER
Jacqueline Rogers is the Portfolio Manager of the Fund since October 1996. She
has served as Vice President of MLAM since January 1986.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
- Insurance Company Obligations -- Short-term funding agreements
and guaranteed insurance contracts with fixed or floating
interest rates.
- Master Notes -- Variable principal amount demand instruments
issued by securities firms and other corporate issuers.
- Other Eligible Investments -- Other money market instruments
permitted by SEC rules governing money market funds.
The Fund may also engage in the following investment practices:
- Repurchase Agreements -- Repurchase agreements are transactions
in which the Fund purchases a class of securities with the
obligation to resell the securities shortly thereafter at a
specified price which reflects interest payable to the Fund. The
Fund may engage in repurchase agreements involving any of the
above instruments (without regard to the instrument's maturity).
- Reverse Repurchase Agreements -- Reverse repurchase agreements
are transactions in which the Fund sells a security with the
obligation to repurchase the security shortly thereafter at a
specified price which reflects a payment by the Fund. The Fund
profits from entering into a reverse repurchase agreement by
reinvesting the proceeds of the sale at a higher return than it
has to pay to repurchase its security.
The Fund's management will vary the types of money market instruments in the
Fund's portfolio, as well as the Fund's average maturity, in response to its
assessment of the relative value of different securities and future short-term
interest rates.
MERRILL LYNCH RESERVE ASSETS FUND 7
<PAGE> 145
[DETAILS ABOUT THE FUND ICON] Details About the Fund
EURODOLLAR -- obligations issued by foreign branches or subsidiaries of U.S.
banks.
YANKEEDOLLAR -- obligations issued by
U.S. branches or subsidiaries of foreign banks.
The Fund may invest in obligations of foreign issuers, including both EURODOLLAR
and YANKEEDOLLAR obligations.
The Fund's management will attempt to maintain a share value of $1.00, but there
is no guarantee that it will be able to do so. The Fund could lose money if
- the issuer of an instrument held by the Fund defaults, or
- short-term interest rates move sharply in a manner not
anticipated by Fund management,
although the risk of loss is minimized by the high credit quality and short-
term maturity of the Fund's investments. In order to maintain a share value of
$1.00, the Fund may reduce the number of shares held by its shareholders.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
8 MERRILL LYNCH RESERVE ASSETS FUND
<PAGE> 146
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed. Numbers
in this table show maximum allowable use only; for actual use, consult the
Fund's annual/semi-annual reports.
[Reserve Assets Fund Chart]
THE MERRILL LYNCH RESERVE ASSETS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investments/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments - x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment ++
grade securities
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities - x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 5 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options ++ x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities + x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++ x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++ x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
MERRILL LYNCH RESERVE ASSETS FUND 9
<PAGE> 147
TABLE OF CONTENTS
Merrill Lynch Special Value Focus Fund
<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
- ------------------------------------------------------------------
The Merrill Lynch Special Value Focus Fund at a Glance...... 3
Risk/Return Bar Chart....................................... 5
Financial Highlights........................................ 6
[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
- ------------------------------------------------------------------
How the Fund Invests........................................ 8
Investment Strategies....................................... 10
APPENDIX
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH SPECIAL VALUE FOCUS FUND
<PAGE> 148
Key Facts [KEY FACTS ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
COMMON STOCK -- shares of ownership of a corporation.
SMALL COMPANIES -- the Fund will invest in companies with a market
capitalization in the same range as companies in the Russell 2000 Stock Index.
The Russell 2000 is a widely known index of small capitalization companies.
EMERGING GROWTH COMPANIES -- companies of any market capitalization without a
long or consistent history of earnings but that Fund management believes have
the potential to grow earnings significantly over an extended period of time.
THE MERRILL LYNCH SPECIAL VALUE FOCUS FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?
The investment objective of the Special Value Focus Fund is to seek long-term
growth of capital.
WHAT ARE THE FUND'S GOALS?
The Fund tries to choose investments that will increase in value. We cannot
guarantee that the Fund will achieve its goal.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in COMMON STOCK of SMALL COMPANIES and EMERGING
GROWTH COMPANIES that Fund management believes have special investment value.
This means Fund management will look for companies that have long-term potential
to grow in size or to become more profitable, or that the stock market may value
more highly in the future.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. Changes in the value of the
Fund's investments may occur because the stock market is rising or falling or as
the result of specific factors that affect particular investments. If the value
of the Fund's investments goes down, you may lose money.
The Fund will invest primarily in small and emerging growth companies. Small and
emerging growth companies may have limited product lines or markets, may depend
on a smaller number of key personnel and may be less financially secure than
larger, more established companies. If a product fails, or if management
changes, or if there are other adverse developments, the Fund's investment in a
small or emerging growth company may lose substantial value.
Small and emerging growth companies' securities generally trade in lower volumes
and are subject to greater, less predictable price changes than the securities
of more established companies. Investing in small or emerging growth companies
requires a long-term view.
MERRILL LYNCH SPECIAL VALUE FOCUS FUND 3
<PAGE> 149
[KEY FACTS ICON] Key Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment to fund a portion of a variable
annuity or insurance contract for contract owners who:
- are investing with long-term goals in mind, such as retirement
- want a professionally managed and diversified portfolio.
- are looking to diversify their holdings by adding exposure to
small and emerging growth companies and are willing to accept
the risks of investing in such companies.
- are willing to accept the risk of short-term fluctuations in
exchange for the potential of higher long-term returns.
- are not looking for current income.
4 MERRILL LYNCH SPECIAL VALUE FOCUS FUND
<PAGE> 150
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class A shares for each complete calendar year since the Fund's inception. The
table compares the average annual total returns for each class of the Fund's
shares for the periods shown with the Russell 2000 Index. How the Fund performed
in the past is not necessarily an indication of how the Fund will perform in the
future. The bar chart and table do not reflect separate account fees and
expenses, which, if reflected, would lower the returns shown below.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
16.6% -12.56% 50.1% -0.53% 17.78% -7.27% 45.9% 8.11% 11.72% -6.5%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
22.69% (quarter ended March 31, 1991) and the lowest return for a quarter was
- -26.69% (quarter ended September 30, 1998). The year-to-date total return as of
March 31, 1999 was -6.28%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR PAST
THE CALENDAR YEAR ENDED) PAST PAST TEN YEARS/
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
VS: Special Value Focus Fund -- Class A -6.50% 8.85% 10.60%
- -------------------------------------------------------------------------------------
Russell 2000 Index* -2.55% 11.86% 12.92%
- -------------------------------------------------------------------------------------
VS: Special Value Focus Fund -- Class B -6.52% N/A -14.47%+
- -------------------------------------------------------------------------------------
Russell 2000 Index* -2.55% 11.86% -4.19%
- -------------------------------------------------------------------------------------
</TABLE>
* This unmanaged Index is comprised of approximately 2,000
smaller-capitalization common stocks from various industrial sectors. During
the 1997 calendar year, the fund's primary performance benchmark was changed
from the Russell 1000 Growth Index and Russell 2000 Growth Index to the
Russell 2000 Small Stock Index to reflect the fund's current focus on
small-capitalization issues. The fund's median market capitalization declined
from approximately $770 million in January to $395 million on December 31,
1997. Past performance is not predictive of future performance.
+ Inception date is October 23, 1997.
MERRILL LYNCH SPECIAL VALUE FOCUS FUND 5
<PAGE> 151
[KEY FACTS ICON] Key Facts
FINANCIAL HIGHLIGHTS -- CLASS A
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
SPECIAL VALUE FOCUS FUND# (CLASS A)+
----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $27.75 $26.22 $27.98 $19.26 $20.96
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .09 .13 .17 .05
- ---------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (1.41) 2.80 1.84 8.64 (1.56)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (1.38) 2.89 1.97 8.81 (1.51)
- ---------------------------------------------------------------------------------------------------------------------------------
Loss dividends and distributions:
Investment income -- net (.09) (.08) (.14) (.09) --
Realized gain on investments -- net (6.33) (1.28) (3.59) -- (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (6.42) (1.36) (3.73) (.09) (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $19.95 $27.75 $26.22 $27.98 $19.26
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (6.50%) 11.72% 8.11% 45.90% (7.27%)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses .81% .80% .81% .81% .83%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .13% .32% .50% .72% .27%
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $446,510 $481,614 $453,029 $339,921 $170,044
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 56.29% 147.06% 80.84% 96.79% 88.48%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Total investment returns exclude insurance-related fees and
expenses.
+ Based on average shares outstanding.
</TABLE>
6 MERRILL LYNCH SPECIAL VALUE FOCUS FUND
<PAGE> 152
FINANCIAL HIGHLIGHTS -- CLASS B (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL VALUE FOCUS FUND (CLASS B)++
-----------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 23, 1997+ TO
INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $27.74 $31.23
- -------------------------------------------------------------------------------------------------------
Investment income (loss) -- net --+++ (.01)
- -------------------------------------------------------------------------------------------------------
Realized and unrealized loss on investments -- net (1.39) (3.48)
- -------------------------------------------------------------------------------------------------------
Total from investment operations (1.39) (3.49)
- -------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net (.08) --
Realized gain on investments -- net (6.33) --
- -------------------------------------------------------------------------------------------------------
Total dividends and distribution (6.41) --
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $19.94 $27.74
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
- -------------------------------------------------------------------------------------------------------
Based on net asset value per share (6.52%) (11.18%)#
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------------------------------
Expenses .97% .96%*
- -------------------------------------------------------------------------------------------------------
Investment income (loss) -- net .02% (.24%)*
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,275 $248
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 56.29% 147.06%
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude insurance-related fees and
expenses.
+ Commencement of Operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
</TABLE>
MERRILL LYNCH SPECIAL VALUE FOCUS FUND 7
<PAGE> 153
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
Daniel V. Szemis is the Portfolio Manager of the Fund since May 1997. Mr. Szemis
has served as First Vice President of MLAM since 1997 and Vice President from
1996 to 1997. From 1990 to 1996, Mr. Szemis was a portfolio manager with
Prudential Mutual Fund Investment Management Advisors.
R. Elise Baum is the Co-Portfolio Manager of the Fund since January 1998. She
has served as First Vice President since 1999, Director of MLAM from 1997 to
1999; Vice President from 1995 to 1997; Senior Fund Analyst from 1994 to 1995;
and Fund Analyst from 1993 to 1994.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund tries to choose investments for capital appreciation -- that is,
investments that will increase in value. The Fund will invest in a diversified
portfolio primarily consisting of equity securities of small and emerging growth
companies. The Fund will generally invest at least 80% of its assets in equity
securities of such companies. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities convertible into Common Stock
- Derivative securities, such as options and futures, the values
of which are based on a common stock or group of common stocks
The Fund will focus on investments in common stock.
The Fund's management chooses investments using a fundamental, value-oriented
investment style. This means that the Fund seeks to invest in companies that the
Fund's management believes to be undervalued. A company's stock is undervalued
when the stock's current price is less than what the Fund believes a share of
the company is worth. A company's worth can be assessed by several factors, such
as financial resources, value of tangible assets, sales and earnings growth,
rate of return on capital, product development, quality of management, and
overall business prospects. A company's stock may become undervalued when most
investors fail to perceive the company's strengths in one or more of these
areas. Fund management may also determine a company is undervalued if its stock
price is down because of temporary factors from which Fund management believes
the company will recover.
Fund management seeks to invest in small companies that:
- have attractive valuation characteristics such as low price-
book value or low price-sales ratios
- have strong management
- have particular qualities that affect the outlook for that
company, such as strong research capabilities, new or unusual
products or occupation of an attractive market niche
- have the potential to increase earnings over an extended period
of time
8 MERRILL LYNCH SPECIAL VALUE FOCUS FUND
<PAGE> 154
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
VOLATILITY -- the frequency and amount of changes to the Fund's net asset value.
Fund management seeks to invest in emerging growth companies that
- occupy dominant positions in new, developing industries or have
a significant market share in a large, fragmented industry,
- have strong management,
- employ sound financial and accounting policies,
- have rapid growth rates or above-average returns on equity, and
- demonstrate successful product development and marketing
capabilities.
Fund management also considers other factors, such as the level of competition
in an industry or the extent of government regulation. The Fund may also
purchase the stock of a company which has suffered a recent earnings decline if
Fund management believes that the decline is temporary or cyclical and will not
significantly affect the company's long-term growth.
The Fund will invest primarily in U.S. companies that do most of their business
in the United States, but may invest a portion of its assets in foreign
companies.
Small and emerging growth companies may have limited product lines or markets,
may depend on a smaller number of key personnel and may be less financially
secure than larger, more established companies. In addition, small and emerging
growth companies' securities generally trade in lower volumes and are subject to
greater, less predictable price changes than the securities of more established
companies. Because of these factors, the Fund is not intended as a complete
investment program but is designed for long-term investors seeking to diversify
their investments and who are prepared to experience above-average VOLATILITY.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
The Fund may use different investment strategies which involve various types of
risk. The strategies that this Fund may use and the types of risk involved are
summarized below:
MERRILL LYNCH SPECIAL VALUE FOCUS FUND 9
<PAGE> 155
[DETAILS ABOUT THE FUND ICON] DETAILS ABOUT THE FUND
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This table shows the investment strategies that the Fund may use and the
investment limitations, if any, as a percentage of Fund assets. The principal
types of risk associated with each investment strategy are also listed.
Numbers in this table show maximum allowable use only; for actual use, consult
the Fund's annual/semi-annual reports.
[Special Value Focus Fund Chart]
THE MERRILL LYNCH SPECIAL VALUE FOCUS FUND
Key:
# Maximum % of total assets
- - No restriction on usage
+ Permitted, but used rarely
++ Not Permitted
x Type of risk involved with
investment strategy
<TABLE>
<CAPTION>
Leverage Credit Market Information Valuation Political Currency Liquidity Correlation Selection
risk risk risk risk risk risk risk risk risk risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing 33 x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Investment/
Repurchase Agreements - x
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending 20 x x
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Trading - x x
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued securities/
forward commitments + x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Non-investment
grade securities ++
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities 10 x x x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid
Securities 15 x x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Covered call options - x x x x
- -----------------------------------------------------------------------------------------------------------------------------------
Indexed derivative
securities +
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and Options ++
- -----------------------------------------------------------------------------------------------------------------------------------
Currency contracts ++
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each of these strategies and risks is explained in the Appendix to this
Prospectus.
APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional Information about this Fund is discussed in the Appendix which is
part of this prospectus.
If you would like further information about the Fund, including how it invests
please see the Statement of Additional Information.
10 MERRILL LYNCH SPECIAL VALUE FOCUS FUND
<PAGE> 156
APPENDIX
Merrill Lynch Variable Series Funds
Class A Shares
<TABLE>
<CAPTION>
PAGE
<S> <C>
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 157
Your Account [YOUR ACCOUNT ICON]
THE INSURANCE COMPANIES
- --------------------------------------------------------------------------------
Shares of the Funds are sold to separate accounts of insurance companies (the
"Insurance Companies") to fund certain variable life insurance contracts and/or
variable annuities (the "Contracts") issued by the Insurance Companies. Certain
Insurance Companies may be affiliates of Merrill Lynch Asset Management, L.P.,
the Funds' adviser.
Shares of the Funds are owned by the Insurance Companies, not Contract owners. A
Contract owner has no direct interest in the shares of a Fund, but only in the
Contract. A Contract is described in the prospectus for that Contract. That
prospectus describes the relationship between changes in the value of shares of
a Fund, and the benefits provided under a Contract. The prospectus for a
Contract also describes various fees payable to the Insurance Company and
charges to the separate account made by the Insurance Company with respect to
the Contract. 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.
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This section contains a discussion of certain investment strategies that may be
used by the Funds. The forepart of this Prospectus indicates which of the
following strategies may be used by each Fund. The risks associated with each of
these strategies are described in greater detail in the following section of
this Appendix, "Types of Investment Risk". As with any mutual fund, there can be
no guarantee that a Fund will meet its goals or that a Fund's performance will
be positive for any period of time.
BORROWING AND LEVERAGE -- Each Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The cost of borrowing may reduce
the Fund's return. Borrowing involves leverage risk.
SHORT-TERM INVESTMENTS -- Each Fund will normally invest a portion of its assets
in short-term debt securities, such as commercial paper or treasury bills
agreements. As a temporary measure for defensive purposes, each Fund
MERRILL LYNCH VARIABLE SERIES FUNDS A-3
<PAGE> 158
[YOUR ACCOUNT ICON] Your Account
may invest more heavily in these securities, without limitation. A Fund may also
increase its investment in these securities when Fund management is unable to
find enough attractive long-term investments, to reduce exposure to long-term
investments when management believes it is advisable to do so on a temporary
basis, or to meet redemptions. Investments in short-term debt securities can be
sold easily and have limited risk of loss but earn only limited returns.
Short-term investments may therefore limit the potential for a fund to achieve
its investment objective. Short-term investments involve credit risk.
REPURCHASE AGREEMENTS -- Each Fund may invest in repurchase agreements. A
repurchase agreement involves the purchase of a security together with a
simultaneous agreement to resell the security to the seller at a later date at
approximately the purchase price less an amount that represents interest to the
buyer. Repurchase agreements are considered relatively safe, liquid investments
for short-term cash, but involve the risk that the seller will fail to
repurchase the security and that the Fund will have to attempt to sell the
security in the market for its current value, which may be less than the amount
the Fund paid for the security. Repurchase agreements involve credit risk.
SECURITIES LENDING -- Each Fund may lend a portion of its portfolio securities.
A Fund may lend portfolio securities to financial institutions in return for
collateral in the form of government securities or cash. A Fund making a
securities loan will either receive a fee from the borrower or pay the borrower
interest in return for the right to seek to invest cash collateral at a higher
rate. If a borrower fails to return a Fund's security, the Fund will have to
attempt to liquidate the borrower's collateral, which may be worth less than the
Fund's security. Securities loans involve leverage risk and credit risk.
SHORT-TERM TRADING -- Each Fund can buy and sell securities whenever it sees a
market opportunity, and therefore each Fund may engage in short-term trading.
Short-term trading may increase a Fund's expenses and have tax consequences.
Short-term trading involves market risk and selection risk.
WHEN-ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued and delayed-delivery securities and forward
commitments involve the risk that the security a Fund buys will lose value
A-4 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 159
prior to its delivery. There also is the risk that the security will not be
issued or that the other party will not meet its obligation. If this occurs, the
Fund both loses the investment opportunity for the assets it has set aside to
pay for the security and any gain in the security's price. When-issued and
delayed delivery securities and forward commitments involve market risk,
selection risk and leverage risk.
NON-INVESTMENT GRADE SECURITIES -- Non-investment grade securities, otherwise
known as "junk bonds", are debt securities that are rated below investment grade
by the major rating agencies or are unrated securities that Fund management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally are
less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer bankruptcy, claims of other creditors may have priority over
the claims of junk bond holders, leaving few or no assets available to repay
junk bond holders. Junk bonds involve credit risk, market risk, selection risk,
valuation risk and liquidity risk, and certain junk bonds may also involve
information risk, political risk or currency risk.
FOREIGN SECURITIES -- Certain Funds may invest in foreign securities. Foreign
investing involves special risks not present in U.S. securities that may
increase the chance a Fund will lose money, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets. Foreign investing involves market risk, selection risk and political
risk, and certain foreign investments may also involve credit risk, information
risk, valuation risk, currency risk and liquidity risk.
RESTRICTED AND ILLIQUID SECURITIES -- Each Fund may invest a portion of its
assets in restricted and illiquid securities, which are investments that the
Fund cannot easily resell within seven days at current value or that have
contractual or legal restrictions on resale. If the Fund buys illiquid
securities it may be unable to quickly resell them or may be able to sell them
only at a price below current value. Restricted and illiquid securities involve
liquidity risk, market risk, selection risk and valuation risk, and may involve
information risk.
MERRILL LYNCH VARIABLE SERIES FUNDS A-5
<PAGE> 160
[YOUR ACCOUNT ICON] Your Account
COVERED CALL OPTIONS -- Certain Funds can sell covered call options, which are
options that give the purchaser the right to require a Fund to sell a security
owned by the Fund to the purchaser at a specified price within a limited time
period. These Funds may also sell the purchaser a right to require the Fund to
make a payment based on the level of an index that is closely correlated with
some of the Fund's holdings. A Fund will receive a premium (an upfront payment)
for selling a covered call option, and if the option expires unexercised because
the price of the underlying security has gone down the premium received by the
Fund will partially offset any losses on the underlying security. By writing a
covered call option, however, a Fund limits its ability to sell the underlying
security and gives up the opportunity to profit from any increase in the value
of the underlying security beyond the sale price specified in the option.
Covered call options involve market risk, correlation risk, liquidity risk and
selection risk.
INDEXED DERIVATIVE SECURITIES -- Certain Funds may invest in debt securities the
potential returns of which are directly related to changes in an underlying
index or interest rate, known as indexed securities. The return on indexed
securities will rise when the underlying index or interest rate rises and fall
when the index or interest rate falls. Some funds may also invest in securities
whose return is inversely related to changes in an index or interest rate. In
general, inverse securities change in value in a manner that is opposite to most
securities -- that is, the return of inverse securities will decrease when the
index increases in value and increase in value when the index decreases.
Investments in indexed and inverse securities may subject the Fund to the risks
of reduced or eliminated interest payments and losses of principal. In addition,
certain indexed and inverse securities may increase or decrease in value at a
greater rate than the underlying index, which effectively leverages the Fund's
investment. As a result, the market value of such securities will generally be
more volatile than that of other securities. Indexed and inverse securities
involve credit risk, market risk and selection risk, and may also involve
leverage risk, valuation risk, political risk, currency risk, liquidity risk or
correlation risk.
FUTURES AND OPTIONS -- Certain Funds may use futures and options. Futures are
exchange-traded contracts involving the obligation of the seller to deliver, and
the buyer to receive, certain assets (or a money payment based on the change in
value of certain assets or an index) at a specified time. Futures involve
leverage risk and correlation risk and may involve currency risk and
A-6 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 161
political risk. Options are exchange-traded or private contracts involving the
right of a holder to deliver (a "put") or receive (a "call") certain assets (or
a money payment based on the change of certain assets or an index) from another
party at a specified price within a specified time period. Options involve
leverage risk and correlation risk. Private options also involve credit risk,
valuation risk and liquidity risk. Options may involve currency risk and
political risk.
The Funds will use futures and options primarily for hedging purposes -- that
is, to offset the risk that other holdings may decrease in value or that
potential investment opportunities may increase in value before the Fund can
fully implement its investment strategy. The Funds may use options, however, to
enhance total return as well as for hedging purposes. While hedging can reduce
losses, it can also reduce or eliminate gains if markets move in a different
manner than anticipated by the Fund or if the cost of the future or option
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the future or option will not match those of the holdings being
hedged as expected by the Fund, in which case losses on the holdings being
hedged may not be reduced.
CURRENCY CONTRACTS -- Certain Funds may buy securities denominated or quoted in
currencies other than the U.S. dollar. Changes in foreign currency exchange
rates will affect the value of the securities of the Fund. In order to seek to
limit such changes, certain Funds may buy or sell contracts relating to foreign
currencies for hedging purposes. Hedging is a strategy in which a currency
contract is used to offset the risk that other Fund holdings may decrease in
U.S. dollar value as the result of changes in exchange rates. Losses on the
other investment may be substantially reduced by gains on a currency contract
that reacts in an opposite manner to market movements. While hedging can reduce
losses, it can also reduce or eliminate gains if exchange rates move in a
different manner than anticipated by the Fund or if the cost of the currency
contract outweighs the benefit of the hedge. Hedging also involves the risk that
changes in the value of the currency contract will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. A Fund may not be able to (or may not
try to) hedge all currency risks, and there is no guaranty that a Fund's
currency hedging, if attempted, will be successful. A Fund may attempt to hedge
through several different types of currency contracts, including currency
forwards, currency options and currency-indexed instruments. Currency contracts
involve currency risk,
MERRILL LYNCH VARIABLE SERIES FUNDS A-7
<PAGE> 162
[YOUR ACCOUNT ICON] Your Account
market risk, political risk and correlation risk and may also involve credit
risk, valuation risk and liquidity risk, leverage risk and liquidity risk.
TYPES OF INVESTMENT RISK
- --------------------------------------------------------------------------------
This section contains a discussion of various risks that may be associated with
certain investment strategies. The forepart of this Prospectus indicates which
investment strategies may be used by each Fund.
CORRELATION RISK -- The risk that changes in the value of two investments do not
track or offset each other in the manner anticipated by Fund management.
Correlation risk is associated with hedging transactions, in which a Fund uses a
derivative to offset the risk that other Fund holdings may decrease in value or
that potential investment opportunities may increase in value before the Fund
can fully implement its investment strategy. Correlation risk means that changes
in the value of the derivative may not match those of the holdings being hedged
as expected by the Fund, in which case any losses on the holdings or potential
holdings being hedged may not be reduced.
CREDIT RISK -- The risk that the issuer of an investment or other party to a
trade will be unable to honor its obligations to a Fund.
CURRENCY RISK -- The risk that changes in the exchange rate between currencies
will adversely affect the value (in U.S. dollar terms) of an investment.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value to a U.S. investor because the
currency is worth fewer U.S. dollars.
INFORMATION RISK -- The risk that important information about a security or
market is inaccurate, unreliable or unavailable.
LEVERAGE RISK -- The risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
A-8 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 163
LIQUIDITY RISK -- The risk that certain securities may be difficult or
impossible to sell at the time that a Fund would like or at the price that a
Fund believes the security is currently worth.
MARKET RISK/INTEREST RATE RISK -- The risk that the entire market will undergo
an unanticipated change in value, including the possibility that the market will
go down sharply and unpredictably. For fixed-income investments, this includes
the risk that the value of an investment will decrease as a result of changes in
interest rates. Generally, when interest rates increase, fixed-income securities
decrease in value and longer-term fixed-income securities decrease in value more
than short-term fixed-income securities.
POLITICAL RISK -- The risk of losses arising from government or legal events,
such as changes in tax or trade laws, imposition of currency controls, adverse
court or administrative rulings, or change of a government or political system.
SELECTION RISK -- The risk that a specific Fund investment will underperform the
market.
VALUATION RISK -- The risk that a Fund has valued an investment at a higher
price than it can actually obtain upon a sale.
SPECIAL RISKS ASSOCIATED WITH FOREIGN INVESTMENTS GENERALLY --
- --------------------------------------------------------------------------------
FOREIGN MARKET RISK -- Investment in foreign securities involves the following
risks, which are generally greater for investments in emerging markets.
- The economies of some foreign markets often do not compare
favorably with that of the United States in areas such as growth
of gross domestic product, reinvestment of capital, resources
and balance of payments. Some of these economies may rely
heavily on particular industries or foreign capital. They may be
more vulnerable to adverse diplomatic developments, the
imposition of economic sanctions against a particular country or
countries, changes
MERRILL LYNCH VARIABLE SERIES FUNDS A-9
<PAGE> 164
[YOUR ACCOUNT ICON] Your Account
in international trading patterns, trade barriers and other
protectionist or retaliatory measures.
- Investments in foreign markets may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes.
- The governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital
markets or in certain industries. Any of these actions could
severely affect security prices. They could also impair the
Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or
otherwise adversely affect the Fund's operations.
- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal
judgments in foreign courts and political and social
instability. Legal remedies available to investors in some
foreign countries may be less extensive than those available to
investors in the United States.
- Because there are generally fewer investors on foreign exchanges
and a smaller number of shares traded each day, it may be
difficult for a Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up
and down more than prices of securities traded in the United
States.
- Foreign markets may have different clearance and settlement
procedures. In certain markets, settlements may be unable to
keep pace with the volume of securities transactions. If this
occurs, settlement may be delayed and a Fund's assets may be
uninvested and not earning returns. The Fund may miss investment
opportunities or be unable to sell an investment because of
these delays.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- A Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on a Fund's ability to recover its assets if a
A-10 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 165
foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for a Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount a Fund can earn on
its investments and typically results in a higher operating expense ratio for a
Fund than investment companies invested only in the U.S.
SPECIAL RISKS ASSOCIATED WITH EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") --
- --------------------------------------------------------------------------------
A number of European countries have agreed to enter into EMU in an effort to
reduce trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Upon introduction of
the euro, certain securities (beginning with government and corporate bonds)
were redenominated in the euro. These securities trade and make dividend and
other payments only in euros. Like other investment companies and business
organizations, including the companies in which a Fund may invest, a Fund could
be adversely affected:
- If the euro, or EMU as a whole, does not take effect as planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the euro
as a distinct currency beginning with euro conversion.
MERRILL LYNCH VARIABLE SERIES FUNDS A-11
<PAGE> 166
[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of a Fund's total assets after deducting
A- 12 liabilities divided by the number of shares outstanding.
HOW TO BUY AND SELL SHARES
- --------------------------------------------------------------------------------
The Company is offering through this prospectus Class A shares in each of its
Funds to the Insurance Companies. The price of shares purchased by the Insurance
Companies is based on the next calculation of the per share net asset value of
the Fund after an order is placed.
The Company may reject any order to buy shares and may suspend the sale of
shares at any time.
The Company will redeem all full and fractional shares of the Funds for cash.
The price of redeemed shares is based on the next calculation of net asset value
after a redemption order is placed.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When an Insurance Company purchases shares, the Insurance Company pays the NET
ASSET VALUE. This is the offering price. Shares are also redeemed at their net
asset value. Each Fund calculates its net asset value (generally by using market
quotations) each day the New York Stock Exchange is open, fifteen minutes after
the close of business on the Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). Securities held by the Domestic Money Market and Reserve
Assets Funds with a remaining maturity of 60 days or less are generally valued
on an amortized cost basis. Under this method of valuation, a security is
initially valued at cost on the date of purchase, and then the Domestic Money
Market and Reserve Assets Fund amortize the value of the security at a constant
rate until the maturity of the security, regardless of the impact of fluctuating
interest rates on the market value of the security. The net asset value used in
determining the price for the purchase or redemption of shares is the next one
calculated after the purchase or redemption order is placed. Foreign securities
owned by a Fund may trade on weekends or other days when a Fund does not price
its shares. As a result, the Fund's net asset value may change on days when an
Insurance Company will not be able to purchase or redeem the Fund's shares. The
Domestic Money Market Fund and the Reserve Assets Fund will seek to maintain a
net asset value of $1.00 per Share.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Domestic Money Market and Reserve Assets Funds will declare dividends daily
and will reinvest dividends monthly in additional full and
A-12 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 167
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
will be reinvested in additional Fund shares as they are paid.
fractional shares of those Funds. The Global Bond Focus, Government Bond, High
Current Income and Prime Bond Funds will declare dividends monthly and reinvest
dividends monthly in additional shares of those Funds. The Global Utility Fund
will declare dividends quarterly and will reinvest dividends quarterly in
additional shares of the Fund. The American Balanced, Basic Value Focus,
Capital Focus, Developing Capital Markets Focus, Special Value Focus, Global
Strategy Focus, Global Growth Focus, Index 500, International Equity Focus,
National Resources Focus and Quality Equity Funds will declare dividends at
least annually and will reinvest dividends at least annually in additional
shares of the respective Funds.
DIVIDENDS paid by the Company may be included in a Insurance Company's gross
income. The tax treatment of these dividends depends on the Insurance Company's
tax status. A description of an Insurance Company's tax status is contained in
the prospectus for the Contract.
MERRILL LYNCH VARIABLE SERIES FUNDS A-13
<PAGE> 168
Management of the Fund [MANAGEMENT OF THE FUND ICON]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Company's Investment Adviser, manages the
Company's investments and its business operations under the overall supervision
of the Company's Board of Directors. The Investment Adviser has the
responsibility for making all investment decisions for the Company. The
Investment Adviser has a sub-advisory agreement with Merrill Lynch Asset
Management U.K. Limited, an affiliate, under which the Investment Adviser may
pay a fee for services it receives.
<TABLE>
<CAPTION>
MANAGEMENT
FEE FOR
YEAR ENDED % OF ITS
FUND NAME DECEMBER 31, 1998 AVG NET ASSETS
- -------------------------------------- ----------------- --------------
<S> <C> <C>
American Balance Fund $1,043,157 0.55%
Basic Value Focus Fund $4,516,100 0.60%
Capital Focus Fund $61,312 0.60%
Developing Capital Markets Focus Fund $1,126,826 1.00%
Domestic Money Market Fund $1,765,415 0.50%
Global Bond Focus Fund $430,336 0.60%
Global Growth Focus Fund $49,823 0.75%
Global Strategy Focus Fund $5,364,685 0.65%
Global Utility Focus Fund $829,080 0.60%
Government Bond Fund $1,195,999 0.50%
High Current Income Fund $2,630,447 0.47%
Index 500 Fund $965,368 0.30%
International Equity Focus Fund $2,370,652 0.75%
Natural Resources Focus Fund $135,222 0.65%
Prime Bond Fund $2,330,935 0.42%
Quality Equity Fund $3,758,987 0.43%
Reserve Assets Fund $109,945 0.50%
Special Value Focus Fund $3,594,897 0.75%
</TABLE>
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $515 billion in investment company and other portfolio
assets under management as of March 1999. This amount includes assets managed
for Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Company
A-14 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 169
could be adversely affected if the computer systems used by the Company's
management or other Company service providers do not properly address this
problem before January 1, 2000. The Company's management expects to have
addressed this problem before then, and does not anticipate that the services it
provides will be adversely affected. The Company's other service providers have
told the Company's management that they also expect to resolve the Year 2000
Problem, and the Company's management will continue to monitor the situation as
the Year 2000 approaches. However, if the problem has not been fully addressed,
the Company could be negatively affected. The Year 2000 Problem could also have
a negative impact on the companies in which the Company invests, and this could
hurt the Company's investment returns.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ADVISER -- Merrill Lynch Asset Management, L.P., 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, has been selected as the investment adviser
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, 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 -- Financial Data Services, Inc. ("FDS"),
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.
FDS 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 LLP, New York, New York, is counsel for the
Company.
MERRILL LYNCH VARIABLE SERIES FUNDS A-15
<PAGE> 170
APPENDIX
Merrill Lynch Variable Series Funds
Class B Shares
<TABLE>
<CAPTION>
PAGE
<S> <C>
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
- ------------------------------------------------------------------
The Insurance Companies..................................... A-3
Investment Strategies....................................... A-3
Types of Investment Risk.................................... A-8
How to Buy and Sell Shares.................................. A-12
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------
Merrill Lynch Asset Management.............................. A-14
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>
MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 171
Your Account [YOUR ACCOUNT ICON]
THE INSURANCE COMPANIES
- --------------------------------------------------------------------------------
Shares of the Funds are sold to separate accounts of insurance companies (the
"Insurance Companies") to fund certain variable life insurance contracts and/or
variable annuities (the "Contracts") issued by the Insurance Companies. Certain
Insurance Companies may be affiliates of Merrill Lynch Asset Management, L.P.,
the Funds' adviser.
Shares of the Funds are owned by the Insurance Companies, not Contract owners. A
Contract owner has no direct interest in the shares of a Fund, but only in the
Contract. A Contract is described in the prospectus for that Contract. That
prospectus describes the relationship between changes in the value of shares of
a Fund, and the benefits provided under a Contract. The prospectus for a
Contract also describes various fees payable to the Insurance Company and
charges to the separate account made by the Insurance Company with respect to
the Contract. 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.
INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
This section contains a discussion of certain investment strategies that may be
used by the Funds. The forepart of this Prospectus indicates which of the
following strategies may be used by each Fund. The risks associated with each of
these strategies are described in greater detail in the following section of
this Appendix, "Types of Investment Risk". As with any mutual fund, there can be
no guarantee that a Fund will meet its goals or that a Fund's performance will
be positive for any period of time.
BORROWING AND LEVERAGE -- Each Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The cost of borrowing may reduce
the Fund's return. Borrowing involves leverage risk.
SHORT-TERM INVESTMENTS -- Each Fund will normally invest a portion of its assets
in short-term debt securities, such as commercial paper or treasury bills
agreements. As a temporary measure for defensive purposes, each Fund
MERRILL LYNCH VARIABLE SERIES FUNDS A-3
<PAGE> 172
[YOUR ACCOUNT ICON] Your Account
may invest more heavily in these securities, without limitation. A Fund may also
increase its investment in these securities when Fund management is unable to
find enough attractive long-term investments, to reduce exposure to long-term
investments when management believes it is advisable to do so on a temporary
basis, or to meet redemptions. Investments in short-term debt securities can be
sold easily and have limited risk of loss but earn only limited returns.
Short-term investments may therefore limit the potential for a fund to achieve
its investment objective. Short-term investments involve credit risk.
REPURCHASE AGREEMENTS -- Each Fund may invest in repurchase agreements. A
repurchase agreement involves the purchase of a security together with a
simultaneous agreement to resell the security to the seller at a later date at
approximately the purchase price less an amount that represents interest to the
buyer. Repurchase agreements are considered relatively safe, liquid investments
for short-term cash, but involve the risk that the seller will fail to
repurchase the security and that the Fund will have to attempt to sell the
security in the market for its current value, which may be less than the amount
the Fund paid for the security. Repurchase agreements involve credit risk.
SECURITIES LENDING -- Each Fund may lend a portion of its portfolio securities.
A Fund may lend portfolio securities to financial institutions in return for
collateral in the form of government securities or cash. A Fund making a
securities loan will either receive a fee from the borrower or pay the borrower
interest in return for the right to seek to invest cash collateral at a higher
rate. If a borrower fails to return a Fund's security, the Fund will have to
attempt to liquidate the borrower's collateral, which may be worth less than the
Fund's security. Securities loans involve leverage risk and credit risk.
SHORT-TERM TRADING -- Each Fund can buy and sell securities whenever it sees a
market opportunity, and therefore each Fund may engage in short-term trading.
Short-term trading may increase a Fund's expenses and have tax consequences.
Short-term trading involves market risk and selection risk.
WHEN-ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS --
When-issued and delayed-delivery securities and forward
A-4 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 173
commitments involve the risk that the security a Fund buys will lose value prior
to its delivery. There also is the risk that the security will not be issued or
that the other party will not meet its obligation. If this occurs, the Fund both
loses the investment opportunity for the assets it has set aside to pay for the
security and any gain in the security's price. When-issued and delayed delivery
securities and forward commitments involve market risk, selection risk and
leverage risk.
NON-INVESTMENT GRADE SECURITIES -- Non-investment grade securities, otherwise
known as "junk bonds", are debt securities that are rated below investment grade
by the major rating agencies or are unrated securities that Fund management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally are
less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer bankruptcy, claims of other creditors may have priority over
the claims of junk bond holders, leaving few or no assets available to repay
junk bond holders. Junk bonds involve credit risk, market risk, selection risk,
valuation risk and liquidity risk, and certain junk bonds may also involve
information risk, political risk or currency risk.
FOREIGN SECURITIES -- Certain Funds may invest in foreign securities. Foreign
investing involves special risks not present in U.S. securities that may
increase the chance a Fund will lose money, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets. Foreign investing involves market risk, selection risk and political
risk, and certain foreign investments may also involve credit risk, information
risk, valuation risk, currency risk and liquidity risk.
RESTRICTED AND ILLIQUID SECURITIES -- Each Fund may invest a portion of its
assets in restricted and illiquid securities, which are investments that the
Fund cannot easily resell within seven days at current value or that have
contractual or legal restrictions on resale. If the Fund buys illiquid
securities it may be unable to quickly resell them or may be able to sell them
only at a price below current value. Restricted and illiquid securities involve
liquidity risk, market risk, selection risk and valuation risk, and may involve
information risk.
MERRILL LYNCH VARIABLE SERIES FUNDS A-5
<PAGE> 174
[YOUR ACCOUNT ICON] Your Account
COVERED CALL OPTIONS -- Certain Funds can sell covered call options, which are
options that give the purchaser the right to require a Fund to sell a security
owned by the Fund to the purchaser at a specified price within a limited time
period. These Funds may also sell the purchaser a right to require the Fund to
make a payment based on the level of an index that is closely correlated with
some of the Fund's holdings. A Fund will receive a premium (an upfront payment)
for selling a covered call option, and if the option expires unexercised because
the price of the underlying security has gone down the premium received by the
Fund will partially offset any losses on the underlying security. By writing a
covered call option, however, a Fund limits its ability to sell the underlying
security and gives up the opportunity to profit from any increase in the value
of the underlying security beyond the sale price specified in the option.
Covered call options involve market risk, correlation risk, liquidity risk and
selection risk.
INDEXED DERIVATIVE SECURITIES -- Certain Funds may invest in debt securities the
potential returns of which are directly related to changes in an underlying
index or interest rate, known as indexed securities. The return on indexed
securities will rise when the underlying index or interest rate rises and fall
when the index or interest rate falls. Some funds may also invest in securities
whose return is inversely related to changes in an index or interest rate. In
general, inverse securities change in value in a manner that is opposite to most
securities -- that is, the return of inverse securities will decrease when the
index increases in value and increase in value when the index decreases.
Investments in indexed and inverse securities may subject the Fund to the risks
of reduced or eliminated interest payments and losses of principal. In addition,
certain indexed and inverse securities may increase or decrease in value at a
greater rate than the underlying index, which effectively leverages the Fund's
investment. As a result, the market value of such securities will generally be
more volatile than that of other securities. Indexed and inverse securities
involve credit risk, market risk and selection risk, and may also involve
leverage risk, valuation risk, political risk, currency risk, liquidity risk or
correlation risk.
FUTURES AND OPTIONS -- Certain Funds may use futures and options. Futures are
exchange-traded contracts involving the obligation of the seller to deliver, and
the buyer to receive, certain assets (or a money payment based on the change in
value of certain assets or an index) at a specified time. Futures involve
leverage risk and correlation risk and may involve currency risk and
A- 6 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 175
political risk. Options are exchange-traded or private contracts involving the
right of a holder to deliver (a "put") or receive (a "call") certain assets (or
a money payment based on the change of certain assets or an index) from another
party at a specified price within a specified time period. Options involve
leverage risk and correlation risk. Private options also involve credit risk,
valuation risk and liquidity risk. Options may involve currency risk and
political risk.
The Funds will use futures and options primarily for hedging purposes -- that
is, to offset the risk that other holdings may decrease in value or that
potential investment opportunities may increase in value before the Fund can
fully implement its investment strategy. The Funds may use options, however, to
enhance total return as well as for hedging purposes. While hedging can reduce
losses, it can also reduce or eliminate gains if markets move in a different
manner than anticipated by the Fund or if the cost of the future or option
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the future or option will not match those of the holdings being
hedged as expected by the Fund, in which case losses on the holdings being
hedged may not be reduced.
CURRENCY CONTRACTS -- Certain Funds may buy securities denominated or quoted in
currencies other than the U.S. dollar. Changes in foreign currency exchange
rates will affect the value of the securities of the Fund. In order to seek to
limit such changes, certain Funds may buy or sell contracts relating to foreign
currencies for hedging purposes. Hedging is a strategy in which a currency
contract is used to offset the risk that other Fund holdings may decrease in
U.S. dollar value as the result of changes in exchange rates. Losses on the
other investment may be substantially reduced by gains on a currency contract
that reacts in an opposite manner to market movements. While hedging can reduce
losses, it can also reduce or eliminate gains if exchange rates move in a
different manner than anticipated by the Fund or if the cost of the currency
contract outweighs the benefit of the hedge. Hedging also involves the risk that
changes in the value of the currency contract will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. A Fund may not be able to (or may not
try to) hedge all currency risks, and there is no guaranty that a Fund's
currency hedging, if attempted, will be successful. A Fund may attempt to hedge
through several different types of currency contracts, including currency
forwards, currency options and currency-indexed instruments. Currency contracts
involve currency risk,
MERRILL LYNCH VARIABLE SERIES FUNDS A-7
<PAGE> 176
[YOUR ACCOUNT ICON] Your Account
market risk, political risk and correlation risk and may also involve credit
risk, valuation risk and liquidity risk, leverage risk and liquidity risk.
TYPES OF INVESTMENT RISK
- --------------------------------------------------------------------------------
This section contains a discussion of various risks that may be associated with
certain investment strategies. The forepart of this Prospectus indicates which
investment strategies may be used by each Fund.
CORRELATION RISK -- The risk that changes in the value of two investments do not
track or offset each other in the manner anticipated by Fund management.
Correlation risk is associated with hedging transactions, in which a Fund uses a
derivative to offset the risk that other Fund holdings may decrease in value or
that potential investment opportunities may increase in value before the Fund
can fully implement its investment strategy. Correlation risk means that changes
in the value of the derivative may not match those of the holdings being hedged
as expected by the Fund, in which case any losses on the holdings or potential
holdings being hedged may not be reduced.
CREDIT RISK -- The risk that the issuer of an investment or other party to a
trade will be unable to honor its obligations to a Fund.
CURRENCY RISK -- The risk that changes in the exchange rate between currencies
will adversely affect the value (in U.S. dollar terms) of an investment.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value to a U.S. investor because the
currency is worth fewer U.S. dollars.
INFORMATION RISK -- The risk that important information about a security or
market is inaccurate, unreliable or unavailable.
LEVERAGE RISK -- The risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
A-8 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 177
LIQUIDITY RISK -- The risk that certain securities may be difficult or
impossible to sell at the time that a Fund would like or at the price that a
Fund believes the security is currently worth.
MARKET RISK/INTEREST RATE RISK -- The risk that the entire market will undergo
an unanticipated change in value, including the possibility that the market will
go down sharply and unpredictably. For fixed-income investments, this includes
the risk that the value of an investment will decrease as a result of changes in
interest rates. Generally, when interest rates increase, fixed-income securities
decrease in value and longer-term fixed-income securities decrease in value more
than short-term fixed-income securities.
POLITICAL RISK -- The risk of losses arising from government or legal events,
such as changes in tax or trade laws, imposition of currency controls, adverse
court or administrative rulings, or change of a government or political system.
SELECTION RISK -- The risk that a specific Fund investment will underperform the
market.
VALUATION RISK -- The risk that a Fund has valued an investment at a higher
price than it can actually obtain upon a sale.
SPECIAL RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
GENERALLY
- --------------------------------------------------------------------------------
FOREIGN MARKET RISK -- Investment in foreign securities involves the following
risks, which are generally greater for investments in emerging markets.
- The economies of some foreign markets often do not compare
favorably with that of the United States in areas such as growth
of gross domestic product, reinvestment of capital, resources
and balance of payments. Some of these economies may rely
heavily on particular industries or foreign capital. They may be
more vulnerable to adverse diplomatic developments, the
imposition of economic sanctions against a particular country or
countries, changes
MERRILL LYNCH VARIABLE SERIES FUNDS A-9
<PAGE> 178
[YOUR ACCOUNT ICON] Your Account
in international trading patterns, trade barriers and other
protectionist or retaliatory measures.
- Investments in foreign markets may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes.
- The governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital
markets or in certain industries. Any of these actions could
severely affect security prices. They could also impair the
Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or
otherwise adversely affect the Fund's operations.
- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal
judgments in foreign courts and political and social
instability. Legal remedies available to investors in some
foreign countries may be less extensive than those available to
investors in the United States.
- Because there are generally fewer investors on foreign exchanges
and a smaller number of shares traded each day, it may be
difficult for a Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up
and down more than prices of securities traded in the United
States.
- Foreign markets may have different clearance and settlement
procedures. In certain markets, settlements may be unable to
keep pace with the volume of securities transactions. If this
occurs, settlement may be delayed and a Fund's assets may be
uninvested and not earning returns. The Fund may miss investment
opportunities or be unable to sell an investment because of
these delays.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- A Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on a Fund's ability to recover its assets if a
A-10 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 179
foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for a Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount a Fund can earn on
its investments and typically results in a higher operating expense ratio a Fund
than investment companies invested only in the U.S.
SPECIAL RISKS ASSOCIATED WITH EUROPEAN ECONOMIC AND
MONETARY UNION ("EMU")
- --------------------------------------------------------------------------------
A number of European countries have agreed to enter into EMU in an effort to
reduce trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Upon introduction of
the euro, certain securities (beginning with government and corporate bonds)
were redenominated in the euro. These securities trade and make dividend and
other payments only in euros. Like other investment companies and business
organizations, including the companies in which a Fund may invest, a Fund could
be adversely affected:
- If the euro, or EMU as a whole, does not take effect as planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the euro
as a distinct currency beginning with euro conversion.
MERRILL LYNCH VARIABLE SERIES FUNDS A-11
<PAGE> 180
[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of a Fund's total assets after deducting
liabilities divided by the number of shares outstanding.
HOW TO BUY AND SELL SHARES
- --------------------------------------------------------------------------------
The Company is offering through this prospectus Class A shares in each of its
Funds to the Insurance Companies. The price of shares purchased by the Insurance
Companies is based on the next calculation of the per share net asset value of
the Fund after an order is placed.
The Company may reject any order to buy shares and may suspend the sale of
shares at any time.
The Company will redeem all full and fractional shares of the Funds for cash.
The price of redeemed shares is based on the next calculation of net asset value
after a redemption order is placed.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When an Insurance Company purchases shares, the Insurance Company pays the NET
ASSET VALUE. This is the offering price. Shares are also redeemed at their net
asset value. Each Fund calculates its net asset value (generally by using market
quotations) each day the New York Stock Exchange is open, fifteen minutes after
the close of business on the Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). Securities held by the Domestic Money Market and Reserve
Assets Funds with a remaining maturity of 60 days or less are generally valued
on an amortized cost basis. Under this method of valuation, a security is
initially valued at cost on the date of purchase, and then the Domestic Money
Market and Reserve Assets Fund amortize the value of the security at a constant
rate until the maturity of the security, regardless of the impact of fluctuating
interest rates on the market value of the security. The net asset value used in
determining the price for the purchase or redemption of shares is the next one
calculated after the purchase or redemption order is placed. Foreign securities
owned by a Fund may trade on weekends or other days when a Fund does not price
its shares. As a result, the Fund's net asset value may change on days when an
Insurance Company will not be able to purchase or redeem the Fund's shares. The
Domestic Money Market Fund and the Reserve Assets Fund will seek to maintain a
net asset value of $1.00 per Share.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Domestic Money Market and Reserve Assets Funds will declare dividends daily
and will reinvest dividends monthly in additional full and
A-12 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 181
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
will be reinvested in additional Fund shares as they are paid.
fractional shares of those Funds. The Global Bond Focus, Government Bond, High
Current Income and Prime Bond Funds will declare dividends monthly and reinvest
dividends monthly in additional shares of those Funds. The Global Utility Fund
will declare dividends quarterly and will reinvest dividends quarterly in
additional shares of the Fund. The American Balanced, Basic Value Focus, Capital
Focus, Developing Capital Markets Focus, Special Value Focus, Global Strategy
Focus, Global Growth Focus, Index 500,
International Equity Focus, National Resources Focus and Quality Equity Funds
will declare dividends at least annually and will reinvest dividends at least
annually in additional shares of the respective Funds.
DIVIDENDS paid by the Company may be included in a Insurance Company's gross
income. The tax treatment of these dividends depends on the Insurance Company's
tax status. A description of an Insurance Company's tax status is contained in
the prospectus for the Contract.
MERRILL LYNCH VARIABLE SERIES FUNDS A-13
<PAGE> 182
Management of the Fund [MANAGEMENT OF THE FUND ICON]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Company's Investment Adviser, manages the
Company's investments and its business operations under the overall supervision
of the Company's Board of Directors. The Investment Adviser has the
responsibility for making all investment decisions for the Company. The
Investment Adviser has a sub-advisory agreement with Merrill Lynch Asset
Management U.K. Limited, an affiliate, under which the Investment Adviser may
pay a fee for services it receives.
<TABLE>
<CAPTION>
MANAGEMENT
FEE FOR
YEAR ENDED % OF ITS
FUND NAME DECEMBER 31, 1998 AVG NET ASSETS
- --------------------------------------- ----------------- --------------
<S> <C> <C>
American Balance Fund $1,043,157 0.55%
Basic Value Focus Fund $4,516,100 0.60%
Capital Focus Fund $61,312 0.60%
Developing Capital Markets Focus Fund $1,126,826 1.00%
Domestic Money Market Fund $1,765,415 0.50%
Global Bond Focus Fund $430,336 0.60%
Global Growth Focus Fund $49,823 0.75%
Global Strategy Focus Fund $5,364,685 0.65%
Global Utility Focus Fund $829,080 0.60%
Government Bond Fund $1,195,999 0.50%
High Current Income Fund $2,630,447 0.47%
Index 500 Fund $965,368 0.30%
International Equity Focus Fund $2,370,652 0.75%
Natural Resources Focus Fund $135,222 0.65%
Prime Bond Fund $2,330,935 0.42%
Quality Equity Fund $3,758,987 0.43%
Reserve Assets Fund $109,945 0.50%
Special Value Focus Fund $3,594,897 0.75%
</TABLE>
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $515 billion in investment company and other portfolio
assets under management as of March 1999. This amount includes assets managed
for Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Company
A-14 MERRILL LYNCH VARIABLE SERIES FUNDS
<PAGE> 183
could be adversely affected if the computer systems used by the Company's
management or other Company service providers do not properly address this
problem before January 1, 2000. The Company's management expects to have
addressed this problem before then, and does not anticipate that the services it
provides will be adversely affected. The Company's other service providers have
told the Company's management that they also expect to resolve the Year 2000
Problem, and the Company's management will continue to monitor the situation as
the Year 2000 approaches. However, if the problem has not been fully addressed,
the Company could be negatively affected. The Year 2000 Problem could also have
a negative impact on the companies in which the Company invests, and this could
hurt the Company's investment returns.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ADVISER -- Merrill Lynch Asset Management, L.P., 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, has been selected as the investment adviser
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, 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 -- Financial Data Services, Inc. ("FDS"),
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.
FDS 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 LLP, New York, New York, is counsel for the
Company.
MERRILL LYNCH VARIABLE SERIES FUNDS A-15
<PAGE> 184
For More Information [FOR MORE INFORMATION ICON]
SHAREHOLDER REPORTS
Additional information about the investments of each of the Fund is available in
the Company's annual and semi-annual reports to shareholders. In the Company's
annual report you will find a discussion of the market conditions and investment
strategies that significantly affected each Fund's performance during its last
fiscal year. You may obtain these reports at no cost by calling (609) 282-2800.
STATEMENT OF ADDITIONAL INFORMATION
The Company's Statement of Additional Information contains further information
about each Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Company at
Merrill Lynch Variable Series Funds, Inc. P.O. Box 9011, Princeton, New Jersey
08543-9011 or by calling (609) 282-2800.
Contact the Company at the telephone number or address indicated above if you
have any questions.
Information about the Company (including the Statement of Additional
Information) can be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the
public reference room. This information is also available on the SEC's Internet
site at http://www.sec.gov and copies may be obtained upon payment of a
duplicating fee by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM INFORMATION
CONTAINED IN THIS PROSPECTUS.
Investment Company Act file #2-74452
(C) Fund Asset Management, L.P.
Prospectus
[MERRILL LYNCH LOGO]
Merrill Lynch
Variable Series Funds, Inc.
[MERRILL LYNCH ARTWORK]
April 16, 1999
<PAGE> 185
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 eighteen 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 Special
Value Focus Fund, Merrill Lynch Natural Resources Focus Fund, Merrill Lynch
American Balanced Fund, Merrill Lynch Global Strategy Focus Fund, Merrill Lynch
Basic Value Focus Fund, Merrill Lynch Global Bond Focus Fund, Merrill Lynch
Global Utility Focus Fund, Merrill Lynch International Equity Focus Fund,
Merrill Lynch Developing Capital Markets Focus Fund, Merrill Lynch Government
Bond Fund, Merrill Lynch Index 500 Fund, Merrill Lynch Global Growth Focus Fund,
Merrill Lynch Capital Focus Fund. Two separate classes of common stock ("Common
Stock"), Class A Common Stock and Class B Common Stock, are 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 16, 1999 which has been filed with the Securities And
Exchange Commission and can be obtained upon request and without charge by
calling (800) MER-FUND or writing the Company at the above address. The
Prospectus is incorporated by reference into the Statement Of Additional
Information and this Statement Of Additional Information is incorporated by
reference into The Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is April 16, 1999.
<PAGE> 186
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Insurance Companies..................................... 2
Investment Restrictions..................................... 15
Management of The Company................................... 21
Investment Advisory Arrangements............................ 24
Determination of Net Asset Value............................ 27
Portfolio Transactions and Brokerage........................ 29
Purchase of Shares.......................................... 31
Redemption of Shares........................................ 31
Dividends and Taxes......................................... 32
Distribution Arrangements................................... 34
Performance Data............................................ 34
Average Annual Total Return................................. 36
Additional Information...................................... 37
Financial Statements........................................ 40
Annex A..................................................... 41
</TABLE>
<PAGE> 187
THE INSURANCE COMPANIES
Shares of the portfolios of Merrill Lynch Variable Series Funds, Inc. (each
a "Fund") are sold to separate accounts ("Separate Accounts") of insurance
companies ("Insurance Companies") to fund certain variable life insurance
contracts and/or variable annuities (together, "Contracts") issued by such
companies. Certain Insurance Companies may be affiliates of Merrill Lynch Asset
Management, L.P., the Fund's adviser. 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. A Contract is described in the prospectus for
that 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 Statement of Additional Information refer to the Insurance Companies.
NON-DIVERSIFIED FUNDS
The Developing Capital Markets Focus, Global Bond Focus, Global Strategy
Focus, Index 500, and Natural Resources Focus Funds are classified as
non-diversified investment companies under the Investment Company Act. However,
each Fund will have to limit its investments to the extent required by the
diversification requirements applicable to regulated investment companies under
the Internal Revenue Code of 1986, as amended (the "Code" or the "Internal
Revenue Code"). To qualify as a regulated investment company, a Fund, at the
close of each fiscal quarter, may not have more than 25% of its total assets
invested in the securities (except obligations of the U.S. Government, its
agencies or instrumentalities) of any one issuer and with respect to 50% of its
assets, (i) may not have more than 5% of its total assets invested in the
securities of any one issuer and (ii) may not own more than 10% of the
outstanding voting securities of any one issuer.
FIXED INCOME SECURITY RATINGS
The Developing Capital Markets Focus Fund, the High Current Income Fund,
the Capital Focus Fund, Global Utility Focus Fund and the International Equity
Focus Fund may invest in fixed-income securities rated below investment grade
(i.e., securities rated Ba or below by Moody's Investors Service, Inc.
("Moody's") or BB or below by Standard & Poor's Ratings Group ("Standard &
Poor's") at the time of investment). However, securities purchased by a Fund may
subsequently be downgraded. Such securities may continue to be held and will be
sold only if, in the judgment of the Investment Adviser, it is advantageous to
do so. Securities in the lowest category of investment grade debt securities may
have speculative characteristics, which may lead to weakened capacity to pay
interest and principal during periods of adverse economic conditions. See Annex
A of this Statement of Additional Information for a fuller description of
corporate bond ratings.
MATURITY OF FIXED INCOME INVESTMENTS
Certain Funds that invest in fixed-income securities have limits on the
maturity of each fixed-income investment or on the average maturity of the
portfolio. For purposes of applying these limits, each Fund will consider a
fixed-income security's maturity to be its stated maturity (the date the issuer
is scheduled to make its final payment of principal), except that
- for a security with an unconditional put entitling a Fund to receive the
security's approximate amortized cost, the maturity will be considered to
be the next put date;
- for mortgage-backed and other amortizing securities, the maturity will be
considered to be the average life remaining (the length of time it is
expected to take to retire half of the remaining principal through
amortizing payments) based on prepayment assumptions that the Investment
Adviser believes to be reasonable;
2
<PAGE> 188
- for a variable or floating rate investment grade security that the
Investment Adviser believes will have a market value approximating
amortized cost on the next interest reset date, the maturity will be
considered to be the next reset date; and
- for a Fund that operates under SEC rules that specifically define the
maturity of a security, the maturity of a security will be the maturity
determined in a manner consistent with the SEC rules.
PORTFOLIO STRATEGIES
Restricted Securities. From time to time a Fund may invest in securities
the disposition of which is subject to legal restrictions, such as restrictions
imposed by the Securities Act of 1933 (the "Securities Act") on the resale of
securities acquired in private placements. If registration of such securities
under the Securities Act is required, such registration may not be readily
accomplished and if such securities may be sold without registration, such
resale may be permissible only in limited quantities. In either event, a Fund
may not be able to sell its restricted securities at a time which, in the
judgment of the Investment Adviser, would be most opportune.
Each of the Funds is subject to limitations on the amount of 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, 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 certain junk bonds, money market
securities and securities that are freely tradeable in their primary market
offshore may be deemed liquid if acquired by a Fund pursuant to Rule 144A. The
Board, however, will retain oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how the market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Funds' investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Foreign Securities. The Basic Value Focus, Developing Capital Markets
Focus, Special Value Focus, Global Strategy Focus, Global Bond Focus, Global
Utility Focus, High Current Income, International Equity Focus, Natural
Resources Focus, Prime Bond, Quality Equity, Global Growth Focus, Capital Focus
and Reserve Assets Funds may invest in securities of foreign issuers. The Index
500 Fund may also invest in securities of foreign issuers to the extent such
issuers are included in the Standard & Poor's 500 Composite Stock Price Index
(the "S&P Index"). Investments in foreign securities, particularly those of non-
governmental issuers, involve considerations and risks which are not ordinarily
associated with investing in domestic issuers. These considerations and risks
include changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or the
difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of economic, political, social or diplomatic developments,
and the difficulty of assessing economic trends in foreign countries. Foreign
legal systems may differ from the U.S. legal system, and 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
3
<PAGE> 189
meet the standards and objectives of a particular Fund. No Fund that may invest
in foreign securities, other than the Natural Resources Focus and Global
Strategy Focus Funds, will concentrate its investments in any particular
country. The Developing Capital Markets Focus, Global Bond Focus, Global
Strategy Focus, Global Utility Focus, International Equity Focus, Global Growth
Focus Fund and Natural Resources Focus Funds may from time to time be
substantially invested in non-dollar-denominated securities of foreign issuers.
For a Fund that invests in foreign securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may directly affect the value of securities in the portfolio and
the unrealized appreciation or depreciation of investments insofar as United
States investors are concerned, and a Fund's return on investments in
non-dollar-denominated securities may be reduced or enhanced as a result of
changes in foreign currency rates during the period in which the Fund holds such
investments. Foreign currency exchange rates are determined by forces of supply
and demand in the foreign exchange markets. These forces are, in turn, affected
by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With respect
to certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments which could affect investment in those countries.
Each Fund of the Company other than the Developing Capital Markets Focus, Global
Bond Focus, Global Strategy Focus, Global Utility Focus, International Equity
Focus, Natural Resources Focus, Global Growth Focus, Capital Focus Fund and
Quality Equity Funds will purchase only securities issued in dollar
denominations.
The securities markets of many countries at times in the past have moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for a Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains a Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility is
reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities markets may be offset by changes in
foreign currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected by changes in exchange rates.
Each of the International Equity Focus Fund and Developing Capital Markets
Focus Fund may invest a significant portion of its assets in securities of
foreign issuers in smaller capital markets, while each of the other Funds which
is permitted to invest in foreign securities may from time to time invest in
securities of such foreign issuers. Foreign investments involve risks, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems, the existence or possible imposition of
exchange controls, or other foreign or United States governmental laws or
restrictions, that are often heightened for investments in smaller capital
markets.
There may be less publicly available information about an issuer in a
foreign market, particularly one 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
4
<PAGE> 190
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio security or, if the Fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser. There is generally less government supervision and regulation of
exchanges, brokers and issuers in countries having smaller capital markets than
there is in the United States.
As a result, management of a Fund that invests in foreign securities may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country. A Fund may
invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.
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. Some 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 Global Utility Focus Fund, International Equity Focus Fund, Developing
Capital Markets Focus Fund, Capital Focus Fund and the Global Growth Focus Fund
may invest in the securities of foreign issuers in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or other
securities convertible into securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by an American bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form, are
designated for use in the United States securities markets, and EDRs, which are
issued in bearer form, are designed for use in European securities markets. The
Funds 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.
5
<PAGE> 191
The Developing Capital Markets Focus and International Equity Focus Funds
may invest a significant portion of their assets 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, Global Growth
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.
Rules adopted under the Investment Company Act permit the Funds to maintain
their foreign securities and cash in the custody of certain eligible non-U.S.
banks and securities depositories. Certain banks in foreign countries may not be
eligible sub-custodians for the Funds, in which event the Funds may be precluded
from purchasing securities in certain foreign countries in which they otherwise
would invest or the Funds may incur additional costs and delays in providing
transportation and custody services for such securities outside of such
countries. The Funds may encounter difficulties in effecting on a timely basis
portfolio transactions with respect to any securities of issuers held outside
their countries. Other banks that are eligible foreign sub-custodians may be
recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations on
the ability of the Funds to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
Liquidity. In order to assure that each Fund has sufficient liquidity, as
a matter of operating policy no Fund may 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. Each Fund of the Company may from time to
time lend securities (but not in excess of 20%, or in the case of the Global
Growth Focus Fund 33 1/3%) 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.
Subject to any applicable investment restriction, 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-
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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 Code.
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 Fund's
custodian (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 judgment upon which these
techniques are based will be accurate or that such techniques when applied will
be effective. The Funds will enter into forward commitment arrangements only
with respect to securities in which they may otherwise invest.
Standby Commitment Agreements. The High Current Income Fund, Global
Utility Focus Fund, International Equity Focus Fund, Global Growth 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.
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,
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International Equity Focus, Developing Capital Markets Focus and the Quality
Equity Funds) may invest in obligations issued by foreign branches or
subsidiaries of U.S. banks ("Eurodollar" obligations), by U.S. branches or
subsidiaries of foreign banks ("Yankeedollar" obligations), or by foreign
depository institutions and their foreign branches and subsidiaries ("foreign
bank obligations"). Investment in such obligations may involve different risks
from the risks of investing in obligations of U.S. banks. Such risks include
adverse political and economic developments, the possible imposition of
withholding taxes on interest income payable on such obligations, the possible
seizure or nationalization of foreign deposits and the possible establishment of
exchange controls or other foreign governmental laws or restrictions which might
adversely affect the payment of principal and interest. Generally the issuers of
such obligations are subject to fewer U.S. regulatory requirements than are
applicable to U.S. banks. Foreign depository institutions and their foreign
branches and subsidiaries, and foreign branches or subsidiaries of U.S. banks,
may be subject to less stringent reserve requirements than U.S. banks. U.S.
branches or subsidiaries of foreign banks are subject to the reserve
requirements of the state in which they are located. There may be less publicly
available information about a foreign depository institution, branch or
subsidiary, or a U.S. branch or subsidiary of a foreign bank, than about a U.S.
bank, and such institutions may not be subject to the same accounting, auditing
and financial record keeping standards and requirements as U.S. banks. Evidence
of ownership of Eurodollar and foreign bank obligations may be held outside of
the United States, and a Fund may be subject to the risks associated with the
holding of such property overseas. Eurodollar and foreign bank obligations of
the Fund held overseas will be held by foreign branches of the Custodian for the
Fund or by other U.S. or foreign banks under subcustodian arrangements complying
with the requirements of the Investment Company Act of 1940.
DERIVATIVE INSTRUMENTS
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 below.
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, the Developing Capital Markets Focus Fund, the
Global Growth Focus Fund and the Reserve Assets Fund may invest in securities
the potential return of which is based on the change in particular measurements
of value or rate (an "index"). As an illustration, a Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of an interest rate index (such as the prime rate or federal funds rate),
a securities index (such as the Standard & Poor's 500 Composite Index (the "S&P
500") or a more narrowly-focused index such as the AMEX Oil & Gas Index) or a
basket of securities, or based on the relative changes of two indices. In
addition, the Developing Capital Markets Focus Fund, the Global Strategy Focus
Fund, the International Equity Focus Fund and the Natural Resources Focus Fund
may invest in securities the potential return of which is based inversely on the
change in an index. For example, these Funds may invest in securities that pay a
higher rate of interest when a particular index decreases and pay a lower rate
of interest (or do not fully return principal) when the value of the index
increases. If the Fund invests in such securities, it may be subject to reduced
or eliminated interest payments or loss of principal in the event of an adverse
movement in the relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Company believes that indexed and inverse securities may provide portfolio
management flexibility that permits Funds to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
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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, the Global Growth 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, the Global Growth Focus Fund and the Natural Resources Focus Fund are each
authorized to purchase call options on securities it intends to purchase or
securities indices the performance of which are substantially correlated with
the performance of the types of securities it intends to purchase. When a Fund
purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium.
Each Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. The American Balanced Fund, the Basic Value Focus Fund,
the Developing Capital Markets Focus Fund, the Special Value Focus Fund, the
Global Bond Focus Fund, the Global Strategy Focus Fund, the Global Utility Focus
Fund, the Index 500 Fund, the International Equity Focus Fund, the Natural
Resources Focus Fund, the Global Growth Focus Fund, the Capital 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, the Global Growth Focus Fund and the
Natural Resources Focus Fund each may also write put options on securities or
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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.
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, the Global Growth 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,
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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, the Natural Resources Focus Fund, the Global Growth Focus
Fund, the Capital Focus Fund and the Quality Equity Fund may engage in spot and
forward foreign exchange transactions and currency swaps, purchase and sell
options on currencies and purchase and sell currency futures and related options
thereon (collectively, "Currency Instruments") for purposes of hedging against
the decline in the value of currencies in which its portfolio holdings are
denominated against the US dollar.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement. A
Fund will enter into foreign exchange transactions only for purposes of hedging
either a specific transaction or a portfolio position. A Fund may enter into a
foreign exchange transaction for purposes of hedging a specific transaction by,
for example, purchasing a currency needed to settle a security transaction or
selling a currency in which the Fund has received or anticipates receiving a
dividend or distribution. A Fund may enter into a foreign exchange transaction
for purposes of hedging a portfolio position by selling forward a currency in
which a portfolio position of the Fund is denominated or by purchasing a
currency in which the Fund anticipates acquiring a portfolio position in the
near future. A Fund may also hedge portfolio positions through currency swaps,
which are transactions in which one currency is simultaneously bought for a
second currency on a spot basis and sold for the second currency on a forward
basis.
The Funds authorized to engage in Currency Instrument transactions may also
hedge against the decline in the value of a currency against the US dollar
through use of currency futures or options thereon. Currency futures are similar
to forward foreign exchange transactions except that futures are standardized
exchange-traded contracts. See "Futures" above.
The Funds authorized to engage in Currency Instrument transactions may also
hedge against the decline in the value of a currency against the US dollar
through the use of currency options. Currency options are similar to options on
securities, but in consideration for an option premium the writer of a currency
option is obligated to sell (in the case of a call option) or purchase (in the
case of a put option) a specified amount of a specified currency on or before
the expiration date for a specified amount of another currency. The Fund may
engage in transactions in options on currencies either on exchanges or OTC
markets. See "Types of Options" above and "Additional Risk Factors of OTC
Transactions" below.
No Fund will speculate in Currency Instruments. Accordingly, a Fund will
not hedge a currency in excess of the aggregate market value of the securities
which it owns (including receivables for unsettled securities sales), or has
committed to or anticipates purchasing, which are denominated in such currency.
A Fund may, however, hedge a currency by entering into a transaction in a
Currency Instrument denominated in a currency other than the currency being
hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the
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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. There can be no assurance that a fund will
be able to enter into hedging transactions or that such transactions, if
attempted, will be effective.
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 adverse 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 or cost-effective (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 derivatives for hedging purposes involves the risk of imperfect
correlation in movements in the value of the derivatives and the value of the
instruments being hedged. If the value of the derivatives 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 derivatives 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 derivative 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 derivative without incurring
substantial losses, if at all.
Certain transactions in derivatives (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 derivatives 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.
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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 derivatives 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 derivatives 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 DERIVATIVES
No Fund may use any derivative 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 or natural
resource index.
RISKS OF HIGH YIELD SECURITIES
The Developing Capital Markets Focus Fund, High Current Income Fund,
International Equity Focus Fund and Capital 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 Developing Capital Markets Focus Fund, High Current Income Fund,
International Equity Focus Fund and Capital 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.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividend to
shareholders.
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High yield securities tend to be more volatile than higher-rated
fixed-income securities, so that adverse economic events may have a greater
impact on their prices and yields than on higher-rated fixed-income securities.
Zero coupon bonds and bonds which pay interest and/or principal in additional
bonds rather than in cash are especially volatile. Like higher-rated
fixed-income securities, junk bonds are generally purchased and sold through
dealers who make a market in such securities for their own accounts. However,
there are fewer dealers in this market, which may be less liquid than the market
for higher-rated fixed-income securities, even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for such bonds
by various dealers. Adverse economic conditions or investor perceptions (whether
or not based on economic fundamentals) may impair the liquidity of this market,
and may cause the prices the Developing Capital Markets Focus Fund, High Current
Income Fund, International Equity Focus Fund and Capital Focus Fund receive for
their junk bonds to be reduced, or a Fund may experience difficulty in
liquidating a portion of its portfolio when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Under such conditions,
judgement may play a greater role in valuing certain of each Fund's portfolio
securities than in the case of securities trading in a more liquid market.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the net asset value of
the Developing Capital Markets Focus Fund, High Current Income Fund, Capital
Focus Fund and International Equity Focus Fund. In addition, each Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default on a portfolio holding or to participate in the restructuring of the
obligation.
Sovereign Debt. The junk bonds in which the Developing Capital Markets
Focus Fund, High Current Income Fund, Capital Focus Fund and International
Equity Focus Fund may invest include junk bonds issued by sovereign entities.
Investment in such sovereign debt involves a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt, including the Developing Capital Markets Focus
Fund, High Current Income Fund, Capital Focus Fund and International Equity
Focus Fund may be requested to participate in the rescheduling of such debt and
to extend further loans to governmental entities. In the event of a default by a
governmental entity, there may be few or no effective legal remedies available
to a Fund and there can be no assurance a Fund will be able to collect on
defaulted sovereign debt in whole or in part.
INSURANCE LAW RESTRICTIONS
In order for shares of the Company's Funds to remain eligible investments
for the Separate Accounts, it may be necessary, from time to time, for a Fund to
limit its investments in certain types of securities in accordance with the
insurance laws or regulations of the various states in which the Contracts are
sold.
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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.
INVESTMENT RESTRICTIONS
The Company has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of the assets of the Funds
and their activities. The fundamental policies set forth below may not be
changed without the approval of the holders of a majority of the outstanding
voting shares of each Fund affected (which for this purpose and under the
Investment Company Act of 1940 means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares of the
affected Fund are represented or (ii) more than 50% of the outstanding shares of
the affected Fund).
RESTRICTIONS APPLICABLE TO THE DOMESTIC MONEY MARKET FUND
The Domestic Money Market Fund may not purchase any security other than
money market and other securities described under "Investment Objectives and
Policies" in the Domestic Money Market Fund's 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
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guidelines of the Securities and Exchange Commission and the Company's
Board of Directors, including maintaining collateral from the borrower
equal at all times to the current market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes. The borrowing provisions shall not
apply to reverse repurchase agreements. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only to meet redemption requests
which might otherwise require untimely dispositions of portfolio
securities. The Fund will not purchase securities while borrowings are
outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except
as provided in (8) above), as security for indebtedness, any securities
owned or held by the Fund except as may be necessary in connection with
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 25% of the Fund's total assets, taken at
market value at the time thereof. Although the Fund has the authority to
mortgage, pledge or hypothecate more than 10% of its total assets under
this investment restriction (10), as a matter of operating policy, the Fund
will not mortgage, pledge or hypothecate in excess of 10% of total net
assets.
(11) act as an underwriter of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(12) purchase, either alone or together with any other Fund or Funds,
more than 10% of the outstanding securities of an issuer except that such
restriction does not apply to U.S. Government or government agency
securities, bank money instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or
variable amount master notes) with legal or contractual restrictions on
resale or for which no readily available market exists or in securities of
issuers (other than issuers of government agency securities) having a
record, together with predecessors, of less than three years of continuous
operation if, regarding all such securities, more than 10% of its total
assets (taken at market value) would be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more
than 10% of the Fund's total assets (taken at market value at the time of
each investment) would be subject to repurchase agreements maturing in more
than seven days.
(15) enter into reverse repurchase agreements if, as a result thereof,
the Fund's obligations with respect to reverse repurchase agreements would
exceed one-third of the Fund's net assets (defined to be total assets,
taken at market value, less liabilities other than reverse repurchase
agreements).
(16) invest more than 25% of its total assets (taken at market value
at the time of each investment) in the securities of issuers in any
particular industry (other than U.S. Government securities, government
agency securities or bank money instruments).
RESTRICTIONS APPLICABLE TO THE RESERVE ASSETS FUND
The Reserve Assets Fund may not purchase any security other than money
market and other securities described under "Investment Objectives and Policies"
in the Prospectus for the Reserve Assets Fund. 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.
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(3) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(4) purchase or sell interests in oil, gas or other mineral
exploration or development programs, commodities, commodity contracts or
real estate, except that the Fund may invest in securities secured by real
estate or interests therein or securities issued by companies which invest
in real estate or interest therein.
(5) purchase any securities on margin except that the Company may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
(6) make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
(7) make loans to other persons; provided that the Fund may purchase
money market securities or enter into repurchase agreements; lend
securities owned or held by it pursuant to (8) below; and provided further
that for purposes of this restriction the acquisition of a portion of an
issue of publicly-distributed bonds, debentures or other corporate debt
securities or of government obligations, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed the
making of a loan.
(8) lend its portfolio securities in excess of 20% of its total
assets, taken at market value at the time of the loan, provided that such
loans are made according to the guidelines set forth below and the
guidelines of the Securities and Exchange Commission and the Company's
Board of Directors, including maintaining collateral from the borrower
equal at all times to the current market value of the securities loaned.
(9) borrow amounts in excess of 20% of its total assets, taken at
market value and then only from banks as a temporary measure for
extraordinary or emergency purposes. The borrowing provisions shall not
apply to reverse repurchase agreements. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only to meet redemption requests
which might otherwise require untimely dispositions of portfolio
securities. The Fund will not purchase securities while borrowings are
outstanding.
(10) mortgage, pledge, hypothecate or in any manner transfer (except
as provided in (8) above), as security for indebtedness, any securities
owned or held by the Fund except as may be necessary in connection with
borrowings mentioned in (9) above, and then such mortgaging, pledging or
hypothecating may not exceed 25% of the Fund's total assets, taken at
market value at the time thereof. As a matter of operating policy, the Fund
will not mortgage, pledge or hypothecate in excess of 10% of total net
assets.
(11) act as an underwriter of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(12) purchase, either alone or together with any other Fund or Funds,
more than 10% of the outstanding securities of an issuer except that such
restriction does not apply to U.S. Government or government agency
securities, bank money instruments or repurchase agreements.
(13) invest in securities (except for repurchase agreements or
variable amount master notes) with legal or contractual restrictions on
resale or for which no readily available market exists or in securities of
issuers (other than issuers of government agency securities) having a
record, together with predecessors, of less than three years of continuous
operation if, regarding all such securities, more than 5% of its total
assets (taken at market value) would be invested in such securities.
(14) enter into repurchase agreements if, as a result thereof, more
than 10% of the Fund's total assets (taken at market value at the time of
each investment) would be subject to repurchase agreements maturing in more
than seven days.
(15) enter into reverse repurchase agreements if, as a result thereof,
the Fund's obligations with respect to reverse repurchase agreements would
exceed one-third of the Fund's net assets (defined to be total assets,
taken at market value, less liabilities other than reverse repurchase
agreements).
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(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.(3)
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
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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.
(3)In the case of the Global Growth Focus Fund, investments in wholly-owned
investment entities created under the laws of certain countries will not be
deemed to be the making of investments for the purpose of exercising control or
management.
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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. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
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."(4)
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.(5)
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.(6)
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.(7)
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.
(8)
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.
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(4)The Global Bond Focus, Global Strategy Focus, International Equity
Focus, Global Growth Focus and Natural Resources Focus Funds may maintain short
positions in forward currency contracts, options, futures contracts and options
on futures contracts.
(5)This restriction is not applicable to the Global Growth Focus Fund and
the Capital Focus Fund.
(6)This restriction is not applicable to the Global Growth Focus Fund and
the Capital Focus Fund.
(7)This restriction is not applicable to the Global Growth Focus Fund and
the Capital Focus Fund.
(8)This restriction is not applicable to the Global Growth Focus Fund and
the Capital Focus Fund.
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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 10% in the case of the Global
Strategy Focus, Government Bond, International Equity Focus and Natural
Resources Focus Funds, and 33 1/3% in the case of the Global Growth Focus
Fund) 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.(9)
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.(10)
k. Lend its portfolio securities in excess of 20% of its total assets
(33 1/3% in the case of the Global Growth Focus Fund), 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 Special Value Focus Fund, the High Current Income Fund, the
Prime Bond Fund and the Quality Equity Fund, invest in the securities of
foreign issuers except that each such Fund (except the American Balanced
Fund) may invest in securities of foreign issuers if at the time of
acquisition no more than 10% (25% in the case of the Quality Equity Fund)
of its total assets, taken at market value at the time of the investment,
would be invested in such securities. Consistent with the general policy of
the Securities and Exchange Commission, the nationality or domicile of an
issuer for determination of foreign issuer status may be (i) the country
under whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) a country in which the
issuer derives a significant proportion (at least 50%) of its revenues or
profits from goods produced or sold, investments made, or services
performed in the country, or in which at least 50% of the assets of the
issuer are situated. See "Other Portfolio Strategies-Foreign Securities" in
the Prospectus.(11)
In addition, to comply with tax requirements for qualification as a
"regulated investment company," each Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of each Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of each Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, each Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity a separate issuer, except
that if the security is backed only by the assets and revenues of a
non-governmental entity then the entity with
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(9)In addition, the American Balanced, Basic Value Focus, Developing
Capital Markets Focus, Special Value Focus, 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, International Equity Focus and Global
Growth Focus Funds will not purchase securities while borrowings in excess of
5% of its total assets are outstanding.
(10)The Capital Focus Fund and Global Growth Focus Fund each are permitted
to pledge their assets to secure borrowings.
(11)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. The 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.
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the ultimate responsibility for the payment of interest and principal may be
regarded as the sole issuer. These tax-related limitations may be changed by the
Board of Directors of each Fund to the extent necessary to comply with changes
to the Federal tax requirements.
OVER-THE-COUNTER OPTIONS
The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter ("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.
MANAGEMENT OF THE COMPANY
Information about the Directors and executive officers of the Company,
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 (66) -- Director(1)(2) -- Chairman of MLAM and FAM from 1997
to 1999; President of MLAM and FAM from 1977 to 1997; Chairman of Princeton
Services from 1997 to 1999 and Director thereof from 1993 to 1999; President of
Princeton Services from 1993 to 1997; Executive Vice President of ML&Co. from
1990 to 1999.
JOE GRILLS (64) -- Director -- P.O. Box 98 Rapidan, VA 22733. 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; Member of the
Investment Advisory Committee of the Howard Hughes Medical Institute; Director,
Duke Management Company since 1992 and elected Vice Chairman in May 1998;
Director, LaSalle Street Fund since 1995; Director, Hotchkis and Wiley Mutual
Funds since 1996; Director, Kimco Realty Corporation since January 1997; Member
of the Investment Advisory Committee of the Virginia Retirement System since
1998 and Director, Montpelier Foundation since December 1998.
WALTER MINTZ (70) -- Director -- 1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982.
MELVIN R. SEIDEN (68) -- 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.
ROBERT S. SALOMON, JR. (62) -- Director -- 106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser) since 1994;
Trustee, the Common Fund since 1980; Chairman and CEO of Salomon Brothers Asset
Management from 1992 until 1995; Chairman of Salomon
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Brothers equity mutual funds from 1992 until 1995; Monthly columnist with Forbes
magazine since 1992; Director of Stock Research and U.S. Equity Strategist at
Salomon Brothers from 1975 until 1991.
STEPHEN B. SWENSRUD (65) -- Director -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Associates (financial
consultants) since 1996; Principal, Fernwood Associates (financial consultant)
since 1975.
TERRY K. GLENN (58) -- President and Director(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.
JOSEPH T. MONAGLE, JR. (50) -- Senior Vice President(1)(2) -- Senior Vice
President and Department Head of the Global Fixed Income Division of the
Investment Adviser and associated therewith since 1977; Senior Vice President of
Princeton Services since 1993.
CHRISTOPHER G. AYOUB (43) -- Senior Vice President(1)(2) -- First Vice
President of the Investment Adviser since 1998; Vice President of the Investment
Adviser from 1985 to 1997.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of FAM; Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from 1990 to 1997.
CLIVE D. LANG (48) -- Vice President(1) -- First Vice President with MLAM
U.K. since 1997 and Senior Quantitative Analyst for the Fund since 1996. Prior
to that, various positions with Paregora Asset Management Limited from 1990 to
1997, including Chief Investment Officer (1994 to 1997).
GRACE PINEDA (42) -- Senior Vice President(1)(2) -- First Vice President
since 1997; Vice President of the Investment Adviser since 1989. Prior to
joining the Investment Adviser, Ms. Pineda was a portfolio manager with Clemente
Capital, Inc.
KEVIN RENDINO (32) -- Senior Vice President(1)(2) -- First Vice President
since 1997; Vice President of the Investment Adviser since December 1993; Senior
Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990.
THOMAS R. ROBINSON (55) -- Senior Vice President(1)(2) -- First Vice
President since 1997; 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.
JACQUELINE ROGERS (41) -- Vice President(1)(2) -- Vice President of the
Investment Adviser since January 1986.
WALTER D. ROGERS (56) -- Senior Vice President(1)(2) -- First Vice
President since 1997; Vice President of the Investment Adviser since 1987; Vice
President of Continental Insurance Asset Management from 1984 to 1987.
HARRY ESCOBAR (53) -- Vice President(1)(2) -- Director (Global Fixed
Income) of the Investment Adviser since 1998.
R. ELISE BAUM (38) -- Vice President(1)(2) -- First Vice President since
1999; Vice President of the Investment Adviser since 1995; Senior Fund Analyst
from 1994-1995; Fund Analyst from 1993-1994; Consultant from 1992-1993.
DANIEL V. SZEMIS (39) -- Senior Vice President(1)(2) -- First Vice
President of the Investment Adviser since 1996 -- Portfolio Manager with
Prudential Mutual Fund Investment Management Advisors from 1990 to 1996.
KURT SCHANSINGER (38) -- Vice President(1)(2) -- First Vice President of
the Investment Adviser since 1997. Prior to joining the Investment Adviser, Mr.
Schansinger spent 12 years with Oppenheimer Capital, where he rose to Senior
Vice President.
LAWRENCE R. FULLER (58) -- Senior Vice President(1)(2) -- First Vice
President of the Investment Adviser since 1997.
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<PAGE> 208
ROBERT SHEARER (43) -- Senior Vice President(1)(2) -- First Vice President
of the Investment Adviser since January 1998; Vice President from 1997 to 1998;
Vice President and Assistant Portfolio Manager at David L. Babson and Company,
Incorporated from 1996 to 1997; Vice President/Section Manager at Concert
Capital Management from 1993 to 1996.
ERIC S. MITOFSKY (44) -- Senior Vice President(1)(2) -- First Vice
President of the Investment Adviser since 1997; Vice President of the Investment
Adviser from 1992 to 1997; Senior Desk Analyst with Merrill Lynch Program
Trading Desk from 1987 to 1992.
KEVIN J. MCKENNA (42) -- Senior Vice President(1)(2) -- First Vice
President of the Investment Adviser since 1997; Vice President of the Investment
Adviser from 1985 to 1997.
ROBERT F. MURRAY (41) -- Vice President(1)(2) -- Vice President of the
Investment Adviser since 1993. Employed by the Investment Adviser since 1989.
- ---------------
(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.
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 Company pays each Director
not affiliated with the Company (each a "non-interested Director") a fee of
$8,000 per year plus $1,250 for each quarterly meeting of the Board of Directors
attended, $7,500 per year for serving on the Audit Committee of the Board of
Directors plus $1,250 for each 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.
The following table sets forth for the fiscal year ended December 31, 1998
compensation paid by the Company to the non-interested Directors and for the
calendar year ended December 31, 1998, 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
AGGREGATE BENEFITS ACCRUED ESTIMATED FROM COMPANY
COMPENSATION AS PART OF ANNUAL AND MLAM/FAM
FROM COMPANY BENEFITS UPON ADVISED FUNDS PAID TO
NAME OF DIRECTOR COMPANY EXPENSE RETIREMENT DIRECTORS(1)
- ---------------- ------------ ------------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Walter Mintz(1).................... $25,500 None None $178,583
Melvin R. Seiden(1)................ 25,500 None None 178,583
Stephen B. Swendsrud(1)............ 25,500 None None 195,583
Joe Grills(1)...................... 25,500 None None 198,333
Robert S. Salomon, Jr.(1).......... 25,500 None None 178,583
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Grills (23 registered investment companies consisting of 55 portfolios); Mr.
Mintz (20 registered investment companies consisting of 41 portfolios); Mr.
Salomon (20 registered investment companies consisting of 41 portfolios);
Mr. Seiden (20 registered investment companies consisting of 41 portfolios);
and Mr. Swensrud (23 registered investment companies consisting of 56
portfolios).
Mr. Zeikel and the officers of the Company owned on March 31, 1999 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.
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.
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<PAGE> 209
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).
INVESTMENT ADVISORY ARRANGEMENTS
The Company has entered into seven separate investment advisory agreements
(the "Investment Advisory Agreements") relating to the Funds with Merrill Lynch
Asset Management, L.P. ("MLAM"), the Investment Adviser (the "Investment
Advisor"), 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 or its affiliate Fund Asset
Management, L.P. ("FAM") currently acts as the investment adviser to over 100
other registered investment companies. The Investment Adviser also offers
portfolio management and portfolio analysis services to individuals and
institutions. As of December 1998, FAM and MLAM had a total of $501 billion in
investment company and other portfolio assets under management, including
selected accounts of certain affiliates of MLAM.
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.
The principal executive officers and directors of the Investment Adviser
are Jeffery M. Peek, President; Terry K. Glenn, Executive Vice President; Robert
W. Crook, Senior Vice President; Linda L. Federici, Senior Vice President;
Vincent R. Giordano, Senior Vice President; Michael J. Hennewinkel, Senior Vice
President, General Counsel, Director and Secretary; Philip L. Kirstein, Senior
Vice President; Ronald M. Kloss, Senior Vice President; Debra W. Landsman-Yaros,
Senior Vice President; Stephen M. M. Miller, Senior Vice President; Joseph T.
Monagle, Jr., Senior Vice President; Gregory Upah, Senior Vice President; and
Brian A. Murdock, Senior Vice President; Donald C. Burke, Senior Vice President;
Michael G. Clark, Senior Vice President and Mark A. DeSario, 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
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<PAGE> 210
assets of each of the Special Value Focus Fund, Global Growth Focus Fund, and
International Equity Focus Fund, 0.60% of the average daily net assets of the
Capital Focus Fund, 0.65% of the average daily net assets of each of the Natural
Resources Focus Fund and Global Strategy Focus Fund, 0.55% of the average daily
net assets of the American Balanced Fund, 0.50% of the average daily net assets
of the Domestic Money Market Fund and Government Bond Fund, 0.60% of the average
daily net assets of the Basic Value Focus Fund, Global Bond Focus Fund and
Global Utility Focus Fund, 1.00% of the average daily net assets of the
Developing Capital Markets Focus Fund, 0.30% of the average daily net assets of
the Index 500 Fund and at the following annual rates with respect to the other
Funds:
RESERVE ASSETS FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
Not exceeding $500 million.................................. 0.500%
In excess of $500 million but not exceeding $750 million.... 0.425%
In excess of $750 million but not exceeding $1 billion...... 0.375%
In excess of $1 billion but not exceeding $1.5 billion...... 0.350%
In excess of $1.5 billion but not exceeding $2 billion...... 0.325%
In excess of $2 billion but not exceeding $2.5 billion...... 0.300%
In excess of $2.5 billion................................... 0.275%
</TABLE>
QUALITY EQUITY FUND
Portion of average daily value of net assets of the Fund:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
Not exceeding $250 million.................................. 0.500%
In excess of $250 million but not exceeding $500 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 exceeding $500
million............................................. 0.50% 0.45%
In excess of $500 million but not exceeding $750
million............................................. 0.45% 0.40%
In excess of $750 million............................. 0.40% 0.35%
</TABLE>
These fee rates for the Prime Bond Fund and High Current Income Fund 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.
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<PAGE> 211
The Investment Adviser and Merrill Lynch Life Agency, Inc. ("MLLA") entered
into two reimbursement agreements, dated April 30, 1985 and February 11, 1992
and amended effective October 9, 1997 (as so amended, 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, and excluding the distribution fees if any imposed on Class
B shares of such Fund) will be limited to 1.25% of its average net assets. Any
such 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, 1998, the
Investment Adviser earned fees of $1,126,826 for the Developing Capital Markets
Focus Fund of which $193,001 was voluntarily waived. For the fiscal year ended
December 31, 1997, the Investment Adviser earned fees of $30,733,366 and
reimbursed $217,067 for the Developing Capital Markets Focus Fund, and $78,164
for the Government Bond Fund. 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 Advisory Agreements relating to all Funds, at a meeting held on April
13, 1999. 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 years ended December 31, 1998, December 31, 1997, and December 31, 1996
the amount of such reimbursement was 1,151,573, $1,157,644 and 903,975,
respectively. Depending upon the nature of the
26
<PAGE> 212
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.
During the Company's fiscal year ended December 31, 1998, the total
operating expenses attributable to the Class A Shares 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, expressed as a percentage
of each Fund's average net assets were as follows: 0.68% of the Reserve Asset's
Fund's average net assets, 0.48% of the Prime Bond Fund's average net assets,
0.53% of the High Current Income Fund's average net assets, 0.49% of the Quality
Equity Fund's average net assets, 0.81% of the Special Value Focus Fund's
average net assets, 0.36% of the Index 500 Fund's average net assets, 0.88% of
the Natural Resources Focus Fund's average net assets, 0.62% of the American
Balanced Fund's average net assets, 0.56% of the Domestic Money Market Fund's
average net assets, 0.72% of the Global Strategy Focus Fund's average net
assets, 0.66% of the Basic Value Focus Fund's average net assets, 0.75% of the
Global Bond Focus Fund's average net assets, 0.68% of the Global Utility Focus
Fund's average net assets, 0.89% of the International Equity Focus Fund's
average net assets, 1.42% of the Developing Capital Markets Focus Fund's average
net assets, 0.56% of the Government Bond Fund's average net assets, 1.03% of the
Global Growth Focus Fund's average net assets, 0.86% of the Capital Focus Fund's
average net assets .
During the Company's fiscal year ended December 31, 1998, the total
operating expenses attributable to the Class B Shares 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, expressed as a percentage
of each Fund's average net assets, were as follows: 0.97% of the Special Value
Focus Fund's average net assets, 0.82% of the Basic Value Focus Fund's average
net assets, and 1.72% of the Developing Capital Markets Focus Fund's average net
assets.
The Funds have adopted a Distribution Plan (the "Plan") with regards to the
Class B Common Stock of each Fund, pursuant to Rule 12b-1 under the Investment
Company Act. The Plan permits the Company to pay to each Insurance Company that
enters into an agreement with the Company to provide distribution related
services to Contract owners, a fee, at the end of each month, of up to 0.15% of
the net asset value of the Class B Common Stock of each Fund held by such
Insurance Company. Such services include, but are not limited to, (a) the
printing and mailing of Fund prospectuses, statements of additional information,
any supplements thereto and shareholder reports for existing and prospective
Contract owners, (b) services relating to the development, preparation, printing
and mailing of Company advertisements, sales literature and other promotional
materials describing and/or relating to the Company and including materials
intended for use within the Insurance Company, (c) holding seminars and sales
meetings designed to promote the distribution of the Class B Shares of the
Funds, (d) obtaining information and providing explanations to Contract owners
regarding the investment objectives and policies and other information about the
Company and its Funds, including the performance of the Funds, (e) training
sales personnel regarding the Company and the Funds, (f) compensating sales
personnel in connection with the allocation of cash values and premiums of the
Separate Accounts of the Insurance Company, (g) providing personal services
and/or maintenance of the Separate Accounts with respect to Class B Shares of
the Funds attributable to such accounts, and (h) financing any other activity
that the Company's Board of Directors determines is primarily intended to result
in the sale of Class B Shares. For the fiscal year ended December 31, 1998, the
Company paid an aggregate of $3,570 in fees pursuant to the Plan to various
Insurance Companies providing services under the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value of each class of shares of each Fund is determined once
daily by the Investment Adviser immediately after the declaration of dividends,
if any, and is determined as of fifteen minutes following the close of trading
(generally 4:00 p.m., Eastern time) on each day the New York Stock Exchange
("NYSE") is open for business. The NYSE is open on business days other than
national holidays and Good
27
<PAGE> 213
Friday. The net asset value per share of each class of shares of a Fund other
than the Domestic Money Market and Reserve Assets Funds is computed by dividing
the sum of the value of the securities plus any cash or other assets (including
interest and dividends accrued) held by such Fund and attributable to such class
minus all liabilities (including accrued expenses) attributable to such class by
the total number of shares of such class outstanding of that Fund at such time,
rounded to the nearest cent. Expenses, including the investment advisory fees
payable to the Investment Adviser, are accrued daily.
Except with respect to securities held by the Domestic Money Market and
Reserve Assets Funds having a remaining maturity of 60 days or less, securities
held by each Fund will be valued as follows: Portfolio securities that are
traded on stock exchanges are valued at the last sale price (regular way) on the
exchange on which such securities are traded as of the close of business on the
day the securities are being valued, or, lacking any sales, at the last
available bid price for long positions and at the last available ask price for
short positions. Long positions in 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. Short positions in
securities traded in the OTC market are valued at the last available ask price
in the OTC market prior to the time of valuation. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by under the authority of the Directors as the primary market.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market,
and it is expected that for debt securities this ordinarily will be the OTC
market. When a Fund writes an option, the amount of the premium received is
recorded on the books as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options 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(SM)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, 1998, American Balanced Fund, Global Strategy Focus
Fund, Global Utility Focus Fund, High Current Income Fund, Government Bond Fund,
Prime Bond Fund and Capital Focus Fund paid MLSPS $263, $155, $29, $5,613,
$2,880, $8,190 and $57, respectively.
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
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<PAGE> 214
Companies will agree to such contribution in these circumstances. Any such
contribution will be treated as a negative dividend for purposes of the Net
Investment Factor under the Contracts described in the Prospectus for the
Contracts. See "Dividends, Distributions and Taxes" for a discussion of the tax
effect of such a reduction. This procedure will permit the net asset value per
share of the Domestic Money Market and Reserve Assets Funds to be maintained at
a constant value of $1.00 per share.
If in the view of the Board of Directors of the Company it is inadvisable
to continue the practice of maintaining the net asset value of the Domestic
Money Market and Reserve Assets Funds at $1.00 per share, the Board of Directors
of the Company reserves the right to alter the procedure. The Company will
notify the Insurance Companies of any such alteration.
Each of the International Equity Focus Fund, Global Utility Focus Fund,
Global Bond Focus Fund, Global Growth 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.
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
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.
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
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<PAGE> 215
Exchange Commission, such as the one described below. However, affiliated
persons of the Company may serve as its broker in over-the-counter transactions
conducted on an agency basis, subject to the Company's policy of obtaining best
price and execution. The Company may not purchase securities from any
underwriting syndicate of which Merrill Lynch is a member except in accordance
with rules and regulations under the Investment Company Act of 1940.
The Securities and Exchange Commission has issued an exemptive order
permitting the Company to conduct principal transactions with respect to the
Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S.
Government and government agency securities, and certain other money market
securities, subject to a number of conditions, including conditions designed to
insure that the prices to the Funds available from GSI and MMI are equal to or
better than those available from other sources. GSI and MMI have informed the
Company that they will in no way, at any time, attempt to influence or control
the activities of the Company or the Investment Adviser in placing such
principal transactions. The exemptive order allows GSI and MMI to receive a
dealer spread on any transaction with the Company no greater than their
customary dealer spreads for transactions of the type involved. Certain court
decisions have raised questions as to whether investment companies should seek
to "recapture" brokerage commissions and underwriting and dealer spreads by
effecting their purchases and sales through affiliated entities. In order to
effect such an arrangement, the Company would be required to seek an exemption
from the Investment Company Act so that it could engage in principal
transactions with affiliates. The Board of Directors has considered the
possibilities of seeking to recapture spreads for the benefit of the Company
and, after reviewing all factors deemed relevant, has made a determination not
to seek such recapture at this time. The Board will reconsider this matter from
time to time. The Company will take such steps as may be necessary to effect
recapture, including the filing of applications for exemption under the
Investment Company Act of 1940, if the Directors should determine that recapture
is in the best interests of the Company or otherwise required by developments in
the law.
While the Investment Adviser seeks to obtain the most favorable net results
in effecting transactions in the Funds' portfolio securities, dealers who
provide supplemental investment research of the Investment Adviser may receive
orders for transactions by the Funds. Such supplemental research services
ordinarily consist of assessments and analysis of the business or prospects of a
company, industry or economic sector. If, in the judgment of the Investment
Adviser, a particular Fund or Funds will be benefited by such supplemental
research services, the Investment Adviser is authorized to pay spreads or
commissions to brokers or dealers furnishing such services which are in excess
of spreads or commissions which another broker or dealer may charge for the same
transaction. Information so received will be in addition to and not in lieu of
the services required to be performed by the Investment Adviser under the
Investment Advisory Agreements. The expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. In some cases, the Investment Adviser may use such supplemental
research in providing investment advice to its other investment advisory
accounts. For the fiscal year ended December 31, 1998, the Company paid
brokerage commissions of $9,859,536, of which $616,864 was paid to Merrill
Lynch. For the fiscal year ended December 31, 1998, the brokerage commissions
paid to Merrill Lynch represented 6.25% of the aggregate brokerage commissions
paid and involved 6.91% of the Company's dollar amount of transactions involving
payment of commissions during the year. For the fiscal year ended December 31,
1997, the Company paid brokerage commissions of $8,344,021, of which $302,843
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.
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<PAGE> 216
Below are portfolio turnover rates for each of the Funds, for the fiscal
years ended December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
American Balanced Fund...................................... 102.47% 136.71%
Basic Value Focus Fund...................................... 113.44% 95.52%
Capital Focus Fund*......................................... 29.48%
Developing Capital Markets Focus Fund....................... 121.06% 93.62%
Global Bond Focus Fund ..................................... 127.93% 568.76%
Global Growth Focus Fund*................................... 15.25%
Global Strategy Focus Fund.................................. 120.59% 108.66%
Global Utility Focus Fund................................... 5.20% 7.70%
Government Bond Fund........................................ 43.10% 117.65%
High Current Income Fund.................................... 33.63% 53.63%
Index 500 Fund.............................................. 11.92% 36.85%
International Equity Focus Fund............................. 126.23% 127.96%
Natural Resources Focus Fund ............................... 29.65% 20.93%
Prime Bond Fund ............................................ 103.24% 89.22%
Quality Equity Fund......................................... 100.29% 100.08%
Special Value Focus Fund ................................... 56.29% 147.06%
</TABLE>
- ---------------
* Commencement of operations is June 5, 1998.
PURCHASE OF SHARES
The Company continuously offers shares of Class A Common Stock of each of
the Funds and shares of Class B Common Stock of the Basic Value Focus Fund,
Developing Capital Markets Focus Fund and the Special Value Focus Fund to the
Insurance Companies at prices equal to the respective per share net asset value
of the Funds. Princeton Funds Distributor, Inc. (the "Distributor"), a wholly
owned subsidiary of the Investment Adviser, acts as the distributor of the
shares.
The Company will offer shares of Class B Stock in each of its other Funds
to the Insurance Companies at the per share price of the Class A Common Stock of
the corresponding Fund until such time as a share of Class B Common Stock is
purchased, and thereafter, the Company will continuously offer shares of Class B
Common Stock at prices equal to the respective per share net asset value of the
Class B Common Stock of the Funds. The Distributor 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.
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.
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<PAGE> 217
DIVIDENDS AND TAXES
DIVIDENDS
It is the Company's intention to distribute substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund, other than the Company's Domestic Money Market and Reserve
Assets Funds, will consist of all payments of dividends or interest received by
such Fund less the estimated expenses of such Fund (including fees payable to
the Investment Adviser). Net investment income of the Domestic Money Market and
Reserve Assets Funds (from the time of the immediate preceding determination
thereof) consists of (i) interest accrued and/or discount earned (including both
original issue and market discount), (ii) plus or minus all realized and
unrealized gains (other than realized long-term capital gains) and losses on its
portfolio securities, (iii) less the estimated expenses of the respective Fund
(including the fees payable to the Investment Adviser) applicable to that
dividend period. Dividends on the Domestic Money Market and Reserve Assets Funds
are declared daily and reinvested monthly in additional full and fractional
shares of such Fund. Dividends from net investment income of the Global Bond
Focus, Government Bond, High Current Income and Prime Bond Funds are declared
and reinvested monthly in additional full and fractional shares of the
respective Funds at net asset value. Dividends from net investment income of the
Global Utility Focus Fund are declared and reinvested quarterly in additional
full and fractional shares of the Fund. Dividends from net investment income of
the American Balanced, Basic Value Focus, Capital Focus, Developing Capital
Markets Focus, Special Value Focus, Global Strategy Focus, Global Growth Focus,
Index 500, International Equity Focus, National Resources Focus and Quality
Equity Funds are declared and reinvested at least annually in additional full
and fractional shares of the respective Funds.
All net realized long-term or short-term capital gains of the Company, if
any, other than short-term capital gains of the Domestic Money Market and
Reserve Assets Funds, are declared and distributed annually after the close of
the Company's fiscal year to the shareholders of the Fund or Funds to which such
gains are attributable. Short-term capital gains are taxable as ordinary income.
FEDERAL INCOME TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), each Fund
of the Company will be treated as a separate corporation for federal income tax
purposes and, thus, each Fund is required to satisfy the qualification
requirements under the Code for treatment as a regulated investment company.
There will be no offsetting of capital gains and losses among the Funds. Each
Fund intends to continue to qualify as a regulated investment company under
certain provisions of the Code. Under such provisions, a Fund will not be
subject to federal income tax on such part of its net ordinary income and net
realized capital gains which it distributes to shareholders. To qualify for
treatment as a regulated investment company, a Fund must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities and derive less than 30% of its gross income in
each taxable year from the gains (without deduction for losses) from the sale or
other disposition of stocks, securities, certain options, futures or forward
contracts and certain foreign currencies held for less than three months. In
addition, the Code requires that each Fund meet certain diversification
requirements, including the requirement that not more than 25% of the value of a
Fund's total assets be invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer. Each of the Company's Funds, including the Natural Resources Focus Fund,
intends to comply with the above-described requirements.
On occasion, some amount of the dividends 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.
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<PAGE> 218
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.
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.
Certain Funds may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as described in the Prospectus and in this
Statement of Additional Information. Some of these high yield securities may be
purchased at a discount and may therefore cause the Fund to accrue and
distribute income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such high yield securities may
be treated as dividends for Federal income tax purposes; in such case, if the
issuer of such high yield securities is a domestic corporation, dividend
payments by the Fund will be eligible for the dividends received deduction to
the extent of the deemed dividend portion of such interest payments.
Certain Funds may invest up to 10% of their total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under recent legislation, the Fund
could elect to "mark to market" at the end of each taxable year all shares that
it holds in PFICs. If it made this election, the Fund would recognize as
ordinary income any increase in the value of such shares over their adjusted
basis and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases. By making the mark-to-market election, the Fund could
avoid imposition of the interest charge with respect to distributions from
PFICs, but in any particular year might be required to recognize income in
excess of the distributions it received from PFICs and its proceeds from
dispositions of PFIC stock.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain countries in which the Fund intends to invest. No such
regulations have been issued.
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
33
<PAGE> 219
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, other than shares of the Class A Common Stock and Class
B Common Stock of the Global Growth Fund and the Capital Focus Fund, to the
Distributor for resale to Insurance Companies' accounts. Such shares will be
sold at their respective net asset values and therefore will involve no sales
charge. The Distributor is a wholly owned subsidiary of the Investment Adviser.
The continuation of the Distribution Agreement was approved by the Company's
Board of Directors at a meeting held on April 13, 1999.
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. 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.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the offering price per
share on the last day of the period. Because no shares of Class B Common Stock
of the Prime Bond Fund, the High
34
<PAGE> 220
Current Income Fund, the Global Bond Focus Fund and the Government Bond Fund
were in issue prior to December 31, 1997, the yield information below relates to
Class A Common Stock only. The yield for the 30-day period ending December 31,
1998 was 5.78% for the Prime Bond Fund, 10.39% for the High Current Income Fund,
3.85% for the Global Bond Focus Fund and 4.67% 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.
The Reserve Assets Fund and the Domestic Money Market Fund normally compute
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 Funds 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.
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<PAGE> 221
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 ON A $1,000 INVESTMENT
AVERAGE ANNUAL TOTAL RETURN HYPOTHETICAL $1,000 AT THE END OF THE
FOR CLASS A SHARES INVESTMENT PERIOD
--------------------------- --------------------- -----------------
<S> <C> <C>
PRIME BOND FUND:
One Year Ended December 31, 1998........................... 7.85% $1,078.50
Five Years Ended December 31, 1998......................... 6.50% $1,369.80
Ten Years Ended December 31, 1998.......................... 8.81% $2,325.70
HIGH CURRENT INCOME FUND:
One Year Ended December 31, 1998........................... (3.09%) $ 969.50
Five Years Ended December 31, 1998......................... 6.23% $1,352.60
Ten Years Ended December 31, 1998.......................... 10.37% $2,682.50
QUALITY EQUITY FUND:
One Year Ended December 31, 1998........................... 15.58% $1,155.80
Five Years Ended December 31, 1998......................... 15.35% $2,041.80
Ten Years Ended December 31, 1998.......................... 15.20% $4,116.20
SPECIAL VALUE FOCUS FUND:
One Year Ended December 31, 1998........................... (6.50%) $ 935.00
Five Years Ended December 31, 1998......................... 8.85% $1,528.00
Ten Years Ended December 31, 1998.......................... 10.60% $2,739.80
INDEX 500 FUND:
One Year Ended December 31, 1998........................... 28.28% $1,282.80
Inception* Through December 31, 1998....................... 30.76% $1,732.40
NATURAL RESOURCES FOCUS FUND:
One Year Ended December 31, 1998........................... (15.30%) $ 847.00
Five Years Ended December 31, 1998......................... (0.79%) $ 961.40
Ten Years Ended December 31, 1998.......................... 1.92% $1,209.80
AMERICAN BALANCED FUND:
One Year Ended December 31, 1998........................... 13.56% $1,135.60
Five Years Ended December 31, 1998......................... 11.05% $1,689.20
Ten years Ended December 31, 1998.......................... 11.32% $2,923.30
GLOBAL STRATEGY FOCUS FUND:
One Year Ended December 31, 1998........................... 8.87% $1,088.70
Five Years Ended December 31, 1998......................... 8.49% $1,503.20
Inception* Through December 31, 1998....................... 9.56% $1,867.00
BASIC VALUE FOCUS FUND:
One Year Ended December 31, 1998........................... 9.44% $1,094.40
Five Years Ended December 31, 1998......................... 15.40% $2,046.60
Inception* Through December 31, 1998....................... 15.80% $2,241.00
GLOBAL BOND FOCUS FUND:
One Year Ended December 31, 1998........................... 12.62% $1,126.20
Five Years Ended December 31, 1998......................... 6.75% $1,386.30
Inception* Through December 31, 1998....................... 7.23% $1,468.10
</TABLE>
36
<PAGE> 222
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT
AVERAGE ANNUAL TOTAL RETURN HYPOTHETICAL $1,000 AT THE END OF THE
FOR CLASS A SHARES INVESTMENT PERIOD
--------------------------- --------------------- -----------------
<S> <C> <C>
GLOBAL UTILITY FOCUS FUND:
One Year Ended December 31, 1998........................... 24.06% $1,240.60
Five Years Ended December 31, 1998......................... 14.95% $2,006.90
Inception* Through December 31, 1998....................... 14.87% $2,144.40
INTERNATIONAL EQUITY FOCUS FUND:
One Year Ended December 31, 1998........................... 7.80% $1,078.00
Five Years Ended December 31, 1998......................... 3.07% $1,163.40
Inception* Through December 31, 1998....................... 4.64% $1,283.30
DEVELOPING CAPITAL MARKETS FOCUS FUND:
One Year Ended December 31, 1998........................... (29.39%) $ 706.10
Inception* Through December 31, 1998....................... (7.74%) $ 686.60
GOVERNMENT BOND FUND:
One Year Ended December 31, 1998........................... 8.76% $1,087.60
Inception* Through December 31, 1998....................... 7.87% $1,423.80
CAPITAL FOCUS FUND
Inception* Through December 31, 1998....................... (2.40%) $ 976.00
GLOBAL GROWTH FOCUS FUND
Inception* Through December 31, 1998....................... 8.20% $1,082.00
</TABLE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT
AVERAGE ANNUAL TOTAL RETURN HYPOTHETICAL $1,000 AT THE END OF THE
FOR CLASS B SHARES INVESTMENT PERIOD
--------------------------- --------------------- -----------------
<S> <C> <C>
SPECIAL VALUE FOCUS FUND
One Year Ended December 31, 1998........................... (6.52%) $ 934.80
Inception* Through December 31, 1998....................... (14.47%) $ 830.40
BASIC VALUE FOCUS FUND:
One Year Ended December 31, 1998........................... 9.28% $1,092.80
Inception* Through December 31, 1998....................... 7.67% $1,089.40
DEVELOPING CAPITAL MARKETS FOCUS FUND:
One Year Ended December 31, 1998........................... (29.51%) $ 704.90
Inception* Through December 31, 1998....................... (26.60%) $ 698.80
</TABLE>
- ---------------
* Inception for the Class A Common Stock of the 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; Index 500 Fund is December
13, 1996; Capital Focus Fund is June 5, 1998; and Global Growth Focus Fund is
June 5, 1998. Inception for the Class B Common Stock of the Basic Value Focus
Fund is November 3, 1997; Developing Capital Markets Focus Fund is November 3,
1997; and Special Value Focus Fund is October 23, 1997.
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.
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<PAGE> 223
ORGANIZATION OF THE COMPANY
The Company was incorporated on October 16, 1981, and operations of its
Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime
Bond, High Current Income, Quality Equity and Special Value Focus Funds
commenced on April 20, 1982. The Natural Resources Focus Fund and the American
Balanced Fund commenced operations on June 1, 1988 and June 1, 1988,
respectively. The Domestic Money Market Fund and the Global Strategy Focus Fund
commenced operations on February 20 and February 28, 1992, respectively. The
Basic Value Focus, Global Bond Focus, Global Utility Focus and International
Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital
Markets Focus Fund and Government Bond Fund commenced operations on May 2, 1994.
The Index 500 Fund commenced operations on December 13, 1996. The Global Growth
Focus Fund and the Capital Focus Fund commenced operations on or about June 5,
1998.
The authorized capital stock of the Company consists of 3,600,000,000
shares of Class A Common Stock, par value $0.10 per share, and 3,600,000,000
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 eighteen classes designated
Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Basic Value
Focus Fund Common Stock, Merrill Lynch Capital Focus Fund Common Stock, Merrill
Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch Domestic
Money Market Fund Common Stock, Merrill Lynch Special Value Focus Fund Common
Stock, Merrill Lynch Global Bond Focus Fund Common Stock, Merrill Lynch Global
Strategy Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common
Stock, Merrill Lynch Global Growth Focus Fund Common Stock, Merrill Lynch
Government Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common
Stock, Merrill Lynch Index 500 Common Stock, Merrill Lynch International Equity
Focus Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common
Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch Quality Equity
Fund Common Stock and Merrill Lynch Reserve Assets Fund Common Stock,
respectively. The Company may, from time to time, at the sole discretion of its
Board of Directors and without the need to obtain the approval of its
shareholders or of Contract owners, offer and sell shares of one or more of such
classes. Each class consists of 100,000,000 Class A shares and 100,000,000 Class
B shares except for Domestic Money Market Fund Common Stock which consists of
1,300,000,000 Class A shares and 1,300,000,000 Class B shares, Reserve Assets
Fund Common Stock which consists of 500,000,000 Class A shares and 500,000,000
Class B shares and Global Bond Focus Fund Common Stock and Global Strategy Focus
Fund Common Stock, each of which consists of 200,000,000 Class A shares and
200,000,000 Class B shares. All shares of Common Stock have equal voting rights,
except that only shares of the respective classes are entitled to vote on
matters concerning only that class. Pursuant to the Investment Company Act of
1940 and the rules and regulations thereunder, certain matters approved by a
vote of all shareholders of the Company may not be binding on a class whose
shareholders have not approved such matter. Each issued and outstanding share of
a class is entitled to one vote and to participate equally in dividends and
distributions declared with respect to such class and in net assets of such
class upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of each class, when issued, will be fully
paid and nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable. Holders of shares of any class
are entitled to redeem their shares as set forth under "Redemption of Shares."
Shares do not have cumulative voting rights and the holders of more than 50% of
the shares of the Company voting for the election of directors can elect all of
the directors of the Company if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any directors. The
Company does not intend to hold meetings of shareholders unless under the
Investment Company Act of 1940 shareholders are required to act on any of the
following matters: (i) election of directors; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of the selection of independent accountants.
Family Life purchased $1,000 worth of shares of each of the Natural
Resources Focus Fund and the American Balanced Fund on April 29, 1988 and
$1,999,000 worth of shares of each such Fund on May 27, 1988. Family Life also
provided the initial capitalization for each of the Company's other Funds other
than the Funds named below for which MLLIC provided the initial capitalization.
MLLIC purchased $100 worth of
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<PAGE> 224
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. On April 16,
1998, MLLIC purchased $1,000 worth of shares of the Global Growth Focus Fund and
$1,000 worth of shares of the Capital Focus Fund.
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.
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, 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
Financial Data Services, Inc. ("FDS"), 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. FDS 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 LLP, 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.
39
<PAGE> 225
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 16, 1999, 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Company could be
adversely affected if the computer systems used by the Investment Adviser or
other Company service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not anticipate
that the transition to the 21st century will have any material impact on its
ability to continue to service the Company at current levels. In addition, the
Investment Adviser has sought assurances from the Company's other service
providers that they are taking all necessary steps to ensure that their computer
systems will accurately reflect the Year 2000, and the Investment Adviser will
continue to monitor the situation. At this time, however, no assurance can be
given that the Company's other service providers have anticipated every step
necessary to avoid any adverse effect on the Company attributable to the Year
2000 Problem.
FINANCIAL STATEMENTS
The Company's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (609) 282-2800.
40
<PAGE> 226
ANNEX A
DESCRIPTION OF TEMPORARY INVESTMENTS AND CORPORATE BOND RATINGS
U.S. GOVERNMENT SECURITIES
The Domestic Money Market Fund, Reserve Assets Fund, Capital Focus Fund and
the Government Bond Fund (and, for temporary or defensive purposes, each other
Fund) may invest in the various types of marketable securities issued by or
guaranteed as to principal and interest by the U.S. Government and supported by
the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ
mainly in the length of their maturity. Treasury bills, the most frequently
issued marketable government security, have a maturity of up to one year and are
issued on a discount basis.
GOVERNMENT AGENCY SECURITIES
The Domestic Money Market Fund, Reserve Assets Fund, Capital Focus Fund and
the Government Bond Fund (and, for temporary or defensive purposes, each other
Fund) may invest in government agency securities, which are debt securities
issued by government sponsored enterprises, federal agencies and international
institutions. Such securities are not direct obligations of the Treasury but
involve government sponsorship or guarantees by government agencies or
enterprises. The Funds may invest in all types of government agency securities
currently outstanding or to be issued in the future.
DEPOSITARY INSTITUTIONS MONEY INSTRUMENTS
The Domestic Money Market Fund, Reserve Assets Fund and Capital Focus 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/guaranteed 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 Capital Focus Fund (and, for temporary or
defensive purposes, the Natural Resources Focus Fund, Global Strategy Focus
Fund, Global Bond Focus Fund, Global Utility Focus Fund, International Equity
Focus Fund, Developing Capital Markets Focus Fund and the Quality Equity Fund)
may 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
41
<PAGE> 227
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 Capital Focus Fund (and, for temporary or
defensive purposes, the Natural Resources Focus Fund, Global Strategy Focus
Fund, Global Bond Focus Fund, Global Utility Focus Fund, International Equity
Focus Fund, Developing Capital Markets Focus Fund and the Quality Equity Fund)
may also invest in U.S. dollar-denominated obligations of foreign depository
institutions and their foreign branches and subsidiaries, such as certificates
of deposit, bankers' acceptances, time deposits and deposit notes. The
obligations of such foreign branches and subsidiaries may be the general
obligation of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government regulation.
Such investments will only be made if determined to be of comparable quality to
other investments permissible for the Reserve Assets Fund. The Reserve Assets
Fund will not invest more than 25% of its total assets (taken at market value at
the time of each investment) in these obligations.
Except as otherwise provided above with respect to investment in
Yankeedollar and other foreign bank obligations no Fund may invest in any bank
money instrument issued by a commercial bank or a savings and loan association
unless the bank or association is organized and operating in the United States,
has total assets of at least $1 billion and its deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC"); provided that this
limitation shall not prohibit the investment of up to 10% of the total assets of
a Fund (taken at market value at the time of each investment) in certificates of
deposit issued by banks and savings and loan associations with assets of less
than $1 billion if the principal amount of each such certificate of deposit is
fully insured by the FDIC.
SHORT-TERM DEBT INSTRUMENTS
The Domestic Money Market Fund, Reserve Assets Fund and Capital Focus Fund
(and, for temporary or defensive purposes, each other Fund) may invest in
commercial paper (including variable amount master demand notes and insurance
company funding agreements), which refers to short-term, unsecured promissory
notes issued by corporations, partnerships, trusts and other entities to finance
short-term credit needs and by trusts issuing asset-backed commercial paper.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. Variable amount master demand notes
are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer and
a commercial bank acting as agent for the payees of such notes, whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes. Because variable amount master notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender may not
sell or otherwise transfer the note without the borrower's consent. Such notes
provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis, in accordance with a stated short-term
interest rate benchmark. Because the interest rate of a variable amount master
note is adjusted no less often than every 60 days and since repayment of the
note may be demanded at any time, the Investment Adviser values such a note in
accordance with the amortized cost basis described under "Determination of Net
Asset Value" in the Statement of Additional Information.
The Domestic Money Market Fund and Reserve Assets Fund may also invest in
nonconvertible debt securities issued by entities or asset-backed nonconvertible
debt securities issued by trusts (e.g., bonds and debentures) with no more than
397 days (13 months) remaining to maturity at date of settlement. Short-term
debt securities with a remaining maturity of less than one year tend to become
extremely liquid and are traded as money market securities. For a discussion of
the ratings requirements of the Funds' portfolio securities, see "Portfolio
Restrictions" in the Prospectuses to the Domestic Money Market Fund and Reserve
Assets Fund.
The Reserve Assets Fund and Capital Focus 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.
42
<PAGE> 228
dollar-denominated commercial paper and other short-term obligations issued by
foreign entities. Such investments are subject to quality standards similar to
those applicable to investments in comparable obligations of domestic issuers.
Investments in foreign entities in general involve the same risks as those
described in the Statement of Additional Information in connection with
investments in Eurodollar, Yankeedollar and foreign bank obligations.
REPURCHASE AGREEMENTS
Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement and generally do not require the
seller to provide additional securities in the event of a decline in the market
value of the purchased security during the term of the agreement. If the seller
were to default on its obligation to repurchase a security under a repurchase
agreement or purchase and sale contract and the market value of the underlying
security at such time was less than the Fund had paid to the seller, the Fund
would realize a loss. Repurchase agreements maturing in more than seven days
will be considered "illiquid securities." The Domestic Money Markets and Reserve
Assets Funds will not enter into repurchase agreements maturing in more than 30
days.
Reverse Repurchase Agreements. The Domestic Money Market and Reserve
Assets Funds may enter into reverse repurchase agreements, which involve the
sale of money market securities held by the Funds, with an agreement to
repurchase the securities at an agreed upon price, date, and interest payment.
The Funds will use the proceeds of the reverse repurchase agreements to purchase
other money market securities either maturing, or under an agreement to resell,
at a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Funds will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the proceeds of the
transaction is greater than the interest expense of the reverse repurchase
transaction. A separate account of the applicable Fund will be established with
the Custodian consisting of cash or liquid securities having a market value at
all times at least equal in value to the proceeds received on any sale subject
to repurchase plus accrued interest.
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc. ("Moody's"):
<TABLE>
<S> <C>
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.
</TABLE>
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<PAGE> 229
<TABLE>
<S> <C>
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
maybe 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.
</TABLE>
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Ratings Services ("Standard & Poor's"):
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the
A category.
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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<PAGE> 230
PART C. OTHER INFORMATION
ITEM 23. 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)
1(j) -- Form of Articles of Amendment to Registrant's Articles of
Incorporation relating to the reclassification of 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(z)
1(l) -- Form of Articles of Amendment redesignating the Class A
and Class B Shares of the Equity Growth Fund as Class A
and Class B Shares of the Special Value Focus Fund(dd)
1(m) -- Form of Articles Supplementary to Registrant's Articles
of Incorporation relating to the designation of shares of
common stock as Merrill Lynch Global Growth Focus Fund
Common Stock and Merrill Lynch Capital Focus Fund(ff)*
2 -- By-Laws of Registrant, as amended(g)
3 -- None
4 -- Specimen certificate for shares of common stock of
Registrant(h)
5(a) -- Investment Advisory Agreement for Merrill Lynch Reserve
Assets Fund(i)
5(b) -- Investment Advisory Agreement for the Merrill Lynch Prime
Bond Fund, Merrill Lynch High Current Income Fund,
Merrill Lynch Quality Equity Fund and Merrill Lynch
Special Value Focus Fund(j)
5(c) -- Form of Investment Advisory Agreement for Merrill Lynch
Index 500 Fund(y)
5(d) -- Form of Investment Advisory Agreement for Merrill Lynch
Natural Resources Focus Fund and Merrill Lynch American
Balanced Fund(l)
5(e) -- Form of Investment Advisory Agreement for Merrill Lynch
Domestic Money Market Fund and Merrill Lynch Global
Strategy Focus Fund(m)
5(f) -- Form of Investment Advisory Agreement for Merrill Lynch
Basic Value Focus Fund, Merrill Lynch Global Bond Focus
Fund, Merrill Lynch Global Utility Focus Fund and Merrill
Lynch International Equity Focus Fund(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
</TABLE>
C-1
<PAGE> 231
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
5(i) -- Form of Investment Advisory Agreement for Merrill Lynch
Global Growth Focus Fund and Merrill Lynch Capital Focus
Fund(ee)
6(a) -- Form of Distribution Agreement(n)
6(b) -- Form of Distribution Agreement relating to the Class B
shares(aa)
7 -- None
8(a) -- Form of Custodian Agreement(o)
8(b) -- Form of Custodian Agreement with Brown Brothers Harriman
& Co.(bb)
9(a) -- Form of Transfer Agency, and Dividend Disbursing
Agreement(p)
9(b) -- Form of Agreement relating to the use of the "Merrill
Lynch" name(q)
10 -- Opinion of Counsel (filed with Rule 24 Fund's-2 Notice)
11 -- Consent of Deloitte & Touche LLP*
12 -- None
13 -- None
14 -- None
15 -- Form of Distribution Plan relating to Class B shares(cc)
16 -- Calculation of Performance Data(r)
24 -- Power of Attorney for Robert S. Salomon, Jr.(v)
27 -- Financial Data Schedules*
</TABLE>
- ---------------
(a) Incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form N-1A (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.
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<PAGE> 232
(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.
26 to the Registration Statement.
(x) Incorporated by reference to Exhibit 1(j) to Post-Effective Amendment No.
26 to the Registration Statement.
(y) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No.
26 to the Registration Statement.
(z) Incorporated by reference to Exhibit 1(k) to Post-Effective Amendment No.
27 to the Registration Statement.
(aa) Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment No.
27 to the Registration Statement.
(bb) Incorporated by reference to Exhibit 8(b) to Post-Effective Amendment No.
27 to the Registration Statement.
(cc) Incorporated by reference to Exhibit 15 to Post-Effective Amendment No. 27
to the Registration Statement.
(dd) Incorporated by reference to Exhibit 1(l) to Post-Effective Amendment No.
28 to the Registration Statement.
(ee) Incorporated by reference to Exhibit 5(i) to Post-Effective Amendment No.
30 to the Registration Statement.
(ff) Incorporated by reference to Exhibit 1(m) to Post-Effective Amendment No.
30 to the Registration Statement.
* Filed herewith.
ITEM 24. 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 25. INDEMNIFICATION.
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, except a proceeding
brought by or on behalf of the Registrant, the Registrant may indemnify the
corporate representative against expenses, including attorneys' fees and
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the corporate representative in connection with the proceeding, if; (i) he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant; and (ii) with respect to any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Registrant is also authorized under Section 2-418 of the Maryland
General Corporation Law to indemnify a corporate representative under certain
circumstances against expenses incurred in connection with the defense of a suit
or action by or in the right of the Registrant. Under each Distribution
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<PAGE> 233
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 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as the
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Convertible Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, 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
Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Focus 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 Real Estate Fund, Inc., 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 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 Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as subadviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield 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.;
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<PAGE> 234
and the following closed-end registered investment companies: Apex Municipal
Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies
Fund II, Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund,
Inc., MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund III, Inc., MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniHoldings Michigan Insured Fund,
Inc., MuniHoldings Pennsylvania Insured Fund, MuniHoldings Insured Fund, Inc.,
MuniHoldings Insured Fund II, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, 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
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc. 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, 23rd 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 Princeton Funds Distributor, Inc. (PFD)
and of Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.")
is World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
December 1, 1996 for his, her own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Glenn is President and Mr. Burke
is Treasurer of all or substantially all of the investment companies described
in the first two paragraphs of this Item 26, and Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<S> <C> <C>
ML & Co.............................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services................... General Partner General Partner of MLAM ("Princeton
Services")
Jeffrey M. Peek...................... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML & Co.;
Managing Director and Co-Head of the
Investment Banking Division of
Merrill Lynch in 1997; Senior Vice
President and Director of the Global
Securities and Economics Division of
Merrill Lynch from 1995 to 1997.
</TABLE>
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<PAGE> 235
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<S> <C> <C>
Terry K. Glenn....................... Executive Vice President Executive Vice President of MLAM and
FAM; Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
President of Princeton
Administrations, L.P.
Robert W. Crook...................... Senior Vice President Senior Vice President of MLFD; Vice
President of MLFD and Vice President
of FAM
Donald C. Burke...................... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of PFD; First
Vice President of MLAM from 1997 to
1999; Vice President of MLAM from
1990 to 1997; Director of Taxation of
MLAM
Michael G. Clark..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Mark A. Desario...................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Linda L. Federici.................... Senior Vice President Senior Vice President of MLAM and FAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano.................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel............... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President of Princeton Services
Philip L. Kirstein................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President, General Counsel,
Director and Secretary of Princeton
Services
Ronald M. Kloss...................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Debra Landsman-Yaros................. Senior Vice President Senior Vice President of MLAM; Vice
President of MLFD; Senior Vice
President of Princeton Services, Vice
President of PDF
Stephen M. M. Miller................. Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Brian A. Murdock..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gregory D. Upah...................... Senior Vice President Senior Vice President of MLAM; 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; Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund
Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc.,
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<PAGE> 236
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, 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 Growth Fund, 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
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Series Trust Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund,
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 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 December 1,
1996, 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 26:
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Alan J. Albert.................... Senior Managing Director Vice President of the Manager
Nicholas C.D. Hall................ Director Director of Merrill Lynch Europe PLC,
General Counsel of Merrill Lynch
International Private Banking Group
Carol Ann Langham................. Company Secretary None
Debra Anne Searle................. Assistant Company None
Secretary
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the registered investment companies referred to in
the first two paragraphs of Item 26 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., and The Municipal Fund Accumulation Program; and MLFD also acts as
principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
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<PAGE> 237
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081, Princeton,
New Jersey 08543-9081, except that the address of Messrs. Crook, 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 President and Director
Michael G. Clark..................... Director and Treasurer None
Robert W. Crook...................... Senior Vice President None
Mark A. DeSario...................... Vice President None
Michelle T. Lau...................... Vice President None
Salvatore Venezia.................... Vice President None
Kevin Boman.......................... Vice President None
Michael J. Brady..................... Vice President None
William M. Breen..................... Vice President None
James T. Fascas...................... Vice President None
William Wasel........................ Vice President None
Debra W. Landsman-Yros............... Vice President None
Mark E. Macguire..................... Vice President None
Patricia A. Schena................... Vice President None
Donald C. Burke...................... Vice President Vice President and Treasurer
Robert Harris........................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 as amended and the Rules
thereunder will be maintained at the offices of the Registrant, its Investment
Adviser, its Custodian, and its Transfer Agent.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth in the Prospectus constituting Part A of the
Registration Statement and under the captions "Management of the Company" and
"Investment Advisory Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a party
to any management-related service contract.
ITEM 30. 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.
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<PAGE> 238
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 REGISTRATION STATEMENT PURSUANT TO
RULE 485(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED 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 16TH DAY OF APRIL, 1999.
Merrill Lynch Variable Series Fund,
Inc.
(Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Director April 16, 1999
- --------------------------------------------------- (Principal Executive
(Arthur Zeikel) Officer)
* Treasurer (Principal
- --------------------------------------------------- Financial and Accounting
(Donald C. Burke) Officer)
* Director
- ---------------------------------------------------
(Walter Mintz)
* Director
- ---------------------------------------------------
(Melvin R. Seiden)
* Director
- ---------------------------------------------------
(Stephen B. Swensrud)
* Director
- ---------------------------------------------------
(Joe Grills)
* Director
- ---------------------------------------------------
(Robert S. Salomon, Jr.)
By: /s/ ARTHUR ZEIKEL April 16, 1999
----------------------------------------------
(Arthur Zeikel)
Attorney-in-Fact
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Variable Series Funds, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 32 to Registration Statement No. 2-74452 of our reports dated February 10,
1999 appearing in the annual reports to shareholders of Merrill Lynch Variable
Series Funds, Inc. for the year ended December 31, 1998, and to the reference to
us under the caption "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 16, 1999
