-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Q++impt1wa7yL95NRjgvGzsYwcyFH5/EK6E95IiRQ0WNp11W4B2vfx7V8053U/sh g5pkDxpNPCh4YU1sk2Z1bw== 0000889812-95-000160.txt : 19950502 0000889812-95-000160.hdr.sgml : 19950502 ACCESSION NUMBER: 0000889812-95-000160 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 37 FILED AS OF DATE: 19950428 EFFECTIVENESS DATE: 19950428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH VARIABLE SERIES FUNDS INC CENTRAL INDEX KEY: 0000355916 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133093080 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-74452 FILM NUMBER: 95532990 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03290 FILM NUMBER: 95532991 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 BUSINESS PHONE: 6092823319 485BPOS 1 AMENDED REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1995 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. 23 /X/ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ AMENDMENT NO. 24 /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 ARTHUR ZEIKEL MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 (NAME AND ADDRESS OF AGENT FOR SERVICE) ------------------------ COPIES TO: PHILIP L. KIRSTEIN, ESQ. MERRILL LYNCH INVESTMENT MANAGEMENT, LEONARD B. MACKEY, JR., ESQ. L.P. ROGERS & WELLS P.O. BOX 9011 200 PARK AVENUE PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10166
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) /X/ immediately upon filing pursuant to paragraph (b) / / on (date) pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a) / / on (date) pursuant to paragraph (a)(i) / / on (date) pursuant to paragraph (a)(i) / / 75 days after filing pursuant to paragraph (a)(ii) / / on (date) pursuant to paragraph (a) 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. ------------------------ The Registrant has registered an indefinite number of shares of its Funds, under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. The notice required by such rule for the Registrant's most recent fiscal year was filed on February 28, 1995. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. CROSS REFERENCE SHEET
FORM N-1A ITEM PROSPECTUS CAPTION - ---------- -------------------------------- PART A 1. Cover Page...................... Cover Page 2. Synopsis........................ * 3. Financial Highlights............ Financial Highlights; Performance Data 4. General Description of Registrant.................... Investment Objective and Policies of the Funds; Additional Information 5. Management of the Fund.......... Investment Adviser; Directors; Portfolio Transactions and Brokerage; Additional Information 5A. Management Discussion of Fund Performance................... * 6. Capital Stock and Other Securities.................... Cover Page; Dividends; Distributions and Taxes; Additional Information 7. Purchase of Securities Being Offered....................... Purchase of Shares; Additional Information 8. Redemption or Repurchase........ Redemption of Shares 9. Pending Legal Proceedings....... * STATEMENT OF ADDITIONAL INFORMATION CAPTION -------------------------------- PART B 10. Cover Page...................... Cover Page 11. Table of Contents............... Table of Contents 12. General Information and History....................... Additional Information 13. Investment Objectives and Policies...................... Investment Objectives and Policies; Investment Restrictions; Portfolio Transactions and Brokerage 14. Management of the Registrant.... Management of the Company 15. Control Persons and Principal Holders of Securities......... Management of the Company; Additional Information 16. Investment Advisory and Other Services...................... Management of the Company 17. Brokerage Allocation and Other Practices..................... Portfolio Transactions and Brokerage 18. Capital Stock and Other Securities.................... * 19. Purchase, Redemption and Pricing of Securities Being Offered... Determination of Net Asset Value; Redemption of Shares 20. Tax Status...................... Dividends, Distributions and Taxes 21. Underwriters.................... Distribution Arrangements 22. Calculation of Performance Data.......................... Performance Data 23. Financial Statements............ Financial Statements
PART C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement. - ------------------ * Item inapplicable or answer negative. EXPLANATORY NOTE This registration statement contains two forms of prospectus: the first prospectus to be found herein is to be used in connection with the sale of shares of the Funds to fund variable annuity contracts, and variable life contracts issued by Insurance Companies other than Merrill Lynch Life Insurance Company ('MLLIC') or Merrill Lynch Life Insurance Company of New York ('ML of New York') and the second prospectus to be found herein is to be used in connection with the sale of shares of the Funds to fund benefits under variable life insurance contracts issued by MLLIC or ML of New York. PROSPECTUS APRIL 28, 1995 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800 ------------------------ Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end management investment company which has a wide range of investment objectives among its seventeen separate funds (hereinafter referred to as the 'Funds' or individually as a 'Fund'). A separate class of common stock ('Common Stock') is issued for each Fund. The shares of the Funds will be sold to Merrill Lynch Life Insurance Company ('MLLIC') and ML Life Insurance Company of New York ('ML of New York') and shares of certain of the Funds will be sold to Family Life Insurance Company ('Family Life') for certain separate accounts ('Separate Accounts') to fund benefits under variable annuity contracts ('Variable Annuity Contracts') issued by such companies. Shares of the funds sold only to MLLIC and ML of New York also will be sold to MLLIC and ML of New York for certain of their other separate accounts to fund variable life insurance contracts issued by them (such contracts, together with Variable Annuity Contracts, are collectively referred to as the 'Contracts'). Shares of the Funds may also be sold in the future to Separate Accounts of insurance companies other than MLLIC, ML of New York or Family Life (together with MLLIC, ML of New York and Family Life, 'Insurance Companies') to fund Contracts issued by them. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. MLLIC and ML of New York are wholly-owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the 'Investment Adviser'). The investment objectives of the Funds, each of whose name is preceded by 'Merrill Lynch,' are as follows: DOMESTIC MONEY MARKET FUND. Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term domestic money market securities. Shares of this Fund are sold only to MLLIC and ML of New York. RESERVE ASSETS FUND. Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term money market securities. PRIME BOND FUND. As high a level of current income as is consistent with prudent investment management, and capital appreciation to the extent consistent with the foregoing objective, by investing primarily in long-term corporate bonds rated A or better by either Moody's Investors Service, Inc. or Standard & Poor's Rating Group. HIGH CURRENT INCOME FUND. As high a level of current income as is consistent with prudent investment management, and capital appreciation to the extent consistent with the foregoing objective, by investing principally in fixed-income securities which are rated in the lower rating categories of the established rating services or in unrated securities of comparable quality. (continued on next page) THE RESERVE ASSETS FUND AND THE DOMESTIC MONEY MARKET FUND ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO. AN INVESTMENT IN THE RESERVE ASSETS FUND OR THE DOMESTIC MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE HIGH CURRENT INCOME FUND, WORLD INCOME FOCUS FUND AND DEVELOPING CAPITAL MARKETS FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS 'JUNK BONDS'), WHICH INVOLVE SPECIAL RISKS. SEE 'INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES.' ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 28, 1995, AND IS AVAILABLE ON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR (continuation of cover page) QUALITY EQUITY FUND. Highest total investment return consistent with prudent risk through a fully managed investment policy utilizing equity securities, primarily common stocks of large-capitalization companies, as well as investment grade debt and convertible securities. EQUITY GROWTH FUND. Long-term capital growth by investing primarily in common shares of small companies and emerging growth companies regardless of size. FLEXIBLE STRATEGY FUND. High total investment return consistent with prudent risk through a flexible investment policy using equity securities, intermediate and long-term debt obligations and money market securities of domestic and foreign issuers. While the Fund will generally emphasize investment in common stocks of larger-capitalization issuers and in investment grade debt obligations, the Fund may from time to time invest in small company and emerging growth company stocks when consistent with the Fund's objective. NATURAL RESOURCES FOCUS FUND. Long-term growth of capital and protection of the purchasing power of shareholders' capital by investing primarily in equity securities of domestic and foreign companies with substantial natural resource assets. AMERICAN BALANCED FUND. A level of current income and a degree of stability of principal not normally available from an investment solely in equity securities and the opportunity for capital appreciation greater than is normally available from an investment solely in debt securities by investing in a balanced portfolio of fixed income and equity securities. GLOBAL STRATEGY FOCUS FUND. High total investment return by investing primarily in a portfolio of equity and fixed income securities of U.S. and foreign issuers. BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by investing in securities, primarily equities that management of the Fund believes are undervalued and therefore represent basic investment value. WORLD INCOME FOCUS FUND. High current income by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currency units. The Fund may invest in United States and foreign government and corporate fixed income securities, including high yield, high risk, lower rated and unrated securities. GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation through investment in securities, principally equities of issuers in countries other than the United States. DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. INTERNATIONAL BOND FUND. High total investment return by investing in a non-U.S. international portfolio of debt instruments denominated in various currencies and multi-national currency units. INTERMEDIATE GOVERNMENT BOND FUND. Highest possible current income consistent with the protection of capital afforded by investing in intermediate-term debt securities issued or guaranteed by the United States Government, its agencies or instrumentalities. For more information on the Funds' investment objectives and policies, please see 'Investment Objectives and Policies of the Funds,' page 17. 2 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY BE MADE. ------------------------ TABLE OF CONTENTS
PAGE ---- Financial Highlights........................... 4 The Insurance Companies........................ 16 Reserve Assets Fund and Domestic Money Market Fund Yield Information....................... 16 Investment Objectives and Policies of the Funds........................................ 17 Directors...................................... 48 Investment Adviser............................. 49 Portfolio Transactions and Brokerage........... 52 Purchase of Shares............................. 53 Redemption of Shares........................... 53 Dividends, Distributions and Taxes............. 53 Performance Data............................... 54 Additional Information......................... 55 Appendix A..................................... A-1
3 FINANCIAL HIGHLIGHTS The following table presents supplementary financial information with respect to each of the Company's Funds. The table has been audited by Deloitte & Touche LLP, independent auditors, in connection with their annual audits of the Company's financial statements. Financial statements for the year ended December 31, 1994 and the independent auditors' report thereon appear in the Statement of Additional Information. The information in the following table should be read in conjunction with the financial statements.
The following per share AMERICAN BALANCED FUND data and ratios have ------------------------------------------------------------------------------------------------- been derived from FOR THE information provided in PERIOD the financial JUNE 1, statements. FOR THE YEAR ENDED DECEMBER 31, 1988+ TO INCREASE (DECREASE) IN ---------------------------------------------------------------------------- DEC. 31, NET ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 -------- -------- ------- ------ ------ ------ -------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period..... $ 14.08 $ 12.85 $ 12.82 $11.26 $11.74 $10.41 $10.00 -------- -------- ------- ------ ------ ------ ----- Investment income--net... .48 .32 .31 .47 .47 .44 .29 Realized and unrealized gain (loss) on investments and foreign currency transactions--net....... (1.06) 1.37 .37 1.76 (.35) 1.40 .12 -------- -------- ------- ------ ------ ------ ----- Total from investment operations.............. (.58) 1.69 .68 2.23 .12 1.84 .41 -------- -------- ------- ------ ------ ------ ----- Less dividends and distributions: Investment income--net......... (.37) (.34) (.37) (.49) (.46) (.50) -- Realized gain on investments--net.... -- (.12) (.28) (.18) (.14) (.01) -- In excess of realized gain on investments--net.... (.05) -- -- -- -- -- -- -------- -------- ------- ------ ------ ------ ----- Total dividends and distributions........... (.42) (.46) (.65) (.67) (.60) (.51) -- -------- -------- ------- ------ ------ ------ ----- Net asset value, end of period.................. $ 13.08 $ 14.08 $ 12.85 $12.82 $11.26 $11.74 $10.41 -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ ----- TOTAL INVESTMENT RETURN:** Based on net asset value per share............... (4.19)% 13.49% 5.72% 20.65% 1.22% 18.11% 4.10%++ -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ ----- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........... .63% .70% .97% 1.20% 1.25% 1.25% 1.25%* -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ ----- Expenses................. .63% .70% .97% 1.20% 1.50% 2.29% 1.25%* -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ ----- Investment income--net... 3.95% 3.20% 3.71% 4.16% 4.71% 4.71% 5.13%* -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ ----- SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......... $158,951 $115,420 $24,918 $7,937 $5,675 $3,854 $2,276 -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ ----- Portfolio turnover....... 35.36% 12.55% 36.34% 50.82% 23.52% 37.60% 2.04% -------- -------- ------- ------ ------ ------ ----- -------- -------- ------- ------ ------ ------ -----
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + The Fund commenced operations on June 1, 1988. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 4 FINANCIAL HIGHLIGHTS (CONTINUED)
DEVELOPING CAPITAL DOMESTIC BASIC VALUE MARKETS MONEY The following per share data and FOCUS FUND FOCUS FUND MARKET FUND ratios have been derived from ---------------------------------------- ---------------------- ------------ information provided in the FOR THE YEAR FOR THE PERIOD JULY 1, FOR THE PERIOD FOR THE YEAR financial statements. ENDED 1993+ TO MAY 2 1994+ TO ENDED INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, VALUE: 1994 1993 1994 1994 ------------ ----------------------- ---------------------- ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.............................. $ 10.95 $ 10.00 $ 10.00 $ 1.00 ------------ ------ ------ ------------ Investment income--net............... .17 .04 .09 .0386 Realized and unrealized gain (loss) on investments and foreign currency transactions--net................... .08 .91 (.58) (.0007) ------------ ------ ------ ------------ Total from investment operations..... .25 .95 (.49) .0379 ------------ ------ ------ ------------ Less dividends and distributions: Investment income--net............ (.10) -- -- (.0386) Realized gain on investments--net.................. -- -- -- -- ------------ ------ ------ ------------ Total dividends and distributions.... (.10) -- -- (.0386) ------------ ------ ------ ------------ Net asset value, end of period....... $ 11.10 $ 10.95 $ 9.51 $ 1.00 ------------ ------ ------ ------------ ------------ ------ ------ ------------ TOTAL INVESTMENT RETURN:** Based on net asset value per share... 2.36% 9.50%++ (4.90)%++ 3.94% ------------ ------ ------ ------------ ------------ ------ ------ ------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement....... .72% .86%* 1.29%* .50% ------------ ------ ------ ------------ ------------ ------ ------ ------------ Expenses............................. .72% .86%* 1.35%* .57% ------------ ------ ------ ------------ ------------ ------ ------ ------------ Investment income--net............... 2.08% 1.69%* 2.18%* --% ------------ ------ ------ ------------ ------------ ------ ------ ------------ Investment income--net, and realized gain (loss) on investments--net***................. -- -- -- 4.02% ------------ ------ ------ ------------ ------------ ------ ------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $164,307 $47,207 $ 36,676 $363,199 ------------ ------ ------ ------------ ------------ ------ ------ ------------ Portfolio turnover................... 60.55% 30.86% 29.79% --% ------------ ------ ------ ------------ ------------ ------ ------ ------------ DOMESTIC MONEY MARKET FUND ------------------------------ The following per share data and FOR THE ratios have been derived from PERIOD information provided in the FOR THE YEAR FEBRUARY 20, financial statements. ENDED 1992+ TO INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31, VALUE: 1993 1992 ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.............................. $ 1.00 $ 1.00 ------------ ------ Investment income--net............... .0302 .0302 Realized and unrealized gain (loss) on investments and foreign currency transactions--net................... .0005 .0013 ------------ ------ Total from investment operations..... .0307 .0315 ------------ ------ Less dividends and distributions: Investment income--net............ (.0302) (.0302) Realized gain on investments--net.................. (.0005) (.0010) ------------ ------ Total dividends and distributions.... (.0307) (.0312) ------------ ------ Net asset value, end of period....... $ 1.00 $ 1.00 ------------ ------ ------------ ------ TOTAL INVESTMENT RETURN:** Based on net asset value per share... 3.10% 3.16%++ ------------ ------ ------------ ------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement....... .36% .32%* ------------ ------ ------------ ------ Expenses............................. .63% .88%* ------------ ------ ------------ ------ Investment income--net............... --% --% ------------ ------ ------------ ------ Investment income--net, and realized gain (loss) on investments--net***................. 3.03% 3.48%* ------------ ------ ------------ ------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $170,531 $ 41,128 ------------ ------ ------------ ------ Portfolio turnover................... --% --% ------------ ------ ------------ ------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. *** Applicable to the Domestic Money Market Fund only. + The Basic Value Focus Fund commenced operations on July 1, 1993 and the Domestic Money Market Fund commenced operations on February 20, 1992. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 5 FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data EQUITY GROWTH FUND and ratios have been derived ------------------------------------------------------------------------------------------- from information provided in the financial statements. FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ------------------------------------------------------------------------------------------- ASSET VALUE: 1994+ 1993+ 1992+ 1991 1990 1989 1988 1987 -------- ------- --------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47 $ 18.42 -------- ------- --------- ------- ------- ------- ------- ------- Investment income--net........ .05 (.01) .01 .09 .05 (.07) (.10) (.09) Realized and unrealized gain (loss) on investments and foreign curency transactions--net............ (1.56) 3.17 (.10) 5.91 (1.77) 2.02 .60 (4.01) -------- ------- --------- ------- ------- ------- ------- ------- Total from investment operations................... (1.51) 3.16 (.09) 6.00 (1.72) 1.95 .50 (4.10) -------- ------- --------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net..... -- --* (.07) (.02) -- -- -- (.03) Realized gain on investments--net......... (.19) -- -- -- -- -- (.22) (2.82) -------- ------- --------- ------- ------- ------- ------- ------- Total dividends and distributions................ (.19) -- (.07) (.02) -- -- (.22) (2.85) -------- ------- --------- ------- ------- ------- ------- ------- Net asset value, end of year......................... $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 $ 11.75 $ 11.47 -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ (7.27)% 17.78% (0.53)% 50.10% (12.55)% 16.60% 4.25% (22.29)% -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .83% .96% 1.18% 1.25% 1.25% 1.25% 1.25% 1.24% -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- Expenses...................... .83% .96% 1.18% 1.28% 1.47% 1.53% 1.25% 1.24% -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- Investment income (loss)--net.................. .27% (.05)% .04% .51% .14% (.68)% (.56)% (.60)% -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $170,044 $98,976 $ 23,167 $11,318 $ 6,851 $ 6,811 $ 5,521 $ 6,707 -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- Portfolio turnover............ 88.48% 131.75% 98.64% 79.10% 135.24% 100.49% 68.73% 94.91% -------- ------- --------- ------- ------- ------- ------- ------- -------- ------- --------- ------- ------- ------- ------- ------- The following per share data EQUITY GROWTH FUND and ratios have been derived ------------------ from information provided in FOR THE YEAR ENDED the financial statements. DECEMBER 31, INCREASE (DECREASE) IN NET ------------------- ASSET VALUE: 1986 1985 ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 15.56 $ 11.85 ------- ------- Investment income--net........ .04 .05 Realized and unrealized gain (loss) on investments and foreign curency transactions--net............ 2.86 3.73 ------- ------- Total from investment operations................... 2.90 3.78 ------- ------- Less dividends and distributions: Investment income--net..... (.04) (.07) Realized gain on investments--net......... -- -- ------- ------- Total dividends and distributions................ (.04) (.07) ------- ------- Net asset value, end of year......................... $ 18.42 $ 15.56 ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 18.68% 32.01% ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ 1.25% 1.08% ------- ------- ------- ------- Expenses...................... 1.44% 1.48% ------- ------- ------- ------- Investment income (loss)--net.................. .24% .34% ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $ 4,955 $ 2,662 ------- ------- ------- ------- Portfolio turnover............ 80.52% 66.55% ------- ------- ------- -------
- ------------------ * Amount is less than $.01 per share. ** Total investment returns exclude insurance-related fees and expenses. + Based on average number of shares outstanding during the year. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 6 FINANCIAL HIGHLIGHTS (CONTINUED)
FLEXIBLE STRATEGY FUND --------------------------------------------------------------------------------------- The following per share data and ratios have been derived from information provided in the financial statements. FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ASSET --------------------------------------------------------------------------------------- VALUE: 1994+++ 1993 1992 1991 1990 1989 1988 --------- --------- -------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......................... $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 $ 9.97 --------- --------- -------- -------- -------- -------- ------- Investment income--net........... .37 .28 .33 .47 .65 .48 .52 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............... (1.02) 1.94 .25 2.52 (.08) 1.67 .60 --------- --------- -------- -------- -------- -------- ------- Total from investment operations...................... (.65) 2.22 .58 2.99 .57 2.15 1.12 --------- --------- -------- -------- -------- -------- ------- Less dividends and distributions: Investment income--net........ (.30) (.15) (.54) (.66) (.46) (.55) (.25) Realized gain on investments--net............ (.54) (.03) (.68) (.09) -- -- -- --------- --------- -------- -------- -------- -------- ------- Total dividends and distributions................... (.84) (.18) (1.22) (.75) (.46) (.55) (.25) --------- --------- -------- -------- -------- -------- ------- Net asset value, end of period... $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 $ 10.84 --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................... (4.20)% 15.80% 4.25% 24.98% 4.81% 20.29% 11.26% --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement... .73% .80% .90% .96% 1.08% 1.19% 1.09% --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- Expenses......................... .73% .80% .90% .96% 1.08% 1.19% 1.09% --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- Investment income--net........... 2.52% 2.26% 2.62% 3.51% 5.19% 3.94% 4.37% --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...................... $ 274,498 $ 194,777 $ 82,549 $ 55,221 $ 47,428 $ 47,837 $46,662 --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- Portfolio turnover............... 65.54% 56.42% 55.25% 67.13% 52.95% 83.31% 80.07% --------- --------- -------- -------- -------- -------- ------- --------- --------- -------- -------- -------- -------- ------- FLEXIBLE STRATEGY FUND -------------------------- FOR THE The following per share data and YEAR FOR THE ratios have been derived from ENDED PERIOD information provided in the DECEM- MAY 1, financial statements. BER 31, 1986+ TO INCREASE (DECREASE) IN NET ASSET ------ DEC. 31, VALUE: 1987 1986 ------- -------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......................... $ 10.22 $ 10.00 ------- ------ Investment income--net........... .24 .11 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............... .03 .11 ------- ------ Total from investment operations...................... .27 .22 ------- ------ Less dividends and distributions: Investment income--net........ (.34) -- Realized gain on investments--net............ (.18) -- ------- ------ Total dividends and distributions................... (.52) -- ------- ------ Net asset value, end of period... $ 9.97 $ 10.22 ------- ------ ------- ------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........................... 2.43% 2.20%++ ------- ------ ------- ------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement... 1.07% 1.25%* ------- ------ ------- ------ Expenses......................... 1.07% 1.25%* ------- ------ ------- ------ Investment income--net........... 2.84% 3.65%* ------- ------ ------- ------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...................... $61,305 $ 20,640 ------- ------ ------- ------ Portfolio turnover............... 74.09% 48.88% ------- ------ ------- ------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + The Fund commenced operations on May 1, 1986. ++ Aggregate total investment return. +++ Based on average shares outstanding during the year. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 7 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL STRATEGY FOCUS FUND GLOBAL UTILITY FOCUS FUND -------------------------------------- --------------------------- The following per share data FOR THE FOR THE and ratios have been derived PERIOD PERIOD from information provided in FOR THE YEAR ENDED FEBRUARY 28, FOR THE JULY 1, the financial statements. DECEMBER 31, 1992+ TO YEAR ENDED 1993+ TO INCREASE (DECREASE) IN NET ----------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ASSET VALUE: 1994 1993 1992 1994 1993 -------- ------------ ------------ ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................... $ 12.17 $ 10.22 $ 10.00 $ 10.66 $ 10.00 -------- ------------ ------ ------------ ------------ Investment income--net........ .30 .16 .13 .35 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (.48) 1.96 .13 (1.25) .64 -------- ------------ ------ ------------ ------------ Total from investment operations................... (.18) 2.12 .26 (.90) .68 -------- ------------ ------ ------------ ------------ Less dividends and distributions: Investment income--net..... (.21) (.17) (.04) (.29) (.02) Realized gain on investments--net......... (.04) -- -- -- -- In excess of realized gain on investments--net...... (.01) -- -- (.02) -- -------- ------------ ------ ------------ ------------ Total dividends and distributions................ (.26) (.17) (.04) (.31) (.02) -------- ------------ ------ ------------ ------------ Net asset value, end of period....................... $ 11.73 $ 12.17 $ 10.22 $ 9.45 $ 10.66 -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ (1.46)% 21.03% 2.62%++ (8.51)% 6.85%++ -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .77% .88% 1.25%* .73% .89%* -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------ Expenses...................... .77% .88% 1.35%* .73% .89%* -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------ Investment income--net........ 2.85% 2.41% 2.66%* 3.68% 2.84%* -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................... $515,407% $269,627 $ 15,527 $126,243% $104,517 -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------ Portfolio turnover............ 21.03% 17.07% 14.47% 9.52% 1.72% -------- ------------ ------ ------------ ------------ -------- ------------ ------ ------------ ------------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + The Global Strategy Focus Fund commenced operations on February 28, 1992 and the Global Utility Focus Fund commenced operations on July 1, 1993. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 8 FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and HIGH CURRENT INCOME FUND ratios have been derived from ------------------------------------------------------------------------------------------ information provided in the financial statements. FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ASSET ------------------------------------------------------------------------------------------ VALUE: 1994 1993 1992 1991 1990 1989 1988 1987 -------- -------- --------- ------ ------ ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........................... $ 12.06 $ 11.13 $ 10.23 $ 8.14 $10.21 $ 10.85 $ 10.55 $ 11.42 -------- -------- --------- ------ ------ ------- ------- ------- Investment income--net........... 1.05 .95 1.07 1.19 1.40 1.29 1.21 1.23 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.............. (1.47) .95 .90 2.10 (2.08) (.64) .20 (.79) -------- -------- --------- ------ ------ ------- ------- ------- Total from investment operations..................... (.42) 1.90 1.97 3.29 (.68) .65 1.41 .44 -------- -------- --------- ------ ------ ------- ------- ------- Less dividends and distributions: Investment income--net........... (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.23) Realized gain on investments--net............... -- -- -- -- -- -- -- (.08) -------- -------- --------- ------ ------ ------- ------- ------- Total dividends and distributions... (1.03) (.97) (1.07) (1.20) (1.39) (1.29) (1.11) (1.31) -------- -------- --------- ------ ------ ------- ------- ------- Net asset value, end of year........ $ 10.61 $ 12.06 $ 11.13 $10.23 $ 8.14 $ 10.21 $ 10.85 $ 10.55 -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share.......................... (3.59)% 17.84% 20.05% 43.00% (7.63)% 6.14% 13.87% 3.82% -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement... .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- Expenses......................... .61% .72% .89% 1.10% 1.15% 1.22% 1.07% 1.01% -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- Investment income--net........... 9.73% 8.62% 10.06% 12.49% 14.52% 11.98% 11.22% 10.88% -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)..................... $255,719 $163,428 $ 26,343 $9,649 $8,106 $12,942 $13,960 $13,075 -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- Portfolio turnover............... 51.88% 35.67% 28.21% 51.54% 26.43% 53.52% 33.91% 56.07% -------- -------- --------- ------ ------ ------- ------- ------- -------- -------- --------- ------ ------ ------- ------- ------- HIGH CURRENT The following per share data and INCOME FUND ratios have been derived from ------------------ information provided in the FOR THE YEAR financial statements. ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ASSET ------------------ VALUE: 1986 1985 ------- ------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........................... $ 11.39 $10.33 ------- ------ Investment income--net........... 1.25 1.32 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.............. .03 1.06 ------- ------ Total from investment operations..................... 1.28 2.38 ------- ------ Less dividends and distributions: Investment income--net........... (1.25) (1.32) Realized gain on investments--net............... -- -- ------- ------ Total dividends and distributions... (1.25) (1.32) ------- ------ Net asset value, end of year........ $ 11.42 $11.39 ------- ------ ------- ------ TOTAL INVESTMENT RETURN:** Based on net asset value per share.......................... 11.74% 24.24% ------- ------ ------- ------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement... 1.12% 1.11% ------- ------ ------- ------ Expenses......................... 1.12% 1.54% ------- ------ ------- ------ Investment income--net........... 10.65% 11.87% ------- ------ ------- ------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands)..................... $12,577 $4,695 ------- ------ ------- ------ Portfolio turnover............... 22.44% 33.67% ------- ------ ------- ------
- ------------------ ** Total investment returns exclude insurance-related fees and expenses. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 9 FINANCIAL HIGHLIGHTS (CONTINUED)
INTERMEDIATE INTERNATIONAL GOVERNMENT BOND FUND INTERNATIONAL EQUITY FOCUS FUND BOND FUND ------------ ------------------------------- ------------ The following per share data FOR THE FOR THE FOR THE and ratios have been derived PERIOD PERIOD PERIOD from information provided in MAY 2, FOR THE YEAR JULY 1, MAY 2, the financial statements. 1994+ TO ENDED 1993+ TO 1994+ TO INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ASSET VALUE: 1994 1994 1993 1994 ------------ ------------ ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................... $10.00 $ 11.03 $ 10.00 $ 10.00 ----- ------------ ------ ------ Investment income--net........ .38 .19 .01 .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (.35) (.13) 1.02 (.07) ----- ------------ ------ ------ Total from investment operations................... .03 .06 1.03 .18 ----- ------------ ------ ------ Less dividends and distributions: Investment income--net..... (.33) (.18) -- (.21) Realized gain on investments--net........... -- (.01) -- -- In excess of realized gain on investments--net........ -- -- -- -- ----- ------------ ------ ------ Total dividends and distributions................ (.33) (.19) -- (.21) ----- ------------ ------ ------ Net asset value, end of period....................... $ 9.70 $ 10.90 $ 11.03 $ 9.97 ----- ------------ ------ ------ ----- ------------ ------ ------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 0.37%++ 0.55% 10.30%++ 1.79%++ ----- ------------ ------ ------ ----- ------------ ------ ------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .00%* .97% 1.14%* .00%* ----- ------------ ------ ------ ----- ------------ ------ ------ Expenses...................... 1.08%* .97% 1.14%* .80%* ----- ------------ ------ ------ ----- ------------ ------ ------ Investment income--net........ 6.34%* 1.09% 0.30%* 4.66%* ----- ------------ ------ ------ ----- ------------ ------ ------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................... $9,933 $247,884 $ 76,906 $ 17,811 ----- ------------ ------ ------ ----- ------------ ------ ------ Portfolio turnover............ 152.20% 58.84% 17.39% 103.03% ----- ------------ ------ ------ ----- ------------ ------ ------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 10 FINANCIAL HIGHLIGHTS (CONTINUED)
NATURAL RESOURCES FOCUS FUND ---------------------------------------------------------------------------------------------- The following per share data FOR THE and ratios have been derived PERIOD from information provided in JUNE 1, the financial statements. FOR THE YEAR ENDED DECEMBER 31, 1988+ TO INCREASE (DECREASE) IN NET ------------------------------------------------------------------------- DEC. 31, ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 ------- ------- ------ ------ ------ ------ -------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................... $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 $10.00 ------- ------- ------ ------ ------ ------ ----- Investment income--net........ .17 .11 .18 .25 .22 .24 .12 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (.02) .92 (.05) (.11) (.90) 1.49 (.54) ------- ------- ------ ------ ------ ------ ----- Total from investment operations................... .15 1.03 .13 .14 (.68) 1.73 (.42) ------- ------- ------ ------ ------ ------ ----- Less dividends and distributions: Investment income--net..... (.15) (.05) (.29) (.25) (.24) (.22) -- Realized gain on investments--net......... -- -- (.06) -- -- -- -- ------- ------- ------ ------ ------ ------ ----- Total dividends and distributions................ (.15) (.05) (.35) (.25) (.24) (.22) -- ------- ------- ------ ------ ------ ------ ----- Net asset value, end of period....................... $ 10.82 $ 10.82 $ 9.84 $10.06 $10.17 $11.09 $ 9.58 ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ ----- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 1.44% 10.47% 1.36% 1.36% (6.21)% 18.23% (4.20)%++ ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ ----- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .87% 1.13% 1.25% 1.25% 1.25% 1.25% 1.24%* ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ ----- Expenses...................... .87% 1.13% 1.27% 1.30% 1.38% 1.74% 1.24%* ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ ----- Investment income--net........ 1.91% 1.34% 2.00% 2.31% 2.26% 2.26% 2.59%* ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ ----- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................... $39,715 $14,778 $4,144 $3,084 $3,247 $2,704 $2,371 ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ ----- Portfolio turnover............ 10.94% 58.44% 22.88% 31.38% 27.61% 93.97% 16.31% ------- ------- ------ ------ ------ ------ ----- ------- ------- ------ ------ ------ ------ -----
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + The Fund commenced operations on June 1, 1988. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 11 FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data PRIME BOND FUND and ratios have been derived --------------------------------------------------------------------------------------------- from information provided in the financial statements. FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET --------------------------------------------------------------------------------------------- ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 1987 -------- -------- ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period................ $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 $ 12.04 -------- -------- ------- ------- ------- ------- ------- ------- Investment income--net..... .77 .70 .79 .90 .88 .90 .87 .87 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........ (1.36) .71 .04 .84 (.12) .48 (.15) (1.00) -------- -------- ------- ------- ------- ------- ------- ------- Total from investment operations............... (.59) 1.41 .83 1.74 .76 1.38 .72 (.13) -------- -------- ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net..... (.76) (.70) (.81) (.90) (.87) (.90) (.80) (.87) Realized gain on investments--net........... -- (.11) -- -- -- -- -- (.15) In excess of realized gain on investments--net........ (.17) -- -- -- -- -- -- -- -------- -------- ------- ------- ------- ------- ------- ------- Total dividends and distributions................ (.93) (.81) (.81) (.90) (.87) (.90) (.80) (1.02) -------- -------- ------- ------- ------- ------- ------- ------- Net asset value, end of period....................... $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 $ 10.81 $ 10.89 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share................ (4.80)% 12.02% 7.27% 16.41% 7.13% 13.29% 6.75% (1.10)% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............ .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Expenses................... .54% .63% .78% .78% 1.06% 1.16% 1.07% 1.07% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Investment income--net..... 6.74% 5.86% 6.76% 7.94% 8.01% 8.12% 8.05% 7.66% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........... $391,234 $314,091 $84,810 $39,743 $34,655 $29,593 $22,499 $17,385 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Portfolio turnover......... 139.89% 115.26% 82.74% 152.18% 155.17% 144.52% 225.81% 129.46% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- The following per share data PRIME BOND FUND and ratios have been derived ------------------ from information provided in FOR THE YEAR the financial statements. ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ------------------- ASSET VALUE: 1986 1985 ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period................ $ 11.50 $ 10.44 ------- ------- Investment income--net..... .99 1.13 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........ .54 1.06 ------- ------- Total from investment operations............... 1.53 2.19 ------- ------- Less dividends and distributions: Investment income--net..... (.99) (1.13) Realized gain on investments--net........... -- -- In excess of realized gain on investments--net........ -- -- ------- ------- Total dividends and distributions................ (.99) (1.13) ------- ------- Net asset value, end of period....................... $ 12.04 $ 11.50 ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share................ 13.75% 22.15% ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............ 1.12% 1.11% ------- ------- ------- ------- Expenses................... 1.12% 1.43% ------- ------- ------- ------- Investment income--net..... 7.98% 10.26% ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........... $20,869 $ 7,631 ------- ------- ------- ------- Portfolio turnover......... 103.63% 16.58% ------- ------- ------- -------
- ------------------ ** Total investment returns exclude insurance-related fees and expenses. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 12 FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data QUALITY EQUITY FUND and ratios have been derived --------------------------------------------------------------------------------------------- from information provided in the financial statements. FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET --------------------------------------------------------------------------------------------- ASSET VALUE: 1994* 1993 1992 1991 1990 1989 1988 1987 -------- -------- ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 $ 20.15 -------- -------- ------- ------- ------- ------- ------- ------- Investment income--net........ .38 .24 .34 .43 .47 .50 .43 .42 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (.74) 3.46 .32 5.75 (.38) 4.96 1.73 (.35) -------- -------- ------- ------- ------- ------- ------- ------- Total from investment operations................... (.36) 3.70 .66 6.18 .09 5.46 2.16 .07 -------- -------- ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net..... (.25) (.12) (.58) (.50) (.41) (.52) (.22) (.60) Realized gain on investments--net........... (.67) (.04) (.95) (1.05) (.84) -- -- (3.62) -------- -------- ------- ------- ------- ------- ------- ------- Total dividends and distributions................ (.92) (.16) (1.53) (1.55) (1.25) (.52) (.22) (4.22) -------- -------- ------- ------- ------- ------- ------- ------- Net asset value, end of year......................... $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 $ 17.94 $ 16.00 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ (1.20)% 14.57% 2.69% 30.18% 0.66% 30.77% 13.54% (0.70)% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .54% .62% .74% .79% .94% 1.05% 1.02% .93% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Expenses...................... .54% .62% .74% .79% .94% 1.05% 1.02% .93% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Investment income--net........ 1.39% 1.07% 1.54% 1.87% 2.36% 2.58% 2.25% 2.31% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $464,360 $309,420 $87,977 $55,005 $39,470 $31,467 $20,055 $23,986 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Portfolio turnover............ 60.57% 88.25% 62.54% 55.83% 69.05% 44.23% 32.53% 65.58% -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- The following per share data QUALITY EQUITY FUND and ratios have been derived ------------------- from information provided in FOR THE YEAR the financial statements. ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ------------------- ASSET VALUE: 1986 1985 ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 17.14 $ 13.94 ------- ------- Investment income--net........ .43 .45 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ 3.01 3.84 ------- ------- Total from investment operations................... 3.44 4.29 ------- ------- Less dividends and distributions: Investment income--net..... (.43) (.60) Realized gain on investments--net........... -- (.49) ------- ------- Total dividends and distributions................ (.43) (1.09) ------- ------- Net asset value, end of year......................... $ 20.15 $ 17.14 ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 20.38% 32.66% ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ 1.09% 1.08% ------- ------- ------- ------- Expenses...................... 1.09% 1.22% ------- ------- ------- ------- Investment income--net........ 2.41% 3.20% ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $16,704 $ 9,973 ------- ------- ------- ------- Portfolio turnover............ 50.96% 34.21% ------- ------- ------- -------
- ------------------ * Based on average shares outstanding during the year. ** Total investment returns exclude insurance-related fees and expenses. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 13 FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data RESERVE ASSETS FUND and ratios have been derived ------------------------------------------------------------------------------------------- from information provided in the financial statements. FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ------------------------------------------------------------------------------------------- ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 1987 ------- ------- ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- ------- ------- ------- Investment income--net........ .0371 .0268 .0320 .0546 .0730 .0822 .0661 .0574 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (.0009) .0005 .0007 .0014 .0019 .0012 .0002 .0005 ------- ------- ------- ------- ------- ------- ------- ------- Total from investment operations................... .0362 .0273 .0327 .0560 .0749 .0834 .0663 .0579 ------- ------- ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net..... (.0362) (.0268) (.0320) (.0546) (.0730) (.0822) (.0661) (.0574) Realized gain on investments--net........... -- (.0005) (.0005) (.0014)+ (.0019)+ (.0012)+ (.0002)+ (.0005)+ ------- ------- ------- ------- ------- ------- ------- ------- Total dividends and distributions................ (.0362) (.0273) (.0325) (.0560) (.0749) (.0834) (.0663) (.0579) ------- ------- ------- ------- ------- ------- ------- ------- Net asset value, end of year........................] $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 3.80% 2.77% 3.29% 5.68% 7.65% 8.62% 6.85% 5.96% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .65% .70% .79% .79% .97% 1.03% 1.01% 1.04% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Expenses...................... .65% .70% .79% .79% .97% 1.03% 1.01% 1.04% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Investment income--net, and realized gain (loss) on investments--net.............. 3.75% 2.73% 3.36% 5.64%+ 7.46%+ 8.34%+ 6.65%+ 5.86%+ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $32,196 $30,168 $26,767 $34,362 $35,871 $29,311 $24,951 $23,068 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- The following per share data RESERVE ASSETS FUND and ratios have been derived ------------------- from information provided in FOR THE YEAR the financial statements. ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ------------------- ASSET VALUE: 1986 1985 ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 1.00 $ 1.00 ------- ------- Investment income--net........ .0560 .0712 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ .0027 .0016 ------- ------- Total from investment operations................... .0587 .0728 ------- ------- Less dividends and distributions: Investment income--net..... (.0560) (.0712) Realized gain on investments--net........... (.0027)+ (.0016)+ ------- ------- Total dividends and distributions................ (.0587) (.0728) ------- ------- Net asset value, end of year......................... $ 1.00 $ 1.00 ------- ------- ------- ------- TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 6.05% 7.55% ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ 1.18% 1.07% ------- ------- ------- ------- Expenses...................... 1.18% 1.26% ------- ------- ------- ------- Investment income--net, and realized gain (loss) on investments--net.............. 5.89%+ 7.24%+ ------- ------- ------- ------- SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $17,214 $15,955 ------- ------- ------- -------
- ------------------ ** Total investment returns exclude insurance-related fees and expenses. + Includes unrealized gain (loss). Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 14 FINANCIAL HIGHLIGHTS (CONTINUED)
WORLD INCOME FOCUS FUND --------------------------- FOR THE PERIOD The following per share data and ratios have FOR THE YEAR JULY 1, been derived from information provided in ENDED 1993+ TO the financial statements. DECEMBER 31, DECEMBER 31, INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period......... $ 10.38 $ 10.00 ------------ Investment income--net....................... .76 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................... (1.19) .33 ------------ ------------ Total from investment operations............. (.43) .58 ------------ ------------ Less dividends and distributions Investment income--net.................... (.76) (.20) Realized gain on investments--net......... -- -- In excess of realized gain on investments--net.......................... (.02) -- ------------ ------------ Total dividends and distributions............ (.78) (.20) ------------ ------------ Net asset value, end of period............... $ 9.17 $ 10.38 ------------ ------------ ------------ ------------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........... (4.21)% 5.90%++ ------------ ------------ ------------ ------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............... .75% .94%* ------------ ------------ ------------ ------------ Expenses..................................... .75% .94%* ------------ ------------ ------------ ------------ Investment income--net....................... 8.01% 6.20%* ------------ ------------ ------------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..... $ 75,150 $ 50,737 ------------ ------------ ------------ ------------ Portfolio turnover........................... 117.58 54.80% ------------ ------------ ------------ ------------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of operations. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 15 THE INSURANCE COMPANIES The Company was organized to fund benefits under Contracts issued by Family Life, formerly a wholly owned subsidiary of Merrill Lynch & Co., Inc. ('ML&Co.') On June 12, 1991, Family Life was sold to a non-affiliated corporation and most (although not all) of the Contracts were transferred to MLLIC and ML of New York, two wholly-owned subsidiaries of ML&Co. The shares of the Funds in existence at the time of that sale (Reserve Assets Fund, Prime Bond Fund, High Current Income Fund, Quality Equity Fund, Equity Growth Fund, Flexible Strategy Fund, Natural Resources Focus Fund and American Balanced Fund, collectively, the 'Original Funds') are sold to MLLIC, ML of New York and Family Life for certain separate accounts (the 'Separate Accounts') which serve as funding vehicles for, among other things, Contracts originally sold by Family Life, Contracts transferred to MLLIC and ML of New York and Contracts sold by MLLIC and ML of New York after the time of the transfer. The shares of the Domestic Money Market Fund, Global Strategy Focus Fund, Basic Value Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund, International Bond Fund and Intermediate Government Bond Fund (collectively, the 'New Funds') are currently sold only to (i) MLLIC and ML of New York Separate Accounts to fund certain Contracts sold after the time of the transfer to MLLIC and ML of New York, respectively, and (ii) certain other separate accounts of MLLIC and ML of New York to fund certain variable life insurance contracts sold by MLLIC and ML of New York, respectively. The Company has applied for an exemptive order from the Securities and Exchange Commission which would allow shares of both the Original Funds and the New Funds to be sold to Separate Accounts of insurance companies not affiliated with MLLIC, ML of New York or Family Life (together with MLLIC, ML of New York and Family Life, 'Insurance Companies') and, if such exemptive order is granted, shares of both the Original Funds and the New Funds may be sold to fund certain variable life insurance contracts and variable annuities issued by such companies. The rights of the Insurance Companies as shareholders should be distinguished from the rights of a Contract owner, which are set forth in the Contract. A Contract owner has no interest in the shares of a Fund, but only in the Contract. The Contract is described in the Prospectus for each Contract. That Prospectus describes the relationship between increases or decreases in the net asset value of shares of a Fund, and any distributions on such shares, and the benefits provided under a Contract. The Prospectus for the Contracts also describes various fees payable to the Insurance Companies and charges to the Separate Accounts made by the Insurance Companies with respect to the Contracts. Since shares of the Funds will be sold only to the Insurance Companies for the Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus refer to the Insurance Companies. MLLIC and ML of New York are wholly-owned subsidiaries of ML&Co., as is the Investment Adviser. RESERVE ASSETS FUND AND DOMESTIC MONEY MARKET FUND YIELD INFORMATION Set forth below is yield information for the Reserve Assets Fund and the Domestic Money Market Fund for the seven-day period ended December 31, 1994, computed to include and exclude realized and unrealized gains and losses, and information as to the compounded annualized yield, excluding gains and losses, for the same periods. The yield quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease the yield.
RESERVE ASSETS DOMESTIC MONEY FUND FUND MARKET --------- --------------- Annualized Yield: Including gains and losses................... 5.00% 5.17% Excluding gains and losses................... 5.00% 5.17% Compounded Annualized Yield....................... 5.13% 5.31% Average maturity of portfolio at end of period.... 38 days 35 days
16 INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS INVESTMENT OBJECTIVES Each Fund of the Company has a different investment objective which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. Each Fund is classified as 'diversified,' as defined in the Investment Company Act of 1940, except for the Natural Resources Focus Fund, the Global Strategy Focus Fund, the World Income Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund, each of which is classified as 'non-diversified.' The investment objectives and classification of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of each Fund affected. The investment objectives and policies of each Fund are discussed below. Fixed Income Security Ratings. No Fund other than the High Current Income Fund, the World Income Focus Fund and Developing Capital Markets Focus Fund invests in fixed-income securities which are rated below investment grade (i.e., securities rated Ba or below by Moody's Investors Service, Inc. ('Moody's') or BB or below by Standard & Poor's Rating Group ('Standard & Poor's')). However, securities purchased by a Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgment of the Investment Adviser, it is advantageous to do so. Securities in the lowest category of investment grade debt securities may have speculative characteristics which may lead to weakened capacity to pay interest and principal during periods of adverse economic conditions. See Appendix A for a fuller description of corporate bond ratings. DOMESTIC MONEY MARKET FUND The investment objectives of the Domestic Money Market Fund are to preserve shareholder capital, to maintain liquidity and to achieve the highest possible current income consistent with the foregoing objectives by investing in short-term domestic money market securities. The Fund will invest in short-term U.S. Government securities, U.S. Government agency securities, domestic depository institution money instruments (including certificates of deposit, bankers' acceptances, time deposits and bank notes), short-term debt securities (such as commercial paper), variable amount master demand notes and repurchase and reverse repurchase agreements of U.S. issuers. As a matter of fundamental policy, which may be changed only with the approval of a majority of the Domestic Money Market Fund's outstanding voting securities, as defined in the Investment Company Act of 1940, the Fund may not purchase securities of foreign issuers (including Eurodollar or Yankeedollar bank obligations). U.S. Government securities may be purchased on a forward commitment basis. The types of money market securities in which the Domestic Money Market Fund may invest are described more fully in Appendix A to this Prospectus. The Domestic Money Market Fund will be subject to portfolio maturity, quality and diversification restrictions discussed below under 'Money Market Fund Portfolio Restrictions.' RESERVE ASSETS FUND The investment objectives of the Reserve Assets Fund are to preserve shareholder capital, to maintain liquidity and to achieve the highest possible current income consistent with the foregoing objectives by investing in short-term money market securities. The Fund will invest in short-term U.S. Government securities, U.S. Government agency securities, depository institution money instruments (including certificates of deposit, bankers' acceptances, time deposits and bank notes), short-term debt securities (such as commercial paper), variable amount master demand notes, securities of foreign issuers (including Eurodollar, Yankeedollar and foreign bank obligations) and repurchase and reverse repurchase agreements. U.S. Government securities may be 17 purchased on a forward commitment basis. The types of money market securities in which the Reserve Assets Fund may invest are described more fully in Appendix A to the Prospectus. The Reserve Assets Fund will be subject to the portfolio maturity, quality and diversification restrictions discussed below under 'Money Market Fund Portfolio Restrictions.' PRIME BOND FUND The principal investment objective of the Prime Bond Fund is to provide shareholders with as high a level of current income as is consistent with the investment policies of the Fund and with prudent investment management. As a secondary objective, the Fund seeks capital appreciation when consistent with its principal objective. The Prime Bond Fund invests primarily in securities rated in the top three rating categories of either Standard & Poor's (AAA, AA and A) or Moody's (Aaa, Aa and A). Additional information regarding various bond ratings is set forth in Appendix A to the Prospectus. The financial risk of the Fund should be minimized by the credit quality of the bonds in which it will invest, but the long maturities that typically provide the best yield will subject the Fund to possible substantial price changes resulting from market yield fluctuations. The market prices of fixed-income securities such as those purchased by the Fund are affected by changes in interest rates generally. As interest rates rise, the market value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. Fund management strategy will attempt to mitigate adverse price changes and optimize favorable price changes through active trading that shifts the maturity and/or quality structure of the Fund within the overall investment guidelines. The Fund's investments will vary from time to time depending upon the judgment of management as to prevailing conditions in the economy and the securities markets and the prospects for interest rate changes among different categories of fixed-income securities. The Fund anticipates that under normal circumstances more than 90% of the assets of the Fund will be invested in fixed-income securities, including convertible and non-convertible debt securities and preferred stock. The Fund does not intend to invest in common stock, rights or other equity securities. Under unusual market or economic conditions, the Fund for defensive or other purposes may invest up to 100% of its assets in U.S. government or government agency securities, money market or other fixed-income securities deemed by the Investment Adviser to be consistent with the objectives of the Fund, or the Fund may hold its assets in cash. HIGH CURRENT INCOME FUND The primary investment objective of the High Current Income Fund, like the Prime Bond Fund, is to obtain the highest level of current income that is consistent with the investment policies of the Fund and with prudent investment management. As a secondary objective, the Fund seeks capital appreciation when consistent with its primary objective. The High Current Income Fund seeks high current income by investing principally in fixed-income securities which are rated in the lower rating categories of the established rating services (Baa or lower by Moody's and BBB or lower by Standard & Poor's), or in unrated securities of comparable quality. Securities rated below Baa by Moody's and below BBB by Standard & Poor's are commonly known as 'junk bonds.' Additional information regarding various bond ratings is set forth in Appendix A to the Prospectus. The market price of fixed-income securities such as those purchased by the Fund is affected by changes in interest rates generally. As interest rates rise, the market value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. Although they can be expected to provide higher yields, lower-rated securities such as those purchased by the Fund may be subject to greater market fluctuations and risks of loss of income and principal than lower- 18 yielding, higher-rated fixed-income securities. Such securities are generally issued by corporations which are not as financially secure or as creditworthy as issuers of higher-rated securities. There is, accordingly, a greater risk that the issuers of higher-yielding securities will not be able to pay principal and interest on such securities, especially during periods of adverse economic conditions. Because investment in such high-yield securities entails relatively greater risk of loss of income or principal, an investment in the High Current Income Fund may not be appropriate as the exclusive investment to fund the Contracts for all Contract Owners. See 'Risks of High Yield Securities' below. Selection and supervision by the management of the Company of investments in lower-rated fixed-income securities involves continuous analysis of individual issuers, general business conditions and other factors which may be too time consuming or too costly for the average investor. The furnishing of these services does not, of course, guarantee successful results. The analysis of issuers may include, among other things, historic and current financial condition, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing, and current and anticipated results or operations. Analysis of general business conditions and other factors may include anticipated changes in economic activity and interest rates, the availability of new investment opportunities, and the economic outlook for specific industries. While the Investment Adviser considers as one factor in its credit analysis the ratings assigned by the rating services, the Investment Adviser performs its own independent credit analysis of issuers and consequently, the Fund may invest, without limit, in unrated securities if such securities offer, in the opinion of the Investment Adviser, a relatively high yield without undue risk. As a result, the High Current Income Fund's ability to achieve its investment objective may depend to a greater extent on the Investment Adviser's own credit analysis than the Funds which invest in higher-rated securities. Although the High Current Income Fund will invest primarily in lower-rated securities, it will not invest in securities rated Ca or lower by Moody's and CC or lower by Standard & Poor's unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded to the particular securities is stronger than would otherwise be indicated by such low ratings. However, securities purchased by the Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgment of the Investment Adviser, it is advantageous to do so. When changing economic conditions and other factors cause the yield difference between lower-rated and higher-rated securities to narrow, the Fund may purchase higher-rated securities if the Investment Adviser believes that the risk of loss of income and principal may be substantially reduced with only a relatively small reduction in yield. The securities in the Fund will be varied from time to time depending upon the judgment of management as to prevailing conditions in the economy and the securities markets and the prospects for interest rate changes among different categories of fixed-income securities. It is anticipated that under normal circumstances more than 90% of the Fund's assets will be invested in fixed-income securities, including convertible and non-convertible debt securities and preferred stock. Although it is expected that, in general, the Fund will not invest in common stocks, rights or other equity securities, it will acquire or hold such securities (if consistent with the objectives of the Fund) when such securities are acquired in unit offerings with fixed-income securities or in connection with an actual or proposed conversion or exchange of fixed-income securities. In addition, under unusual market or economic conditions, the High Current Income Fund for defensive purposes may invest up to 100% of its assets in U.S. government or government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The yield on such securities may be lower than the yield on lower-rated fixed-income securities. 19 The table below shows the average monthly dollar-weighted market value, by Standard & Poor's rating category, of the securities held by the Fund during the year ended December 31, 1994.
% MARKET VALUE % NET CORPORATE RATING* ASSETS BONDS - --------------------------------------------- ----------- ------------- AAA.......................................... .15% 0.14% AA........................................... .20 0.20 A............................................ 5.78 5.79 BBB.......................................... .38 0.38 BB........................................... 24.16 24.31 B............................................ 56.20 56.55 CCC.......................................... 3.81 3.85 CC........................................... 0.04 0.04 C............................................ 0.05 0.05 D............................................ 0.03 0.03 NR........................................... 8.62 8.66 ------------- 100.00%
- --------------- *A description of corporate bond ratings of Standard & Poor's is set forth in Appendix A to the Prospectus. QUALITY EQUITY FUND The Quality Equity Fund seeks to achieve the highest total investment return, or the aggregate of income and capital value changes, consistent with prudent risk. To do this, management will shift the emphasis among investment alternatives for capital growth, capital stability and income as market trends change. This 'fully managed' investment policy distinguishes the Fund from investment companies which seek either capital growth or income. The Fund's investment philosophy is based on management's belief that the structure of the United States economy and its securities markets will undergo continuous change. The flexibility of the Fund is designed to reduce overall exposure to risk by achieving below-average volatility in a falling market and above-average volatility in a rising market. The Quality Equity Fund's fully managed investment approach will make use of equity, debt and convertible securities. The majority of the Fund's equity portfolio will be in the common stocks of large-capitalization, 'quality' companies. For this purpose, 'large capitalization' companies are considered to be those companies with market capitalizations in excess of $500 million. Management of the Company believes that a quality company is one which conforms closely to the following criteria: good financial resources, strong balance sheet, satisfactory rate of return on capital, good industry position and superior management skills. The earnings of quality companies generally tend to grow consistently. Whenever market or financial conditions warrant, the Fund may, in order to reduce risk and achieve the highest total investment return, invest in non-convertible, long-term debt securities, including 'deep discount' corporate debt securities of investment grade or issues of fixed-income convertible securities which give the owner the option of a later exchange for common stock. Management expects that over longer periods the larger portion of the Fund's portfolio will consist of equity securities. During defensive periods, the Fund may invest in U.S. government and government agency, money-market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash. 20 EQUITY GROWTH FUND The investment objective of the Equity Growth Fund is to seek long-term growth of capital by investing in a diversified portfolio of securities, primarily common stocks, of relatively small companies that management of the Company believes have special investment value and emerging growth companies regardless of size. Companies are selected by management on the basis of their long-term potential for expanding their size and profitability or for gaining increased market recognition for their securities. Current income is not a factor in the selection of securities. The Fund is intended to provide an opportunity for Contract Owners who are not ordinarily in a position to perform the specialized type of research or analysis of small and emerging growth companies. Management seeks to identify those small emerging growth companies which can show significant and sustained increases in earnings over an extended period of time and are in sound financial condition. Management believes that, while these companies present above-average risks, properly selected companies of this type also have the potential to increase their earnings at a rate substantially in excess of the general growth of the economy. The Fund attempts to achieve its objective by focusing on the long-range view of a company's prospects through a fundamental analysis of its management, financial structure, product development, marketing ability and other relevant factors. Full development of these companies frequently takes time and, for this reason, the Fund should be considered as a long-term investment and not as a vehicle for seeking short-term profits. Small companies. Management seeks small companies that offer special investment value in terms of their product or service, research capability, or other unique attributes, and are relatively undervalued in the marketplace when compared with similar, but larger, enterprises. These companies typically have total market capitalizations in the $50-$300 million range and generally are little known to most individual investors, although some may be dominant in their respective industries. Underlying this strategy is management's belief that relatively small companies will continue to have the opportunity to develop into significant business enterprises. Some such companies may be in a relatively early stage of development; others may manufacture a new product or perform a new service. Such companies may not be counted upon to develop into major industrial companies, but management believes that eventual recognition of their special value characteristics by the investment community can provide above-average long-term growth to the portfolio. Emerging growth companies. In selecting investments for the Equity Growth Fund, management also seeks emerging growth companies that either occupy a dominant position in an emerging industry or subindustry or have a significant and growing market share in a large, fragmented industry. Management believes that capable and flexible management is one of the most important criteria of emerging growth companies and that such companies should employ sound financial and accounting policies and also demonstrate effective research, successful product development and marketing, efficient service and pricing flexibility. Emphasis is given to companies with rapid historical growth rates, above-average returns on equity and strong current balance sheets, all of which should enable the company to finance its continued growth. Management of the Company also analyzes and weighs relevant factors beyond the company itself, such as the level of competition in the industry, the extent of governmental regulation, the nature of labor conditions and other related matters. The Equity Growth Fund emphasizes investments in companies that do most of their business in the United States and therefore are free of the currency exchange problems, foreign tax considerations and potential political and economic upheavals that many multinational corporations face. Moreover, the size and kinds of markets that they serve make these companies less susceptible than larger companies to intervention from the federal government by means of price controls, regulations or litigation. While the process of selection and continuous supervision by management does not, of course, guarantee successful investment results, it does provide ingredients not available to the average individual due to the time 21 and cost involved. Careful initial selection is particularly important in this area as many new enterprises have promise but lack certain of the ingredients necessary to prosper. It should be apparent that an investment in a fund such as the Equity Growth Fund involves greater risk than is customarily associated with more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent upon a limited management group. Because of these factors, management of the Company believes that shares in the Equity Growth Fund are suitable for Contract Owners who are in a financial position to assume above-average investment risk in search of above-average long-term reward. As indicated, the Fund is designed for Contract Owners whose investment objective is growth rather than income. It is definitely not intended for exclusive funding of Contracts but is designed for Contract Owners who are prepared to experience above-average fluctuations in net asset value. The securities in which the Equity Growth Fund invests will often be traded only in the over-the-counter market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by the Fund or portfolio securities to meet redemptions or otherwise may require the Fund to sell these securities at a discount from market prices or during periods when in management's judgment such disposition is not desirable or to make many small sales over a lengthy period of time. The investment emphasis of the Equity Growth Fund is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks and rights to subscribe for common stock, and the Fund will maintain at least 80% of its net assets invested in equity securities of small or emerging growth companies except during defensive periods. The Fund reserves the right as a defensive measure and to provide for redemptions to hold other types of securities, including non-convertible preferred stocks and debt securities, U.S. government and government agency securities, money market securities or other fixed-income Securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. FLEXIBLE STRATEGY FUND The investment objective of the Flexible Strategy Fund is to seek a high total investment return consistent with prudent risk. Total investment return consists of interest, dividends, discount accruals and capital changes, including changes in the value of non-dollar denominated securities and other assets and liabilities resulting from currency fluctuations. This investment objective is a fundamental policy and may not be changed without a vote of the majority of outstanding shares of the Fund. The Fund will seek to achieve its objective by utilizing a flexible investment policy which permits the Fund to vary its investment emphasis among equity securities, intermediate and long-term debt obligations and money market securities and, to a lesser extent, between the securities of domestic and foreign issuers. While the Fund will generally emphasize investment in common stocks of larger-capitalization issuers and in investment-grade debt obligations, the Fund may from time to time invest a portion of its assets in small company and emerging growth company stocks when consistent with the Fund's objective. The Fund may also seek to enhance the return on its common stock portfolio by writing covered call options listed on United States securities exchanges. The Fund's success in achieving its investment objective depends upon management's ability to assess the effect of economic and market trends on U.S. and foreign capital market and on different sectors of those markets. There can be no assurance that the Fund's investment objective will be achieved. As a matter of operating policy, this Fund may not invest more than 25% of its assets in the securities of foreign issuers. 22 Management will determine the composition of the Fund's portfolio based upon its assessment of economic and market trends and the anticipated relative total return available from investment in a particular type of security. Accordingly, at any given time, the Fund may be substantially invested in common stocks, bonds and notes or money market securities. Similarly, the portion of the Fund's assets which are invested in foreign securities will be varied, subject to the operating policy referred to above, in accordance with management's judgment as to the anticipated relative performance of foreign capital markets as compared to U.S. markets. Management will consider, among other factors, the condition and growth potential of the various economies and securities markets, currency and tax considerations and other pertinent financial, social, national and political factors. The Fund's investments in foreign securities may include American Depository Receipts and European Depository Receipts, and the Fund may invest in non-dollar denominated securities. For a discussion of the risks of investing in foreign securities, see 'Other Portfolio Strategies--Foreign Securities,' below. Because of the flexible investment policy of the Fund, portfolio turnover may be greater resulting in increased transaction costs to the Fund. NATURAL RESOURCES FOCUS FUND The investment objectives of the Natural Resources Focus Fund are to achieve long-term growth of capital and to protect the purchasing power of shareholders' capital by investing primarily in a portfolio of equity securities (e.g., common stocks and securities convertible into common stocks) of domestic and foreign companies with substantial natural resource assets. This investment objective is a fundamental policy and may not be changed without a vote of the majority of outstanding shares of the Fund. The Fund also may invest in debt, preferred or convertible securities, the value of which is related to the market value of some natural resource asset ('asset-based securities'). See 'Asset-Based Securities' below. Management of the Company will seek to identify companies or asset-based securities it believes are attractively priced relative to the intrinsic value of the underlying natural resource assets or are especially well positioned to benefit during particular portions of inflationary cycles. There can be no assurance the investment objectives of the Fund will be realized. IN SEEKING TO PROTECT THE PURCHASING POWER OF SHAREHOLDERS' CAPITAL, THE FUND HAS RESERVED THE RIGHT, WHEN MANAGEMENT OF THE COMPANY ANTICIPATES SIGNIFICANT ECONOMIC, POLITICAL OR FINANCIAL INSTABILITY, SUCH AS HIGH INFLATIONARY PRESSURES OR UPHEAVAL IN THE FOREIGN CURRENCY EXCHANGE MARKETS, TO INVEST A MAJORITY OF ITS ASSETS IN COMPANIES THAT EXPLORE FOR, EXTRACT, PROCESS OR DEAL IN GOLD OR IN ASSET-BASED SECURITIES INDEXED TO THE VALUE OF GOLD BULLION. Such a switch in investment strategies could require the Fund to liquidate portfolio securities and incur transaction costs. The Company has been advised by counsel that it is uncertain under the current federal tax law whether the Fund may concentrate its investments in gold and gold-related securities without adversely affecting the federal tax status of the Contracts. Accordingly, management of the Company has determined that the Fund will not concentrate its investments in such securities until counsel has advised the Company that such uncertainty has been resolved favorably. Management attempts to achieve the investment objectives of the Fund by seeking to identify securities of companies which, in its opinion, are undervalued relative to the value of natural resource holdings of such companies in light of current and anticipated economic or financial conditions. Natural resource assets are materials derived from natural sources which have economic value. Management will consider a company to have substantial natural resource assets when, in its opinion, the company's holdings of the assets are of such magnitude, when compared to the capitalization, revenues or operating profits of the company, that changes in the economic value of the assets will affect the market price of the equity securities of such company. Generally, a company has substantial natural resource assets when at least 50% of the non-current assets, capitalization, 23 gross revenues or operating profits of the company in the most recent or current fiscal year are involved in or result from directly or indirectly through subsidiaries, exploring, mining, refining, processing, fabricating, dealing in or owning natural resource assets. Examples of natural resource assets include precious metals (e.g., gold, silver and platinum), ferrous and nonferrous metals (e.g., iron, steel, aluminum and copper), strategic metals (e.g., uranium and titanium), hydrocarbons (e.g., coal, oil and natural gas), timber land, undeveloped real property and agricultural commodities. The Fund presently does not intend to invest directly in natural resource assets or contracts related thereto. Management of the Company believes that, based upon past performance, the securities of specific companies that hold different types of substantial natural resource assets may move relatively independently of one another during different stages of inflationary cycles due to different degrees of demand for, or market values of, their respective natural resource holdings during particular portions of such inflationary cycles. The Fund's fully-managed investment approach enables it to switch its emphasis among various industry groups depending upon management's outlook with respect to prevailing trends and developments. The Natural Resources Focus Fund may seek to hedge its portfolio against adverse market fluctuations by writing covered call options or purchasing put options on portfolio securities, writing call options or purchasing put options on stock indices, or by purchasing or selling stock index futures contracts and options thereon. The Fund may also seek to hedge its portfolio of non-dollar denominated securities and other assets or liabilities against adverse currency fluctuations by writing call options and purchasing put options on currency, by buying or selling futures contracts on currency and options thereon and by engaging in forward foreign exchange transactions. See 'Transactions in Options, Futures and Currency.' The Fund at all times, except during defensive periods, will maintain at least 65% of its total assets invested in companies with substantial natural resource assets or in asset-based securities. Current income from dividends and interest will not be a primary consideration in selecting securities. The Fund reserves the right as a temporary defensive measure and to provide for redemptions, to hold short-term U.S. Government and government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. Asset-Based Securities. The Fund may invest in debt securities, preferred stocks or convertible securities, the principal amount, redemption terms or conversion terms of which are related to the market price of some natural resource asset such as gold bullion. For the purposes of the Fund's investment policies, these securities are referred to as 'asset-based securities.' The Fund will purchase only asset-based securities which are rated, or are issued by issuers that have outstanding debt obligations rated, investment grade (that is AAA, AA, A or BBB by Standard & Poor's or Aaa, Aa, A or Baa by Moody's or commercial paper rated A-1 by Standard & Poor's or Prime-1 by Moody's) or of issuers that the Investment Adviser has determined to be of similar creditworthiness. If the asset-based security is backed by a bank letter of credit or other similar facility, the Investment Adviser may take such backing into account in determining the creditworthiness of the issuer. While the market prices for an asset-based security and the related natural resource asset generally are expected to move in the same direction, there may not be perfect correlation in the two price movements. Asset-based securities may not be secured by a security interest in or claim on the underlying natural resource asset. The asset-based securities in which the Fund may invest may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. As an example, assume gold is selling at a market price of $300 per ounce and an issuer sells a $1,000 face amount gold-related note with a seven-year maturity, payable at maturity at the greater of either $1,000 in cash or the then market price of three ounces of gold. If at maturity, the market price of gold is $400 per ounce, the amount payable on the note would be $1,200. Certain asset-based securities may be payable at maturity in cash at the stated principal amount or, at the option of the holder, directly in a stated amount of the 24 asset to which it is related. In such instance, because the Fund presently does not intend to invest directly in natural resource assets, the Fund would sell the asset-based security in the secondary market, to the extent one exists prior to maturity, if the value of the stated amount of the asset exceeds the stated principal amount, and thereby realize the appreciation in the underlying asset. Risk Factors. As indicated above, under certain circumstances, the Fund has reserved the right to invest a majority of its assets in gold-related companies or securities. Based on historic experience, during periods of economic or financial instability, the securities of such companies may be subject to extreme price fluctuations, reflecting the high volatility of gold prices during such periods. In addition, the instability of gold prices may result in volatile earnings of gold-related companies which, in turn, may affect adversely the financial condition of such companies. Gold mining companies also are subject to the risks generally associated with mining operations. The major producers of gold include the Republic of South Africa, the Confederation of Independent States ('CIS') (the former Soviet Union), the United States, Australia, Canada, the People's Republic of China and the Philippines. Sales of gold by the CIS and the People's Republic of China are largely unpredictable and often relate to political and economic considerations rather than to market forces. As a result of a change in policy adopted by the Board of Directors of the Company in April 1993, the Fund is permitted to invest in companies the assets of which are located primarily in the Republic of South Africa, which produces approximately 38% of the gold mined in non-Communist nations. Economic, social and political developments within the CIS, the People's Republic of China and South Africa may affect significantly gold production in those countries. See 'Other Portfolio Strategies--Foreign Securities' for special considerations in investments in foreign securities. The Company and Merrill Lynch Funds Distributor, Inc., the distributor of the Company's shares, reserve the right to suspend the sale of shares of the Natural Resources Focus Fund in response to conditions in the securities markets or otherwise. AMERICAN BALANCED FUND The investment objective of the American Balanced Fund is to seek a level of current income and a degree of stability of principal not normally available from an investment solely in equity securities and the opportunity for capital appreciation greater than is normally available from an investment solely in debt securities by investing in a balanced portfolio of fixed income and equity securities. This investment objective is a fundamental policy and may not be changed without a vote of the majority of the outstanding shares of the Fund. The Fund will seek current income by investing a portion of its assets in a portfolio of intermediate to long-term debt, convertible debt and money market securities. The Fund will seek capital appreciation primarily by investing a portion of its assets in equity securities, including preferred and convertible preferred stock. At all times the Fund will maintain at least 25% of its net assets in senior fixed income securities. As indicated under 'Investment Restrictions' on page 4 of the Statement of Additional Information, the Fund is not permitted to invest in securities of foreign issuers. There can be no assurance that the Fund's objective will be achieved. The Fund will normally seek to maintain the allocation of its assets between debt securities and equity securities at approximately equal percentages of the Fund's net asset value. However, the prices of debt and equity securities will not generally move in the same direction or to the same extent, and, consequently, the relative percentages of the Fund's debt and equity investments will vary. The Fund will seek to reduce such variations by investing its available cash in securities of the appropriate type. However, except as discussed below, the Fund is not obligated to sell portfolio securities, including money market securities, in order to reduce such discrepancies. 25 The Fund will normally limit its allocation of assets to equity securities to no more than 50% of its net assets. To the extent its equity position exceeds this limitation, because of changes in the value of portfolio securities or otherwise, the Fund will seek to reduce its equity position to less than 50% of net assets by selling such securities at such times and in such amounts as management of the Company deems appropriate in light of market conditions and other pertinent factors. See 'Dividends, Distributions and Taxes--Tax Treatment of the Company.' The Fund will generally emphasize investment in common stocks of larger-capitalization issuers and in investment-grade debt obligations. The Fund may also seek to enhance the return on its common stock portfolio by writing covered call options listed on United States securities exchanges. Under unusual market or economic conditions, the Fund for defensive purposes may invest up to 100% of its assets in short-term U.S. government or government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash. GLOBAL STRATEGY FOCUS FUND The investment objective of the Global Strategy Focus Fund is to seek high total investment return by investing primarily in a portfolio of equity and fixed income securities, including convertible securities, of U.S. and foreign issuers. Total investment return consists of interest, dividends, discount accruals and capital changes, including changes in the value of non-dollar denominated securities and other assets and liabilities resulting from currency fluctuations. Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. The Global Strategy Focus Fund seeks to achieve its objective by investing primarily in the securities of issuers located in the United States, Canada, Western Europe and the Far East. There are no prescribed limits on the geographical allocation of the Fund among these regions. Such allocation will be made primarily on the basis of the anticipated total return from investments in the securities of issuers wherever located, considering such factors as the condition and growth potential of the various economies and securities markets and the issuers domiciled therein, anticipated movements in interest rates in the various capital markets and in the value of foreign currencies relative to the U.S. dollar, tax considerations and economic, social, financial, national and political factors which may affect the climate for investing within such securities markets. When, in the judgment of the Investment Adviser, economic or market conditions warrant, the Fund reserves the right to concentrate its investments in one or more capital markets, including the United States. For additional information concerning the risks of investing in foreign securities, see 'Other Portfolio Strategies--Foreign Securities.' The equity and convertible preferred securities in which the Global Strategy Focus Fund may invest are primarily securities issued by quality companies. Generally, the characteristics of such companies include a strong balance sheet, good financial resources, a satisfactory rate of return on capital, a good industry position and superior management. The corporate debt securities, including convertible debt securities, in which the Fund may invest will be primarily those rated BBB or better by Standard and Poor's or Baa or better by Moody's or of comparable quality. The Fund may also invest in debt obligations issued or guaranteed by sovereign governments, political subdivisions thereof (including states, provinces and municipalities) or their agencies or instrumentalities or issued or guaranteed by international organizations designated or supported by governmental entities to promote economic reconstruction or development ('supranational entities') such as the International Bank for Reconstruction and Development (the 'World Bank') and the European Coal and Steel Community. Investments in securities of supranational entities are subject to the risk that member governments will fail to make required capital contributions and that a supranational entity will thus be unable to meet its obligations. 26 When market or financial conditions warrant, the Global Strategy Focus Fund may invest as a temporary defensive measure up to 100% of its assets in U.S. government or government agency securities issued or guaranteed by the United States Government or its agencies or instrumentalities, money market securities or other fixed income securities deemed by the Investment Adviser to be consistent with a defensive posture, or may hold its assets in cash. The Global Strategy Focus Fund may write covered call options and purchase put options on its portfolio securities for the purpose of generating incremental income or hedging its securities against market risk. The Fund may seek to hedge its non-dollar denominated securities and other assets and liabilities against adverse currency fluctuations by writing call options and purchasing put options on currency, purchasing or selling futures contracts and futures contract options on currency and entering into forward foreign exchange transactions in currency. See 'Transactions in Options, Futures and Currency.' BASIC VALUE FOCUS FUND The investment objective of the Basic Value Focus Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price-earnings ratio. The investment policy of the Basic Value Focus Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relatively high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price-earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated, events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above-average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Basic Value Focus Fund's portfolio generally will have significant representation in this secondary segment of the market. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Basic Value Focus Fund also may invest in preferred stocks and non-convertible debt securities and utilize covered call options with respect to portfolio securities as described below and in the Statement of Additional Information. It reserves the right as a defensive measure to hold other types of securities, including U.S. government and government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may 27 invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. WORLD INCOME FOCUS FUND The investment objective of the World Income Focus Fund is to seek to provide shareholders with high current income by investing in a global portfolio of fixed income securities denominated in various currencies, including multi-national currency units. The Fund may invest in United States and foreign government and corporate fixed income securities, including high yield, high risk securities (commonly known as 'junk bonds'). The Fund will, under normal conditions, invest at least 90% of its total assets in such fixed income securities and may invest up to 100% of its total assets in lower-rated, high yield, high risk securities. In pursuing its investment objective, the Fund will allocate its investments among different types of fixed income securities denominated in various currencies based upon the Investment Adviser's analysis of the yield, maturity and currency considerations affecting such securities. Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The Fund may purchase fixed income securities issued by United States or foreign corporations or financial institutions, including debt securities of all types and maturities, convertible securities and preferred stocks. The Fund also may purchase securities issued or guaranteed by United States or foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ('governmental entities') or issued or guaranteed by international organizations designated or supported by multiple governmental entities to promote economic reconstruction or development ('supranational entities'). International Investing. The Fund may invest in fixed income securities denominated in any currency or multinational currency unit. An illustration of a multinational currency unit is the European Currency Unit ('ECU') which is a 'basket' consisting of specified amounts of the currencies of certain of the twelve member states of the European Community, a Western European economic cooperative association including France, Germany, the Netherlands and the United Kingdom. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. The Investment Adviser does not believe that such adjustments will adversely affect holders of ECU-denominated obligations or the marketability of such securities. European supranational entities (described further below), in particular, issue ECU-denominated obligations. The Fund may invest in securities denominated in the currency of one nation although issued by a governmental entity, corporation or financial institution of another nation. For example, the Fund may invest in a British pound sterling-denominated obligation issued by a United States corporation. Such investments involve credit risks associated with the issuer and currency risks associated with the currency in which the obligation is denominated. It is anticipated that under current conditions the Fund will invest primarily in marketable securities denominated in the currencies of the United States, Canada, Western European nations, New Zealand and Australia, as well as in ECUs. Further, it is anticipated that such securities will be issued primarily by entities located in such countries and by supranational entities. Under normal conditions, the Fund's investments will be denominated in at least three currencies or multinational currency units. Under certain adverse conditions, the Fund may restrict the financial markets or currencies in which its assets will be invested. The Fund presently intends to invest its assets solely in the United States financial markets or United States dollar-denominated obligations only for temporary defensive purposes. United States Government securities include: (i) U.S. Treasury obligations (bills, notes and bonds), which differ in their interest rates, maturities and times of issuance, all of which are backed by the full faith and credit of the United States; and 28 (ii) obligations issued or guaranteed by U.S. Government agencies or instrumentalities, including government guaranteed mortgage-related or asset-backed securities, some of which are backed by the full faith and credit of the U.S. Treasury (e.g., direct pass-through certificates of the Government National Mortgage Association), some of which are supported by the right of the issuer to borrow from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and some of which are backed only by the credit of the issuer itself (e.g., obligations of the Student Loan Marketing Association). In the case of mortgage-related securities, prepayments occur when the holder of an individual mortgage prepays the remaining principal before the mortgage's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, a mortgage-related security is often subject to more rapid prepayment of principal than its stated maturity would indicate. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the realized yield or average life of a particular issue of the mortgage-related securities. (Asset-backed securities, other than those backed by home equity loans, generally do not prepay in response to changes in interest rates but may be subject to prepayment in response to other factors.) Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments adversely impact yields for securities purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for securities purchased at a discount. The Fund may purchase mortgage-related (and asset-backed) securities at a premium or at a discount. The obligations of foreign governmental entities have various kinds of government support and include obligations issued or guaranteed by foreign governmental entities with taxing power. These obligations may or may not be supported by the full faith and credit of a foreign government. The Fund will invest in foreign government securities of issuers considered stable by the Fund's Investment Adviser. The Investment Adviser does not believe that the credit risk inherent in the obligations of stable foreign governments is significantly greater than that of U.S. Government securities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The government members, or 'stockholders,' usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. Allocation of Investments and Risks of High Yield, High Risk Securities. In seeking high current income, the Fund will allocate its investments among fixed income securities of various types, maturities and issuers in the various global markets based upon the analysis of the Investment Adviser of yield and price differentials, currency considerations and general market and economic conditions. In making such allocations, the Investment Adviser will assess the overall quality of the portfolio considering in particular the extent to which the differences in yield justify investments in higher risk securities. In its evaluations, the Investment Adviser will utilize its internal financial, economic and credit analysis resources as well as information in this regard obtained from other sources. The Fund has established no rating criteria for the fixed income securities in which it may invest, and a substantial portion of the securities in the Fund's portfolio may be securities rated in the medium to low rating categories of nationally recognized statistical rating organizations such as Moody's or Standard & Poor's, or in unrated securities of comparable quality. See Appendix A to this Prospectus for a description of these rating categories. See also 'Risks of High Yield Securities' below. 29 The average maturity of the World Income Focus Fund's portfolio securities will vary based upon the Investment Adviser's assessment of economic and market conditions. As with all fixed income securities, changes in market yields will affect the Fund's asset value as the prices of portfolio securities generally increase when interest rates decline and decrease when interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. The Fund does not expect the average maturity of its portfolio to exceed ten years. The table below shows the average monthly dollar-weighted market value, by Standard & Poor's rating category, of the securities held by the Fund during the year ended December 31, 1994.
% MARKET VALUE % NET CORPORATE RATING* ASSETS BONDS - --------------------------------------------- ----------- ------------- A............................................ 0.35% 0.44% AA........................................... 1.60 2.03 BBB.......................................... 0.04 0.09 BB........................................... 17.88 22.53 B............................................ 38.59 48.54 CCC.......................................... 3.15 3.83 NR........................................... 12.06 15.19 NA........................................... 5.42 6.85 UR........................................... 0.28 0.50 ------------- 100.00%
- --------------- *A description of corporate bond ratings of Standard & Poor's is set forth in Appendix A to the Prospectus. GLOBAL UTILITY FOCUS FUND The investment objective of the Global Utility Focus Fund is to seek both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk, as described below under 'Transactions in Options, Futures and Currency.' Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. The Global Utility Focus Fund at all times, except during temporary defensive periods, will maintain at least 65% of its total assets invested in equity and debt securities issued by domestic and foreign companies in the utilities industries. The Fund reserves the right to hold, as a tempororary defensive measure or as a reserve for redemptions, short-term U.S. Government securities, money market securities, including repurchase agreements, or cash in such proportions as, in the opinion of the Investment Adviser, prevailing market or economic conditions warrant. Except during temporary defensive periods, such securities or cash will not exceed 20% of its total assets. Under normal circumstances, the Fund will invest at least 65% of its total assets in issuers domiciled in at least three countries, one of which may be the United States, although the Investment Adviser expects the Fund's portfolio to be more geographically diversified. Under normal conditions, it is anticipated that the percentage of assets invested in U.S. securities will be higher than that invested in securities of any other single country. It is possible that at times the Fund may have 65% or more of its total assets invested in foreign securities. 30 The Fund will invest in common stocks (including preferred or debt securities convertible into common stocks), preferred stocks and debt securites. The relative weightings among common stocks, debt securities and preferred stocks will vary from time to time based upon the Investment Adviser's judgement of the extent to which investments in each category will contribute to meeting the Fund's investment objective. Fixed income securities in which the Fund will invest generally will be limited to those rated investment grade, that is, rated in one of the four highest rating categories by Standard & Poor's or Moody's, or deemed to be of equivalent quality (i.e., securities rated at least BBB by Standard & Poor's or Baa by Moody's) in the judgment of the Investment Adviser. Securities rated Baa by Moody's are described by it as having speculative characteristics and, according to Standard & Poor's, fixed income securities rated BBB normally exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal. The Fund's commercial paper investments at the time of purchase will be rated 'A-1' or 'A-2' by Standard & Poor's or 'Prime-1' or 'Prime-2' by Moody's or, if not rated, will be of comparable quality as determined by the Investment Adviser. The Fund may also invest up to 5% of its total assets at the time of purchase in fixed income securities having a minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The Fund may, but need not, dispose of any security if it is subsequently downgraded. For a description of ratings of debt securities, see Appendix A to this Prospectus. The Fund may invest in the securities of foreign issuers in the form of American Depository Receipts ('ADRs'), European Depository Receipts ('EDRs') or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designated for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in ADRs and EDRs through both sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some or all of the depository's transaction fees, whereas in an unsponsored arrangement the foreign issuer assumes no obligations and the depository's transaction fees are paid by the ADR or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs or EDRs have been issued are not necessarily obligated to disclose material information in the markets in which the unsponsored ADRs or EDRs are traded and, therefore, there may not be a correlation between such information and the market value of such securities. A change in prevailing interest rates is likely to affect the Fund's net asset value because prices of debt and equity securities of utility companies tend to increase when interest rates decline and decrease when interest rates rise. Utility Industries--Description and Risks. Under normal circumstances, the Fund will invest at least 65% of its total assets in common stocks (including preferred or debt securities convertible into common stocks), debt securities and preferred stocks of domestic and/or foreign companies in the utility industries. To meet its objective of current income, the Fund may invest in domestic utility companies that pay higher than average dividends, but have a lesser potential for capital appreciation. The average dividend yields of common stocks issued by domestic utility companies historically have significantly exceeded those of industrial companies' common stocks, while the prices of domestic utility stocks have tended to be less volatile than stocks of industrial companies. Total returns on domestic utility stocks have also generally exceeded those on stocks of industrial companies. Debt securities of domestic utility companies historically also have yielded slightly more than similar debt securities of industrial companies, and have had higher total returns. For certain periods, the total return of 31 utility companies' securities has underperformed that of industrial companies' securities. There can be no assurance that positive relative returns on utility securities will occur in the future. The Investment Adviser believes that the average dividend yields of common stocks issued by foreign utility companies have also historically exceeded those of foreign industrial companies' common stocks. To meet its objective of capital appreciation, the Fund may invest in foreign utility companies which pay lower than average dividends, but have a greater potential for capital appreciation. The utility companies in which the Fund will invest include companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Risks that are intrinsic to the utility industries include difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations which may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availabilty of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, the effects of energy conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences between the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common stocks. Additionally, existing and possible future regulatory legislation may make it even more difficult for these utilities to obtain adequate relief. Certain of the issuers of securities of the portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies, and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Utility companies in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future. The nature of regulation of the utility industries is evolving both in the United States and in foreign countries. Changes in regulation in the United States increasingly allow utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The Investment Adviser believes that the emergence of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated rates of return, while others may be forced to defend their core businesses from increased competition and may be less profitable. The Investment 32 Adviser seeks to take advantage of favorable investment opportunities that are expected to arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the future. Foreign utility companies are also subject to regulation, although such regulations may or may not be comparable to that in the United States. Foreign utility companies may be more heavily regulated by their respective governments than utilities in the United States and, as in the U.S., generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels that cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation in the United States. The Global Utility Focus Fund's investment policies are designed to enable it to capitalize on evolving investment opportunities throughout the world. For example, the rapid growth of certain foreign economies will necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently are government-owned, thereby limiting current investment opportunities for the Fund, the Investment Adviser believes that, in order to attract significant capital for growth, foreign governments are likely to seek global investors through the privatization of their utility industries. Privatization, which refers to the trend toward investor ownership of assets rather than government ownership, is expected to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that such favorable developments will occur or that investment opportunities in foreign markets for the Fund will increase. The revenues of domestic and foreign utility companies generally reflect the economic growth and developments in the geographic areas in which they do business. The Investment Adviser will take into account anticipated economic growth rates and other economic developments when selecting securities of utility companies. The principal sectors of the global utility industries are discussed below. Electric. The electric utility industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. Domestic electric utility companies, in general, recently have been favorably affected by lower fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies recently have generated cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory climate. As interest rates have declined, many utilities have refinanced high cost debt and in doing so have improved their fixed charges coverage. Regulators, however, have lowered allowed rates of return as interest rates have declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In the United States, the construction and operation of nuclear power facilities is subject to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies having comparable jurisdiction. Increased scrutiny might result in higher operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning of such plants. 33 In October 1993, S&P stiffened its debt-ratings formula for the electric utility industry, stating that the industry is in long-term decline. In addition, Moody's stated that it expected a drop in the next three years in its average credit ratings for the industry. Reasons set forth for these outlooks included slowing demand and increasing cost pressures as a result of competition from rival providers. Telecommunications. The telephone industry is large and highly concentrated. Companies that distribute telephone services and provide access to the telephone networks comprise the greatest portion of this segment. Telephone companies in the United States are still experiencing the effects of the breakup of American Telephone & Telegraph Company, which occurred in 1984. Since 1984, companies engaged in telephone communication services have expanded their non-regulated activities into other businesses, including cellular telephone services, data processing, equipment retailing, computer software and hardware services, and financial services. This expansion has provided significant opportunities for certain telephone companies to increase their earnings and dividends at faster rates than had been allowed in traditional regulated businesses. Increasing competition, technological innovations and other structural changes, however, could adversely affect the profitability of such utilities. Technological breakthroughs and the merger of telecommunications with video and entertainment is now associated with the expansion of the role of cable companies as providers of utility services in the telecommunications industry and the competitive response of traditional telephone companies. Given mergers and certain marketing tests currently underway, it is likely that both traditional telephone companies and cable companies will soon provide a greatly expanded range of utility services, including two-way video and informational services. Gas. Gas transmission companies and gas distribution companies are also undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decades, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. In the opinion of the Investment Adviser, however, environmental considerations could improve the gas industry outlook in the future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal. Water. Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world, the industry is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per capita volume growth. In the opinion of the Investment Adviser, there may be opportunities for certain companies to acquire other water utility companies and for foreign acquisition of domestic companies. The Investment Adviser believes that favorable investment opportunities may result from consolidation of this segment. There can be no assurance that the positive developments noted above, including those relating to privatization and changing regulation, will occur or that risk factors other than those noted above will not develop in the future. Investment Outside the Utility Industries. The Global Utility Focus Fund is permitted to invest up to 35% of its assets in securities of issuers that are outside the utility industries. Such investments may include common stocks, debt securities or preferred stocks and will be selected to meet the Fund's investment objective of both capital appreciation and current income. These securities may be issued by either U.S. or non-U.S. companies. Some of these issuers may be in industries related to utility industries and, therefore, may be subject to similar 34 risks. Securities that are issued by foreign companies or are denominated in foreign currencies are subject to the risks outlined above. The Global Utility Focus Fund is also permitted to invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ('U.S. Government Securities'). Such investments may be backed by the 'full faith and credit' of the United States, including U.S. Treasury bills, notes and bonds as well as certain agency securities and mortgage-backed securities issued by the Government National Mortgage Association (GNMA). The guarantees on these securities do not extend to the securities' yield or value or to the yield or value of the Fund's shares. Other investments in agency securities are not necessarily backed by the 'full faith and credit' of the United States, such as certain securities issued by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing Association and the Farm Credit Bank. The Global Utility Focus Fund may invest in securities issued or guaranteed by foreign governments. Such securities are typically denominated in foreign currencies and are subject to the currency fluctuation and other risks of foreign securities investments. The foreign government securities in which the Fund intends to invest generally will consist of obligations supported by national, state or local governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, including international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Investment Bank, the Asian Development Bank and the Inter-American Development Bank. Foreign government securities also include debt securities of 'quasi-governmental agencies' and debt securities denominated in multinational currency units. An example of a multinational currency unit is the European Currency Unit. A European Currency Unit represents specified amounts of the currencies of certain of the twelve member states of the European Economic Community. Debt securities of quasi-governmental agencies are issued by entities owned by either a national or local government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. Foreign government securities also include mortgage-related securities issued or guaranteed by national or local governmental instrumentalities including quasi-governmental agencies. Foreign government securities will not be considered government securities for purposes of determining the Fund's compliance with diversification and concentration policies. INTERNATIONAL EQUITY FOCUS FUND The investment objective of the International Equity Focus Fund is to seek capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of issuers located in countries other than the United States. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund is designed for investors seeking to complement their U.S. 35 holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The International Equity Focus Fund will invest in an international portfolio of securities of foreign companies located thoughout the world. While there are no prescribed limits on the geographic allocation of the Fund's investments, management of the Fund anticipates that a substantial portion of its assets will be invested in the developed countries of Europe and the Far East. However, for the reasons stated below, management of the Fund will give special attention to investment opportunities in the developing countries of the world, including, but not limited to Latin America, the Far East and Eastern Europe. It is anticipated that a significant portion of the Fund's assets may be invested in such developing countries. The allocation of the Fund's assets among the various foreign securities markets will be determined by the Investment Adviser based primarily on its assessment of the relative condition and growth potential of the various economies and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. Within such allocations, the Investment Adviser will seek to identify equity investments in each market which are expected to provide a total return which equals or exceeds the return of such market as a whole. A significant portion of the Fund's assets may be invested in developing countries. This allocation of the Fund's assets reflects the belief that attractive investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain developing countries with smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called 'emerging' countries (such as Malaysia, Mexico and Thailand), which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Because of the general illiquidity of the capital markets in certain developing countries, the Fund may invest in a relatively small number of leading or relatively actively traded companies in such countries' capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the countries' capital markets as a whole. While the Fund will primarily emphasize investments in common stock, the Fund may also invest in preferred stocks and convertible debt securities. The Fund reserves the right, as a temporary defensive measure and to provide for redemptions, to hold cash or cash equivalents in U.S. dollars or foreign currencies and short-term securities including money market securities. Under certain adverse investment conditions, the Fund may restrict the markets in which its assets will be invested and may increase the proportion of assets invested in temporary defensive obligations of U.S. issuers. Under normal conditions, at least 65% of the Fund's total assets will be invested in the securities of issuers from at least three different foreign countries. Investments made for defensive purposes will be maintained only during periods in which the Investment Adviser determines that economic or financial conditions are adverse for holding or being fully invested in equity securities of foreign issuers. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Recipts (GDRs) or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. GDRs are receipts issued 36 throughout the world which evidence a similar ownership arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradeable both in the U.S. and Europe and are designed for use throughout the world. DEVELOPING CAPITAL MARKETS FOCUS FUND The investment objective of the Developing Capital Markets Focus Fund is to seek long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. For purposes of its investment objective, the Fund considers countries having smaller capital markets to be all countries other than the four countries having the largest equity market capitalizations. Currently, these four countries are Japan, the United Kingdom, the United States and Germany. At March 31, 1995, those countries' equity market capitalizations totalled approximately 78% of the world's equity market capitalization according to data provided by Morgan Stanley Capital International. The Fund will at all times, except during defensive periods, maintain investments in at least three countries having smaller capital markets. The Fund seeks to benefit from economic and other developments in smaller capital markets. The investment objective of the Fund reflects the belief that investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain countries having smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called 'emerging' countries (such as Malaysia, Mexico and Thailand) which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Other countries (such as France, the Netherlands and Spain), although having relatively mature smaller capital markets, may also be in a position to benefit from local or international developments encouraging greater market orientation and diminishing governmental intervention in economic affairs. Many investors, particularly individuals, lack the information, capability or inclination to invest in countries having smaller capital markets. It also may not be permissible for such investors to invest directly in certain such markets. Unlike many intermediary investment vehicles, such as closed-end investment companies that invest in a single country, the Fund intends to diversify investment risk among the capital markets of a number of countries. The Fund will not necessarily seek to diversify investments on a geographical basis or on the basis of the level of economic development of any particular country. 37 In its investment decision-making, the Investment Adviser will emphasize the allocation of assets among certain countries' capital markets, rather than the selection of particular industries or issuers. Because of the general illiquidity of the capital markets in some countries, the Fund may invest in a relatively small number of leading or actively traded companies in a country's capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the country's capital markets as a whole. The Fund also may invest in debt securities of issuers in countries having smaller capital markets. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. See 'Risks of High Yield Securities' below. Such income can be used, however, to offset the operating expenses of the Fund. The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ('governmental entities'), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ('supranational entities'), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the 'World Bank'), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or 'stockholders,' usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgment, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign Securities' and 'Risks of High Yield Securities' below. For purposes of the Fund's investment objective, an issuer ordinarily will be considered to be located in the country where the primary trading market of its securities is located. The Fund, however, may consider a company to be located in countries having smaller capital markets, without reference to its domicile or to the primary trading market of its securities, when at least 50% of its non-current assets, capitalization, gross revenues or profits in any one of the two most recent fiscal years represents (directly or indirectly through subsidiaries) assets or activities located in such countries. The Fund also may consider closed-end investment companies to be located in the country or countries in which they primarily make their portfolio investments. 38 Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital markets. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in countries having smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States, and therefore, there may not be a correlation between such information and the market value of such ADRs. INTERNATIONAL BOND FUND The investment objective of the International Bond Fund is to seek a high total investment return by investing in an international portfolio of non-U.S. debt instruments denominated in various currencies and multinational currency units. Total investment return consists of interest, dividends, discount accruals and capital changes, including changes in the value of non-dollar denominated securities and other assets and liabilities resulting from currency fluctuations. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. Under normal circumstances, the Fund will invest at least 65% of its assets in non-U.S. debt instruments. The Fund may seek to hedge against interest rate and currency risks through the use of option, futures and currency transactions. Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a vehicle for diversification and not as a balanced investment program. The Fund may purchase debt obligations issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ('governmental entities'), or issued or guaranteed by international organizations designated or supported by multiple governmental entities to promote economic reconstruction or development ('supranational entities') such as the International Bank for Reconstruction and Development (the 'World Bank') and the European Coal and Steel Community, or issued by foreign corporations or financial institutions. With respect to the creditworthiness of the Fund's portfolio securities, under normal conditions all of the securities owned by the Fund will be obligations which have a credit rating of A or better by S&P or by Moody's or commercial paper rated A-1 by S&P or Prime-1 by Moody's or obligations that the Fund's Investment Adviser has determined to be of similar creditworthiness. The Fund's Investment Adviser may determine that a non-dollar 39 denominated obligation of a foreign government is of similar creditworthiness notwithstanding S&P's or Moody's less favorable rating of a dollar denominated obligation of the same issuer, provided that the Investment Adviser believes that such dollar denominated obligation is assigned a lower rating because it is denominated in a currency other than the foreign government's own currency. In evaluating obligations, the Investment Adviser will utilize its internal credit analysis resources as well as financial and economic information obtained from other sources. With respect to foreign corporate issuers, the Investment Adviser will consider the financial condition of the issuer and market and economic conditions relevant to its operations. In terms of foreign governmental obligations, the Investment Adviser will review the financial position of the issuer and political and economic conditions in the country. Investment in securities of supranational entities is subject to the additional risk to be considered by the Investment Adviser that member governments will fail to make required capital contributions and that a supranational entity will thus be unable to meet its obligations. The Fund's fully managed approach enables it to seek high total investment return by investing in debt instruments denominated in various currencies and currency units on the basis of the potential capital appreciation of such instruments in U.S. dollars and the rates of income paid on such instruments. As a general matter, in evaluating investments, the Fund will consider, among other factors, the relative levels of interest rates prevailing in various countries, the potential appreciation of such investments in their denominated currencies and, for debt instruments not denominated in U.S. dollars, the potential movement in the value of such currencies compared to the U.S. dollar. In seeking capital appreciation, the Fund may invest in relatively low-yielding instruments in expectation of favorable currency fluctuations or interest rate movements, thereby potentially reducing the Fund's current yield. In seeking income, the Fund may invest in short-term instruments with relatively high yields (as compared to other debt securities) meeting the Fund's investment criteria, notwithstanding that the Fund may not anticipate that such instruments will experience substantial capital appreciation. The average maturity of the Fund's portfolio securities will vary based upon the Investment Adviser's assessment of economic and market conditions. As with all debt securities, changes in market yields will affect the Fund's asset value as the prices of portfolio securities generally increase when interest rates decline and decrease when interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. The Fund does not expect the average maturity of its portfolio to exceed ten years. The Fund may invest in debt instruments denominated in any currency or multinational currency unit. An illustration of a multinational currency unit is the European Currency Unit ('ECU') which is a 'basket' consisting of specified amounts of the currencies of certain of the twelve member states of the European Community, a Western European economic cooperative association including France, Germany, the Netherlands and the United Kingdom. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. The Investment Adviser does not believe that such adjustments will adversely affect holders of ECU-denominated obligations or the marketability of such securities. European supranationals, in particular, issue ECU-denominated obligations. The Fund may invest in debt instruments denominated in the currency of one nation although issued by a governmental entity, corporation or financial institution of another nation. For example, the Fund may invest in a Japanese yen-denominated obligation issued by a German corporation. Such investments involve credit risks associated with the issuer and currency risks associated with the currency in which the obligation is denominated. It is anticipated that the Fund will invest primarily in marketable instruments denominated in the currencies of the U.S., Japan, Canada, Western European nations, New Zealand and Australia as well as in ECUs. Further, it is anticipated that such instruments will be issued primarily by entities located in such countries and by supranational entities. Under certain adverse conditions, the 40 Fund may restrict the financial markets or currencies in which its assets will be invested and may invest its assets solely in U.S. dollar-denominated obligations. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in foreign markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. INTERMEDIATE GOVERNMENT BOND The investment objective of the Intermediate Government Bond Fund is to seek the highest possible current income consistent with the protection of capital afforded by investing in intermediate-term debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities with a maximum maturity not to exceed fifteen years. Under normal circumstances, all or substantially all of the Fund's assets will be invested in such securities. Depending on market conditions, an average maturity of six to eight years is anticipated. When, in the opinion of management, prevailing market or economic conditions warrant, a portion of the Fund may be invested in money market securities or a liquid asset fund to effectively utilize cash reserves. Certain of the securities in which the Fund invests are supported by the full faith and credit of the U.S. Government, such as U.S. Treasury obligations. Other of the securities in which the Fund invests are not supported by the full faith and credit of the U.S. Government but are issued by U.S. Government agencies, instrumentalities or government-sponsored enterprises. Such securities are generally supported only by the credit of the agency, instrumentality or enterprise issuing the security and are generally considered to have a low principal risk. However, because of the longer-term maturities of the securities in which the Fund will invest, interest rate fluctuations may adversely affect the market value of such securities. As interest rates rise, the value of fixed-income securities will fall, adversely affecting the net asset value of the Fund. The U.S. Treasury Department has enacted regulations prescribing diversification standards to be met by investment company portfolios to which the investment base for any variable annuity policy has been allocated as a condition to such policies being treated as variable annuity contracts under the Internal Revenue Code of 1986, as amended (the 'Code'). The regulations limit the percentage of the total assets of any investment company portfolio which may be invested in securities of any five or fewer issuers, including a requirement that no more than 55% of a portfolio's total assets be invested in the securities of any one issuer. Direct obligations of the U.S. Treasury are not excepted from the diversification requirements. Each government agency or instrumentality issuing, guaranteeing or insuring securities will be treated as a separate issuer for purposes of the diversification standards. NON-DIVERSIFIED FUNDS The Natural Resources Focus, Global Strategy Focus, World Income Focus, Developing Capital Markets Focus and International Bond Funds are classified as non-diversified investment companies under the Investment Company Act of 1940. However, each Fund will have to limit its investments to the extent required by the diversification requirements applicable to regulated investment companies under the Internal Revenue Code. To qualify as a regulated investment company, a Fund, at the close of each fiscal quarter, may not have more than 25% of its total assets invested in the securities (except obligations of the U.S. Government, its agencies or instrumentalities) of any one issuer and with respect to 50% of its assets, (i) may not have more than 5% of its total assets invested in the securities of any one issuer and (ii) may not own more than 10% of the outstanding voting securities of any one issuer. 41 INVESTMENT RESTRICTIONS The Company has adopted a number of restrictions and policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of the Company's outstanding voting securities (including a majority of the shares of each Fund). Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. MONEY MARKET FUND PORTFOLIO RESTRICTIONS For purposes of the investment policies of the Domestic Money Market and Reserve Assets Funds, the Company defines short-term money market securities as securities having a maturity of no more than 762 days (25 months) in the case of U.S. Government and agency securities and no more than 397 days (13 months) in the case of all other securities. Management of the Company expects that substantially all the assets of the Domestic Money Market and Reserve Assets Funds will be invested in securities maturing in less than one year, but at times some portion may have maturities of up to 25 months. For these purposes, the maturity of a variable rate security is deemed to be the next coupon date on which the interest rate is adjusted. The dollar-weighted average maturity of each Fund's portfolio assets will not exceed 90 days. During the year ended December 31, 1994, the average maturity of the Reserve Assets Fund's assets ranged from 35 days to 85 days and the average maturity of the Domestic Money Market Fund's assets ranged from 31 days to 78 days. The Domestic Money Market and Reserve Asset Funds' investments in short-term debt and depository institution money instruments will be rated, or will be issued by issuers who have been rated, in one of the two highest rating categories for short-term debt obligations by a nationally recognized statistical rating organization (an 'NRSRO') or, if not rated, will be of comparable quality as determined by the Directors of the Company. Each Fund's investments in corporate bonds and debentures (which must have maturities at the date of purchase of 397 days (13 months) or less) will be in issuers which have received from an NRSRO a rating, with respect to a class of short-term debt obligations that is comparable in priority and security with the investment, in one of the two highest rating categories for short-term obligations or, if not rated, are of comparable quality as determined by the Directors of the Company. Currently, there are six NRSROs: Duff & Phelps Inc., Fitch Investors Services, Inc., IBCA Limited and its affiliate IBCA Inc., Moody's, Standard & Poor's and Thomson BankWatch. A recently adopted regulation of the Securities and Exchange Commission will limit investments by the Domestic Money Market and Reserve Assets Funds in securities issued by any one issuer (other than the U.S. Government, its agencies or instrumentalities) ordinarily to not more than 5% of its total assets, or in the event that such securities do not have the highest rating, not more than 1% of its total assets. In addition, this regulation requires that not more than 5% of each Fund's total assets be invested in securities that have a rating lower than the highest rating. OTHER PORTFOLIO STRATEGIES Restricted Securities. Each of the Funds is subject to limitations on the amount of illiquid securities they may purchase; however, each Fund may purchase without regard to that limitation certain securities that are not registered under the Securities Act of 1933 (the 'Securities Act'), including (a) commercial paper exempt from registration under Section 4(2) of the Securities Act, and (b) securities that can be offered and sold to 'qualified institutional buyers' under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities sold under 42 Rule 144A which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Funds' investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Indexed and Inverse Securities. A Fund may invest in securities whose potential return is based on the change in particular measurements of value or rate (an 'index'). As an illustration, a Fund may invest in a security that pays interest and returns principal based on the change in an index of interest rates or on the value of a precious or industrial metal. Interest and principal payable on a security may also be based on relative changes among particular indices. In addition, certain of the Funds may invest in securities whose potential investment return is inversely based on the change in particular indices. For example, a Fund may invest in securities that pay a higher rate of interest and principal when a particular index decreases and pay a lower rate of interest and principal when the value of the index increases. To the extent that a Fund invests in such types of securities, it will be subject to the risks associated with changes in the particular indices, which may include reduced or eliminated interest payments and losses of invested principal. Certain indexed securities, including certain inverse securities, may have the effect of providing a degree of investment leverage, because they may increase or decrease in value at a rate that is a multiple of the changes in applicable indices. As a result, the market value of such securities will generally be more volatile than the market values of fixed-rate securities. The Company believes that indexed securities, including inverse securities, represent flexible portfolio management instruments that may allow a Fund to seek potential investment rewards, hedge other portfolio positions, or vary the degree of portfolio leverage relatively efficiently under different market conditions. Foreign Securities. The Reserve Assets, Prime Bond, High Current Income, Quality Equity, Equity Growth, Flexible Strategy, Natural Resources Focus, Global Strategy Focus, Basic Value Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may invest in securities of foreign issuers. Investments in foreign securities, particularly those of non-governmental issuers, involve considerations and risks which are not ordinarily associated with investing in domestic issuers. These considerations and risks include changes in currency rates, currency exchange control regulations, the possibility of expropriation, the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards, less liquidity and more volatility in foreign securities markets, the impact of political, social or diplomatic developments, and the difficulty of assessing economic trends in foreign countries. If it should become necessary, a Fund could encounter greater difficulties in invoking legal processes abroad than would be the case in the United States. Transaction costs in foreign securities may be higher. The operating expense ratio of a Fund investing in foreign securities can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial costs, are higher. In addition, net investment income earned by a Fund on a foreign security may be subject to withholding and other taxes imposed by foreign governments which will reduce a Fund's net investment income. The Investment Adviser will consider these and other factors before investing in foreign securities, and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. No Fund which may invest in foreign securities, other than the Natural Resources Focus and Global Strategy Focus Funds, will concentrate its investments in any particular country. The Flexible Strategy, Natural Resources Focus, Global Strategy Focus, 43 World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may from time to time be substantially invested in non-dollar-denominated securities of foreign issuers. A Fund's return on investments in non-dollar-denominated securities may be reduced or enhanced as a result of changes in foreign currency rates during the period in which the Fund holds such investments. Each Fund other than the Flexible Strategy, Natural Resources Focus, Global Strategy Focus, Basic Value Focus, World Income Focus, Global Utility Focus and International Equity Focus, Developing Capital Markets Focus and International Bond Funds will purchase only securities issued in dollar denominations. Each of the International Equity Focus Fund and Developing Capital Markets Focus Fund may invest a significant portion of its assets in securities of foreign issuers in smaller capital markets, while each of the other Funds which is permitted to invest in foreign securities may from time to time invest in securities of such foreign issuers. Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital markets. Because a Fund which invests in foreign securities will invest in securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. Smaller capital markets, while often growing in trading volume, have substantially less volume than United States markets, and securities in many smaller capital markets are less liquid and their prices may be more volatile than securities of comparable United States companies. Brokerage commissions, custodial services, and other costs relating to investment in smaller capital markets are generally more expensive than in the United States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in a Fund which invests in these markets incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement could result in temporary periods when assets of such a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible 44 liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there is in the United States. As a result, management of a Fund which invests in foreign securities may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience. Due to its emphasis on securities of issuers located in smaller capital markets, the Developing Capital Markets Focus Fund and the International Equity Focus Fund should be considered as a vehicle for diversification and not as a balanced investment program. Certain of the Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors. As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. The issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements. The Developing Capital Markets Focus and International Equity Focus Funds intend to invest in securities of foreign issuers in smaller capital markets. Some countries with smaller capital markets prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms than securities of the company available for purchase by nationals. A number of countries, such as South Korea, Taiwan and Thailand, have authorized the formation of closed-end investment companies to facilitate indirect foreign investment in their capital markets. In accordance with the Investment Company Act of 1940, as amended (the 'Investment Company Act' or 'the Act'), the Developing Capital Markets Focus and International Equity Focus Funds each may invest up to 10% of its total assets in 45 securities of such closed-end investment companies. This restriction on investments in securities of closed-end investment companies may limit opportunities for the Fund to invest indirectly in certain smaller capital markets. Shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. If a Fund acquires shares in closed-end investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies. A Fund also may seek, at its own cost, to create its own investment entities under the laws of certain countries. In some countries, banks or other financial institutions may constitute a substantial number of the leading companies or the companies with the most actively traded securities. Also, the Investment Company Act restricts a Fund's investments in any equity security of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from 'securities related activities,' as defined by the rules thereunder. These provisions may also restrict a Fund's investments in certain foreign banks and other financial institutions. Lending of Portfolio Securities. Each Fund of the Company may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government which, while the loan is outstanding, will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities plus accrued interest. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. Forward Commitments. Each of the Funds may purchase securities on a when-issued basis, and they may purchase or sell such securities for delayed delivery. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. The value of the security on the delivery date may be more or less than its purchase price. A Fund entering into such transactions will maintain a segregated account with its custodian of cash or liquid, high-grade debt obligations in an aggregate amount equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Standby Commitment Agreements. The High Current Income, Global Utility Focus and Developing Capital Markets Focus Funds may from time to time enter into standby commitment agreements. Such agreements commit the respective Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will at all times maintain a segregated account with its custodian of cash or liquid, high-grade debt obligations in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY The Quality Equity, Flexible Strategy, Natural Resources Focus, American Balanced, Global Strategy Focus, Basic Value Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may engage in certain of the options, futures and currency transactions discussed in Appendix A to this Prospectus. A Fund may engage in transactions in futures contracts, options on futures contracts, forward foreign exchange contracts, currency options and options on portfolio securities and on stock indexes only for hedging purposes and not for speculation. A Fund may write call options on portfolio securities and on stock indexes for the purpose of achieving, through receipt of premium income, a 46 greater average total return than it would otherwise realize from holding portfolio securities alone. There can be no assurance that the objectives sought to be obtained from the use of these instruments will be achieved. A Fund's use of such instruments may be limited by certain Internal Revenue Code requirements for qualification of the Fund for the favorable tax treatment afforded investment companies. There can be no assurance that a Fund's hedging transactions will be effective. Furthermore, a Fund will only engage in hedging activities from time to time and will not necessarily engage in hedging transactions in all the smaller capital markets in which certain of the Funds may be invested at any given time. RISKS OF HIGH YIELD SECURITIES The High Current Income Fund, World Income Focus Fund and Developing Capital Markets Focus Fund may invest a substantial portion of their assets in high yield, high risk securities or junk bonds, which are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During recessionary periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. While the high yield securities in which the High Current Income Fund, World Income Focus Fund or Developing Capital Markets Focus Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after a Fund purchases a particular security, in which case a Fund may experience losses and incur costs. In an effort to minimize the risk of issuer default or bankruptcy, the High Current Income Fund, World Income Focus Fund and Developing Capital Markets Focus Fund each will diversify its holdings among many issuers. However, there can be no assurance that diversification will protect a Fund from widespread defaults brought about by a sustained economic downturn. High yield securities tend to be more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on their prices and yields than on higher-rated fixed-income securities. Zero coupon bonds and bonds which pay interest and/or principal in additional bonds rather than in cash are especially volatile. Like higher-rated fixed-income securities, junk bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in this market, which may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for such bonds by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market, and may cause the prices the High Current Income Fund, World Income Focus Fund and Developing Capital Markets Focus Fund receive for their junk bonds to be reduced, or a Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgment may play a greater role in valuing certain of each Fund's portfolio securities than in the case of securities trading in a more liquid market. 47 Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the net asset value of the High Current Income Fund, World Income Focus Fund and Developing Capital Markets Focus Fund. In addition, each Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. INSURANCE LAW RESTRICTIONS In order for shares of the Company's Funds to remain eligible investments for the Separate Accounts, it may be necessary, from time to time, for a Fund to limit its investments in certain types of securities in accordance with the insurance laws or regulations of the various states in which the Contracts are sold. The New York insurance law requires that investments of each Fund be made with the degree of care of an 'ordinarily prudent person.' In addition, each Fund has undertaken, at the request of the State of California Department of Insurance, to observe certain investment related requirements of the Insurance Code of the State of California. The Investment Adviser believes that compliance with these standards will not have any negative impact on the performance of any of the Funds. OTHER CONSIDERATIONS The Investment Adviser will use its best efforts to assure that each Fund of the Company complies with certain investment limitations of the Internal Revenue Service to assure favorable income tax treatment for the Contracts. It is not expected that such investment limitations will materially affect the ability of any Fund to achieve its investment objective. DIRECTORS The Directors of the Company consist of six individuals, five of whom are not 'interested persons' of the Company as defined in the Investment Company Act of 1940. The Directors of the Company are responsible for the overall supervision of the operations of the Company and perform the various duties imposed on the directors of the investment companies by the Investment Company Act of 1940. The Board of Directors elects officers of the Company annually. The Directors of the Company and their principal employment are as follows: ARTHUR ZEIKEL*--President of the Investment Adviser; Executive Vice President of Merrill Lynch & Co., Inc. ('ML&Co.'); Executive Vice President of Merrill Lynch; Director of the Distributor. WALTER MINTZ--Special Limited Partner of Cumberland Partners (investment partnership). MELVIN R. SEIDEN--President of Silbanc Properties, Ltd. (real estate, consulting and investments). STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial consultants). JOE GRILLS--Member of the Committee on Investment of Employee Benefits Assets of the Financial Executives Institute. HARRY WOOLF--Professor and former Director of the Institute for Advanced Study (private institution devoted to the encouragement, support and patronage of learning). - --------------- * Interested person, as defined in the Investment Company Act of 1940, of the Company. 48 INVESTMENT ADVISER Merrill Lynch Asset Management L.P. ('MLAM'), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The principal address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset Management, L.P. ('FAM'), acts as the investment adviser for over 130 other registered investment companies. MLAM also offers portfolio management and portfolio analysis services to individuals and institutions. In the aggregate, as of March 31, 1995, MLAM and FAM had a total of approximately $170.3 billion in investment company and other portfolio assets under management including accounts of certain affiliates of FAM. MLAM (the general partner of which is Princeton Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned affiliate of Merrill Lynch & Co., Inc. and has its principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. While the Investment Adviser is at all times subject to the direction of the Board of Directors of the Company, the Investment Advisory Agreements provide that the Investment Adviser, subject to review by the Board of Directors, is responsible for the actual management of the Funds and has responsibility for making decisions to buy, sell or hold any particular security. The Investment Adviser provides the portfolio managers for the Funds, who consider information from various sources, make the necessary investment decisions and effect transactions accordingly. The Investment Adviser is also obligated to perform certain administrative and management services for the Company (certain of which it may delegate to third parties) and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreements. The Investment Adviser has access to the full range of the securities and economic research facilities of Merrill Lynch. During the Company's fiscal year ended December 31, 1994, the advisory fees expense incurred by the Company totalled $16,313,767 of which $166,992 related to the Reserve Assets Fund (representing .50% of its average net assets), $1,740,429 related to the Prime Bond Fund (representing .47% of its average net assets), $1,176,777 related to the High Current Income Fund (representing .52% of its average net assets), $1,889,188 related to the Quality Equity Fund (representing .47% of its average net assets), $1,062,086 related to the Equity Growth Fund (representing .75% of its average net assets), $1,598,769 related to the Flexible Strategy Fund (representing .65% of its average net assets), $179,492 related to the Natural Resources Focus Fund (representing .65% of its average net assets), $803,973 related to the American Balanced Fund (representing .55% of its average net assets), $1,418,479 related to the Domestic Money Market Fund (representing .50% of its average net assets), $2,818,040 related to the Global Strategy Focus Fund (representing .65% of its average net assets), $683,107 related to the Basic Value Focus Fund (representing .60% of its average net assets), $429,608 related to the World Income Focus Fund (representing .60% of its average net assets), $777,517 related to the Global Utility Focus Fund (representing .60% of its average net assets), $1,355,159 related to the International Equity Focus Fund (representing .75% of its average net assets), $30,838 related to the International Bond Fund (representing .60% of its average net assets), $151,621 related to the Developing Capital Markets Focus Fund (representing 1.00% of its average net assets), and $31,692 related to the Intermediate Government Bond Fund (representing .50% of its average net assets). Although the .75% and the 1.00% investment advisory fees of the Equity Growth Fund and Developing Capital Markets Focus Fund, respectively, are higher than that of many other mutual funds, the Funds believe they are justified by the high degree of care that must be given to the initial selection and continuous supervision of the types of portfolio securities in which the Funds invest. 49 During the Company's fiscal year ended December 31, 1994, the total operating expenses of the Company's Funds (including the advisory fees paid to the Investment Adviser), before reimbursement of a portion of such expenses, were as follows: $216,442 by the Reserve Assets Fund (representing .65% of its average net assets), $1,989,456 by the Prime Bond Fund (representing .54% of its average net assets), $1,371,582 by the High Current Income Fund (representing .61% of its average net assets), $2,171,770 by the Quality Equity Fund (representing .54% of its average net assets), $1,181,790 by the Equity Growth Fund (representing .83% of its average net assets), $1,798,136 by the Flexible Strategy Fund (representing .73% of its average net assets), $241,363 by the Natural Resources Focus Fund (representing .87% of its average net assets) $921,933 by the American Balanced Fund (representing .63% of its average net assets), $1,629,682 by the Domestic Money Market Fund (representing .57% of its average net assets), $3,336,174 by the Global Strategy Focus Fund (representing .77% of its average net assets), $814,168 related to the Basic Value Focus Fund (representing .72% of its average net assets), $535,498 related to the World Income Focus Fund (representing .75% of its average net assets), $943,233 related to the Global Utility Focus Fund (representing .73% of its net assets), $1,758,567 related to the International Equity Focus Fund (representing .97% of its net assets), $204,274 related to the Developing Capital Markets Focus Fund (representing 1.35% of its average net assets), $55,475 related to the International Bond Fund (representing 1.08% of its average net assets), and $50,942 related to the Intermediate Government Bond Fund (representing .80% of its average net assets). The Investment Advisory Agreements require the Investment Adviser to reimburse the Company's Funds if and to the extent that in any fiscal year the operating expenses of each Fund exceeds the most restrictive expense limitations then in effect under any state securities laws or published regulations thereunder. At present the most restrictive expense limitation requires the Investment Adviser to reimburse expenses which exceed 2.5% of each Fund's first $30 million of average daily net assets, 2.0% of its average daily net assets in excess of $30 million but less than $100 million, and 1.5% of its average daily net assets in excess of $100 million. Expenses for this purpose include the Investment Adviser's fee but exclude interest, taxes, brokerage fees and commissions and extraordinary charges, such as litigation. No fee payments will be made to the Investment Adviser with respect to any Fund during any fiscal year which would cause the expenses of such Fund to exceed the pro rata expense limitation applicable to such Fund at the time of such payment. The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have entered into two agreements which limit the operating expenses paid by each Fund in a given year to 1.25% of its average daily net assets (the 'Reimbursement Agreements'), which is less than the expense limitations imposed by state securities laws or published regulations thereunder. The reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. During the Company's fiscal year ended December 31, 1994, the Domestic Money Market Fund, Developing Capital Markets Focus Fund, International Bond Fund, and Intermediate Government Bond Fund were reimbursed for operating expenses. Such reimbursements amounted to $201,286, $8,915, $55,475, and $50,942, respectively. See 'Investment Advisory Arrangements' in the Statement of Additional Information. MLLA sells the Contracts described in the Prospectus for the Contracts. The Investment Adviser has entered into an Administrative Services Agreement with 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 MLLIC and ML of New York. The Investment Adviser may enter into similar agreements with other Insurance Companies in the future. 50 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 Adviser (together, the 'Codes'). The Codes significantly restrict the personal investing activities of all employees of the Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the 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 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 Adviser. Furthermore, the Codes provide for trading 'blackout periods' which prohibit trading by investment personnel of the Company within periods of trading by the Company in the same (or equivalent) security (15 or 30 days depending upon the transaction). PORTFOLIO MANAGERS The following is information with respect to the Portfolio Managers for each of the Company's Funds. Joel Heymsfeld has served as the American Balanced Fund's Portfolio Manager since June 1988, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1978. Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Christopher Ayoub has served as the Domestic Money Market Fund's Portfolio Manager since June 1992, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1985. Fredric Lutcher has served as the Equity Growth Fund's Portfolio Manager since June 1990, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1989. Denis Cummings has served as the Flexible Strategy Focus Fund's Portfolio Manager since May 1986, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1978. Joel Heymsfeld has served as the Global Strategy Focus Fund's Portfolio Manager since February 1992, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1978. Walter Rogers has served as the Global Utility Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1987. Aldona Schwartz has served as the High Current Income Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. She has served as Vice President of MLAM since 1991 and employee of the Investment Adviser since 1986. Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have served as the International Equity Focus Fund's Portfolio Managers since July 1993, and are primarily responsible for the Fund's day-to-day 51 management. Andrew Bascand has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P. Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior Research Officer of the Bank of England's International Department from 1986 to 1987. Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993; Vice President from 1990 to 1993; and an employee since 1987. Grace Pineda and Steve Silverman have served as Vice Presidents of MLAM since 1989 and 1983, respectively. Peter Lehman has served as the Natural Resources Focus Fund's Portfolio Manager since January 1994, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1994; Senior Fund Analyst for an international fund managed by the Investment Adviser from 1992 to 1994; Director and Senior Portfolio Manager for Prudential Insurance Company of America from 1989 to 1991. Jay Harbeck has served as the Prime Bond Fund's Portfolio Manager since July 1992, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1986. Denis Cummings has served as the Quality Equity Fund's Portfolio Manager since April 1982, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1978. Christopher Ayoub has served as the Reserve Assets Fund's Portfolio Manager since June 1992, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1986. Vincent Lathbury, III and Robert Parish have served as the World Income Focus Fund's Portfolio Managers since July 1993 and are primarily responsible for the Fund's day-to-day management. They have served as Vice Presidents of MLAM since 1982 and 1991, respectively. Mr. Parish was the Vice President and Senior Portfolio Manager for Templeton International from 1987 to 1991. Grace Pineda has served as the Developing Capital Markets Focus Fund's Portfolio Manager since May 1994, and is primarily responsible for the Fund's day-to-day management. She has served as Vice President of MLAM since 1989. Robert Parish has served as the International Bond Fund's Portfolio Manager since May 1994 and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1991, and was Vice President and Senior Portfolio Manager for Templeton International from 1987 to 1991. Jay Harbeck has served as the Intermediate Government Fund's Portfolio Manager since May 1994 and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1986. 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. 52 Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Affiliated persons of the Company may serve as its broker in over-the-counter transactions conducted on an agency basis. The Securities and Exchange Commission has issued an order permitting the Company to conduct certain principal transactions with respect to the Domestic Money Market and Reserve Assets Funds with Merrill Lynch Government Securities Inc. and Merrill Lynch Money Markets Inc. in U.S. Government and government agency securities, and certain other money market securities, subject to certain terms and conditions. During the year ended December 31, 1994, the Company engaged in 33 transactions pursuant to such order involving $154.9 million of securities. For the year ended December 31, 1994, the Company paid brokerage commissions of $3,526,815, of which $219,686 was paid to Merrill Lynch. PURCHASE OF SHARES The Company will offer shares in the Funds, without sales charge, only for purchase by the Insurance Companies for the Separate Accounts to fund benefits under the Contracts. Shares of the Domestic Money Market Fund, the Global Strategy Focus Fund, the Basic Value Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund, International Bond Fund and Intermediate Government Bond Fund are currently sold only to MLLIC and ML of New York, but may be sold to other Insurance Companies if the Company is granted an exemptive order by the Securities and Exchange Commission permitting such sales. The Company continuously offers shares in each of its Funds to the Insurance Companies at prices equal to the respective per share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary of the Investment Adviser, acts as the distributor of the shares. Net asset value is determined in the manner set forth below under 'Additional Information-Determination of Net Asset Value.' REDEMPTION OF SHARES The Company is required to redeem all full and fractional shares of the Funds for cash. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the Company's intention to distribute substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund, other than the Domestic Money Market and Reserve Assets Funds, will consist of all payments of dividends or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Investment Adviser). Net investment income of the Domestic Money Market and Reserve Assets Funds (from the time of the immediate preceding determination thereof) consists of (i) interest accrued and/or discount earned (including both original issue and market discount), (ii) plus or minus all realized and unrealized gains (other than realized long-term capital gains) and losses on its portfolio securities, (iii) less the estimated expenses of the respective Fund (including the fees payable to the Investment Adviser) applicable to that dividend period. Dividends on the Domestic Money Market and Reserve Assets Funds are declared and reinvested daily in additional full and fractional shares of such Fund. Dividends from net investment income of the Prime Bond, the High Current Income, World Income Focus, International Bond and Intermediate Government Bond Funds are declared and reinvested monthly in additional full and fractional shares of the respective Funds at net asset value. Dividends from net investment income of the Global Utility Focus Fund are declared and reinvested quarterly in 53 additional full and fractional shares of the Fund. Dividends from net investment income of the Quality Equity, Equity Growth, Flexible Strategy, National Resources Focus, American Balanced, Global Strategy Focus, International Equity Focus, Basic Value Focus and Developing Capital Markets Focus Funds are declared and reinvested at least annually in additional full and fractional shares of the respective Funds. All net realized long-term or short-term capital gains of the Company, if any, other than short-term capital gains of the Domestic Money Market and Reserve Assets Funds, are declared and distributed annually after the close of the Company's fiscal year to the shareholders of the Fund or Funds to which such gains are attributable. Short-term capital gains are taxable as ordinary income. TAX TREATMENT OF THE COMPANY Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Internal Revenue Code of 1986, as amended (the 'Code'). Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. One of the requirements to qualify for treatment as a regulated investment company under the Code is that a Fund, among other things, derive less than 30% of its gross income in each taxable year from gains (without deduction of losses) from the sale or other disposition of stocks, securities and certain options, futures or forward contracts held for less than three months. This requirement may limit the ability of certain Funds to dispose of certain securities at times when management of the Company might otherwise deem such disposition appropriate or desirable. If a Fund earns original issue discount income in a taxable year which is not represented by correlative cash income, or if a Fund receives property rather than cash in payment of interest, shareholders will be allocated income greater than the amount of cash distributed to them. In addition, the Fund may have to dispose of securities and use the proceeds thereof to make distributions in amounts necessary to satisfy its distribution requirements under the Code. TAX TREATMENT OF INSURANCE COMPANIES AS SHAREHOLDERS Dividends paid by the Company from its ordinary income and distributions of the Company's net realized capital gains are includable in the respective Insurance Company's gross income. Distributions of the Company's net realized long-term capital gains retain their character as long-term capital gains in the hands of the Insurance Companies if certain requirements are met. The tax treatment of such dividends and distributions depends on the respective Insurance Company's tax status. To the extent that income of the Company represents dividends on common or preferred stock, rather than interest income, its distributions to the Insurance Companies will be eligible for the present 70% dividends received deduction applicable in the case of a life insurance company as provided in the Code. See the Prospectus for the Contracts for a description of the respective Insurance Company's tax status and the charges which may be made to cover any taxes attributable to the Separate Account. Not later than 60 days after the end of each calendar year, the Company will send to the Insurance Companies a written notice required by the Code designating the amount and character of any distributions made during such year. PERFORMANCE DATA From time to time the average annual total return and yield of one or more of the Company's Funds for various specified time periods may be included in advertisements or information furnished by the Insurance Companies to present or prospective Contract owners. Average annual total return and yield are computed in accordance with formulas specified by the Securities and Exchange Commission. 54 Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield to maturity of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the offering price per share on the last day of the period. The yield for the 30-day period ending December 31, 1994 was 7.69% for the Prime Bond Fund, 11.57% for the High Current Income Fund, 9.96% for the World Income Fund, 7.62% for the International Bond Fund and 5.07% for the Intermediate 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 Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service or contained in publications such as Morningstar Publications, Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with other performance data, performance comparisons should not be considered representative of the Fund's relative performance for any future period. ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Investment Adviser immediately after the declaration of dividends, if any, and is determined as of fifteen minutes following the close of trading on each day the New York Stock Exchange is open for business. The New York Stock Exchange is open on business days other than national holidays (except for Martin Luther King Day, when it is open) and Good Friday. The net asset value per share of each Fund other than the Domestic Money Market and Reserve Assets Funds is computed by dividing the sum of the value of the securities held by that Fund plus any cash or other assets (including interest and dividends accrued) minus all liabilities (including accrued expenses) by the total number of shares outstanding of that Fund at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser, are accrued daily. Since the net investment income of the Domestic Money Market and Reserve Assets Funds (including realized and unrealized gains and losses on their portfolio securities) are declared as a dividend each time the net income of the Funds are determined (see 'Dividends, Distributions and Taxes'), the net asset value per share of the Funds normally remains at $1.00 per share immediately after each such determination and dividend declaration. 55 Except with respect to securities held by the Domestic Money Market and Reserve Assets Funds having a remaining maturity of 60 days or less, securities held by each Fund will be valued as follows: Portfolio securities which are traded on stock exchanges are valued at the last sale price (regular way) as of the close of business on the day the securities are being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter market are valued at the last available bid price in the over-the-counter market prior to the time of valuation. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. When a Portfolio writes a call option, the amount of the premium received is recorded on the books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options being traded in the over-the-counter market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. Securities held by the Domestic Money Market and Reserve Assets Funds with a remaining maturity of 60 days or less are valued on an amortized cost basis, unless particular circumstances dictate otherwise. The Company has used pricing services, including Merrill Lynch Securities Pricing Service ('MLSPS'), to value securities held by the High Current Income and Prime Bond Funds and to value bonds held by other of the Company's Funds. The Board of Directors of the Company has examined the methods used by the pricing services in estimating the value of securities held by the Funds and believes that such methods will reasonably and fairly approximate the price at which those securities may be sold and result in a good faith determination of the fair value of such securities; however, there is no assurance that securities can be sold at the prices at which they are valued. During the year ended December 31, 1994, the Company used the pricing services of MLSPS and made payment of $31,356 to MLSPS for such service. ORGANIZATION OF THE COMPANY The Company was incorporated on October 16, 1981, and operations of its Reserve Assets Fund commenced on November 12, 1981. Operations of the Prime Bond, High Current Income, Quality Equity and Equity Growth Funds commenced on April 20, 1982. The Flexible Strategy Fund commenced operations on May 1, 1986. 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, World Income Focus, Global Utility Focus and International Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital Markets Focus Fund and International Bond Fund and Intermediate Government Bond Fund commenced operations on May 2, 1994. The authorized capital stock of the Company consists of 2,300,000,000 shares of Common Stock, par value $0.10 per share. The shares of Common Stock are divided into seventeen classes designated Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Flexible Strategy Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill 56 Lynch World Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch International Bond Fund Common Stock and Merrill Lynch Intermediate Government Bond Fund Common Stock, respectively. The Company may, from time to time, at the sole discretion of its Board of Directors and without the need to obtain the approval of its shareholders or of Contract Owners, offer and sell shares of one or more of such classes. Each class consists of 100,000,000 shares except for Domestic Money Market Fund Common Stock which consists of 300,000,000 shares and Reserve Assets Fund Common Stock which consists of 500,000,000 shares. All shares of Common Stock have equal voting rights, except that only shares of the respective classes are entitled to vote on matters concerning only that class. Pursuant to the Investment Company Act of 1940 and the rules and regulations thereunder, certain matters approved by a vote of all shareholders of the Company may not be binding on a class whose shareholders have not approved such matter. Each issued and outstanding share of a class is entitled to one vote and to participate equally in dividends and distributions declared with respect to such class and in net assets of such class upon liquidation or dissolution remaining after satisfaction of outstanding liabilities. The shares of each class, when issued, will be fully paid and nonassessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any class are entitled to redeem their shares as set forth under 'Redemption of Shares.' Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Company voting for the election of directors can elect all of the directors of the 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 Domestic Money Market, Global Strategy Focus, Basic Value Focus, World Income Focus, Global Utility Focus and International Equity Focus Funds. MLLIC purchased $100 worth of shares of each of the Domestic Money Market and Global Strategy Focus Funds on February 6, 1992, $2,000,000 worth of shares of the Domestic Money Market Fund on February 20, 1992, $2,000,000 worth of shares of the Global Strategy Focus Fund on February 28, 1992 and $100 worth of shares of each of the Basic Value Focus, World Income 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 World Income 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 $5,000,000 worth of shares of the International Bond Fund, and, on May 16, 1994, $2,000,000 worth of shares of the Intermediate Government Bond Fund. The organizational expenses of each of the Company's Funds are paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year period. 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. 57 CUSTODIAN The Bank of New York ('BONY'), 110 Washington Street, New York, New York 10286, acts as custodian of the Company's assets, except that Chase Manhattan Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245, acts as custodian for assets of the Company's Developing Capital Markets Focus Fund. TRANSFER AND DIVIDEND DISBURSING AGENT 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. Prior to June 1, 1990, BONY was the Company's transfer agent. LEGAL COUNSEL Rogers & Wells, New York, New York, is counsel for the Company. REPORTS TO SHAREHOLDERS The fiscal year of the Company ends on December 31 of each year. The Company will send to its shareholders at least semi-annually reports showing the Funds' portfolio securities and other information. An annual report containing financial statements, audited by independent auditors, will be sent to shareholders each year. ADDITIONAL INFORMATION This Prospectus does not contain all of the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940, with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated April 28, 1995, 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. 58 APPENDIX A U.S. GOVERNMENT SECURITIES The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in the various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in government agency securities, which are debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Funds may invest in all types of government agency securities currently outstanding or to be issued in the future. DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in depositary institutions money instruments, such as certificates of deposit, including variable rate certificates of deposit, bankers' acceptances, time deposits and bank notes. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks, savings banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ('coupon dates'), based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Often, dealers selling variable rate certificates of deposit to the Funds agree to repurchase such instruments, at the Funds' option, at par on the coupon dates. The dealers' obligations to repurchase these instruments are subject to conditions imposed by the various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. The Funds are also able to sell variable rate certificates of deposit in the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed rate certificates of deposit because variable rate certificates of deposit generally have a longer stated maturity than comparable fixed rate certificates of deposit. As a matter of policy, the Domestic Money Market Fund will invest only in these types of instruments issued by U.S. issuers. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. The Reserve Assets Fund (and, for temporary or defensive purposes, the Flexible Strategy Fund, Natural Resources Focus Fund, Global Strategy Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund) may invest in certificates of deposit and bankers' acceptances issued by foreign branches or subsidiaries of U.S. banks ('Eurodollar' obligations) or U.S. branches or subsidiaries of foreign banks ('Yankeedollar' obligations). The Fund may invest only in Eurodollar obligations which by their terms are general obligations of the U.S. parent bank and meet the other criteria discussed below. Yankeedollar obligations in which the Fund may invest must be issued by U.S. branches or subsidiaries of foreign banks which are subject to state or federal banking regulations in the U.S. and by their terms must be general obligations of the foreign parent. In addition, the Fund will limit its investments in Yankeedollar obligations to obligations issued by banking institutions with more than $1 billion in assets. A-1 The Reserve Assets Fund (and, for temporary or defensive purposes, the Flexible Strategy Fund, Natural Resources Focus Fund, Global Strategy Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund) may also invest in U.S. dollar-denominated obligations of foreign depository institutions and their foreign branches and subsidiaries, such as certificates of deposit, bankers' acceptances, time deposits and deposit notes. The obligations of such foreign branches and subsidiaries may be the general obligation of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. Such investments will only be made if determined to be of comparable quality to other investments permissible for the Reserve Assets Fund. The Reserve Assets Fund will not invest more than 25% of its total assets (taken at market value at the time of each investment) in these obligations. Except as otherwise provided above with respect to investment in Yankeedollar and other foreign bank obligations no Fund may invest in any bank money instrument issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least $1 billion and its deposits are insured by the Federal Deposit Insurance Corporation (the 'FDIC'); provided that this limitation shall not prohibit the investment of up to 10% of the total assets of a Fund (taken at market value at the time of each investment) in certificates of deposit issued by banks and savings and loan associations with assets of less than $1 billion if the principal amount of each such certificate of deposit is fully insured by the FDIC. SHORT-TERM DEBT INSTRUMENTS The Domestic Money Market Fund and Reserve Assets Fund (and, for temporary or defensive purposes, each other Fund) may invest in commercial paper (including variable amount master demand notes), which refers to short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs and by trusts issuing asset-backed commercial paper. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis, in accordance with a stated short-term interest rate benchmark. Because the interest rate of a variable amount master note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Investment Adviser values such a note in accordance with the amortized cost basis described under 'Determination of Net Asset Value' in the Statement of Additional Information. The Domestic Money Market Fund and Reserve Assets Fund may also invest in nonconvertible debt securities issued by entities or asset-backed nonconvertible debt securities issued by trusts (e.g., bonds and debentures) with no more than 397 days (13 months) remaining to maturity at date of settlement. Short-term debt securities with a remaining maturity of less than one year tend to become extremely liquid and are traded as money market securities. For a discussion of the ratings requirements of the Funds' portfolio securities, see 'Investment Objectives and Policies of the Funds-Money Market Fund Portfolio Restrictions' and 'Investment Objectives and Policies of the Funds-Domestic Money Market Fund' in the Prospectus. The Reserve Assets Fund (and, for temporary or defensive purposes, The Flexible Strategy Fund, Natural Resources Focus Fund, Global Strategy Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund) may also invest in U.S. dollar-denominated commercial paper and other short-term obligations issued by foreign entities. Such investments are subject to quality standards similar to those applicable to investments in comparable obligations of domestic issuers. Investments in foreign entities in general involve the same risks as those described in the Statement of Additional Information in connection with investments in Eurodollar, Yankeedollar and foreign bank obligations. A-2 REPURCHASE AGREEMENTS Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Under a repurchase agreement, the seller agrees, upon entering into the contract with the Fund, to repurchase a security (typically a security issued or guaranteed by the U.S. government) at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed yield for the Fund insulated from fluctuations in the market value of the underlying security during such period, although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System, a primary dealer in U.S. government securities or an affiliate thereof. A purchase and sale contract is similar to a repurchase agreement, but purchase and sale contracts, unlike repurchase agreements, allocate interest on the underlying security to the purchaser during the term of the agreement and generally do not require the seller to provide additional securities in the event of a decline in the market value of the purchased security during the term of the agreement. In all instances, the Fund takes possession of the underlying securities when investing in repurchase agreements or purchase and sale contracts. Nevertheless, if the seller were to default on its obligation to repurchase a security under a repurchase agreement or purchase and sale contract and the market value of the underlying security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. Repurchase agreements and purchase and sale contracts maturing in more than seven days will be considered 'illiquid securities.' The Domestic Money Markets and Reserve Assets Funds will not enter into repurchase agreements maturing in more than 30 days. Reverse Repurchase Agreements: The Domestic Money Market and Reserve Assets Funds may enter into reverse repurchase agreements, which involve the sale of money market securities held by the Funds, with an agreement to repurchase the securities at an agreed upon price, date, and interest payment. The Funds will use the proceeds of the reverse repurchase agreements to purchase other money market securities either maturing, or under an agreement to resell, at a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Funds will utilize reverse repurchase agreements when the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the reverse repurchase transaction. A separate account of the applicable Fund will be established with the Custodian consisting of cash or U.S. Government securities having a market value at all times at least equal in value to the proceeds received on any sale subject to repurchase plus accrued interest. DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.: Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as 'gilt-edge.' Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present 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. A-3 Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded both during good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other market shortcomings. C--Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Standard & Poor's Corporation: AAA--This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A--Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB--B--CCC--CC--Bonds rated BB, B, CCC, and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. NR--Not rated by the indicated rating agency. Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY Options on Portfolio Securities. Each of the Quality Equity, Flexible Strategy, Natural Resources Focus, American Balanced, Global Strategy Focus, Basic Value Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may from time to time sell ('write') covered call options on its portfolio securities in which it may invest and may engage in closing purchase transactions with respect to such options. A covered call option is an option where the Fund, in return for a premium, gives another party a right to buy particular securities held by the Fund at a specified future date and at a price set at the time of the contract. The principal reason for writing call options is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, a Fund gives up the opportunity, while the option is in effect, to profit from any A-4 price increase in the underlying security above the option exercise price. In addition, the Fund's ability to sell the underlying security will be limited while the option is in effect unless the Fund effects a closing purchase transaction. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options serve as a partial hedge against the price of the underlying security declining. The Quality Equity Fund and the Basic Value Focus Fund may not write covered call options on underlying securities exceeding 15% of the value of its total assets. Each of the Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds also may write put options, which give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. The Fund will receive a premium for writing a put option which increases the Fund's return. A Fund will write only covered put options which means that so long as the Fund is obligated as the writer of the option, it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for as long as the option is outstanding. A Fund may engage in closing transactions in order to terminate put options that it has written. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may purchase put options on portfolio securities. In return for payment of a premium, the purchase of a put option gives the holder thereof the right to sell the security underlying the option to another party at a specified price until the put option is closed out, expires or is exercised. Each Fund will only purchase put options to seek to reduce the risk of a decline in value of the underlying security. The total return on the security may be reduced by the amount of the premium paid for the option by the Fund. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out the Fund's position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, a Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities which it intends to purchase. The Fund will not purchase options on securities if as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Each of the Funds may engage in options transactions on exchanges and in the over-the-counter ('OTC') markets. In general, exchange traded contracts are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates. OTC options transactions are two-party contracts with terms negotiated by the buyer and seller. See 'Over-the-Counter Options' below for information as to restrictions on the use of OTC options. Options on Stock Indices. The Natural Resources Focus, Global Strategy Focus, World Income Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may purchase and write call options and put options on stock indices traded on a national securities exchange to seek to reduce the general market risk of their securities or specific industry sectors which the Fund invests in. Options on indices are similar to options on securities except that, on exercise or assignment, the parties to the contract pay or receive an amount of cash equal to the difference between the closing value of the index and the exercise price of the option times a specified multiple. The Funds may invest in index options based on a broad market index, e.g., the S&P 500, or on a narrow index representing an industry or market segment, e.g., the Amex Oil & Gas Index. The effectiveness of a hedge employing stock index options will depend primarily on the degree of correlation between movements in the value of the index underlying the option and in the portion of the portfolio being hedged. For further discussion concerning such options, see 'Risk Factors in Options, Futures and Currency Transactions' below and the Company's Statement of Additional Information. A-5 Stock Index and Financial Futures Contracts. The Natural Resources Focus, Global Strategy Focus, World Income Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may purchase and sell stock index futures contracts and financial futures contracts to hedge their portfolios. The Funds may sell stock index futures contracts and financial futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Funds' securities portfolios that might otherwise result. When the Funds are not fully invested in the securities market and anticipate a significant market advance, they may purchase stock index or financial futures in order to gain rapid market exposure that may in part or entirely offset increases in the cost of securities that the Funds intend to purchase. A stock index or financial futures contract is a bilateral agreement pursuant to which the Funds will agree to buy or deliver at settlement an amount of cash equal to a dollar multiplied by the difference between the value of a stock index or financial instrument at the close of the last trading day of the contract and the price at which the futures contract is originally entered into. The Funds may engage in transactions in stock index futures contracts based on broad market indexes or on indexes on industry or market segments. A Fund may effect transactions in stock index futures contracts in connection with the equity securities in which it invests and in financial futures contracts in connection with the debt securities in which it invests. As with stock index options, the effectiveness of the Funds' hedging strategies depend primarily upon the degree of correlation between movements in the value of the securities subject to the hedge and the index or securities underlying the futures contract. See 'Risk Factors in Options, Futures and Currency Transactions' below. Hedging Foreign Currency Risks. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds are authorized to deal in forward foreign exchange contracts between currencies of the different countries in which they will invest, including multi-national currency units, as a hedge against possible variations in the foreign exchange rate between these currencies. This is accomplished through contractual agreements to purchase or sell a specified currency at a specified future date (up to one year) and price at the time of the contract. The dealings of the Funds in forward foreign exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward foreign currency with respect to specific receivables or payables of the Funds accruing in connection with the purchase and sale of their portfolio securities, the sale and redemption of shares of the Funds or the payment of dividends and distributions by the Funds. Position hedging is the sale of forward foreign currency with respect to portfolio security positions denominated or quoted in such foreign currency. The Funds will not speculate in forward foreign exchange. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Funds to hedge against a devaluation that is so generally anticipated that the Funds are not able to contract to sell the currency at a price above the devaluation level they anticipate. The Funds are also authorized to purchase or sell listed foreign currency options and foreign currency futures contracts as a hedge against possible adverse variations in foreign exchange rates. Foreign currency options provide the holder thereof the right to buy or to sell a currency at a fixed price on or before a future date. A futures contract on a foreign currency is an agreement between two parties to buy and sell a specified amount of a currency for a set price on a future date. Such transactions may be effected with respect to hedges on non-U.S. dollar-denominated securities (including securities denominated in multi-national currency units) owned by the Funds, sold by the Funds but not yet delivered, or committed or anticipated to be purchased by the Funds. As an illustration, the Funds may use such techniques to hedge the stated value in United States dollars of an investment in a Japanese yen-denominated security. In such circumstances, for example, the Funds may purchase a foreign currency put option enabling them to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Funds may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a 'straddle'). By selling such call option in this illustration, the Funds give up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. A-6 The Funds will not speculate in foreign currency options or futures. Accordingly, the Funds will not hedge a currency substantially in excess of the market value of the securities denominated in such currency which they own, the expected acquisition price of securities which they have committed or anticipate to purchase which are denominated in such currency, and, in the case of securities which have been sold by the Funds but not yet delivered, the proceeds thereof in its denominated currency. Further, if a security with respect to which a currency hedging transaction has been executed should subsequently decrease in value, the Funds will direct their custodian to segregate liquid, high-grade debt securities having a market value equal to such decrease in value, less any initial or variation margin held in the account of their broker. As in the case of forward foreign exchange contracts, employing currency futures and options in hedging transactions does not eliminate fluctuations in the market price of a security and such transactions preclude or reduce the opportunity for gain if the hedged currency should move in a favorable direction. Options on Futures Contracts. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus and International Equity Focus Funds may also purchase and write call and put options on futures contracts in connection with their hedging activities. Generally, these strategies are utilized under the same market conditions (i.e., conditions relating to specific types of investments) in which the Funds enter into futures transactions. The Funds may purchase put options or write call options on futures contracts rather than selling the underlying futures contract in anticipation of a decline in the equities markets or in the value of a foreign currency. Similarly, the Funds may purchase call options, or write put options on futures contracts, as a substitute for the purchase of such futures to hedge against the increased cost resulting from appreciation of equity securities or in the currency in which securities which the Funds intend to purchase are denominated. Limitations on transactions in options on futures contracts are described below. Over-the-Counter Options. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may engage in options transactions in the over-the-counter markets. In general, over-the-counter ('OTC') options are two-party contracts with price and terms negotiated by the buyer and seller, whereas exchange-traded options are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates. OTC options include put and call options on individual securities, cash settlement options on groups of securities, and options on currency. The Funds may engage in an OTC options transaction only if they are permitted to enter into transactions in exchange-traded options of the same general type. The Funds will engage in OTC options only with member banks of the Federal Reserve System and primary dealers in U.S. Government securities or their affiliates which have a capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Restrictions on Use of Futures Transactions. Regulations of the Commodity Futures Trading Commission applicable to the Company require that each of the Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds' futures transactions constitute bona fide hedging transactions or, with respect to non-hedging transactions, that the Fund not enter into such transactions, if, immediately thereafter, the sum of the amount of initial margin deposits on the respective Fund's existing non-hedging futures positions and premiums paid for related options would exceed 5% of the market value of the Fund's total assets. When a Fund purchases a futures contract, a call option thereon or writes a put option, an amount of cash and cash equivalents will be deposited in a segregated account with the Company's custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the market value of the futures contract, thereby insuring that the use of such futures is unleveraged. An order has been obtained from the Securities and Exchange Commission which exempts the Company from certain provisions of the Investment Company Act of 1940 in connection with transactions involving futures contracts and options thereon. Risk Factors in Options, Futures and Currency Transactions. A Fund's ability to effectively hedge all or a portion of its portfolio of securities through transactions in options on stock indexes, stock index futures and financial futures depends on the degree to which price movements in the index underlying the hedging instrument A-7 correlates with price movements in the relevant portion of the securities portfolio. The securities portfolio will not duplicate the components of the index. As a result, the correlation will not be perfect. Consequently, a Fund bears the risk that the price of the portfolio securities being hedged will not move in the same amount or direction as the underlying index or securities and that the Fund would experience a loss on one position which is not completely offset by a gain on the other position. It is also possible that there may be a negative correlation between the index or securities underlying an option or futures contract in which a Fund has a position and the portfolio securities the Fund is attempting to hedge, which could result in a loss on both the securities and the hedging instrument. A Fund will invest in a hedging instrument only if, in the judgment of the Investment Adviser, there is expected to be a sufficient degree of correlation between movements in the value of the instrument and movements in the value of the relevant portion of the portfolio of securities for such hedge to be effective. There can be no assurance that the judgment will be accurate. Investment in stock index and currency futures, financial futures and options thereon entail the additional risk of imperfect correlation between movements in the futures price and the price of the underlying index or currency. The anticipated spread between the prices may be distorted due to differences in the nature of the markets, such as differences in margin and maintenance requirements, the liquidity of such markets and the participation of speculators in the futures market. However, the risk of imperfect correlation generally tends to diminish as the maturity date of the futures contract or termination date of the option approaches. The Funds intend to enter into exchange-traded options and futures transactions only if there appears to be a liquid secondary market for such options or futures. However, there can be no assurance that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an options or futures transaction. The inability to close options and futures positions could have an adverse impact on a Fund's ability to effectively hedge its portfolio. There is also the risk of loss by a Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom a Fund has an open position in an option or futures contract. A-8 APRIL 28, 1995 STATEMENT OF ADDITIONAL INFORMATION MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800 Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end management investment company which has a wide range of investment objectives among its seventeen separate funds (hereinafter referred to as the 'Funds' or individually as a 'Fund'): Merrill Lynch Domestic Money Market Fund, Merrill Lynch Reserve Assets Fund, Merrill Lynch Prime Bond Fund, Merrill Lynch High Current Income Fund, Merrill Lynch Quality Equity Fund, Merrill Lynch Equity Growth Fund, Merrill Lynch Flexible Strategy 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 World Income Focus Fund, Merrill Lynch Global Utility Focus Fund, Merrill Lynch International Equity Focus Fund, Merrill Lynch Developing Capital Markets Focus Fund, Merrill Lynch International Bond Fund and Merrill Lynch Intermediate Government Bond Fund. A separate class of Common Stock is issued for each Fund. The shares of the Funds will be sold to Merrill Lynch Life Insurance Company ('MLLIC') and ML Life Insurance Company of New York ('ML of New York') and shares of certain of the Funds will be sold to Family Life Insurance Company ('Family Life') for their separate accounts ('Separate Accounts') to fund benefits under variable annuity contracts (the 'Variable Annuity Contracts') issued by such companies. Shares of the Funds sold only to MLLIC and ML of New York also will be sold to MLLIC and ML of New York for certain of their other separate accounts to fund variable life insurance contracts issued by them (such contracts, together with the Variable Annuity Contracts, are collectively referred to as the 'Contracts'). Shares of the Funds may also be sold in the future to Separate Accounts of insurance companies other than MLLIC, ML of New York or Family Life (together with MLLIC, ML of New York and Family Life, 'Insurance Companies') to fund Contracts issued by them. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. MLLIC and ML of New York are wholly-owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the 'Investment Adviser'). ------------------------ 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 28, 1995 WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WHICH IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. ------------------------ MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR TABLE OF CONTENTS
PAGE --------- Investment Objectives and Policies................ 3 Investment Restrictions........................... 4 Management of the Company......................... 37 Investment Advisory Arrangements.................. 39 Determination of Net Asset Value.................. 42 Portfolio Transactions and Brokerage.............. 43 Redemption of Shares.............................. 45 Dividends, Distributions and Taxes................ 45 Distribution Arrangements......................... 46 Performance Data.................................. 46 Additional Information............................ 49 Independent Auditor's Report...................... 50 Financial Statements..............................
2 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of the Funds are as follows: The Domestic Money Market Fund seeks preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term domestic money market securities. The Reserve Assets Fund seeks the preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives by investing in short-term money market securities. The Prime Bond Fund seeks to attain as high a level of current income as is consistent with prudent investment management, and capital appreciation to the extent consistent with the foregoing objective, by investing primarily in long-term corporate bonds rated A or better by either Moody's Investors Service, Inc. ('Moody's') or Standard & Poor's Rating Group ('Standard & Poor's'). The High Current Income Fund seeks to attain as high a level of current income as is consistent with prudent investment management, and capital appreciation to the extent consistent with the foregoing objective, by investing principally in fixed-income securities which are rated in the lower rating categories of the established rating services or in unrated securities of comparable quality. The Quality Equity Fund seeks to attain the highest total investment return consistent with prudent risk through a fully managed investment policy utilizing equity securities, primarily common stocks of large-capitalization companies, as well as investment grade debt and convertible securities. The Equity Growth Fund seeks to attain long-term capital growth by investing primarily in common shares of small companies and emerging growth companies regardless of size. The Flexible Strategy Fund seeks to achieve high total investment return consistent with prudent risk by utilizing a flexible investment strategy which permits the Fund to vary its investment emphasis among equity securities, intermediate and long-term debt obligations and money market securities of foreign and domestic issuers. While the Fund will generally emphasize investment in common stocks of larger-capitalization issuers and in investment grade debt obligations, the Fund may from time to time invest a portion of its assets in small company and emerging growth company stocks when consistent with the Fund's objective. The Natural Resources Focus Fund seeks to attain long-term growth of capital and the protection of the purchasing power of shareholders' capital by investing primarily in equity securities of domestic and foreign companies with substantial natural resource assets. The American Balanced Fund seeks a level of current income and a degree of stability of principal not normally available from an investment solely in equity securities and the opportunity for capital appreciation greater than normally available from an investment solely in debt securities by investing in a balanced portfolio of fixed income and equity securities. The Global Strategy Focus Fund seeks high total investment return by investing primarily in a portfolio of equity and fixed income securities of U.S. and foreign issuers. The Basic Value Focus Fund seeks to attain capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The World Income Focus Fund seeks to attain high current income by investing in a global portfolio of fixed income securities donominated in various currencies, including multinational currency units. The Fund may invest in United States and foreign government and corporate fixed income securities, including high yield, high risk, lower rated and unrated securities. The Global Utility Focus Fund seeks to attain capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. The International Equity Focus Fund seeks to attain capital appreciation through investment in securities, principally equities, of issuers in countries other than the United States. The Developing Capital Markets Focus Fund seeks long-term capital appreciation through investment in securities, principally equities, of issuers in countries having smaller capital markets. The International Bond Fund seeks high total investment return from investment in a non-U.S. international portfolio of debt instruments denominated in various currencies and multi-national currency units. The Intermediate Government Bond Fund seeks the highest possible current income consistent 3 with the protection of capital afforded by investing in intermediate-term debt securities issued or guaranteed by the United States Government, its agencies or instrumentalities. Investors are referred to 'Investment Objectives and Policies of the Funds' in the Prospectus for a more complete discussion of the investment objectives and policies of the Company. INVESTMENT RESTRICTIONS The Company has adopted the following restrictions and policies relating to the investment of assets of the Funds and their activities. These are fundamental policies and 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 are represented or (ii) more than 50% of the outstanding shares). A change in policy affecting only one Fund may be effected with the approval of a majority of the outstanding shares of such Fund. The Company may not issue senior securities. RESTRICTIONS APPLICABLE TO THE DOMESTIC MONEY MARKET The Domestic Money Market Fund may not purchase any security other than money market and other securities described under 'Investment Objectives and Policies of the Funds--Domestic Money Market Fund' in the Prospectus. In addition, the Domestic Money Market Fund may not purchase securities of foreign issuers (including Eurodollar and Yankeedollar obligations). In addition, the Domestic Money Market Fund may not: (1) invest more than 10% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities) of any one issuer (including repurchase agreements with any one bank) except that up to 25% of the value of the Fund's total assets may be invested without regard to such 10% limitation. (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combination thereof. (7) make loans to other persons; provided that the Fund may purchase money market securities or enter into repurchase agreements; lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the 4 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 FUNDS The Reserve Assets Fund may not purchase any security other than money market and other securities described under 'Investment Objectives and Policies of the Funds--Reserve Assets Fund' in the Prospectus. In addition, the Reserve Assets Fund may not: (1) invest more than 10% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities) of any one issuer (including repurchase 5 agreements with any one bank) except that up to 25% of the value of the Fund's total assets may be invested without regard to such 10% limitation. (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. (7) make loans to other persons; provided that the Fund may purchase money market securities or enter into repurchase agreements; lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 20% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. The borrowing provisions shall not apply to reverse repurchase agreements. Usually only 'leveraged' investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 25% of the Fund's total assets, taken at market value at the time thereof. As a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total net assets. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) purchase, either alone or together with any other Fund or Funds, more than 10% of the outstanding securities of an issuer except that such restriction does not apply to U.S. Government or government agency securities, bank money instruments or repurchase agreements. (13) invest in securities (except for repurchase agreements or variable amount master notes) with legal or contractual restrictions on resale or for which no readily available market exists or in securities of issuers (other 6 than issuers of government agency securities) having a record, together with predecessors, of less than three years of continuous operation if, regarding all such securities, more than 5% of its total assets (taken at market value) would be invested in such securities. (14) enter into repurchase agreements if, as a result thereof, more than 10% of the Fund's total assets (taken at market value at the time of each investment) would be subject to repurchase agreements maturing in more than seven days. (15) enter into reverse repurchase agreements if, as a result thereof, the Fund's obligations with respect to reverse repurchase agreements would exceed one-third of the Fund's net assets (defined to be total assets, taken at market value, less liabilities other than reverse repurchase agreements). (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry (other than U.S. Government securities, government agency securities or bank money instruments). RESTRICTIONS APPLICABLE TO THE PRIME BOND FUND The Prime Bond Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may purchase securities of issuers which invest or deal in any of the above. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and the Fund may purchase obligations in private placements, and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the 7 Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 5% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in the securities of foreign issuers except that the Fund may invest in securities of foreign issuers if at the time of acquisition no more than 10% of its total assets, taken at market value at the time of the investment, would be invested in such securities, provided however, that up to 25% of the total assets of the Prime Bond Fund may be invested in securities (i) issued, assumed or guaranteed by foreign governments, or political subdivisions or instrumentalities thereof, (ii) assumed or guaranteed by domestic issuers, including Eurodollar securities or (iii) issued, assumed or guaranteed by foreign issuers having a class of securities listed for trading on the New York Stock Exchange (see 'Other Portfolio Strategies--Foreign Securities' in the Prospectus). Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuer are situated. (13) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested in such securities. (14) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. If through the appreciation of restricted securities or the depreciation of unrestricted securities held by a Fund, more than 10% of the assets of the Fund should be invested in restricted securities, the Fund will consider appropriate steps to assure maximum flexibility. (15) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers primarily engaged in the same industry (utilities will be divided according to their services; for example, gas, gas transmission, electric and telephone each will be considered a separate industry for purposes of this restriction). 8 (17) participate on a joint (or a joint and several) basis in any trading account in securities (but this does not include the 'bunching' of orders for the sale or purchase of portfolio securities with the other Funds or with individually managed accounts advised or sponsored by the Investment Adviser or any of its affiliates to reduce brokerage commissions or otherwise to achieve best overall execution). (18) purchase, either alone or together with any other Fund or Funds, more than either 10% (a) in principal amount of the outstanding securities of an issuer, or (b) of the outstanding voting securities of an issuer except that such restriction will not apply to U.S. Government or government agency securities, bank money instruments or bank repurchase agreements. RESTRICTIONS APPLICABLE HIGH CURRENT INCOME FUND The High Current Income Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may purchase securities of issuers which invest or deal in any of the above. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 5% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. 9 (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in the securities of foreign issuers; except that the High Current Income Fund may invest in securities of foreign issuers if at the time of acquisition no more than 10% of its total assets, taken at market value at the time of the investment, would be invested in such securities, provided however, that up to 25% of the total assets of the Fund may be invested in securities (i) issued, assumed or guaranteed by foreign governments, or political subdivisions or instrumentalities thereof, (ii) assumed or guaranteed by domestic issuers, including Eurodollar securities or (iii) issued, assumed or guaranteed by foreign issuers having a class of securities listed for trading on the New York Stock Exchange (see 'Other Portfolio Strategies--Foreign Securities' in the Prospectus). Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuer are situated. (13) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (14) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. If through the appreciation of restricted securities or the depreciation of unrestricted securities held by a Fund, more than 10% of the assets of the Fund should be invested in restricted securities, the Fund will consider appropriate steps to assure maximum flexibility. (15) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers primarily engaged in the same industry (utilities will be divided according to their services; for example, gas, gas transmission, electric and telephone each will be considered a separate industry for purposes of this restriction). (17) participate on a joint (or a joint and several) basis in any trading account in securities (but this does not include the 'bunching' of orders for the sale or purchase of portfolio securities with the other Funds or with individually managed accounts advised or sponsored by the Investment Adviser or any of its affiliates to reduce brokerage commissions or otherwise to achieve best overall execution). (18) purchase, either alone or together with any other Fund or Funds, more than either 10% (a) in principal amount of the outstanding securities of an issuer, or (b) of the outstanding voting securities of an issuer except 10 that such restriction will not apply to U.S. Government or government agency securities, bank money instruments or bank repurchase agreements. RESTRICTIONS APPLICABLE TO THE QUALITY EQUITY FUND The Quality Equity Fund, may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except that the Fund may write covered call options. (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposits, bankers' acceptances and variable amount notes shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned; and provided further that the Fund may only make loans to New York Stock Exchange Member firms, other brokerage firms having net capital of at least $10 million and financial institutions, such as registered investment companies, banks and insurance companies, having at least $10 million in capital and surplus. (9) borrow amounts in excess of 5% of its total assets, taken at market value or, acquisition cost if it is lower, and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with 11 borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 15% of the Fund's total assets, taken at market value at the time thereof (the deposit is escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge); although Fund has the authority to mortgage, pledge or hypothecate more than 10% of its total assets under this investment restriction (10), as a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total net assets. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in the securities of foreign issuers except that the Quality Equity Fund may invest in securities of foreign issuers if at the time of acquisition no more than 10% of its total assets, taken at market value at the time of the investment, would be invested in such securities. Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuer are situated. (13) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested in the securities. (14) Quality Equity Fund may not invest in securities for which there are legal or contractual restrictions on resale, and it may not invest in securities for which there is no readily available market if at the time of acquisition more than 5% of its total assets would be invested in such securities). (15) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (16) concentrate its investments in any particular industry; provided that if it is deemed appropriate for the attainment of the Fund's investment objectives, up to 25% of its total assets (taken at acquisition cost at the time of each investment) may be invested in any one industry. (17) invest, either alone or together with any other Fund or Funds, in securities of any single issuer, if immediately after and as a result of such investment, the Fund owns more than 10% of the outstanding securities, or more than 10% of the outstanding voting securities, of such issuer. (18) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) RESTRICTIONS APPLICABLE TO THE EQUITY GROWTH FUND The Equity Growth Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). 12 (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof. (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 5% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating amy not exceed the Fund's total assets, taken at market value at the time thereof. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in securities of foreign issuers except that the Quality Equity Fund may invest in securities of foreign issuers if at the time of acquisition no more than 10% of its total assets, taken at (market value at the time of the investment, would be invested in such securities. Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuer are situated. 13 (13) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (14) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 5% of the total assets of the Fund taken at market value, would be invested in the securities. (15) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry. (17) invest, either alone or together with any other Fund or Funds, in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 10% of the outstanding securities, or more than 10% of any class of securities, of such issuer would be owned by the Fund. (18) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) RESTRICTIONS APPLICABLE TO THE FLEXIBLE STRATEGY FUND The Flexible Strategy Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interest therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except that the Fund may write covered call options. 14 (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend it portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 5% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (10) mortgage, pledge, hypothecate or any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 15% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge); although the Fund has the authority to mortgage, pledge or hypothecate more than 10% of its total assets under this investment restriction (10), as a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total net asset. (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (13) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. (14) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (15) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry. (16) invest, either alone or together with any other Fund or Funds, in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 10% of the outstanding securities, or more than 10% of any class of securities, of such issuer would be owned by the Fund. (17) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) 15 RESTRICTIONS APPLICABLE TO THE NATURAL RESOURCES FOCUS FUND The Natural Resources Focus Fund may not: (1) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (2) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. (3) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may purchase securities of investors which invest or deal in any of the above, and except further, that the Fund may engage in transactions in currency and options thereon, forward currency contracts, futures contracts and options thereon and purchase, sell or otherwise invest or deal in commodities or commodities contracts (as a matter of operating policy, however, the Fund at present does not intend to engage in transactions in commodities or commodities contracts, other than foreign currency, futures contracts and options on futures contracts). (4) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and the Fund may make margin payments in connection with transactions in options, forward currency contracts, futures contracts and options on futures contracts. (5) make short sales of securities or maintain a short position (except that the Fund may maintain short positions in forward currency contracts, options, futures contracts and options on futures contracts). (6) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (7) below; and the Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (7) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (8) borrow amounts in excess of 10% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. Usually, only 'leveraged' investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (9) except as may be necessary in connection with transactions in options, foreign currency contracts, futures contracts and options on futures contracts, mortgage, pledge, hypothecate or in any manner transfer (except as provided in (7) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (7) above, and then such mortgaging, pledging 16 or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge). (10) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (11) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (12) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. (13) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (14) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers primarily engaged in the same industry, except that when management anticipates significant economic, political or financial instability, the Natural Resources Focus Fund may invest more than 25% of its total assets in gold-related companies. In determining compliance by the Natural Resources Focus Fund with its policy on investing in the securities of issuers primarily engaged in the same industry, management will rely on industrial classifications contained in Standard & Poor's Register of Corporations, Directors and Executives. RESTRICTIONS APPLICABLE TO THE AMERICAN BALANCED FUND The American Balanced Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may purchase securities of issuers which invest or deal in any of the above. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except that the Fund may write covered call options. 17 (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and provided that for purposes of this restriction the acquisition of a portion of an issue of publicly- distributed bonds, debentures of 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 securlties in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 5% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 15 % of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge); although the Fund has the authority to mortgage, pledge or hypothecate more than 10% of its total assets under this investment restriction (10), as a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total net assets. (11) act as a an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in the securities of foreign issuers. Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuer are situated. (13) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (14) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. (15) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (16) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry. (17) invest, either alone or together with any other Fund or Funds, in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment 18 more than 10% of the outstanding securities, or more than 10% of any class of securities, of such issuer would be owned by the Fund. (18) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) RESTRICTIONS APPLICABLE TO THE GLOBAL STRATEGY FOCUS FUND The Global Strategy Focus Fund, may not: (1) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (2) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities. (3) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may purchase securities of issuers which invest or deal in any of the above, and except further, that the Fund may engage in transactions in currency and options thereon, forward currency contracts, futures contracts and options thereon and purchase, sell or otherwise invest or deal in commodities or commodities contracts. (4) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and the Fund may make margin payment in connection with transactions in options, forward currency contracts, futures contracts and options on futures contracts. (5) make short sales of securities or maintain a short position (except that the Fund may maintain short positions in forward currency contracts, options, futures contracts and options on futures contracts). (6) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (7) below; and the Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances. (7) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (8) borrow amounts in excess of 10% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes. Usually only 'leveraged' investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. 19 (9) except as may be necessary in connection with transactions in options, foreign currency contracts, futures contracts and options on futures contracts, mortgage, pledge, hypothecate or in any manner transfer (except as provided in (7) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (8) above, and then such mortgaging, pledging or hypothecating may not exceed 15% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge); although the Fund has the authority to mortgage, pledge or hypothecate more than 10% of its total assets under this investment restriction (9), as a matter of operating policy, the Fund will not mortgage, pledge or hypothecate in excess of 10% of total assets. (10) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (11) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (12) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. (13) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (14) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry. (15) invest, either alone or together with any other Fund or Funds, in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 10% of the outstanding securities, or more than 10% of any class of securities, of such issuer would be owned by the Fund. (16) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) RESTRICTIONS APPLICABLE TO THE BASIC VALUE FOCUS FUND The Basic Value Focus Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, 20 and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (6) make short sales of securities or maintain a short position or write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except that the Fund may write covered call options. (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and provided further that for the purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures of other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 5% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes. The Fund will not purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income. (10) mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge). (11) act as a an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in the securities of foreign issuers except that the Basic Value Focus Fund may invest in securities of foreign issuers if at the time of acquisition no more than 10% of its total assets, taken at market value at the time of the investment, would be invested in such securities. Consistent with the general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) a country in which the issuer derives a significant proportion (at least 50%) of its revenues or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuer are situated. (13) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. 21 (14) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 5% of the total assets of the Fund taken at market value, would be invested in the securities. (15) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (16) invest more than 25% of its assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (including securities issued or guaranteed by the government of any one foreign country, but excluding the U.S. Government, its agencies and instrumentalities). RESTRICTIONS APPLICABLE TO THE WORLD INCOME FOCUS FUND The World Income Focus Fund may not: (1) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (2) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commissions, is involved, and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. (3) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein, and except further, that the Fund may engage in transactions in currency and options thereon, forward currency contracts, futures contracts and options thereon and purchase, sell or otherwise invest or deal in commodities or commodities contracts. (4) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and the Fund may make margin payments in connection with transactions in options, forward currency contracts, futures contracts and options on futures contracts. (5) make short sales of securities or maintain a short position (except that the Fund may maintain short positions in forward currency contracts, options, futures contracts and options on futures contracts). (6) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (7) below; and the Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (7) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. 22 (8) borrow amounts in excess of 20% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. Usually only 'leveraged' investment companies may borrow in excess of 5 % of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding except that the Fund may purchase securities if their outstanding borrowings do not exceed 5% of their total assets. Interest paid on such borrowings will reduce net income. (9) except as may be necessary in connection with transactions in options, foreign currency contracts, futures contracts and options on future contracts, mortgage, pledge, hypothecate or in any manner transfer (except as provided in (7) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (8) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge). (10) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (11) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (12) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. (13) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (14) invest more than 25% of the assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (including securities issued or guaranteed by the government of any one foreign country, but excluding the U.S. Government, its agencies and instrumentalities). RESTRICTIONS APPLICABLE TO THE GLOBAL UTILITY FOCUS FUND The Global Utility Focus Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or, by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. 23 (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, cornmodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein and except further, that the Fund may engage in transactions in currency and options thereon, forward currency contracts, futures contracts and options thereon and purchase, sell or otherwise invest or deal in commodities or commodities contracts. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and the Fund may make margin payments in connection with transactions in options, forward currency contracts, futures contracts and options on futures contracts. (6) make short sales of securities or maintain a short position (except that the Fund may maintain short positions in forward currency contracts, options, futures contracts and options on tures contract). (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and the Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 10% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. Usually only 'leveraged' investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding, except that the Fund may purchase securities if their outstanding borrowings do not exceed 5% of their total assets. Interest paid on such borrowings will reduce net income. (10) except as may be necessary in connection with transactions in options, foreign currency contracts, futures contracts and options on future contracts, mortgage, pledge, hypothecate or or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge). (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (13) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more 24 than 10% of the total assets of the Fund taken at market value, would be invested in the securities. However, the asset-backed securities which the Fund has the option to put to the issuer or a stand-by bank or broker and receive the principal amount or redemption price thereof less transaction costs on no more than seven days' notice or when the Fund has the right to convert such securities into a readily marketable security in which it could otherwise invest upon not less than seven days' notice are not subject to this restriction. (14) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (15) invest less than 65% of its total assets in equity and debt securities issued by domestic and foreign companies in the utilities industries, except during temporary defensive periods. RESTRICTIONS APPLICABLE TO THE INTERNATIONAL EQUITY FOCUS FUND The International Equity Focus Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than U.S. Government or government agency securities or, securities issued by instrumentalities of the U.S. Government) of any one issuer (including repurchase agreements with any one bank). (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management. (3) purchase securities or other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. (4) purchase or sell interests in oil, gas or other mineral exploration or developing program, commodities, commodity contracts or real estate, except that the Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interest therein and except further, that the Fund may engage in transactions in currency and options thereon, forward currency contracts, futures contracts and options thereon and purchase, sell or otherwise invest or deal in commodities or commodities contracts. (5) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and the Fund may make margin payments in connection with transactions in options, forward currency contracts, futures contracts and options on futures contracts. (6) make short sales of securities or maintain a short position (except that the Fund may maintain short positions in forward currency contracts, options, futures contracts and options on futures contracts). (7) make loans to other persons; provided that the Fund may lend securities owned or held by it pursuant to (8) below; and the Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan. 25 (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. (9) borrow amounts in excess of 10% of its total assets, taken at market value and then only from banks as a temporary measure for extraordinary or emergency purposes. Usually only 'leveraged' investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. The Fund will not purchase securities while borrowings are outstanding, except that the Fund may purchase securities if their outstanding borrowings do not exceed 5% of their total assets. Interest paid on such borrowings will reduce net income. (10) except as may be necessary in connection with transactions in options, foreign currency contracts, futures contracts and options on future contracts, mortgage, pledge, hypothecate or or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value at the time thereof (the deposit in escrow by the Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge). (11) act as an underwriter of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested is such securities. (13) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% of the total assets of the Fund taken at market value, would be invested in the securities. (14) purchase or retain the securities of any issuer, if those individual officers and directors of the Company, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (15) invest more than 25% of the assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (including securities issued or guaranteed by the government of any one foreign country, but excluding the U.S. Government, its agencies and instrumentalities). RESTRICTIONS APPLICABLE TO THE DEVELOPING CAPITAL MARKETS FOCUS FUND The Developing Capital Markets Focus Fund may not: (1) Invest more than 25% of its assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). 26 (2) Make investments for the purpose of exercising control or management. Investments by the Fund in wholly-owned investment entities created under the laws of certain countries will not be deemed the making of investments for the purpose of exercising control or management. (3) Purchase securities of other investment companies, except to the extent permitted by applicable law. (4) Purchase or sell real estate (including real estate limited partnerships), except that the Fund may invest in securities secured by real estate or interests therein or issued by companies including real estate investment trusts, which invest in real estate or interests therein. (5) Purchase any securities on margin, except that the Fund may obtain such short- term credit as may be necessary for the clearance of purchases and sales of portfolio securities. The payment by the Fund of initial or variation margin in connection with futures or related options transactions, if applicable, shall not be considered the purchase of a security on margin. (6) Make short sales of securities or maintain a short position. (7) Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, short-term commercial paper, certificates of deposit, bankers' acceptances and repurchase agreements and purchase and sale contracts shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities as set forth in (8) below. (8) Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value; provided that such loans may only be made in accordance with the guidelines set forth below. (9) Issue senior securities, borrow money or pledge its assets in excess of 20% of its total assets taken at market value (including the amount borrowed) and then only from a bank as a temporary measure for extraordinary or emergency purposes including to meet redemptions or to settle securities transactions. Usually only 'leveraged' investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only as a temporary measure for extraordinary or emergency purposes including to meet redemptions or to settle securities transactions which may otherwise require untimely dispositions of Fund securities. The Fund will not purchase securities while borrowings exceed 5% of total assets except (a) to honor prior commitments or (b) to exercise subscription rights where outstanding borrowings have been obtained exclusively for settlements of other securities transactions. (For the purpose of this restriction, collateral arrangements with respect to the writing of options, and, if applicable, futures contracts, options on futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets and neither such arrangements nor the purchase or sale of futures or related options are deemed to be the issuance of a senior security.) (10) Invest in securities which cannot be readily resold because of legal or contractual restrictions or which are otherwise not readily marketable, including repurchase agreements and purchase and sale contracts maturing in more than seven days, if at the time of acquisition more than 15% of its net assets would be invested in such securities. (11) Underwrite securities of other issuers except insofar as the Fund technically may be deemed and underwriter under the Securities Act of 1933, as amended (the 'Securities Act'), in selling portfolio securities. (12) Purchase or sell interests in oil, gas or other mineral exploration or development programs, except that the Fund may invest in securities issued by companies that engage in oil, gas or other mineral exploration or development activities. Additional investment restrictions adopted by the Company for the Developing Capital Markets Focus Fund, which may be changed by the Board of Directors, provide that the Fund may not: 27 (i) Invest in warrants if at the time of acquisition its investments in warrants, valued at the lower of cost or market value, would exceed 5% of the Fund's net assets; included within such limitation, but not to exceed 2% of the Fund's net assets, are warrants which are not listed on the New York or American Stock Exchange. For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. (ii) Purchase or sell commodities or commodity contracts, except that the Fund may deal in forward foreign exchange between currencies of the different countries in which it may invest and purchase and sell stock index and currency options, stock index futures, financial futures and currency futures contracts and related options on such futures. (iii) Invest in securities of corporate issuers having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of its total assets, taken at market value, would be invested in such securities. (iv) Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent described in the Fund's Prospectus and in this Statement of Additional Information, as amended from time to time. (v) Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, the Manager or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. RESTRICTIONS APPLICABLE TO THE INTERNATIONAL BOND FUND The International Bond Fund may not: (1) Make investments for the purpose of exercising control or management. (2) Purchase securities of other investment companies, except to the extent permitted by applicable law. (3) Purchase or sell real estate, provided that the Fund may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. (4) Purchase or sell commodities or commodity contracts except that the Fund may deal in forward foreign exchange between currencies in which its portfolio securities are denominated and the Fund may purchase and sell interest rate and currency options, futures contracts and related options. (5) Invest more than 25% of its total assets, taken at market value at the time of each investment, in the securities of corporate issuers in any particular industry. (6) Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, or make short sales of securities or maintain a short position. (The deposit or payment by the Fund of initial or variation margin in connection with futures or options transactions is not considered the purchase of a security on margin.) (7) Make loans to other persons (except as provided in (8) below), provided that for purposes of this restriction the acquisition of a portion of publicly distributed bonds, debentures, or other corporate debt securities and investment in governmental and supranational obligations, short-term commercial paper, certificates of deposit, bankers' acceptances and repurchase agreements shall not be deemed to be the making of a loan. (8) Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value, provided that such loans shall be made in accordance with the guidelines set forth below. (9) Issue senior securities, borrow money or pledge its asset except that the Fund may borrow from a bank as a temporary measure for extraordinary or emergency purposes or to meet redemption in amounts not exceeding 10% (taken at the market value) of its total assets and pledge its assets to secure such borrowings. (For the purpose of this restriction, collateral arrangements with respect to the writing of options, futures contracts, options on futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets and neither such arrangements nor the purchase or sale of options, futures or related options are deemed to be the issuance of a senior security.) 28 (10) Invest in securities which cannot be readily resold because of legal or contractual restrictions or which are not otherwise readily marketable if, regarding all such securities, more than 15% of its net assets, taken at market value, would be invested in such securities. (11) Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. (12) Purchase or sell interests in oil, gas or other mineral exploration or development programs. (13) Invest in securities of corporate issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of its total assets, taken at market value, would be invested in such securities. The Directors have established the policy that the Fund will not purchase or retain the securities of any issuer if those individual officers and Trustees of the Company, the Investment Advisor or Merrill Lynch Funds Distributor, Inc. (the 'Distributor'), each owning beneficially more than one-half of 1% of the securities of each issuer, own in the aggregate more than 5% of the securities of such issuer. RESTRICTIONS APPLICABLE TO INTERMEDIATE GOVERNMENT BOND FUND The Intermediate Government Bond Fund may not: (1) Invest in any security which is not issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities which has a stated maturity greater than fifteen years from the date of purchase. (2) make investments for the purpose of exercising control over, or management of, any issuer. (3) Purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Fund may purchase securities of issuers which invest or deal in any of the above, and the Fund may purchase and sell financial futures contracts and related options. (4) Purchase any securities on margin (except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities) or make short sales of securities or maintain a short position. (The deposit or payment by the Fund of initial or variation margin in connection with futures or options transactions is not considered the purchase of a security on margin.) (5) Make loans, except as provided in (6) below and except through the purchase of obligations in private placements (the purchase of publicly-traded obligations not being considered the making of a Loan. (6) Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value at the time of the loan, and provided that such loan shall be made in accordance with the guidelines set forth above. (7) Borrow amounts in excess of 10% of its total assets, taken at market value at the time of the borrowing, and then only from banks as a temporary measure for extraordinary or emergency purposes. (8) Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (7) above (and then such mortgaging, pledging or hypothecating may not exceed 10% of such Fund's total assets taken at market value at the time thereof. (For the purpose of this restriction, collateral arrangements with respect to the writing of options, and, if applicable, futures contracts, options on futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets and neither such arrangements nor the purchase or sale of futures or related options are deemed to be the issuance of a senior security.) (9) Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. 29 (10) Participate on a joint (or a joint and several) basis in any trading account in securities (but) this does not include the 'bunching' of orders for the sale or purchase of portfolio securities or with individually managed accounts advised or sponsored by the Investment Adviser or any of its affiliates to reduce brokerage commissions or otherwise to achieve best overall execution. (l1) Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 or 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. The Directors have established a policy that the Fund will not invest in financial futures or options thereon or write, purchase or sell puts, calls or combinations thereof. OVER-THE-COUNTER OPTIONS The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Company has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by a Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund's existing OTC options on futures contracts exceeds 15% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are otherwise not readily marketable. However, if an OTC option is sold by a Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities equal to the repurchase price less the amount by which the option is 'in-the-money' (i.e., current market value of the underlying securities minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is 'in-the-money'. This policy as to OTC options is not a fundamental policy of any Fund and may be amended by the Directors of the Company without the approval of the Company's shareholders. However, the Company will not change or modify this policy prior to the change or modification by the Commission staff of its position. RESTRICTED SECURITIES From time to time a Fund may invest in securities the disposition of which is subject to legal restrictions, such as restrictions imposed by the Securities Act of 1933 (the 'Securities Act') on the resale of securities acquired in private placements. If registration of such securities under the Securities Act is required, such registration may not be readily accomplished and if such securities may be sold without registration, such resale may be permissible only in limited quantities. In either event, a Fund may not be able to sell its restricted securities at a time which, in the judgment of the Investment Adviser, would be most opportune. Each of the Funds is subject to limitations on the amount of securities which are illiquid, because of restrictions under the Securities Act or otherwise, they may purchase. Each Fund may, however, purchase without regard to that limitation securities that are not registered under the Securities Act, but that can be offered and sold to 'qualified institutional buyers' under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. 30 Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Fund's investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. PORTFOLIO STRATEGIES Liquidity. In order to assure that each Fund has sufficient liquidity, as a matter of operating policy no Fund may invest more than 10% of its net assets, except that the Developing Capital Markets Focus and International Bond Funds may not invest more than 15% of its net assets in securities for which market disposition is not readily available. Market disposition may not be readily available for repurchase agreements maturing in more than seven days and for securities having restrictions on resale. Lending of Portfolio Securities. Subject to any applicable investment restriction above, each Fund may from time to time loan securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash, securities issued or guaranteed by the U.S. Government or, in the case of the Domestic Money Market and Reserve Assets Fund, cash equivalents which while the loan is outstanding will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. The Fund will retain all rights of beneficial ownership as to the loaned portfolio securities, including voting rights and rights to interest or other distributions, and will have the right to regain record ownership of loaned securities to exercise such beneficial rights. Such loans will be terminable at any time. The Fund may pay reasonable finders', administrative and custodial fees to persons unaffiliated with the Fund in connection with the arranging of such loans. The dividends, interest and other distributions received by the Company on loaned securities may, for tax purposes, be treated as income other than qualified income for the 90% test discussed under 'Dividends, Distributions and Taxes--Federal Income Taxes.' The Company intends to lend portfolio securities only to the extent that such activity does not jeopardize the Company's qualification as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Forward Commitments. Securities may be purchased or sold on a delayed delivery basis or may be purchased on a forward commitment basis by each of the Company's Funds at fixed purchase terms with periods of up to 180 days between the commitment and settlement dates. The purchase will be recorded on the date the purchasing Fund enters into the commitment and the value of security will thereafter be reflected in the calculation of the Fund's net asset value. The value of the security on the delivery date may be more or less than its purchase price. A separate account of the Fund will be established with The Bank of New York or Chase Manhattan Bank N.A. (for Developing Capital Markets Focus Fund) (the 'Custodian') consisting of cash or liquid, high-grade debt obligations having a market value at all times until the delivery date at least equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Although a Fund will generally enter into forward commitments with the intention of acquiring securities for its portfolio, it may dispose of a commitment prior to settlement if the Investment Adviser deems it appropriate to do so. There can, of course, be no assurance that the judgment upon which these techniques are based will be accurate or that such techniques when applied will be effective. The Funds will enter into forward commitment arrangements only with respect to securities in which they may otherwise invest as described under 'Investment Objectives and Policies of the Funds' in the Prospectus. Eurodollar and Yankeedollar Obligations. The Reserve Assets Fund 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 31 subsidiaries ('foreign bank obligations'). Investment in such obligations may involve different risks from the risks of investing in obligations of U.S. banks. Such risks include adverse political and economic developments, the possible imposition of withholding taxes on interest income payable on such obligations, the possible seizure or nationalization of foreign deposits and the possible establishment of exchange controls or other foreign governmental laws or restrictions which might adversely affect the payment of principal and interest. Generally the issuers of such obligations are subject to fewer U.S. regulatory requirements than are applicable to U.S. banks. Foreign depository institutions and their foreign branches and subsidiaries, and foreign branches or subsidiaries of U.S. banks, may be subject to less stringent reserve requirements than U.S. banks. U.S. branches or subsidiaries of foreign banks are subject to the reserve requirements of the state in which they are located. There may be less publicly available information about a foreign depository institution, branch or subsidiary, or a U.S. branch or subsidiary of a foreign bank, than about a U.S. bank, and such institutions may not be subject to the same accounting, auditing and financial record keeping standards and requirements as U.S. banks. Evidence of ownership of Eurodollar and foreign bank obligations may be held outside of the United States, and a Fund may be subject to the risks associated with the holding of such property overseas. Eurodollar and foreign bank obligations of the Fund held overseas will be held by foreign branches of the Custodian for the Fund or by other U.S. or foreign banks under subcustodian arrangements complying with the requirements of the Investment Company Act of 1940. The Investment Adviser will consider the above factors in making investments in Eurodollar, Yankeedollar and foreign bank obligations and will not knowingly purchase obligations which, at the time of purchase, are subject to exchange controls or withholding taxes. Generally, the Reserve Assets Fund will limit its Yankeedollar investments to obligations of banks organized in Canada, France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and other western industrialized nations. Standby Commitment Agreements. The High Current Income Fund, Global Utility Focus Fund, International Equity Focus Fund, and Developing Capital Markets Focus Fund may from time to time enter into standby commitment agreements. Such agreements commit a Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. A Fund will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and price which is considered advantageous to the Fund. A Fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale, will not exceed 10% of its assets taken at the time of acquisition of such commitment or security. A Fund will at all times maintain a segregated account with its custodian of cash or liquid, high-grade debt obligations in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, a Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued and the value of the security will thereafter be reflected in the calculation of a Fund's net asset value. If the security is issued, the cost 32 basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. Asset-Based Securities. As described in the Prospectus, the Natural Resources Focus Fund may invest in debt securities, preferred stocks or convertible securities, the principal amount, redemption terms or conversion terms of which are related to the market price of some natural resource asset such as gold bullion. These securities are referred to as 'asset-based securities.' The Fund will not acquire asset-based securities for which no established secondary trading market exists if at the time of acquisition more than 5% of its total assets are invested in securities which are not readily marketable. The Fund may invest in asset-based securities without limit when it has the option to put such securities to the issuer or a stand-by bank or broker and received the principal amount or redemption price thereof less transaction costs on no more than seven days' notice or when the Fund has the right to convert such securities into a readily marketable security in which it could otherwise invest upon not less than seven days' notice. The asset-based securities in which the Fund may invest may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. The Fund's holdings of such securities therefore may not generate appreciable current income, and the return from such securities primarily will be from any profit on the sale, maturity or conversion thereof at a time when the price of the related asset is higher than it was when the Fund purchased such securities. Writing of Covered Options. The Quality Equity Fund, Flexible Strategy Fund, Natural Resources Focus Fund, American Balanced Fund, Global Strategy Focus Fund, Basic Value Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund may from time to time write covered call options on their portfolio securities. A covered call option is an option where the Fund owns the underlying securities. By writing a covered call option, the Fund, in return for the premium income realized from the sale of the option, may give up the opportunity to profit from a price increase in the underlying security above the option exercise price. In addition, the Fund will not be able to sell the underlying security until the option expires or is exercised or the Fund effects a closing purchase transaction as described below. If the option expires unexercised, or is closed out at a profit, the Fund realizes a gain (short-term capital gain for federal income tax purposes) on the option which may offset all or a part of a decline in the market price of the underlying security during the option period. The Quality Equity Fund and the Basic Value Focus Fund may not write options on underlying securities exceeding 15% of the value of their total assets. Each of the Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds also may write put options, which give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. The Fund will receive a premium for writing a put option which increases the Fund's return. A Fund will write only covered put options which means that so long as the Fund is obligated as the writer of the option, it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for as long as the option is outstanding. A Fund may engage in closing transactions in order to terminate put options that it has written. Exchange-traded options are issued by The Options Clearing Corporation (the 'Clearing Corporation') and are currently traded on the Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange, and Midwest Stock Exchange. An Option gives the purchaser of an option the right to buy, and obligates the writer (seller) to sell, the underlying security at the exercise price during the option period. The 33 maximum term of an option is nine months. For writing an option, the Funds receive a premium, which is the price of such option on the Exchange on which it is traded. The exercise price of the option may be below, equal to or above the current market value of the underlying security at the time the option was written. A Fund may terminate its obligation prior to the expiration date of the option by executing a closing purchase transaction which is effected by purchasing on an exchange an option of the same series (i.e., same underlying security, exercise price and expiration date) as the option previously written. The cost of such closing purchase transaction may be greater than the premium received upon the original option, in which case a Fund will have incurred a loss in the transaction. An option may be closed out only on an exchange which provides a secondary market for an option of the same series and there is no assurance that a secondary market will exist for any particular option at any specific time. In the event a Fund is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the option expires or the underlying security is delivered upon exercise, with the result that the Fund will be subject to the risk of market decline in the underlying security during such period. A Fund will write an exchange-traded option on a particular security only if management believes that a secondary market will exist on an exchange for options of the same series which will permit the Fund to make a closing purchase transaction in order to close out its position. Writing options involves risks of possible unforeseen events which can be disruptive to the option markets or could result in the institution of certain procedures including restriction of certain types of orders. Purchasing Options. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds, each may purchase put options in connection with its hedging activities. By buying a put, these Funds have the right to sell the underlying securities at the exercise price, thus limiting the Fund's risk of loss through a decline in the market value of the security until the put expires. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out the Fund's position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, a Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities which it intends to purchase. The Fund will not purchase options on securities if as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Stock Index Options. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus and Developing Capital Markets Focus Funds may purchase and write exchange-traded call options and put options on stock indexes for the purpose of hedging the Funds' investment portfolios. As stated in the Prospectus, the effectiveness of this hedging technique will depend upon the extent to which price movements in the portion of the Funds' investment portfolio being hedged correlate with price movements of the stock index selected. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Fund will realize a gain or loss on the purchase or sale of an option on an index depends upon movements in the level of prices in the stock market generally or in an industry or market segment rather than movements in the price of a particular stock. Accordingly, successful use by the Funds of options on indexes will be subject to the Investment Adviser's ability to correctly predict movements in the direction of the stock market generally or of a particular industry or market segment. This requires different skills and techniques than predicting changes in the price of individual stocks. Stock Index and Financial Futures. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International 34 Bond Funds will only engage in transactions in stock index or financial futures to hedge its investment portfolios. The Funds may sell stock index or financial futures contracts in anticipation of or during a market decline in an endeavor to offset the decrease in market value of the Funds' securities portfolio that would otherwise result from a market decline. When the Funds are not fully invested in the securities market and anticipate a significant market advance, they may purchase stock index or financial futures in order to gain rapid market exposure that may in part or entirely offset increases in the cost of the securities that the Funds intend to purchase. No purchase of stock index or financial futures will be made, however, unless the Funds intend to purchase securities in approximately the amount of the market value of the stocks represented by the stock index or financial futures purchased and the Funds have identified the cash or cash equivalents needed to make such a purchase. An amount of cash and cash equivalents will be deposited in a segregated account with the Company's Custodian so that the amount so segregated, plus the initial and variation margin held in the account of its broker, will collateralize the Funds' positions in stock index or financial futures. Forward Foreign Exchange Transactions. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds are authorized to deal in forward foreign exchange between currencies of the different countries in which they will invest and multinational currency units as a hedge against possible variations in the foreign exchange rates between these currencies. This is accomplished through contractual agreements to purchase or sell a specified currency at a specified future date (up to one year) and price at the time of the contract. A Fund's dealings in forward foreign exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward foreign currency with respect to specific receivables or payables of the Fund accruing in connection with the purchase and sale of its portfolio securities, the sale and redemption of shares of the Fund or the payment of dividends and distributions by the Fund. Position hedging is the purchase or sale of one forward foreign currency for another currency with respect to portfolio security positions denominated or quoted in such foreign currency to offset the effect of an anticipated substantial appreciation or depreciation, respectively, in the value of such currency relative to the U.S. dollar. In this situation, the Fund also may, for example, enter into a forward contract to sell or purchase a different foreign currency for a fixed U.S. dollar amount where it is believed that the U.S. dollar value of the currency to be sold or bought pursuant to the forward contract will fall or rise, as the case may be, whenever there is a decline or increase, respectively, in the U.S. dollar value of the currency in which portfolio securities of the Fund are denominated (this practice being referred to as a 'cross-hedge'). A Fund will not speculate in forward foreign exchange. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. Call Options on Futures Contracts. A call option on a futures contract provides the purchaser with the right, but not the obligation, to enter into a 'long' position in the underlying futures contract at any time up to the expiration of the option. The purchase of an option on a futures contract presents more limited risk than purchasing the underlying futures contract. Depending on the price of the option compared to either the futures contract upon which it is based, or the underlying securities or currency, exercise of the option may or may not be less risky than ownership of the futures contract or underlying securities or currency. Like the purchase of a futures contract, the National Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds will purchase a call option on a futures contract to hedge against the appreciation of securities resulting from a market 35 advance or appreciation of securities denominated in foreign currencies resulting from strengthening of the currency which the Fund intends to purchase. The writing of a call option on a futures contract may constitute a partial hedge against a decline in the equities market or drop in the value of a foreign currency, if the futures price at expiration is below the exercise price of the option. In such event, the Fund will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Fund's security investments or investments denominated in foreign currencies. Conversely, if the futures price is above the exercise price at any point prior to expiration, the option may be exercised and the Fund would be required to enter into the underlying futures contract at an unfavorable price. Put Options on Futures Contracts. A put option on a futures contract provides the purchaser with the right, but not the obligation, to enter into a 'short' position in the futures contract at any time up to the expiration of the option. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds will purchase a put option on a futures contract to hedge its securities against the risk of a decline in the equities markets or drop in the value of a foreign currency. The writing of a put option on a futures contract may constitute a partial hedge against increasing prices of portfolio securities or in value of foreign currencies which the Fund intends to purchase, if the futures price at expiration is higher than the exercise price. In such event, the Fund will retain the full amount of the option premium, which provides a partial hedge against any increase in the price of the securities which the Fund intends to purchase. Conversely, if the futures price is below the exercise price at any point prior to expiration, the option may be exercised and the Fund would be required to enter into the underlying futures contract at an unfavorable price. Risk Factors in Transactions in Futures and Options Thereon. The Natural Resources Focus, Global Strategy Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may purchase futures contracts or purchase call or write put options thereon to hedge against a possible increase in the price of securities before the Fund is able to invest its cash in such securities. In such instances, it is possible that the market may instead decline. If the Fund does not then invest in such securities because of concern as to possible further market decline or for other reasons, the Fund may realize a loss on the futures or option contract that is not offset by a reduction in the price of securities purchased. Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contract can result in substantial unrealized gains or losses. Because the Fund will engage in the purchase and sale of stock index and currency contracts solely for hedging purposes, however, any losses incurred in connection therewith should, if the hedging strategy is successful, be offset in whole or in part by increases in the value of securities held by the Fund or decreases in the price of securities the Fund intends to acquire. The anticipated offsetting movements between the price of the futures or option contracts and the hedged security may be distorted due to differences in the nature of the markets, such as differences in initial and variation margin requirements, the liquidity of such markets and the participation of speculators in such markets. The amount of risk the Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related transactions costs. In order to profit from an option purchased, however, it may be necessary to exercise the option and to liquidate the underlying futures contract, subject to the risks of the availability of a liquid offset market. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected 36 in the value of the option purchased. The writer of an option on a futures contract is subject to the risks of commodity futures trading, including the requirement of variation margin payments, as well as the additional risk that movements in the price of the option may not correlate with movements in the price of the underlying security or futures contract. The trading of futures contracts and options thereon also is subject to certain market risks, such as trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of a brokerage firm or clearing corporation or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions. MANAGEMENT OF THE COMPANY The Directors and executive officers of the Company and their ages and principal occupations for at least the last five years are set forth below. Unless otherwise noted, the address of each executive officer and director is P.O. Box 9011, Princeton, New Jersey 08543-9011. ARTHUR ZEIKEL (62)--President and Director(1)(2)--President of the Investment Adviser (which term as used herein includes its corporate predecessors) since 1977; President of Fund Asset Management, L.P. ('FAM') (which term as used herein includes its corporate predecessors) since 1977; President and Director of Princeton Services, Inc. ('Princeton Services') since 1993; Executive Vice President of Merrill Lynch since 1990 and a Senior Vice President thereof from 1985 to 1990; Executive Vice President of Merrill Lynch & Co., Inc. ('ML&Co.') since 1990; Director of the Distributor. WALTER MINTZ (65)--Director(2)--1114 Avenue of the Americas, New York, New York 10036. Special Limited Partner of Cumberland Partners (investment partnership) since 1982. MELVIN R. SEIDEN (64)--Director(2)--780 Third Avenue, New York, New York 10017. President of Silbanc Properties, Ltd. (real estate, consulting and investments) since 1987; Chairman and President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to 1987. STEPHEN B. SWENSRUD (61)--Director(2)--24 Federal Street, Boston, Massachusetts 02110. Principal of Fernwood Associates (financial consultants); Director, Hitchiner Manufacturing Company. JOE GRILLS (59)--Director(2)--183 Soundview Lane, New Canaan, Connecticut 06840. Investment Management Advisor; Director of the Duke Management Company and a member of the Executive Committee; Member of the Investment Advisory Committee of the State of New York Common Fund; Director of the University of Chicago Graduate School of Business New York Association; formerly, Assistant Treasurer of International Business Machines Corporation ('IBM') and Chief Investment Officer of the IBM Retirement Funds from 1986 until 1993. HARRY WOOLF (71)--Director(2)--The Institute for Advanced Study, Olden Lane, Princeton, New Jersey 08540. Professor and former Director of The Institute for Advanced Study (private institution devoted to the encouragement, support and patronage of learning) since 1976; Director, Alex. Brown Cash Reserve Fund, Flag Investors Fund and Advanced Technology Laboratories and Space Labs Medical (medical equipment manufacturing and marketing). TERRY K. GLENN (54)--Executive Vice President(1)(2)--Executive Vice President of the Investment Adviser and FAM since 1983 and Director since 1991; President and Director of Merrill Lynch Funds Distributor, Inc. (the 'Distributor') since 1986; Executive Vice President and Director of Princeton Services of Princeton Administrators, Inc. since 1988; and Director of Financial Data Services, Inc. since 1985. BERNARD J. DURNIN (52)--Senior Vice President(1)(2)--Senior Vice President of the Investment Adviser since 1981. 37 N. JOHN HEWITT (60)--Senior Vice President(1)(2)--Senior Vice President of MLAM and FAM since 1980. JOSEPH T. MONAGLE, JR. (46)--Senior Vice President(1)(2)--Senior Vice President of MLAM since 1990; Vice President of MLAM from 1978 to 1990. CHRISTOPHER G. AYOUB (39)--Vice President(1)(2)--Vice President of MLAM since 1985; Assistant Vice President from 1984 to 1985 and an employee since 1982. DONALD C. BURKE (34)--Vice President(1)(2)--Vice President of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to 1990. DENIS B. CUMMINGS (52)-- Vice President(1)(2)--Vice President of MLAM since 1978. JOEL HEYMSFELD (50)--Vice President(1)(2)--Vice President of MLAM since 1978. VINCENT T. LATHBURY, III (54)--Vice President(1)(2)--Vice President of MLAM and FAM and Portfolio Manager of MLAM and FAM since 1982. FREDRIC LUTCHER (46)--Vice President(1)(2)--Vice President of MLAM since 1990 and Portfolio Manager since 1989; Senior Vice President, Lazard Freres Asset Management, Inc. from 1988 to 1989; Director, E. F. Hutton Capital Management, Inc. from 1981 to 1988. JAY C. HARBECK (60)--Vice President(1)(2)--Vice President of MLAM since 1986. ALDONA A. SCHWARTZ (46)--Vice President(1)(2)--Vice President of MLAM since 1991 and an employee of the Investment Adviser since 1986. GERALD M. RICHARD (45)--Treasurer(1)(2)--Senior Vice President and Treasurer of MLAM and FAM since 1984; Treasurer of the Distributor since 1984 and Vice President since 1981; and Senior Vice President and Treasurer of Princeton Administrators, Inc. since 1988. MICHAEL J. HENNEWINKEL (42)--Secretary(1)(2)--Vice President of MLAM since 1985 and attorney associated with MLAM and FAM since 1982. - ------------------ (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. Set forth below is a chart showing the aggregate compensation paid by the Company to each of its Directors, as well as the total compensation paid to each Director of the Company by the Company and by other investment companies advised by the Adviser or FAM for their services as Directors or Trustees of such investment companies for the year ending December 31, 1994.
TOTAL COMPENSATION FROM AGGREGATE PENSION OR RETIREMENT COMPANY AND FAM/MLAM COMPENSATION BENEFITS ACCRUED AS PART ADVISED COMPANIES PAID NAME OF DIRECTOR FROM COMPANY OF COMPANY EXPENSE TO DIRECTORS(1) - ----------------------------------- ------------ ------------------------ ----------------------- Walter Mintz $ 15,500 NONE $ 157,325 Melvin R. Seiden $ 15,500 NONE $ 157,325 Harry Woolf $ 15,500 NONE $ 157,325 Stephen B. Swensrud $ 15,500 NONE $ 165,325 Joe Grills $ 15,500 NONE $ 190,383
- ------------------ (1) In addition to the Fund, the Directors serve on the boards of other FAM/MLAM Advised Funds as follows: Mr. Mintz (18 boards); Mr. Seiden (18 boards); Mr. Woolf (18 boards); Mr. Swensrud (19 boards); Mr. Grills (18 boards). 38 Mr. Zeikel and the officers of the Company owned on February 28, 1995 in the aggregate less than 1% of the outstanding Common Stock of Merrill Lynch & Co., Inc. The Company has an Audit Committee consisting of all of the directors of the Company who are not interested persons of the Company. Pursuant to the terms of the Investment Advisory Agreements, the Investment Adviser pays all compensation of officers and employees of the Company as well as the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries. The fees payable by the Company to non-interested directors are $5,500 per year plus $1,500 per quarterly meeting of the Board of Directors attended, $3,000 per year for serving on the Audit Committee of the Board of Directors plus $250 per meeting of the Audit Committee attended if such meeting is held on a day other than a day on which the Board of Directors meets, and reimbursement of out-of-pocket expenses. For the year ended December 31, 1994, such fees and expenses aggregated $61,192. INVESTMENT ADVISORY ARRANGEMENTS The Company has entered into seven separate investment advisory agreements (the 'Investment Advisory Agreements') relating to the Funds with the Investment Adviser, which is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. The principal business address of the Investment Adviser is P.O. Box 9011, Princeton, New Jersey 08543-9011. The Investment Adviser and FAM currently act as the investment adviser to over 110 other registered investment companies. The principal executive officers and directors of the Investment Adviser are Arthur Zeikel, President and Director; Terry K. Glenn, Executive Vice President and Director; Robert W. Crook, Senior Vice President; Bernard J. Durnin, Senior Vice President; Vincent R. Giordano, Senior Vice President; Norman R. Harvey, Senior Vice President; N. John Hewitt, Senior Vice President; Philip L. Kirstein, Senior Vice President, General Counsel and Secretary; Ronald M. Kloss, Senior Vice President; Stephen M. M. Miller, Senior Vice President; Joseph T. Monagle, Senior Vice President; Gerald M. Richard, Senior Vice President and Treasurer; Richard L. Rufener, Senior Vice President; Ronald L. Welburn, Senior Vice President; and Anthony Wiseman, Senior Vice President. Securities held by any Fund may also be held by other funds for which the Investment Adviser or FAM acts as an adviser or by investment advisory clients of the Investment Adviser. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for any Fund or other funds for which the Investment Adviser or FAM acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or FAM during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Advisory Fee. As compensation for its services to the Company and its Funds, the Investment Adviser receives a fee from the Company at the end of each month at an annual rate of 0.75% of the average daily net assets of the Equity Growth Fund, 0.65% of the average daily net assets of each of the Flexible Strategy Fund, 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, 0.60% of the average daily net assets of the Basic Value Focus Fund, 0.60% of the average daily net assets of the World Income Focus Fund, 0.60% of the average daily net assets of the Global Utility Focus Fund, 0.75% of the average daily net assets of the International Equity Focus Fund, 1.00% of the average daily net assets of the Developing Capital Markets Focus Fund, 0.60% of the average 39 daily net assets of the International Bond Fund and 0.50% of the average daily net assets of the Intermediate Government Bond Fund, and at the following annual rates with respect to the other Funds: RESERVE ASSETS FUND Portion of average daily value of net assets of the Fund:
ADVISORY FEE ----------- Not exceeding $500 million.................................. 0.500% In excess of $500 million but not exceeding $750 million.... 0.425% In excess of $750 million but not exceeding $1 billion...... 0.375% In excess of $1 billion but not exceeding $1.5 billion...... 0.350% In excess of $1.5 billion but not exceeding $2 billion...... 0.325% In excess of $2 billion but not exceeding $2.5 billion...... 0.300% In excess of $2.5 billion................................... 0.275%
QUALITY EQUITY FUND Portion of average daily value of net assets of the Fund: Not exceeding $250 million.................................. 0.500% In excess of $250 million but not exceeding $300 million.... 0.450% In excess of $300 million but not exceeding $400 million.... 0.425% In excess of $400 million................................... 0.400%
PRIME BOND FUND AND HIGH CURRENT INCOME FUND Portion of aggregate average daily value of net assets of both Funds:
ADVISORY FEE ---------------------------- HIGH CURRENT BOND INCOME PRIME FUND FUND --------------- ----------- Not exceeding $250 million........................ 0.55% 0.50% In excess of $250 million but not more than $500 million......................................... 0.50% 0.45% In excess of $500 million but not more than $750 million......................................... 0.45% 0.40% In excess of $750 million......................... 0.40% 0.35%
As the last table shows, the advisory fee rates for the Prime Bond Fund and the High Current Income Fund are subject to reduction to the extent that the aggregate average daily net assets of those Funds exceeds $250 million. The reductions will be applicable to each Fund regardless of size on a 'uniform percentage' basis. Determination of the portion of the net assets of each such Fund to which a reduced rate is applicable is made by multiplying the net assets of that Fund by the 'uniform percentage,' which is derived by dividing the amount of the portion of the aggregate assets of both Funds to which such rate applies by the total amount of such aggregate assets. There can be no assurance, however, that any of the Funds will reach a net asset level at which a reduced advisory fee rate would be applicable. The Investment Advisory Agreements require the Investment Adviser to reimburse each Fund (up to the amount of the advisory fee earned by the Investment Adviser with respect to such Fund) if and to the extent that in any fiscal year the operating expenses of the Fund exceed the most restrictive expense limitation then in effect under any state securities law or the published regulations thereunder. At present the most restrictive expense limitation requires the Investment Adviser to reimburse expenses (excluding interest, taxes, brokerage fees and commissions and extraordinary charges such as litigation costs) which exceed 2.5% of each Fund's first $30 40 million of average daily net assets, 2.0% of its average daily net assets in excess of $30 million but less than $100 million, and 1.5% of its average daily net assets in excess of $100 million. It should be noted that because the Funds' shares are sold only to the Insurance Companies, the shares are not required to be registered under state 'blue sky' or securities laws. The Investment Adviser believes, however, that the most restrictive expense limitations imposed by state securities laws or published regulations thereunder are an appropriate standard. The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') entered into two reimbursement agreements, dated April 30, 1985 and February 11, 1992 (the 'Reimbursement Agreements'), that provide that the expenses paid by each Fund (excluding interest, taxes, brokerage fees and commissions and extraordinary charges such as litigation costs) will be limited to 1.25% of its average net assets. Any expenses in excess of this percentage will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. The Reimbursement Agreements may be amended or terminated by the parties thereto upon prior written notice to the Company. For the fiscal year ended December 31, 1992, the Investment Adviser earned fees of $1,592,890 and reimbursed $83,713 for the Domestic Money Market Fund, $6,125 for the Global Strategy Focus Fund and $730 for the Natural Resources Focus Fund. For the fiscal year ended December 31, 1993, the Investment Adviser earned fees of $5,421,039 from the Company and reimbursed $246,351 for the Domestic Money Market Fund. The Investment Adviser was reimbursed by MLLA for those amounts. For the fiscal year ended December 31, 1994, the Investment Adviser earned fees of $16,313,767 from the Company and reimbursed $8,915 for the Developing Capital Markets Focus Fund, $55,475 for the International Bond Fund, and $50,942 for the Intermediate Government Bond Fund. The Investment Advisory Agreements relating to the Company's Funds, unless earlier terminated as described below, will continue in effect from year to year if approved annually (a) by the Board of Directors of the Company or by a majority of the outstanding shares of the respective Funds, and (b) by a majority of the directors who are not parties to such contracts or interested persons (as defined in the Investment Company Act of 1940) of any such party. The Board of Directors of the Company approved the continuation of the Investment Advisory Agreements relating to all Funds, other than the Basic Value Focus, World Income Focus, Global Utility Focus and International Equity Focus Funds, at a meeting held on April 12, 1995. 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 Administrative Services Agreement with 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 MLLIC and ML of New York. The Investment Adviser may enter into similar agreements with other Insurance Companies in the future. 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 41 are provided for the Company by the Investment Adviser, and the Company reimburses the Investment Adviser for its costs in connection with such services. For the year ended December 31, 1994, the amount of such reimbursement was $893,297. Depending upon the nature of the lawsuit, litigation costs may be directly applicable to the Funds or allocated on the basis of the size of the respective Funds. The Board of Directors has determined that this is an appropriate method of allocation of expenses. DETERMINATION OF NET ASSET VALUE As set forth in the Prospectus, since the net investment income of the Domestic Money Market and Reserve Assets Funds (including realized gains and losses on its portfolio securities) is declared as a dividend each time the net income of the Funds are determined (see 'Dividends, Distributions and Taxes'), the net asset value per share of the Funds normally remains at $1.00 per share immediately after each such determination and dividend declaration. The Board of Directors of the Company expects that the Domestic Money Market and Reserve Assets Funds will have a positive net income at the time of each determination. If for any reason the net income of either Fund is a negative amount (i.e., net realized and unrealized losses and expenses exceed interest income), that Fund will reduce the number of its outstanding shares. This reduction will be effected by having MLLIC and Family Life from the Separate Account 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 MLLIC and Family Life 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 MLLIC and Family Life of any such alteration. Each of the International Equity Focus Fund, Global Utility Focus Fund, World Income Focus Fund, Developing Capital Markets Focus Fund, and International Bond Fund may invest a substantial portion of its assets in foreign securities which are traded on days on which such Fund's net asset value is not computed. On any such day, shares of such a Fund may not be purchased or redeemed since shares of a Fund may only be purchased or redeemed on days on which the Fund's net asset value is computed. As set forth in the Prospectus, securities held by the Domestic Money Market and Reserve Assets Funds with a remaining maturity of 60 days or less are valued on an amortized cost basis, unless particular circumstances dictate otherwise. Under this method of valuation, the security is initially valued at cost on the date of purchase (or in the case of securities purchased with more than 60 days remaining to maturity, the market value on the 61st day prior to maturity); and thereafter the Domestic Money Market and Reserve Assets Funds assume a constant proportionate amortization in value until maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. For purposes of this method of valuation, the maturity of a variable rate certificate of deposit is deemed to be the next coupon date on which the interest rate is to be adjusted. If, due to the impairment of the creditworthiness of the issuer of a security held by either Fund or to other factors with respect to such security, the fair value of such security is not fairly reflected through the amortized cost method of valuation, such security will be valued at fair value as determined in good faith by the Board of Directors. 42 PORTFOLIO TRANSACTIONS AND BROKERAGE If the securities in which a particular Fund of the Company invests are traded primarily in the over-the-counter market, where possible, the Fund will deal directly with the dealers who make a market in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principals for their own account. On occasions, securities may be purchased directly from the issuer. Bonds and money market securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. The cost of executing portfolio securities transactions of each Fund will primarily consist of brokerage commissions or underwriter or dealer spreads. Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Since over-the-counter transactions are usually principal transactions, affiliated persons of the Company, including Merrill Lynch Government Securities Inc. ('GSI'), Merrill Lynch Money Markets Inc. ('MMI') and Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch'), may not serve as the Company's dealer in connection with such transactions except pursuant to exemptive orders from the Securities and Exchange Commission, such as the one described below. However, affiliated persons of the Company may serve as its broker in over-the-counter transactions conducted on an agency basis, subject to the Company's policy of obtaining best price and execution. The Company may not purchase securities from any underwriting syndicate of which Merrill Lynch is a member except in accordance with rules and regulations under the Investment Company Act of 1940. The Securities and Exchange Commission has issued an exemptive order permitting the Company to conduct principal transactions with respect to the Domestic Money Market and Reserve Assets Funds with GSI and MMI in U.S. Government and government agency securities, and certain other money market securities, subject to a number of conditions, including conditions designed to insure that the prices to the Funds available from GSI and MMI are equal to or better than those available from other sources. GSI and MMI have informed the Company that they will in no way, at any time, attempt to influence or control the activities of the Company or the Investment Adviser in placing such principal transactions. The exemptive order allows GSI and MMI to receive a dealer spread on any transaction with the Company no greater than their customary dealer spreads for transactions of the type involved. Certain court decisions have raised questions as to whether investment companies should seek to 'recapture' brokerage commissions and underwriting and dealer spreads by effecting their purchases and sales through affiliated entities. In order to effect such an arrangement, the Company would be required to seek an exemption from the Investment Company Act so that it could engage in principal transactions with affiliates. The Board of Directors has considered the possibilities of seeking to recapture spreads for the benefit of the Company and, after reviewing all factors deemed relevant, has made a determination not to seek such recapture at this time. The Board will reconsider this matter from time to time. The Company will take such steps as may be necessary to effect recapture, including the filing of applications for exemption under the Investment Company Act of 1940, if the Directors should determine that recapture is in the best interests of the Company or otherwise required by developments in the law. While the Investment Adviser seeks to obtain the most favorable net results in effecting transactions in the Funds' portfolio securities, dealers who provide supplemental investment research of the Investment Adviser may receive orders for transactions by the Funds. Such supplemental research services ordinarily consist of assessments and analysis of the business or prospects of a company, industry or economic sector. If, in the judgment of the Investment Adviser, a particular Fund or Funds will be benefited by such supplemental research services, the Investment Adviser is authorized to pay spreads or commissions to brokers or dealers furnishing such services which are in excess of spreads or commissions which another broker or dealer may charge for the 43 same transaction. Information so received will be in addition to and not in lieu of the services required to be performed by the Investment Adviser under the Investment Advisory Agreements. The expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. In some cases, the Investment Adviser may use such supplemental research in providing investment advice to its other investment advisory accounts. For the year ended December 31, 1994, the Company paid brokerage commissions of $3,526,815, of which $219,686 was paid to Merrill Lynch. For the year ended December 31, 1993, the Company paid brokerage commissions of $2,210,358, of which $158,442 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 predicted for the Domestic Money Market and Reserve Assets Funds. The Company expects that the annual portfolio turnover rate for the Prime Bond Fund should not generally exceed 100%, although in any particular year market conditions could result in portfolio activity of the Fund at a greater or lesser rate than anticipated. During 1990, volatility in the fixed-income markets contributed to an increase in portfolio activity. For the year ended December 31, 1994, the portfolio turnover rate for the Prime Bond Fund was approximately 139.89%. The Company expects that, because of the nature of the High Current Income Fund, its annual portfolio turnover rate generally will be higher than 100%. In any particular year, however, market conditions could result in portfolio activity of the Fund at a lesser, or at an even greater, rate than anticipated. For the year ended December 31, 1994, the portfolio turnover rate for the High Current Income Fund was approximately 51.88%. The Company expects that the annual portfolio turnover rate for the Quality Equity Fund should not generally exceed 100%, although in any particular year market conditions could result in portfolio activity of the Fund at a greater or lesser rate than anticipated. For the year ended December 31, 1994, the portfolio turnover rate for the Quality Equity Fund was approximately 60.57%. While it is the policy of the Equity Growth Fund generally not to engage in trading for short-term gains, management will effect portfolio transactions without regard to holding period if, in its judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The Fund anticipates that its annual turnover rate should not exceed 50%, but the turnover rate will not be a limiting factor when management deems portfolio changes appropriate. For the year ended December 31, 1994, the portfolio turnover rate for the Equity Growth Fund was approximately 88.48%. The Company expects that the annual portfolio turnover rate for the Flexible Strategy Fund should not generally exceed 100%. For the year ended December 31, 1994, the portfolio turnover rate for the Flexible Strategy Fund was 65.54%. The Company expects that the annual portfolio turnover rate for each of the Natural Resources Focus Fund, the American Balanced Fund and the Global Strategy Focus Fund should not generally exceed 100%, respectively, although in any particular year market conditions could result in portfolio activity at a greater or lesser rate than anticipated. For the year ended December 31, 1994, the portfolio turnover rates for the Natural 44 Resources Focus Fund, the American Balanced Fund and the Global Strategy Focus Fund were 10.94%, 35.36% and 21.03%, respectively. The Company expects that the annual portfolio turnover rate for each of the Basic Value Focus Fund, Global Utility Focus Fund and International Equity Focus Fund should not generally exceed 100%. For the year ended December 31, 1994, the portfolio turnover rates were 60.55%, 9.52% and 58.84%, respectively. The Company expects that the annual portfolio turnover rate for the World Income Focus Fund should not generally exceed 200%. For the year ended December 31, 1994, the portfolio turnover rate was 117.58%. The Company expects that the annual portfolio turnover rate for each of the Developing Capital Markets Focus Fund, International Bond Fund and Intermediate Government Bond Fund should not generally exceed 100%, 150% and 150%, respectively. For the year ended December 31, 1994, the portfolio turnover rates were 29.79%, 155.20% and 103.03%, respectively. REDEMPTION OF SHARES The right to redeem shares or to receive payment with respect to any redemption may only be suspended for any period during which trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission or such Exchange is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Securities and Exchange Commission as a result of which disposal of portfolio securities or determination of the net asset value of each Fund is not reasonably practicable, and for such other periods as the Securities and Exchange Commission may by order permit for the protection of shareholders of each Fund. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS Reference is made to 'Dividends, Distributions and Taxes' in the Prospectus. FEDERAL INCOME TAXES Under the Internal Revenue Code of 1986, as amended (the 'Code'), each Fund of the Company will be treated as a separate corporation for federal income tax purposes and, thus, each Fund is required to satisfy the qualification requirements under the Code for treatment as a regulated investment company. There will be no offsetting of capital gains and losses among the Funds. Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Code. Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. To qualify for treatment as a regulated investment company, a Fund must, among other things, derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of securities and derive less than 30% of its gross income in each taxable year from the gains (without deduction for losses) from the sale or other disposition of stocks, securities, certain options, futures or forward contracts and certain foreign currencies held for less than three months. In addition, the Code requires that each Fund meet certain diversification requirements, including the requirement that not more than 25% of the value of a Fund's total assets be invested in the securities (other than U.S. Government securities or the securities of other regulated investment companies) of any one issuer. Each of the Company's Funds, including the Natural Resources Focus Fund, intends to comply with the above-described requirements. 45 On occasion, some amount of the distributions of the Domestic Money Market Fund or the Reserve Assets Fund for a fiscal year may constitute a return of capital, in which case such amount would be applied against and reduce the Separate Account's tax basis in shares of such Fund. If such amount were to exceed the Separate Account's tax basis for shares of the Domestic Money Market Fund or the Reserve Assets Fund, the excess would be treated as gain from the sale or exchange of such shares. On occasion the net income of the Domestic Money Market Fund or the Reserve Assets Fund may be a negative amount as a result of a net decline in the value of the portfolio securities of the Fund which is in excess of the interest earned. Consequently, the Fund will reduce the number of its outstanding shares to reflect the negative net income. The adjustment may result in gross income to MLLIC, ML of New York and Family Life in excess of the net dividend credited to MLLIC, ML of New York and Family Life for a period. In such a case, MLLIC's, ML of New York's and Family Life's tax basis in the shares of the Domestic Money Market Fund or the Reserve Assets Fund may be adjusted to reflect the difference between taxable income and net dividends actually distributed. Such difference may be realized as a capital loss when the shares are liquidated. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury Regulations promulgated thereunder. The Code and these Regulations are subject to change by legislative or administrative action, and such change may apply retroactively. DISTRIBUTION ARRANGEMENTS The Company has entered into a distribution agreement (the 'Distribution Agreement') with Merrill Lynch Funds Distributor, Inc. (the 'Distributor') with respect to the sale of the Company's shares to the Distributor for resale to Insurance Companies' accounts. Such shares will be sold at their respective net asset values and therefore will involve no sales charge. The Distributor is a wholly-owned subsidiary of the Investment Adviser. The continuation of the Distribution Agreement was approved by the Company's Board of Directors at a meeting held on April 12, 1995 and will continue in effect until June 30, 1996. 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. 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. 46 The Reserve Assets Fund normally computes its annualized yield by determining the net change for a seven-day base period, exclusive of capital changes, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, dividing the net change in account value by the value of the account at the beginning of the base period to obtain the base period return, and multiplying the base period return by 365 and then dividing by seven. Under this calculation, the yield does not reflect realized and unrealized gains and losses on portfolio securities. The Fund may also include its yield in advertisements, calculated in the same manner as set forth above but including realized and unrealized gains and losses. The Securities and Exchange Commission also permits the calculation of a standardized effective or compounded yield. This is computed by compounding the unannualized base period return by dividing the base period by seven, adding one to the quotient, raising the sum to the 365th power, and subtracting one from the result. This compounded yield calculation also excludes realized or unrealized gains or losses on portfolio securities. Set forth below is average annual total return information for the shares of each of the Company's Funds, other than the Reserve Assets Fund and Domestic Money Market Fund. The total return quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease total return. AVERAGE ANNUAL TOTAL RETURN
REDEEMABLE VALUE OF A HYPOTHETICAL EXPRESSED AS A $1,000 PERCENTAGE BASED INVESTMENT ON A HYPOTHETICAL AT THE END $1,000 INVESTMENT OF THE PERIOD ----------------- ---------------- PRIME BOND FUND: One Year Ended December 31, 1994...... (4.80)% $ 952.00 Five Years Ended December 31, 1994.... 7.37 1,426.80 Ten Years Ended December 31, 1994..... 9.02 2,371.40 HIGH CURRENT INCOME FUND: One Year Ended December 31, 1994...... (3.59) 964.10 Five Years Ended December 31, 1994.... 12.49 1,801.40 Ten Years Ended December 31, 1994..... 12.12 3,138.10 QUALITY EQUITY FUND: One Year Ended December 31, 1994...... (1.20) 988.00 Five Years Ended December 31, 1994.... 8.78 1,523.10 Ten Years Ended December 31, 1994..... 13.62 3,586.20 EQUITY GROWTH FUND: One Year Ended December 31, 1994...... (7.27) 927.30 Five Years Ended December 31, 1994.... 7.36 1,426.10 Ten Years Ended December 31, 1994..... 7.76 2,110.50 FLEXIBLE STRATEGY FUND: One Year Ended December 31, 1994...... (4.20) 958.00 Five Years Ended December 31, 1994.... 8.66 1,514.90 Inception* Through December 31, 1994............................... 9.06 2,122.50
47
REDEEMABLE VALUE OF A HYPOTHETICAL EXPRESSED AS A $1,000 PERCENTAGE BASED INVESTMENT ON A HYPOTHETICAL AT THE END $1,000 INVESTMENT OF THE PERIOD ----------------- ---------------- NATURAL RESOURCES FOCUS FUND: One Year Ended December 31, 1994...... 1.44% $ 1,014.40 Five Years Ended December 31, 1994.... 1.55 1,079.80 Inception* Through December 31, 1994............................... 3.10 1,223.00 AMERICAN BALANCED FUND: One Year Ended December 31, 1994...... (4.19) 958.10 Five Years Ended December 31, 1994.... 7.02 1,403.80 Inception* Through December 31, 1994............................... 8.64 1,726.00 GLOBAL STRATEGY FOCUS FUND: One Year Ended December 31, 1994...... (1.46) 985.40 Inception* Through December 31, 1994............................... 7.37 1,223.90 BASIC VALUE FOCUS FUND: One Year Ended December 31, 1994...... 2.36 1,023.60 Inception* Through December 31, 1994............................... 7.90 1,120.90 WORLD INCOME FOCUS FUND: One Year Ended December 31, 1994...... (4.21) 957.90 Inception* Through December 31, 1994............................... 0.96 1,014.40 GLOBAL UTILITY FOCUS FUND: One Year Ended December 31, 1994...... (8.51) 914.90 Inception* Through December 31, 1994............................... (1.50) 977.60 INTERNATIONAL EQUITY FOCUS FUND: One Year Ended December 31, 1994...... 0.55 1,005.50 Inception* Through December 31, 1994............................... 7.14 1,109.10 DEVELOPING CAPITAL MARKETS FOCUS FUND: Inception* Through December 31, 1994............................... (4.90) 951.00 INTERNATIONAL BOND FUND: Inception* Through December 31, 1994............................... 0.37 1,003.70 INTERMEDIATE GOVERNMENT BOND FUND: Inception* Through December 31, 1994............................... 1.79 1,017.90
- ------------------ * Inception for Flexible Strategy Fund is May 1, 1986; Natural Resources Focus Fund is June 1, 1988; American Balanced Fund is June 1, 1988; and Global Strategy Focus Fund is February 28, 1992; Basic Value Focus Fund is July 1, 1993; World Income Focus Fund is July 1, 1993; Global Utility Focus Fund is July 1, 1993; International Equity Focus Fund is July 1, 1993; Developing Capital Markets Focus Fund is May 2, 1994; International Bond Fund is May 2, 1994; and Intermediate Government Bond Fund is May 2, 1994. 48 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. 49 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, MERRILL LYNCH VARIABLE SERIES FUNDS, INC.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of American Balanced, Basic Value Focus, Developing Capital Markets Focus, Domestic Money Market, Equity Growth, Flexible Strategy, Global Strategy Focus, Global Utility Focus, High Current Income, Intermediate Government Bond, International Bond, International Equity Focus, Natural Resources Focus, Prime Bond, Quality Equity, Reserve Assets, and World Income Focus Funds of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1994, the related statements of operations for the period then ended and changes in net assets for each of the periods in the two-year period then ended, and the financial highlights for each of the periods presented. These financial statements and the financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedure included confirmation of securities owned at December 31, 1994, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial positions of American Balanced, Basic Value Focus, Developing Capital Markets Focus, Domestic Money Market, Equity Growth, Flexible Strategy, Global Strategy Focus, Global Utility Focus, High Current Income, Intermediate Government Bond, International Bond, International Equity Focus, Natural Resources Focus, Prime Bond, Quality Equity, Reserve Assets, and World Income Focus Funds of Merrill Lynch Variable Series Funds, Inc. as of December 31, 1994, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Princeton, New Jersey February 17, 1995 50 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ AEROSPACE 42,000 United Technologies Corp......... $ 2,368,095 $ 2,640,750 1.7% - ------------------------------------------------------------------------------------------------------------------------ BANKING 42,000 Morgan (J.P.) & Co............... 2,772,971 2,352,000 1.5 - ------------------------------------------------------------------------------------------------------------------------ BUILDING--RELATED 67,700 Stanley Works Co................. 2,802,105 2,420,275 1.5 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS 47,100 Eastman Chemical Co.............. 2,041,302 2,378,550 1.5 82,400 Nalco Chemical Co................ 2,742,236 2,760,400 1.7 4,783,538 5,138,950 3.2 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER TECHNOLOGY 30,600 Hewlett-Packard Co............... 2,149,544 3,056,175 1.9 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER--SERVICES 88,000 Kelly Services, Inc.............. 2,331,400 2,398,000 1.5 - ------------------------------------------------------------------------------------------------------------------------ ENERGY RELATED 121,000 + California Energy Co. Inc........ 2,187,016 1,890,625 1.2 - ------------------------------------------------------------------------------------------------------------------------ ENVIRONMENTAL CONTROL 167,792 + Wheelabrator Technologies Inc.... 2,869,023 2,474,932 1.6 - ------------------------------------------------------------------------------------------------------------------------ FOODS 184,069 Archer-Daniels-Midland Co........ 2,699,457 3,796,423 2.4 - ------------------------------------------------------------------------------------------------------------------------ HEALTHCARE 147,400 + Humana Inc....................... 1,940,466 3,334,925 2.1 - ------------------------------------------------------------------------------------------------------------------------ MACHINERY 77,700 Ingersoll-Rand Co................ 2,609,066 2,447,550 1.5 - ------------------------------------------------------------------------------------------------------------------------ MISCELLANEOUS--MANUFACTURING 137,900 Keystone International, Inc...... 3,285,477 2,344,300 1.5 - ------------------------------------------------------------------------------------------------------------------------ NATURAL GAS 66,900 Consolidated Natural Gas Co...... 3,024,660 2,374,950 1.5 - ------------------------------------------------------------------------------------------------------------------------ OFFICE RELATED 73,800 Pitney-Bowes, Inc................ 2,913,361 2,343,150 1.5 - ------------------------------------------------------------------------------------------------------------------------ OIL--INTEGRATED 90,500 Phillips Petroleum Co............ 2,637,514 2,963,875 1.9 - ------------------------------------------------------------------------------------------------------------------------ PETROLEUM & EQUIPMENT SERVICES 130,300 Dresser Industries, Inc.......... 2,729,193 2,459,413 1.6 - ------------------------------------------------------------------------------------------------------------------------ PHARMACEUTICALS 90,000 Abbott Laboratories.............. 2,827,672 2,936,250 1.8 101,000 Merck & Co., Inc................. 3,482,470 3,850,625 2.4 6,310,142 6,786,875 4.2 - ------------------------------------------------------------------------------------------------------------------------ PHOTOGRAPHY 57,400 Eastman Kodak Co................. 2,420,080 2,740,850 1.7 - ------------------------------------------------------------------------------------------------------------------------ PRINTING/PUBLISHING 51,200 Gannett Co., Inc................. 2,589,416 2,726,400 1.7 - ------------------------------------------------------------------------------------------------------------------------ TELECOMMUNICATIONS 57,800 American Telephone & Telegraph 3,086,880 2,904,450 1.8 Co............................... 59,600 Bell Atlantic Corp............... 3,218,314 2,965,100 1.9 86,500 Comsat Corp...................... 2,451,106 1,611,062 1.0 8,756,300 7,480,612 4.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS 64,178,824 64,171,030 40.4
- -------------------------------------------------------------------------------- 51 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF AMOUNT US GOVERNMENT OBLIGATIONS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ US TREASURY NOTES US Treasury Notes: $ 900,000 7.50% due 5/15/2002................. $ 955,500 $ 883,404 0.6% 3,500,000 6.375% due 8/15/2002................ 3,459,668 3,204,670 2.0 12,550,000 6.25% due 2/15/2003................. 12,863,703 11,349,844 7.1 12,750,000 5.75% due 8/15/2003................. 12,841,898 11,080,515 7.0 10,300,000 5.875% due 2/15/2004................ 9,682,422 8,981,909 5.7 11,300,000 7.25% due 5/15/2004................. 11,427,203 10,851,503 6.8 30,500,000 7.25% due 8/15/2004................. 30,594,766 29,275,120 18.4 10,000,000 7.875% due 11/15/2004............... 10,003,750 10,028,100 6.3 91,828,910 85,655,065 53.9 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT OBLIGATIONS 91,828,910 85,655,065 53.9 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM SECURITIES - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER* 7,043,000 General Electric Capital Corp., 5.80% due 1/03/1995................. 7,038,461 7,038,461 4.4 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES 7,038,461 7,038,461 4.4 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS................... $163,046,195 156,864,556 98.7 ------------ ------------ OTHER ASSETS LESS LIABILITIES....... 2,086,184 1.3 NET ASSETS.......................... $158,950,740 100.0%
- -------------------------------------------------------------------------------- * Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the Fund. + Non-income producing security.
See Notes to Financial Statements. 52 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - -------------------------------------------------------------------------------- DISCOUNT FROM BOOK VALUE - -------------------------------------------------------------------------------- AEROSPACE 150,000 Aviall, Inc....................... $ 2,234,988 $ 1,143,750 0.7% BANKING 70,000 Bankers Trust Company............. 4,143,450 3,876,250 2.4 HOME--BUILDERS 225,000 + Beazer Homes USA, Inc............. 3,558,474 2,615,625 1.6 SAVINGS & LOANS 150,000 + Brooklyn Bancorp Inc.............. 4,817,050 4,425,000 2.7 RETAIL 150,000 + Federated Department Stores, Inc............................. 3,112,749 2,887,500 1.7 SAVINGS & LOANS 110,000 GP Financial Corp................. 2,160,925 2,268,750 1.4 OIL & GAS PRODUCERS 100,000 Gerrity Oil & Gas Corp............ 1,339,313 425,000 0.3 SAVINGS & LOANS 325,000 Greater N.Y. Savings Bank......... 2,895,742 2,803,125 1.7 STEEL 518,600 + Lone Star Technologies Inc........ 3,712,010 3,630,200 2.2 TECHNOLOGY 525,000 Micronics Computers, Inc.......... 2,470,294 2,231,250 1.4 TECHNOLOGY 585,000 + Network Systems Corp.............. 4,724,176 4,095,000 2.5 SAVINGS & LOANS 100,000 River Bank America................ 900,000 937,500 0.6 INSURANCE 210,000 TIG Holdings Inc.................. 3,709,325 3,937,500 2.4 OIL--REFINERS 300,000 Total Petroleum Ltd............... 3,525,248 3,750,000 2.3 OIL--REFINERS 150,000 Valero Energy Corp................ 3,126,262 2,531,250 1.5 46,430,006 41,557,700 25.4
- --------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO - -------------------------------------------------------------------------------- CONGLOMERATES 300,000 + ADT Ltd. (ADR) (a)................ 2,813,075 3,225,000 2.0 ELECTRONICS 650,000 Automated Security (Holdings) PLC (ADR) (a)....................... 2,039,500 1,462,500 0.9 TEXTILES 200,000 + Burlington Industries, Inc........ 2,297,829 1,975,000 1.2 TECHNOLOGY 200,000 + Conner Peripherals, Inc........... 2,479,943 1,900,000 1.2 RETAIL APPAREL 100,000 + Fruit of the Loom, Inc............ 2,541,440 2,700,000 1.6 AUTOMOTIVE 100,000 General Motors Corp............... 4,824,087 4,225,000 2.6 INFORMATION PROCESSING 50,000 International Business Machine Corp............................ 2,753,000 3,675,000 2.2 HOTELS 250,000 + John Q Hammons Hotels Inc......... 3,793,112 3,500,000 2.1 OIL & GAS PRODUCERS 152,000 KCS Energy Inc.................... 2,178,495 2,470,000 1.5 RETAIL SPECIALTY 200,000 + The Limited, Inc.................. 3,931,540 3,625,000 2.2 AUTO--RELATED 386,000 + National Auto Credit Inc.......... 4,405,603 4,583,750 2.8 SEMICONDUCTORS 155,000 + National Semiconductor Corp....... 2,734,089 3,022,500 1.8 INSURANCE 100,000 PartnerRe Holdings Ltd............ 2,029,881 2,062,500 1.3 TECHNOLOGY 150,000 + Syquest Technology Inc............ 1,847,920 2,662,500 1.6 INSURANCE 100,000 Travelers Corp.................... 3,791,524 3,250,000 2.0 44,461,038 44,338,750 27.0
- --------------------------------------------------------------------------------
ABOVE-AVERAGE YIELD - -------------------------------------------------------------------------------- OIL/DOMESTIC 25,000 Atlantic Richfield Co............. 2,460,592 2,543,750 1.6 REAL ESTATE INVESTMENT TRUST 120,000 Bay Apartment Communities, Inc.... 2,400,000 2,415,000 1.5 PHARMACEUTICALS 70,000 Bristol-Myers Squibb Co........... 3,867,699 4,051,250 2.5 REAL ESTATE INVESTMENT TRUST 120,000 Camden Property Trust............. 2,907,225 2,985,000 1.8 PHOTOGRAPHY 70,000 Eastman Kodak Co.................. 3,137,689 3,342,500 2.0 REAL ESTATE INVESTMENT TRUST 150,000 Evans Withycombe Residential, 3,013,688 3,150,000 1.9 Inc............................. REAL ESTATE INVESTMENT TRUST 180,000 Felcor Suite Hotels, Inc.......... 3,872,250 3,442,500 2.1 OIL SERVICES 135,000 Halliburton Co.................... 4,438,600 4,471,875 2.7 RETAIL 314,500 K mart Corp....................... 5,429,472 4,088,500 2.5 REAL ESTATE INVESTMENT TRUST 120,000 Liberty Property Trust............ 2,406,656 2,355,000 1.4 PHARMACEUTICALS 100,000 Merck & Co., Inc.................. 3,127,175 3,812,500 2.3 OIL/DOMESTIC 140,000 Occidental Petroleum Corp......... 2,528,525 2,695,000 1.6 TOBACCO 60,000 Philip Morris Cos. Inc............ 3,341,700 3,450,000 2.1 SAVINGS & LOANS 125,000 River Bank America (Preferred).... 3,453,125 3,156,250 1.9 RETAIL 60,000 Sears, Roebuck & Co............... 3,043,578 2,760,000 1.7 FINANCIAL SERVICES 140,000 Student Loan Marketing Association..................... 5,430,576 4,550,000 2.8 54,858,550 53,269,125 32.4
- -------------------------------------------------------------------------------- 53 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - -------------------------------------------------------------------------------- SPECIAL SITUATIONS - -------------------------------------------------------------------------------- MEDICAL SERVICES 365,000 + Applied Bioscience International Inc............................. $ 1,875,863 $ 2,007,500 1.2% FOOD & HOUSEHOLD 150,000 Sara Lee Corp..................... 3,296,038 3,787,500 2.3 OIL--RELATED 285,000 + TETRA Technologies, Inc........... 2,185,200 3,348,750 2.0 OIL SERVICES 440,000 + Varco International, Inc.......... 2,676,579 2,750,000 1.7 10,033,680 11,893,750 7.2 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS 155,783,274 151,059,325 92.0 - -------------------------------------------------------------------------------- FACE AMOUNT SHORT-TERM SECURITIES - ----------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER* $3,384,000 General Electric Capital Corp., 5.80% due 1/03/1995............. 3,381,819 3,381,819 2.1 3,000,000 Nomura Holding America, Inc., 5.83% due 1/27/1995............. 2,986,397 2,986,397 1.8 6,500,000 Xerox Credit Corp., 5.95% due 1/17/1995....................... 6,480,825 6,480,825 3.9
- -------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES 12,849,041 12,849,041 7.8
- -------------------------------------------------------------------------------- TOTAL INVESTMENTS................. $168,632,315 163,908,366 99.8 ------------ ------------ OTHER ASSETS LESS LIABILITIES..... 398,353 0.2 NET ASSETS........................ $164,306,719 100.0%
- -------------------------------------------------------------------------------- * Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) American Depositary Receipt (ADR). + Non-income producing security.
See Notes to Financial Statements. 54 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARES HELD/ VALUE PERCENT OF NET AFRICA INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) ASSETS SOUTH AFRICA MULTI--INDUSTRY 6,000 ASA Ltd................. $ 281,052 $ 269,250 0.7% 22,000 + The Morgan Stanley Africa Investment Fund, Inc............. 254,320 250,250 0.7 18,000 New South Africa Fund, Inc................... 257,580 254,250 0.7 18,000 + Southern Africa Fund, Inc................... 264,224 249,750 0.7 1,057,176 1,023,500 2.8 TRANSPORTATION ZAL 12,000,000 Transnet Ltd., 15.00% due 10/01/1995........ 2,886,806 2,970,458 8.1 TOTAL INVESTMENTS IN SOUTH AFRICA 3,943,982 3,993,958 10.9 TOTAL INVESTMENTS IN AFRICA 3,943,982 3,993,958 10.9 EUROPE GREECE BEVERAGE 9,600 Hellenic Bottling Co. S.A. (Bearer)......... 281,725 340,142 0.9 TOTAL INVESTMENTS IN GREECE 281,725 340,142 0.9 HUNGARY FOOD 2,065 Pick Szeged Reszvenytarasag (ADR) (a)................... 141,347 121,298 0.3 TOTAL INVESTMENTS IN HUNGARY 141,347 121,298 0.3 PORTUGAL ENGINEERING & 25,000 Sociedade de Construsoes CONSTRUCTION Soares de Costa S.A................... 519,168 471,757 1.3 5,000 Sociedade de Construsoes Soares de Costa S.A. (Baby Shares)......... 0 94,351 0.3 2,500 Sociedade de Construsoes Soares de Costa S.A. (Ordinary)............ 31,270 47,176 0.1 550,438 613,284 1.7 RETAIL 48,000 Sonae Investimentos-SGPS S.A................... 1,006,931 1,105,347 3.0 TOTAL INVESTMENTS IN PORTUGAL 1,557,369 1,718,631 4.7 RUSSIA MULTI--INDUSTRY 60,000 + Fleming Russia 588,000 405,000 1.1 Securities Fund (ADR) (a)................... TOTAL INVESTMENTS IN RUSSIA 588,000 405,000 1.1 SRI LANKA DIVERSIFIED 6,500 + John Keells Holdings Corp. (GDR) (b)....... 65,000 58,500 0.2 TOTAL INVESTMENTS IN SRI LANKA 65,000 58,500 0.2 TURKEY BEVERAGE 397,500 Erciyas Biracilik Ve Malt Sanayii A.S...... 322,290 294,253 0.8 BUILDING MATERIALS 305,250 Alarko Holdings A.S..... 239,118 261,643 0.7 72,600 + Cimentas Izmir Cimento Fabrikasi T.A.S....... 56,392 50,914 0.1 295,510 312,557 0.8 INSURANCE 93,000 Akisgorta A.S........... 23,250 18,842 0.0 STEEL 1,971,000 + Izmir Demir Celik Sanayii A.S........... 147,748 107,509 0.3 TOTAL INVESTMENTS IN TURKEY 788,798 733,161 1.9 TOTAL INVESTMENTS IN EUROPE 3,422,239 3,376,732 9.1
55 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
LATIN SHARES HELD/ VALUE PERCENT OF NET AMERICA INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) ASSETS ARGENTINA OIL & RELATED 27,000 Yacimientos Petroliferos Fiscales S.A. (Sponsored) (ADR) (a)................... $ 695,315 $ 577,125 1.6% REAL ESTATE 19,000 Inversiones y Representaciones S.A. (GDR) (b)............. 495,140 503,500 1.4 TOBACCO 100,126 + Nobleza Piccardo S.A.... 501,811 425,535 1.2 TOTAL INVESTMENTS IN ARGENTINA 1,692,266 1,506,160 4.2 BRAZIL APPLIANCES 1,335,000 Brasmotor Group S.A. (Preferred)........... 582,433 541,259 1.5 AUTOMOTIVE 55,000 + CAPCO Automotive Products Corp. S.A.... 719,383 660,000 1.8 STEEL 339,000,000 Usinas Siderurgicas de Minas Gerais--Usiminas S.A. (Preferred)...... 578,807 460,816 1.3 TELECOMMUNICATIONS 25,480 Telecomunicacoes Brasileiras S.A.--Telebras (ADR) (a)................... 1,048,742 1,133,860 3.1 1,600,000 Telecomunicacoes Brasileiras S.A.--Telebras PN (Preferred)........... 68,826 71,678 0.2 1,117,568 1,205,538 3.3 UTILITIES 31,100 + Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR) (a)..... 558,442 730,850 2.0 UTILITIES--ELECTRIC 117,000 Centrais Eletricas Brasileiras S.A.--Eletrobras 'B' (Preferred)........... 40,181 40,660 0.1 3,828,000 Light--Servicios de Electricidade S.A..... 1,631,835 1,384,596 3.8 1,672,016 1,425,256 3.9 TOTAL INVESTMENTS IN BRAZIL 5,228,649 5,023,719 13.8 CHILE TELECOMMUNICATIONS 5,500 Compania de Telefonos de Chile S.A. (ADR) (a)................... 500,110 433,125 1.2 TOTAL INVESTMENTS IN CHILE 500,110 433,125 1.2 ECUADOR BUILDING MATERIALS 260 La Cemento Nacional C.A................... 100,100 96,200 0.3 TOTAL INVESTMENTS IN ECUADOR 100,100 96,200 0.3 MEXICO BEVERAGE 17,500 Grupo Embotellador de Mexico, S.A. de C.V. (GEMEX) (ADR) (a)..... 497,000 251,562 0.7 BUILDING & 39,000 Tolmex, S.A. de C.V. 455,106 330,306 0.9 CONSTRUCTION 'B2'.................. DIVERSIFIED 60,000 Desc Sociedad de Fomento Industrial, S.A. de C.V. 'C'.............. 459,346 341,633 0.9 FINANCIAL SERVICES 26,000 Grupo Financiero (GBM) Atlantico, S.A. de C.V. (Class L)........ 517,525 182,000 0.5 GLASS MANUFACTURING 51,500 Vitro, S.A. de C.V...... 354,538 241,209 0.7 6,200 Vitro, S.A. de C.V. (ADR) (a)............. 131,105 86,800 0.2 485,643 328,009 0.9 LEISURE 56,000 + Grupo Carso, S.A. de C.V. 'A1'............. 562,674 419,429 1.1 METALS 12,000 Grupo Simec, S.A. de C.V. (ADR) (a)........ 301,145 181,500 0.5 NEWSPAPER/ PUBLISHING 264,000 Grupo Fernandez Editores, S.A. de C.V................... 422,478 287,706 0.8 TELECOMMUNICATIONS 10,000 Telefonos de Mexico, S.A. de C.V. (ADR) (a)................... 585,600 410,000 1.1 TOTAL INVESTMENTS IN MEXICO................ 4,286,517 2,732,145 7.4
56 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
LATIN AMERICA SHARES HELD/ VALUE PERCENT OF NET (CONCLUDED) INDUSTRY FACE AMOUNT INVESTMENTS COST (NOTE 1A) ASSETS PERU BANKING 25,000 + Banco Weise Limitado S.A. (ADR) (a)........ $ 493,750 $ 468,750 1.3% TOTAL INVESTMENTS IN PERU 493,750 468,750 1.3 TOTAL INVESTMENTS IN LATIN AMERICA 12,301,392 10,260,099 28.2 PACIFIC BASIN/ASIA - ------------------------------------------------------------------------------------------------------------------------ AUSTRALIA MERCHANDISING 18,600 Amway Asia Pacific Ltd................... 540,642 604,500 1.6 TOTAL INVESTMENTS IN AUSTRALIA 540,642 604,500 1.6 HONG KONG AUTOMOTIVE 254,000 Sime Darby (Hong Kong) Ltd................... 406,139 282,368 0.8 DIVERSIFIED 116,000 Jardine Matheson Holdings, Ltd......... 859,252 828,464 2.3 MACHINERY 252,000 Beiren Printing Machinery Holdings Ltd................... 138,774 70,036 0.2 MULTI--INDUSTRY 1,091,000 Sinocan Holdings Ltd.... 215,590 242,570 0.7 TOTAL INVESTMENTS IN HONG KONG 1,619,755 1,423,438 4.0 INDIA BROADCASTING & 37,600 + Videocon International PUBLISHING Ltd. (ADR) (a)........ 323,217 174,088 0.5 LEISURE 40,400 + East India Hotels, Ltd................... 640,744 585,800 1.6 TOBACCO 31,500 + Indian Tobacco Co. Ltd................... 419,437 315,000 0.9 TOTAL INVESTMENTS IN INDIA 1,383,398 1,074,888 3.0 INDONESIA BROADCASTING & $ 15,000 P.T. Surya Citra PUBLISHING Television, 4.00% due 7/01/1997............. 15,000 14,850 0.0 FOOD & HOUSEHOLD 592,000 + P.T. Wicaksana Overseas PRODUCTS International......... 1,160,794 1,697,588 4.6 TOTAL INVESTMENTS IN INDONESIA 1,175,794 1,712,438 4.6 MALAYSIA AUTOMOTIVE 79,400 Sime Darby BHD.......... 191,533 181,975 0.5 BROADCASTING 93,000 Sistem Televisyen Malaysia BHD.......... 267,129 202,213 0.5 FINANCIAL SERVICES 57,000 Commerce Asset--Holdings BHD................... 293,164 230,010 0.6 FOODS 30,000 Nestle (Malaysia) BHD... 197,136 199,804 0.5 NEWSPAPER/ PUBLISHING 76,000 New Straits Times Press BHD................... 311,411 244,153 0.7 TELECOMMUNICATIONS 115,000 Leader Universal Holdings BHD.......... 407,073 369,442 1.0 TOTAL INVESTMENTS IN MALAYSIA 1,667,446 1,427,597 3.8 NEW ZEALAND TRANSPORTATION 7,700 Ports of Auckland 10,869 11,085 0.0 Ltd................... TOTAL INVESTMENT IN NEW ZEALAND 10,869 11,085 0.0 PHILIPPINES MULTI--INDUSTRY 10,500 + Benpres Holdings Corp. (c)................... 106,200 94,500 0.3 TELECOMMUNICATIONS $ 1,000,000 Philippine Long Distance Telephone Co., 10.625% due 6/02/2004......... 1,015,000 960,000 2.6 TOTAL INVESTMENTS IN THE PHILIPPINES 1,121,200 1,054,500 2.9 SOUTH KOREA UTILITIES-ELECTRIC 77,000 + Korea Electric Power Corp.................. 1,606,935 1,645,875 4.5 TOTAL INVESTMENTS IN SOUTH KOREA 1,606,935 1,645,875 4.5
57 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
PACIFIC BASIN/ASIA VALUE PERCENT OF NET (CONCLUDED) INDUSTRY SHARES HELD INVESTMENTS COST (NOTE 1A) ASSETS TAIWAN MERCHANDISING 12,047 Hocheng Group Corp. (ADR) (a) (c)......... $ 349,363 $ 271,057 0.7% TOTAL INVESTMENTS IN TAIWAN 349,363 271,057 0.7 THAILAND APPLIANCES & HOUSEHOLD 41,400 Karat Sanitary Ware Co., DURABLES Ltd................... 244,164 169,922 0.5 AUTOMOTIVE PARTS 13,700 Swedish Motor Corp. Ltd................... 90,197 84,618 0.2 BANKING 65,000 Bangkok Bank Ltd. 'Foreign'............. 616,906 694,162 1.9 REAL ESTATE 56,000 Bangkok Land Company Ltd................... 181,816 139,470 0.4 UTILITIES 5,100 Sanyo Universal Electric Co., Ltd.............. 120,776 118,279 0.3 TOTAL INVESTMENTS IN THAILAND 1,253,859 1,206,451 3.3 TOTAL INVESTMENTS IN THE PACIFIC BASIN/ASIA 10,729,261 10,431,829 28.4 FACE AMOUNT SHORT-TERM SECURITIES COMMERCIAL $ 960,000 General Electric Capital PAPER** Corp., 5.80% due 1/03/1995............. 959,536 959,536 2.6 COMMERCIAL PAPER**--FOREIGN Mexican Cetes (Certificados de la Tesorera de la Federacion): 449,030 23.32%* due 1/26/1995... 92,019 90,235 0.2 610,690 23.32%* due 2/02/1995... 124,600 120,326 0.3 327,240 23.32%* due 2/16/1995... 66,188 64,720 0.2 810,000 23.32%* due 2/23/1995... 163,124 159,357 0.4 445,931 434,638 1.1 US GOVERNMENT & AGENCY OBLIGATIONS** Federal Home Loan Bank: 1,000,000 5.57% due 1/04/1995..... 999,381 999,381 2.7 1,500,000 5.76% due 1/17/1995..... 1,495,920 1,495,920 4.1 1,000,000 Federal Home Loan Mortgage Association, 5.91% due 1/12/1995... 998,030 998,030 2.7 Federal National Mortgage Association: 3,500,000 5.78% due 1/23/1995..... 3,487,075 3,487,075 9.5 1,500,000 5.74% due 1/30/1995..... 1,492,825 1,492,825 4.1 8,473,231 8,473,231 23.1 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN SHORT-TERM SECURITIES 9,878,698 9,867,405 26.8 TOTAL INVESTMENTS.......................... $40,275,572 37,930,023 103.4 LIABILITIES IN EXCESS OF OTHER ASSETS...... (1,254,271) (3.4) NET ASSETS................................. $36,675,752 100.0%
(a) American Depositary Receipt (ADR). (b) Global Depositary Receipt (GDR). (c) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $366,000, representing 1.00% of net assets. - ------------------------------------------------------------------------------------------------------------------------ ACQUISITION VALUE ISSUE DATES COST (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ Benpres Holdings Corp.................................................................. 10/25/1994 $ 106,200 $ 94,500 Hocheng Group Corp. (ADR).............................................................. 8/09/1994 349,363 271,057 - ------------------------------------------------------------------------------------------------------------------------ TOTAL.................................................................................. $ 455,563 $ 365,557 - ------------------------------------------------------------------------------------------------------------------------ * Represents the yield to maturity on this zero coupon issue. ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase of the Fund. + Non-income producing security.
See Notes to Financial Statements. 58 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
FACE INTEREST MATURITY VALUE AMOUNT ISSUE RATE* DATE (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ BANK NOTES--2.7% $ 10,000,000 PNC Bank N.A..................................... 5.15 % 2/22/95 $ 9,984,066 - ------------------------------------------------------------------------------------------------------------------------ TOTAL BANK NOTES (COST -- $9,999,001) 9,984,066 - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER--67.6% 5,000,000 ABN-AMRO North American Finance, Inc............. 5.42 1/04/95 4,996,181 10,000,000 ANZ (Delaware), Inc.............................. 5.05 1/20/95 9,966,750 7,000,000 Abbey National N.A. Corp......................... 5.07 2/28/95 6,929,417 5,000,000 Abbey National N.A. Corp......................... 5.075 3/02/95 4,946,611 5,000,000 Avco Financial Services, Inc..................... 5.68 2/14/95 4,961,667 5,134,000 BTR Dunlop Finance Inc........................... 5.40 1/13/95 5,122,979 10,000,000 Bankers Trust New York Corp...................... 5.41 1/27/95 9,955,278 1,000,000 Bankers Trust New York Corp...................... 5.40 1/30/95 994,963 4,794,000 Bankers Trust New York Corp...................... 5.58 4/12/95 4,707,588 8,323,000 CS First Boston, Inc............................. 5.50 1/25/95 8,288,436 5,000,000 CS First Boston, Inc............................. 6.00 2/10/95 4,965,000 10,000,000 Deer Park Refining, L.P.......................... 6.10 1/19/95 9,966,111 5,125,000 Falcon Asset Securization Corp................... 6.00 1/09/95 5,116,458 5,000,000 Ford Motor Credit Co............................. 5.42 1/11/95 4,990,800 6,000,000 Ford Motor Credit Co............................. 5.42 1/12/95 5,988,040 5,000,000 General Electric Capital Corp.................... 5.50 1/09/95 4,992,333 5,000,000 General Electric Capital Corp.................... 5.03 1/23/95 4,980,833 5,000,000 General Electric Capital Corp.................... 5.48 1/24/95 4,980,035 3,974,000 Goldman Sachs Group L.P.......................... 4.95 2/01/95 3,952,507 4,000,000 Goldman Sachs Group L.P.......................... 5.15 3/01/95 3,957,978 5,000,000 Goldman Sachs Group L.P.......................... 5.25 3/13/95 4,937,139 5,000,000 International Lease Finance Corp................. 5.42 1/09/95 4,992,333 5,000,000 International Lease Finance Corp................. 5.33 1/20/95 4,983,375 1,500,000 MCA Funding Corp................................. 5.50 1/25/95 1,493,771 4,000,000 Miles Inc........................................ 5.70 2/10/95 3,972,000 5,000,000 NationsBank Corp................................. 5.33 1/23/95 4,980,833 5,000,000 New Center Asset Trust........................... 5.44 1/19/95 4,984,167 6,000,000 New Center Asset Trust........................... 5.48 1/24/95 5,976,042 4,000,000 New Center Asset Trust........................... 5.72 2/08/95 3,973,333 5,000,000 Norfolk Southern Corporation..................... 5.75 2/07/95 4,967,933 4,000,000 Panasonic Finance, Inc........................... 5.50 1/26/95 3,982,750 9,500,000 Panasonic Finance, Inc........................... 6.20 3/29/95 9,354,386 5,000,000 Preferred Receivables Funding Corp............... 6.10 1/05/95 4,994,917 10,000,000 Premium Funding, Inc., Series A.................. 6.05 1/13/95 9,976,472 7,000,000 Riverwoods Funding Corp.......................... 5.95 1/25/95 6,969,919 15,000,000 SBC Finance (Delaware) Inc....................... 5.43 1/20/95 14,950,125 3,000,000 Santander Finance (Delaware) Inc................. 5.40 1/17/95 2,991,450 3,340,000 Sheffield Receivables Corp....................... 5.90 2/01/95 3,321,936 10,000,000 Societe Generale North America, Inc.............. 5.40 1/23/95 9,961,667 1,126,000 Transamerica Finance Corp........................ 5.40 1/18/95 1,122,613 5,000,000 Transamerica Finance Corp........................ 5.80 2/17/95 4,959,167 4,000,000 US Borax Inc..................................... 5.70 2/07/95 3,974,347 8,500,000 WCP Funding Inc.................................. 6.17 3/03/95 8,407,775 711,000 Windmill Funding Corp............................ 6.00 1/13/95 709,341 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COMMERCIAL PAPER (COST--$245,780,511) 245,697,756 - ------------------------------------------------------------------------------------------------------------------------ MASTER NOTES+--2.2% 5,000,000 Bear Stearns Cos., Inc. (The).................... 5.978 2/17/95 5,000,409 3,000,000 Goldman Sachs Group L.P.......................... 6.07 5/26/95 3,000,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL MASTER NOTES (COST--$8,000,409) 8,000,409 - ------------------------------------------------------------------------------------------------------------------------
59 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
FACE INTEREST MATURITY VALUE AMOUNT ISSUE RATE* DATE (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT, AGENCY & INSTRUMENTALITY $ 2,000,000 US Treasury Bills................................ 3.43 % 2/09/95 $ 1,987,427 OBLIGATIONS-- 9,000,000 US Treasury Bills................................ 4.905 3/16/95 8,896,830 DISCOUNT--4.9% 7,000,000 US Treasury Bills................................ 6.335 7/06/95 6,775,280 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY OBLIGATIONS-- DISCOUNT (COST--$17,674,804) 17,659,537 - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT, AGENCY & INSTRUMENTALITY 9,500,000 Federal Farm Credit Bank......................... 5.19 3/01/95 9,481,950 OBLIGATIONS-- 5,000,000 Federal Home Loan Bank........................... 5.79 4/28/95 4,987,500 NON-DISCOUNT--24.2% 3,000,000 Federal Home Loan Bank+.......................... 5.93 12/28/95 3,000,000 1,500,000 Federal Home Loan Bank+.......................... 5.83 5/06/96 1,496,404 5,000,000 Federal Home Loan Bank+.......................... 5.82 9/12/96 4,995,506 10,000,000 Federal Home Loan Mortgage Corp.+................ 5.86 9/01/95 9,998,725 1,000,000 Federal Home Loan Mortgage Corp.+................ 5.75 6/03/96 997,154 10,000,000 Federal Home Loan Mortgage Corp.+................ 5.95 6/07/96 9,995,588 3,000,000 Federal National Mortgage Association+........... 5.70 6/01/95 2,999,877 2,000,000 Federal National Mortgage Association+........... 5.83 5/13/96 2,000,000 2,000,000 Federal National Mortgage Association+........... 5.83 8/13/96 2,000,000 15,000,000 Federal National Mortgage Association+........... 6.093 10/11/96 15,000,000 2,000,000 Federal National Mortgage Association+........... 5.95 5/19/97 2,000,000 2,000,000 Federal National Mortgage Association+........... 6.00 5/14/98 2,000,000 2,000,000 Student Loan Marketing Association+.............. 6.32 4/17/95 2,002,984 1,500,000 Student Loan Marketing Association+.............. 6.02 6/02/95 1,501,397 600,000 Student Loan Marketing Association+.............. 6.07 3/20/96 601,620 3,000,000 Student Loan Marketing Association+.............. 5.90 5/14/96 3,003,150 4,000,000 Student Loan Marketing Association+.............. 6.17 8/22/96 4,019,534 2,000,000 Student Loan Marketing Association+.............. 6.04 3/03/97 2,000,502 1,500,000 US Treasury Notes................................ 3.875 4/30/95 1,488,984 1,000,000 US Treasury Notes................................ 4.125 6/30/95 988,437 750,000 US Treasury Notes................................ 3.875 8/31/95 735,234 500,000 US Treasury Notes................................ 4.00 1/31/96 482,812 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY OBLIGATIONS-- NON-DISCOUNT (COST--$87,860,716) 87,777,358 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST--$369,315,441)--101.6%... 369,119,126 LIABILITIES IN EXCESS OF OTHER ASSETS --(1.6%)... (5,920,026) ------------- NET ASSETS--100.0%............................... $ 363,199,100 ------------- ------------- - ------------------------------------------------------------------------------------------------------------------------
* Commercial Paper and certain US Government, Agency & Instrumentality Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. Other securities bear interest at the rates shown, payable at fixed dates or upon maturity. The interest rates on variable rate securities are adjusted periodically based upon appropriate indexes. The interest rates shown are the rates in effect at December 31, 1994. + Variable Rate Notes.
See Notes to Financial Statements. 60 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARE VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ AEROSPACE & DEFENSE 80,000 Teledyne, Inc....................... $ 1,354,796 $ 1,610,000 0.9% - ------------------------------------------------------------------------------------------------------------------------ AIR TRANSPORTATION 100,000 Skywest, Inc........................ 2,305,063 1,225,000 0.7 - ------------------------------------------------------------------------------------------------------------------------ AUTO-RELATED 115,000 + Automotive Industries Inc........... 2,842,963 2,328,750 1.4 - ------------------------------------------------------------------------------------------------------------------------ AUTOMOBILE PARTS 50,000 + Custom Chrome, Inc.................. 1,149,000 843,750 0.5 - ------------------------------------------------------------------------------------------------------------------------ BANKING 90,000 Cole Taylor Financial Group, Inc.... 1,598,829 1,845,000 1.1 110,000 Collective Bancorp, Inc............. 2,208,751 1,856,250 1.1 50,000 First Financial Corp................ 743,437 675,000 0.4 50,000 Mercantile Bancorp., Inc............ 1,621,750 1,562,500 0.9 100,000 Midlantic National Bank............. 2,628,125 2,650,000 1.6 100,000 Roosevelt Financial Group, Inc...... 1,515,001 1,487,500 0.9 50,000 TCF Financial Corp.................. 1,962,682 2,062,500 1.2 12,278,575 12,138,750 7.2 - ------------------------------------------------------------------------------------------------------------------------ BUILDING MATERIALS 140,000 Apogee Enterprises Inc.............. 1,943,285 2,380,000 1.4 - ------------------------------------------------------------------------------------------------------------------------ BUSINESS SERVICES 95,000 Amresco, Inc........................ 781,875 593,750 0.3 70,000 Reynolds & Reynolds Co. (The) (Class 1,649,200 1,750,000 1.0 A).................................. 2,431,075 2,343,750 1.3 - ------------------------------------------------------------------------------------------------------------------------ CAPITAL EQUIPMENT 155,000 + BWIP Holdings, Inc.................. 2,732,500 2,635,000 1.5 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS 150,000 Crompton & Knowles Corp............. 2,530,875 2,475,000 1.5 45,000 + Mississippi Chemical Corp........... 675,000 770,625 0.5 3,205,875 3,245,625 2.0 - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL SERVICES 80,000 + Devry, Inc.......................... 2,025,179 2,440,000 1.4 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER SOFTWARE 70,000 + FileNet Corp........................ 1,838,121 1,872,500 1.1 57,000 Metatec Corp. (Class A)............. 629,250 498,750 0.3 25,000 + Phamis, Inc......................... 300,000 446,875 0.3 75,000 + Sterling Software, Inc.............. 2,318,689 2,756,250 1.6 5,086,060 5,574,375 3.3 - ------------------------------------------------------------------------------------------------------------------------ COMPUTERS 130,000 + AST Research, Inc................... 1,872,500 1,885,000 1.1 55,000 + Electronics For Imaging, Inc........ 907,500 1,498,750 0.9 65,000 Exide Electronics Group Inc......... 1,200,000 1,251,250 0.7 100,000 + Read-Rite Corp...................... 1,301,953 1,837,500 1.1 5,281,953 6,472,500 3.8 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER PRODUCTS & 130,000 Scotts Co. (Class A)................ 2,310,625 2,031,250 1.2 SERVICES - ------------------------------------------------------------------------------------------------------------------------ DIVERSIFIED 65,000 Lancaster Colony Corp............... 2,248,125 1,909,375 1.1 - ------------------------------------------------------------------------------------------------------------------------ ELECTRICAL EQUIPMENT 120,000 + Willcox & Gibbs, Inc................ 617,266 705,000 0.4 - ------------------------------------------------------------------------------------------------------------------------ ELECTRONIC/INSTRUMENTS 70,000 BMC Industries Inc.................. 566,421 1,093,750 0.6 80,000 DOVatron International, Inc......... 1,871,250 2,060,000 1.2 100,000 + Electro Scientific Industries, 1,843,994 2,137,500 1.3 Inc................................. 35,000 + Kent Electronics Corp............... 730,910 1,386,875 0.8 155,000 Methode Electronics Inc. (Class 1,895,370 2,557,500 1.5 A).................................. 30,750 Vishay Intertechnology Inc.......... 1,007,977 1,506,750 0.9 7,915,922 10,742,375 6.3 - ------------------------------------------------------------------------------------------------------------------------ ENTERTAINMENT 45,000 + Regal Cinemas, Inc.................. 785,625 1,113,750 0.7 - ------------------------------------------------------------------------------------------------------------------------ ENVIRONMENTAL 200,000 Calgon Carbon Corp.................. 2,433,712 2,075,000 1.2 80,000 Donaldson Inc....................... 1,366,077 1,920,000 1.1 92,400 IMCO Recycling Inc.................. 1,262,004 1,397,550 0.8 87,500 TETRA Technologies, Inc............. 1,201,250 1,509,375 0.9 6,263,043 6,901,925 4.0 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES 75,000 GFC Financial Corp.................. 2,393,126 2,381,250 1.4 150,000 + National Auto Credit, Inc........... 1,933,125 1,781,250 1.0 4,326,251 4,162,500 2.4 - ------------------------------------------------------------------------------------------------------------------------ FOODS/FOOD PROCESSING 50,000 + Smithfield Foods, Inc............... 1,590,000 1,587,500 0.9 - ------------------------------------------------------------------------------------------------------------------------
61 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ GAMING 135,000 Players International Inc............ $ 3,020,625 $ 3,003,750 1.8% 100,000 + Shuffle Master, Inc.................. 1,297,500 1,187,500 0.7 50,000 Sodak Gaming Inc..................... 1,268,874 762,500 0.4 5,586,999 4,953,750 2.9 - ------------------------------------------------------------------------------------------------------------------------ HEALTH SERVICES 100,000 Advocat, Inc......................... 950,000 1,325,000 0.8 150,000 + Ornda Health Corp.................... 2,331,250 1,837,500 1.1 100,000 + Physician Reliance Network, Inc...... 1,400,000 1,850,000 1.1 40,000 + Physicians Health Services, Inc...... 882,500 1,070,000 0.6 80,000 Sun Healthcare Group Inc............. 1,336,150 2,030,000 1.2 6,899,900 8,112,500 4.8 - ------------------------------------------------------------------------------------------------------------------------ HEALTHCARE--PRODUCTS & 85,000 Sybron Corp.......................... 2,357,265 2,932,500 1.7 SERVICES 110,000 Thermedics, Inc...................... 1,535,333 1,402,500 0.8 3,892,598 4,335,000 2.5 - ------------------------------------------------------------------------------------------------------------------------ HIGH TECHNOLOGY 100,000 Thermotrex Corp...................... 1,589,918 1,350,000 0.8 30,000 + Videonics Inc........................ 330,000 367,500 0.2 1,919,918 1,717,500 1.0 - ------------------------------------------------------------------------------------------------------------------------ INSURANCE 93,700 + Acceptance Insurance Holdings, 1,345,459 1,405,500 0.8 Inc.................................. 105,000 Gainsco Inc.......................... 1,031,649 866,250 0.5 2,377,108 2,271,750 1.3
- ------------------------------------------------------------------------------------------------------------------------ MANUFACTURED HOUSING 125,000 Clayton Homes, Inc.................. 1,920,136 1,968,750 1.2 100,000 Oakwood Homes Corp.................. 2,299,368 2,437,500 1.4 150,000 Redman Industries Inc............... 2,660,186 2,437,500 1.4 6,879,690 6,843,750 4.0 - ------------------------------------------------------------------------------------------------------------------------ MANUFACTURING 75,000 Modine Manufacturing Co............. 2,045,000 2,118,750 1.2 - ------------------------------------------------------------------------------------------------------------------------ MEDIA/PUBLISHING 100,000 + Electronic Arts, Inc................ 1,994,731 1,912,500 1.1 - ------------------------------------------------------------------------------------------------------------------------ MEDICAL SERVICES 150,000 + North American Biologicals, Inc..... 1,050,000 1,087,500 0.6 - ------------------------------------------------------------------------------------------------------------------------ MEDICAL SUPPLIES 80,000 Beckman Instruments, Inc............ 2,217,984 2,230,000 1.3 70,000 Dentsply International, Inc......... 2,378,125 2,170,000 1.3 50,000 + Isolyser Company, Inc............... 904,169 900,000 0.5 102,000 + Maxxim Medical Inc.................. 1,281,120 1,479,000 0.9 6,781,398 6,779,000 4.0 - ------------------------------------------------------------------------------------------------------------------------ METALS 65,000 Harsco Corp......................... 2,668,892 2,656,875 1.6 100,000 + Magma Copper Co..................... 1,632,000 1,675,000 1.0 79,500 Material Sciences Corp.............. 1,107,365 1,262,063 0.7 5,408,257 5,593,938 3.3 - ------------------------------------------------------------------------------------------------------------------------ OFFICE EQUIPMENT 80,000 Danka Business Systems PLC.......... 1,685,000 1,710,000 1.0 - ------------------------------------------------------------------------------------------------------------------------ OIL & GAS 125,000 Lomak Petroleum Inc................. 915,625 828,125 0.5 60,000 Parker & Parsley Development Partners............................ 1,380,798 1,230,000 0.7 2,296,423 2,058,125 1.2 - ------------------------------------------------------------------------------------------------------------------------ PRINTING 107,000 Merrill Corp........................ 2,289,739 1,819,000 1.1 - ------------------------------------------------------------------------------------------------------------------------ PRINTING & 60,000 Banta Corp.......................... 1,973,750 1,800,000 1.1 PUBLISHING 50,000 International Imaging Materials 864,374 1,612,500 0.9 Inc................................. 2,838,124 3,412,500 2.0 - ------------------------------------------------------------------------------------------------------------------------
62 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--EQUITY GROWTH FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - -------------------------------------------------------------------------------- REAL ESTATE 50,000 Capstone Capital Trust, Inc......... $ 900,000 $ 787,500 0.5% 50,000 First Industrial Realty Trust, 1,180,200 975,000 0.6 Inc................................. 45,250 National Health Investors, Inc...... 1,250,000 1,182,156 0.7 3,330,200 2,944,656 1.8 - ------------------------------------------------------------------------------------------------------------------------ RESTAURANTS 75,000 + Outback Steakhouse, Inc............. 2,053,125 1,734,375 1.0 - ------------------------------------------------------------------------------------------------------------------------ RETAIL APPAREL 55,000 + Tommy Hilfiger Corp................. 2,258,269 2,481,875 1.5 - ------------------------------------------------------------------------------------------------------------------------ RETAIL SPECIALTY 200,000 MicroAge Inc........................ 3,065,251 2,325,000 1.4 110,000 + Tech Data Corp...................... 1,722,527 1,856,250 1.1 4,787,778 4,181,250 2.5 - ------------------------------------------------------------------------------------------------------------------------ SEMICONDUCTOR 60,000 + Electroglas Inc..................... 2,043,125 1,995,000 1.2 PRODUCTION EQUIPMENT 50,000 + Ultratech Stepper Inc............... 1,095,001 1,900,000 1.1 30,000 + Veeco Instruments, Inc.............. 330,000 285,000 0.2 3,468,126 4,180,000 2.5 - ------------------------------------------------------------------------------------------------------------------------ SEMICONDUCTORS 170,000 Dallas Semiconductor Corp........... 2,926,559 2,826,250 1.7 50,000 + Tower Semiconductor Ltd............. 585,820 525,000 0.3 3,512,379 3,351,250 2.0 - ------------------------------------------------------------------------------------------------------------------------ SHIPPING 50,000 + Kirby Corp.......................... 896,850 987,500 0.6 - ------------------------------------------------------------------------------------------------------------------------ STEEL 90,000 Birmingham Steel Corp............... 2,511,223 1,800,000 1.1 75,000 Reliance Steel & Aluminum Co........ 1,087,500 946,875 0.6 3,598,723 2,746,875 1.7 - ------------------------------------------------------------------------------------------------------------------------ TEXTILES 55,000 + Galey & Lord, Inc................... 761,875 790,625 0.5 100,000 + Mohawk Industries,Inc............... 1,790,625 1,225,000 0.7 2,552,500 2,015,625 1.2 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS 149,096,016 151,740,144 89.2 - ------------------------------------------------------------------------------------------------------------------------ FACE AMOUNT SHORT-TERM SECURITIES - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER* $8,000,000 Daimler-Benz AG, 5.64% due 7,993,778 7,993,778 4.7 1/04/1995........................... 2,204,000 General Electric Capital Corp., 5.80% due 1/03/1995................. 2,202,580 2,202,580 1.3 10,196,358 10,196,358 6.0 - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & 8,000,000 Federal Home Loan Mortgage Corp., AGENCY OBLIGATIONS* 5.54% due 1/05/1995................. 7,992,613 7,992,613 4.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES 18,188,971 18,188,971 10.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS................... $167,284,987 169,929,115 99.9 OTHER ASSETS LESS LIABILITIES....... 114,508 0.1 NET ASSETS.......................... $170,043,623 100.0% - ------------------------------------------------------------------------------------------------------------------------
* Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security. See Notes to Financial Statements. 63 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS - -------------------------------------------------------------------------------- ALUMINUM 16,000 Aluminum Co. of America.......... $ 1,358,485 $ 1,386,000 0.5% - ------------------------------------------------------------------------------------------------------------------------ APPLIANCES 180,000 Singer Co. N.V. (f).............. 5,613,949 5,377,500 2.0 205,000 Sunbeam-Oster Inc................ 4,195,820 5,278,750 1.9 ------------ ------------ ---------- 9,809,769 10,656,250 3.9 - ------------------------------------------------------------------------------------------------------------------------ AUTOMOTIVE 65,000 Consorcio G Grupo Dina S.A. de C.V. (ADR) (a) (f)............. 1,273,435 617,500 0.2 - ------------------------------------------------------------------------------------------------------------------------ BANKING 50,000 BankAmerica Corp................. 2,267,371 1,975,000 0.7 70,000 Bank of New York, Inc............ 1,973,776 2,030,000 0.7 40,000 + Bank of New York, Inc. (Warrants) (b)............................ 300,938 385,000 0.1 110,000 Espirito Santo Financial Holdings S.A. (ADR) (a) (f)............. 1,638,728 1,471,250 0.5 50,000 Grupo Financiero Serfin S.A. de C.V. (ADR) (a) (f)............. 1,284,529 375,000 0.1 ------------ ------------ ---------- 7,465,342 6,236,250 2.1 - ------------------------------------------------------------------------------------------------------------------------ BEVERAGES 8,000 Panamerican Beverage, Inc. (Class A) (f)......................... 287,834 253,000 0.1 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS 40,000 du Pont (E.I.) de Nemours & Co............................. 2,355,629 2,250,000 0.8 75,000 Eastman Chemical Co.............. 3,860,673 3,787,500 1.4 45,000 + IMC Fertilizer Group, Inc........ 1,826,535 1,946,250 0.7 40,000 Rohm and Haas Co................. 2,347,779 2,285,000 0.8 ------------ ------------ ---------- 10,390,616 10,268,750 3.7 - ------------------------------------------------------------------------------------------------------------------------ COMMUNICATION EQUIPMENT 110,000 + ADC Telecommunication Inc........ 3,872,648 5,445,000 2.0 100,000 DSC Communications Corp.......... 2,363,175 3,600,000 1.3 30,000 Motorola, Inc.................... 1,560,200 1,736,250 0.6 30,000 Tellabs, Inc..................... 831,315 1,665,000 0.6 ------------ ------------ ---------- 8,627,338 12,446,250 4.5 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER EQUIPMENT 11,000 International Business Machines Corp........................... 781,579 808,500 0.3 85,000 + Solectron Corp................... 1,824,067 2,337,500 0.9 ------------ ------------ ---------- 2,605,646 3,146,000 1.2 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER SERVICES 165,000 Computer Sciences Corp........... 5,588,070 8,415,000 3.1 25,000 General Motors Corp. (Class E)... 981,560 962,500 0.3 ------------ ------------ ---------- 6,569,630 9,377,500 3.4 - ------------------------------------------------------------------------------------------------------------------------ CONSTRUCTION 63,000 Empresas ICA Sociedad Controladora, S.A. de C.V. (ADR) (a) (f).................. 1,407,219 976,500 0.4 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER--MISCELLANEOUS 50,000 Duracell International, Inc...... 2,093,659 2,168,750 0.8 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER SERVICES 55,000 Block (H&R), Inc................. 2,478,297 2,041,875 0.7 - ------------------------------------------------------------------------------------------------------------------------ ELECTRICAL EQUIPMENT 75,000 Grainger (W.W), Inc.............. 4,651,873 4,331,250 1.6 - ------------------------------------------------------------------------------------------------------------------------ ENERGY RELATED 100,000 + California Energy Co., Inc....... 1,837,585 1,562,500 0.6 - ------------------------------------------------------------------------------------------------------------------------ ENVIRONMENTAL CONTROL 350,000 + Wheelabrator Technologies, Inc............................ 5,888,869 5,162,500 1.9 - ------------------------------------------------------------------------------------------------------------------------ HEALTHCARE 175,000 + Humana Inc....................... 3,164,634 3,959,375 1.4 80,000 + Physician Corp. of America....... 1,759,763 1,620,000 0.6 15,000 + Vivra Inc........................ 278,914 420,000 0.2 ------------ ------------ ---------- 5,203,311 5,999,375 2.2 - ------------------------------------------------------------------------------------------------------------------------ HEALTH AND PERSONAL CARE 45,000 Huntington International Holdings PLC (ADR) (a) (f).............. 461,978 118,125 0.0 - ------------------------------------------------------------------------------------------------------------------------ HOUSEHOLD PRODUCTS 100,000 Procter & Gamble Co.............. 5,564,714 6,200,000 2.3 - ------------------------------------------------------------------------------------------------------------------------ INSURANCE 35,000 ITT Corp......................... 3,004,477 3,101,875 1.1 - ------------------------------------------------------------------------------------------------------------------------ MACHINERY 45,000 Siebe PLC (f).................... 392,986 391,813 0.1 - ------------------------------------------------------------------------------------------------------------------------ MULTI--INDUSTRY 60,000 + Allied Signal Inc................ 2,155,828 2,040,000 0.7 - ------------------------------------------------------------------------------------------------------------------------ OFFICE EQUIPMENT 190,000 Danka Business Systems Inc. PLC (ADR) (a) (f).................. 3,055,107 4,061,250 1.5 - ------------------------------------------------------------------------------------------------------------------------
64 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD US STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ OIL--INTEGRATED 15,110 British Petroleum PLC (ADR) (a) (f)............................ $ 1,147,919 $ 1,206,911 0.4% 50,000 Mobil Oil Corp................... 3,922,826 4,212,500 1.5 50,000 Phillips Petroleum Co............ 1,699,244 1,637,500 0.6 30,000 Royal Dutch Petroleum Co. (ADR) (a) (f).................. 3,013,607 3,225,000 1.2 ------------ ------------ ---------- 9,783,596 10,281,911 3.7 - ------------------------------------------------------------------------------------------------------------------------ PACKAGING 40,000 + Crown Cork & Seal Co., Inc....... 1,456,240 1,510,000 0.5 - ------------------------------------------------------------------------------------------------------------------------ PHARMACEUTICALS 25,000 American Home Products Corp...... 1,557,695 1,568,750 0.6 100,000 Merck & Co., Inc................. 3,637,356 3,812,500 1.4 ------------ ------------ ---------- 5,195,051 5,381,250 2.0 - ------------------------------------------------------------------------------------------------------------------------ PHOTOGRAPHY 40,000 Eastman Kodak Co................. 1,969,398 1,910,000 0.7 - ------------------------------------------------------------------------------------------------------------------------ RAILROADS 105,000 + Southern Pacific Rail Corp....... 2,146,353 1,903,125 0.7 - ------------------------------------------------------------------------------------------------------------------------ RETAIL 30,000 Phillips-Van Heusen Corp......... 853,660 457,500 0.2 25,000 + Revco D.S., Inc.................. 579,095 590,625 0.2 ------------ ------------ ---------- 1,432,755 1,048,125 0.4 - ------------------------------------------------------------------------------------------------------------------------ SOAP 7,000 Unilever Capital Corp. (ADR) (a) (f)............................ 812,101 815,500 0.3 - ------------------------------------------------------------------------------------------------------------------------ TIRE & RUBBER 25,000 Bandag, Inc. (Class A)........... 1,354,227 1,337,500 0.5 35,000 Cooper Tire & Rubber Co.......... 949,285 826,875 0.3 ------------ ------------ ---------- 2,303,512 2,164,375 0.8 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES--COMMUNICATIONS 15,500 + ALC Communications Corp.......... 464,664 482,438 0.2 60,000 GTE Corp......................... 1,920,691 1,822,500 0.7 164,734 LDDS Communications Inc.......... 3,522,400 3,191,721 1.2 130,000 + MCI Communications Corp.......... 3,498,756 2,388,750 0.9 70,000 + Southwestern Bell Corp........... 2,980,278 2,826,250 1.0 45,000 Telefonos de Mexico, S.A. de C.V. (ADR) (a) (f).................. 2,814,912 1,845,000 0.7 ------------ ------------ ---------- 15,201,701 12,556,659 4.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US STOCKS & WARRANTS 126,884,705 130,114,258 47.3 - ------------------------------------------------------------------------------------------------------------------------ COUNTRY FOREIGN STOCKS++++ - ------------------------------------------------------------------------------------------------------------------------ AUSTRALIA 69,633 National Australia Bank Ltd. (2)............................ 577,474 557,068 0.2 80,000 News Corp. Ltd. (ADR) (a) (19)... 1,626,298 1,250,000 0.5 40,000 News Corp. Ltd. (Preferred) (ADR) (a) (19)................. 499,721 555,000 0.2 475 Pacific Dunlop, Ltd. (20)........ 1,371 1,263 0.0 ------------ ------------ ---------- 2,704,864 2,363,331 0.9 - ------------------------------------------------------------------------------------------------------------------------ CANADA 30,000 Hudson Bay Co. (23).............. 740,755 534,721 0.2 50,000 Semi-Tech Corp. Receipts, Inc. (d) (11).................. 536,117 196,064 0.1 55,000 Nova Corp. (5)................... 577,810 508,750 0.2 ------------ ------------ ---------- 1,854,682 1,239,535 0.5 - ------------------------------------------------------------------------------------------------------------------------ CHILE 15,200 Banco O'Higgins (Sponsored) (ADR) (a) (2).................. 221,987 260,300 0.1 20,000 Cristalerias de Chile S.A. (ADR) (a) (26)....................... 391,925 315,000 0.1 25,000 ++ Distribuidora Chilectra Metropolitana S.A. (ADR) (a) (9)............................ 795,208 1,225,000 0.4 14,000 Telex Chile S.A. (25)............ 276,514 148,750 0.1 ------------ ------------ ---------- 1,685,634 1,949,050 0.7 - ------------------------------------------------------------------------------------------------------------------------ DENMARK 42,000 Tele Danmark A/S (ADR) (a) (25)........................... 1,020,702 1,071,000 0.4 - ------------------------------------------------------------------------------------------------------------------------ FRANCE 4,646 Compagnie Generale des Eaux (Ordinary) (28)................ 485,421 452,227 0.2 7,800 + Eramet (29)...................... 488,521 504,689 0.2 ------------ ------------ ---------- 973,942 956,916 0.4 - ------------------------------------------------------------------------------------------------------------------------
65 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF COUNTRY HELD FOREIGN STOCKS++++ COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ HONG KONG 91,641 HSBC Holdings PLC (2)............ $ 766,003 $ 989,145 0.4% 245,000 Hutchison Whampoa Co. (20)....... 810,025 991,275 0.4 200,000 Johnson Electric Holdings Ltd. (11)........................... 408,481 458,894 0.2 700,000 Shanghai Petrochemical Co., Ltd. (21)........................... 233,787 199,069 0.1 ------------ ------------ ---------- 2,218,296 2,638,383 1.1 - ------------------------------------------------------------------------------------------------------------------------ INDONESIA 980 P.T. Indonesia Satellite (ADR) (a) (25)....................... 31,409 35,035 0.0 - ------------------------------------------------------------------------------------------------------------------------ ITALY 25,000 Istituto Mobiliare Italiano S.p.A. (ADR) (a) (2)........... 552,180 459,375 0.2 - ------------------------------------------------------------------------------------------------------------------------ JAPAN 20,000 Fujitsu, Ltd. (7)................ 220,570 203,015 0.1 45,000 Hitachi, Ltd. (10)............... 447,643 447,286 0.2 6,000 Kyocera Corp. (11)............... 444,404 445,628 0.2 115,000 Mitsubishi Electric Corp. (10)... 805,387 817,136 0.3 15,000 NEC Corp. (11)................... 192,442 171,859 0.1 10,000 TDK Corp. (11)................... 471,824 485,427 0.2 ------------ ------------ ---------- 2,582,270 2,570,351 1.1 - ------------------------------------------------------------------------------------------------------------------------ MEXICO 210,000 Cifra, S.A. de C.V. (23)......... 551,720 406,286 0.1 96,400 ++ Grupo Carso, S.A. de C.V. (ADR) (a) (20)....................... 1,124,115 1,458,050 0.5 311,500 Telefonos de Mexico, S.A. de C.V. (Telemex) (Class L) (25)....... 579,168 648,429 0.2 ------------ ------------ ---------- 2,255,003 2,512,765 0.8 - ------------------------------------------------------------------------------------------------------------------------ NORWAY 30,000 Norsk Hydro A.S. (ADR) (a) (5)... 1,143,208 1,173,750 0.4 - ------------------------------------------------------------------------------------------------------------------------ SWEDEN 5,000 Electrolux A.B. 'B' Free (10).... 254,436 254,187 0.1 - ------------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM 15,000 Hanson PLC (ADR) (a) (20)........ 332,006 270,000 0.1 50,000 L.M. Ericsson Telephone Co. (25)........................... 2,895,870 2,756,250 1.0 40,000 Reuters Holdings PLC (ADR) (a) (4)............................ 1,467,162 1,755,000 0.6 ------------ ------------ ---------- 4,695,038 4,781,250 1.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL FOREIGN STOCKS 21,971,664 22,004,928 8.3 - ------------------------------------------------------------------------------------------------------------------------
FACE INDUSTRY AMOUNT* CORPORATE & FOREIGN BONDS++++ - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--AUSTRALIA Queensland Treasury Corp., Global Notes (15): A$ 7,300,000 8.00% due 5/14/1997............... 5,356,175 5,405,042 2.0 1,925,000 8.00% due 7/14/1999............... 1,436,763 1,371,506 0.5 ------------ ------------ ---------- 6,792,938 6,776,548 2.5 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--CANADA US$ 5,000,000 Hydro-Electric Quebec, 6.35% due 1/15/2002 (15).................. 5,000,000 4,462,500 1.6 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--GERMANY DM 13,700,000 Bundes Obligation, 6.375% due 5/20/1998 (15).................. 8,366,515 8,664,843 3.2 1,450,000 Deutschland Republic, 8.00% due 7/22/2002 (15).................. 950,668 953,647 0.3 ------------ ------------ ---------- 9,317,183 9,618,490 3.5 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--ITALY US$ 500,000 Republic of Italy, 8.75% due 2/08/2001 (15).................. 537,305 502,188 0.2 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN-- Pound 625,000 UK Treasury Gilt (15): UNITED KINGDOM Sterling 7.25% due 3/30/1998............. 942,775 942,659 0.3 1,800,000 8.00% due 6/10/2003............... 2,729,309 2,687,551 1.0 ------------ ------------ ---------- 3,672,084 3,630,210 1.3 - ------------------------------------------------------------------------------------------------------------------------
66 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
FACE CORPORATE & FOREIGN BONDS++++ VALUE PERCENT OF INDUSTRY AMOUNT* COST (NOTE 1A) NET ASSETS - --------------------------------------------------------------------------------------------------------- US--FINANCIAL US$ 1,000,000 Ford Motor Credit Co., 7.125% SERVICES due 12/01/1997............. $ 995,000 $ 966,564 0.4% - --------------------------------------------------------------------------------------------------------- US--INDUSTRIAL 1,000,000 International Business Machines Corp., 6.375% due 6/15/2000.................. 1,000,000 915,314 0.3 - --------------------------------------------------------------------------------------------------------- US-- 5,000,000 Chesapeake & Potomac Telecom tELECOMMUNICATIONS Co., 6.125% due 7/15/2005.................. 4,503,300 4,243,750 1.5 - --------------------------------------------------------------------------------------------------------- TOTAL CORPORATE & FOREIGN BONDS 31,817,810 31,115,564 11.3 - --------------------------------------------------------------------------------------------------------- US GOVERNMENT & AGENCY OBLIGATIONS - --------------------------------------------------------------------------------------------------------- FEDERAL Federal National Mortgage AGENCY Association: OBLIGATIONS US$ 5,000,000 7.85% due 9/10/2004.......... 4,992,969 4,791,405 1.7 5,000,000 8.00% due 1/01/2020.......... 4,774,219 4,790,625 1.7 2,000,000 Series 93D, 5.85% due 2/25/2006.................. 1,996,250 1,819,375 0.7 ------------ ------------ ---------- 11,763,438 11,401,405 4.1 - --------------------------------------------------------------------------------------------------------- GOVERNMENT OBLIGATIONS US Treasury Notes: 1,000,000 8.625% due 8/15/1997....... 1,027,344 1,018,750 0.4 6,000,000 7.50% due11/15/2001.......... 6,143,336 5,891,250 2.1 5,000,000 6.25% due 2/15/2003.......... 4,990,469 4,523,440 1.6 10,000,000 7.25% due 8/15/2004.......... 10,103,125 9,604,690 3.5 US Treasury STRIPS++: 3,000,000 7.77% due 5/15/2000 (e)...... 2,219,543 1,994,094 0.7 10,000,000 7.92% due 11/15/2004 (e)..... 4,661,724 4,634,520 1.7 ------------ ------------ ---------- 29,145,541 27,666,744 10.0 - --------------------------------------------------------------------------------------------------------- MORTGAGE- Government National Mortgage BACKED Association (c): SECURITIES 1,184,942 9.00% due 11/15/2019....... 1,174,190 1,195,311 0.4 541,884 9.00% due 11/15/2019......... 538,159 546,626 0.2 ------------ ------------ ---------- 1,712,349 1,741,937 0.6 - --------------------------------------------------------------------------------------------------------- TOTAL US GOVERNMENT & AGENCY OBLIGATIONS 42,621,328 40,810,086 14.7 - ---------------------------------------------------------------------------------------------------------
67 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF AMOUNT* SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS - -------------------------------------------------------------------------------- COMMERCIAL US$ 14,000,000 Corporate Asset Funding Co. PAPER** Inc., 5.83% due 1/27/1995.. $ 13,938,785 $ 13,938,785 5.1% 7,789,000 General Electric Capital Corp., 5.80% due 1/03/1995........ 7,785,235 7,785,235 2.8 14,000,000 PHH Corp., 6.00% due 1/17/1995.................. 13,960,333 13,960,333 5.1 ------------ ------------ ---------- 35,684,353 35,684,353 13.0 - --------------------------------------------------------------------------------------------------------- US GOVERNMENT & AGENCY 14,000,000 Federal Home Loan Mortgage OBLIGATIONS** Association, 5.54% due 1/05/1995.................. 13,989,228 13,989,228 5.1 - --------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES 49,673,581 49,673,581 18.1 - --------------------------------------------------------------------------------------------------------- SHARES PREMIUMS COVERED ISSUE RECEIVED - --------------------------------------------------------------------------------------------------------- CALL 10,000 ADC Telecommunications Inc., OPTIONS expiring January 1995 at WRITTEN US$50...................... (13,271) (11,250) 0.0 6,000 ITT Corp., expiring January 1995 at US$90.............. (7,257) (6,750) 0.0 - --------------------------------------------------------------------------------------------------------- TOTAL OPTIONS WRITTEN (20,528) (18,000) 0.0 - --------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN............ $272,948,560 273,700,417 99.7 ------------ ------------ OTHER ASSETS LESS LIABILITIES................ 797,849 0.3 ------------ ---------- NET ASSETS................... $274,498,266 100.0% ------------ ---------- ------------ ---------- - ---------------------------------------------------------------------------------------------------------
(a) American Depositary Receipts (ADR). (b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. (c) US Government Agency Mortgage-Backed Obligations are subject to principal paydowns as a result of prepayments or refinancings of the underlying mortgage investments. As a result, the average life may be substantially less than the original maturity. (d) Receipts evidence payment by the Fund of 40% of the purchase price of International Semi-Tech Corp. Receipts. The Fund is obligated to pay the remaining 60%, approximately $498,000, over the next two years. (e) Represents the yield-to-maturity on this zero coupon issue. (f) Consistent with general policy of the Securities and Exchange Commission, the nationality or domicile of an issuer for determination of foreign issuer status may be (i) the country under whose laws the issuer is organized, (ii) the country in which the issuer's securities are principally traded, or (iii) the country in which the issuer derives a significant proportion (at least 50%) of its revenue or profits from goods produced or sold, investments made, or services performed in the country, or in which at least 50% of the assets of the issuers are situated. * Denominated in US dollars unless otherwise indicated. ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security.
68 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FLEXIBLE STRATEGY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - -------------------------------------------------------------------------------- ++ Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $2,683,000, representing 0.98% of net assets.
- --------------------------------------------------------------------------------
ACQUISITION VALUE ISSUE DATES COST (NOTE 1A) - -------------------------------------------------------------------------------- Distribuidora Chilectra Metropolitana S.A. (ADR)................................. 2/12/1992 $ 795,208 $ 1,225,000 Grupo Carso, S.A. de C.V. (ADR).................................................. 1/24/1992 1,124,115 1,458,050 - ----------------------------------------------------------------------------------------------------------------------- TOTAL............................................................................ $ 1,919,323 $ 2,683,050 ------------ ------------ ------------ ------------ - -----------------------------------------------------------------------------------------------------------------------
++ Separate Trading of Registered Interest and Principal of Securities (STRIPS). ++++ Corresponding industry groups for foreign securities:
(1) Automotive (2) Banking (3) Beverages (4) Business Services (5) Chemicals (6) Communications Equipment (7) Computers (8) Construction (9) Electric Utilities (10) Electrical Equipment (11) Electronics (12) Energy (13) Financial Services (14) Food Chains (15) Government Entities (16) Health and Personal Care (17) Insurance (18) Machinery (19) Media Publishing (20) Multi-Industry (21) Petroleum (22) Real Estate (23) Retail Stores (24) Soap (25) Telecommunications (26) Containers (27) Packaging (28) Utilities-Water (29) Metals
See Notes to Financial Statements. 69 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD US STOCKS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ AEROSPACE 61,500 United Technologies Corp........... $ 3,820,923 $ 3,866,812 0.7% - ------------------------------------------------------------------------------------------------------------------------ BANKING 46,900 Morgan (J.P.) & Co................. 3,144,878 2,626,400 0.5 - ------------------------------------------------------------------------------------------------------------------------ BUILDING--RELATED 75,700 Stanley Works Co................... 3,136,707 2,706,275 0.5 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS 54,050 Eastman Chemical Co................ 2,354,380 2,729,525 0.5 94,500 Nalco Chemical Co.................. 3,283,332 3,165,750 0.6 ------------ ------------ ---------- 5,637,712 5,895,275 1.1 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER TECHNOLOGY 30,400 Hewlett-Packard Co................. 2,362,976 3,036,200 0.6 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER--SERVICES 112,000 Kelly Services, Inc. (Class A)..... 3,154,750 3,052,000 0.6 - ------------------------------------------------------------------------------------------------------------------------ ENERGY RELATED 134,000 + California Energy Co., Inc......... 2,383,346 2,093,750 0.4 - ------------------------------------------------------------------------------------------------------------------------ ENVIRONMENTAL CONTROL 201,800 + Wheelabrator Technologies, Inc..... 3,633,140 2,976,550 0.6 - ------------------------------------------------------------------------------------------------------------------------ FOODS 172,275 Archer-Daniels-Midland Co.......... 2,567,582 3,553,172 0.7 - ------------------------------------------------------------------------------------------------------------------------ HEALTH CARE 120,000 + Humana Inc......................... 2,876,654 2,715,000 0.5 - ------------------------------------------------------------------------------------------------------------------------ MACHINERY 78,900 Ingersoll-Rand Co.................. 2,785,025 2,485,350 0.5 - ------------------------------------------------------------------------------------------------------------------------ MISCELLANEOUS-- MANUFACTURING 162,200 Keystone International, Inc........ 3,719,883 2,757,400 0.5 - ------------------------------------------------------------------------------------------------------------------------ NATURAL GAS 119,000 Westcoast Energy Inc............... 1,925,615 1,889,125 0.4 - ------------------------------------------------------------------------------------------------------------------------ OFFICE--RELATED 84,500 Pitney Bowes, Inc.................. 3,323,892 2,682,875 0.5 - ------------------------------------------------------------------------------------------------------------------------ OIL--INTEGRATED 96,700 Phillips Petroleum Co.............. 2,816,185 3,166,925 0.6 - ------------------------------------------------------------------------------------------------------------------------ PETROLEUM & SERVICE 142,900 Dresser Industries, Inc............ 3,146,100 2,697,238 0.5 EQUIPMENT 50,200 Schlumberger Ltd................... 2,972,633 2,528,825 0.5 ------------ ------------ ---------- 6,118,733 5,226,063 1.0 - ------------------------------------------------------------------------------------------------------------------------ PHARMACEUTICALS 112,000 Abbott Laboratories................ 3,152,867 3,654,000 0.7 105,000 Merck & Co., Inc................... 3,539,150 4,003,125 0.8 ------------ ------------ ---------- 6,692,017 7,657,125 1.5 - ------------------------------------------------------------------------------------------------------------------------ PHOTOGRAPHY 57,200 Eastman Kodak Co................... 2,529,035 2,731,300 0.5 - ------------------------------------------------------------------------------------------------------------------------ PRINTING/PUBLISHING 70,800 Gannett Co., Inc................... 3,634,477 3,770,100 0.7 - ------------------------------------------------------------------------------------------------------------------------ 50,100 American Telephone & Telegraph TELECOMMUNICATIONS Co............................... 2,740,599 2,517,525 0.5 50,300 Bell Atlantic Corp................. 2,829,968 2,502,425 0.5 98,000 Comsat Corp........................ 2,582,928 1,825,250 0.4 ------------ ------------ ---------- 8,153,495 6,845,200 1.4 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US STOCKS 74,417,025 71,732,897 13.8 - ------------------------------------------------------------------------------------------------------------------------ COUNTRY FOREIGN STOCKS & WARRANTS++ - ------------------------------------------------------------------------------------------------------------------------ ARGENTINA 127,520 Banco de Galicia S.A. (ADR)* (3)... 2,868,834 2,183,780 0.4 117,000 + Banco Frances del Rio de la Plata S.A. (Class A) (ADR)* (3)........ 3,272,016 2,500,875 0.5 100,000 Yacimientos Petroliferos Fiscales S.A. (Sponsored) (ADR)* (21)..... 2,345,882 2,137,500 0.4 ------------ ------------ ---------- 8,486,732 6,822,155 1.3 - ------------------------------------------------------------------------------------------------------------------------ AUSTRALIA 621,000 CSR Ltd. (Ordinary) (18)........... 1,970,236 2,142,226 0.4 251,000 National Bank of Australia (3)..... 1,939,280 2,008,016 0.4 837,600 Pacific Dunlop, Ltd. (18).......... 2,815,855 2,227,125 0.4 ------------ ------------ ---------- 6,725,371 6,377,367 1.2 - ------------------------------------------------------------------------------------------------------------------------ CANADA 172,100 Canadian Pacific Ltd. (18)......... 2,710,067 2,581,500 0.5 65,000 Imperial Oil Ltd. (9).............. 2,297,743 2,143,341 0.4 20,000 Imperial Oil Ltd. (ADR)* (9)....... 592,938 660,000 0.1 77,400 Northern Telecommunications, Ltd. (27)............................. 2,137,422 2,583,225 0.5 217,000 Thomson Corp. (7).................. 2,673,122 2,668,794 0.5 ------------ ------------ ---------- 10,411,292 10,636,860 2.0 - ------------------------------------------------------------------------------------------------------------------------
70 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF COUNTRY HELD FOREIGN STOCKS & WARRANTS++ COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ 150,000 + Banco O'Higgins (Sponsored) (ADR)* CHILE (3).............................. $ 2,377,482 $ 2,568,750 0.5% - ------------------------------------------------------------------------------------------------------------------------ CHINA 8,000,000 Shanghai Petrochemical Company, Ltd. (9)......................... 2,557,317 2,275,078 0.4 - ------------------------------------------------------------------------------------------------------------------------ FRANCE 33,900 Alactel Alsthom (8)................ 3,830,275 2,899,175 0.6 22,100 Compagnie de Saint Gobain (14)..... 2,366,194 2,544,899 0.5 23,800 + Compagnie General des Eaux (31).... 2,592,063 2,316,617 0.4 36,766 + Schneider S.A (11)................. 2,409,589 2,440,953 0.5 1,966 + Schneider S.A. (Warrants) (a) (11)............................. 16,314 14,011 0.0 40,300 TOTAL S.A. (21).................... 2,118,813 2,344,535 0.5 ------------ ------------ ---------- 13,333,248 12,560,190 2.5 - ------------------------------------------------------------------------------------------------------------------------ GERMANY 10,250 + Mannesmann AG (17)................. 2,195,390 2,794,251 0.5 9,750 Preussag AG (18)................... 2,569,641 2,834,302 0.5 10,700 RWE AG (Rheinisch Westfalisches) (31)............................. 2,883,098 3,003,327 0.6 6,150 Siemens AG (12).................... 2,507,770 2,578,391 0.5 16,600 Thyssen AG (Ordinary) (17)......... 2,353,011 3,168,798 0.6 ------------ ------------ ---------- 12,508,910 14,379,069 2.7 - ------------------------------------------------------------------------------------------------------------------------ 536,400 China Light & Power Co., Ltd. HONG KONG (31)............................. 2,653,976 2,288,159 0.4 350,000 Sun Hung Kai Properties, Ltd. (24)............................. 2,393,488 2,090,228 0.4 397,000 Swire Pacific, Ltd. (Class A) (8).............................. 2,402,225 2,473,552 0.5 ------------ ------------ ---------- 7,449,689 6,851,939 1.3 - ------------------------------------------------------------------------------------------------------------------------ 65,180 PT Indonesia Satellite (ADR)* INDONESIA (27)............................. 2,516,111 2,330,185 0.5 - ------------------------------------------------------------------------------------------------------------------------ ITALY 680,000 Daniel & Co. (17).................. 2,451,794 2,433,667 0.5 660,000 Italcementi S.p.A. (4)............. 2,340,308 2,288,782 0.4 ------------ ------------ ---------- 4,792,102 4,722,449 0.9 - ------------------------------------------------------------------------------------------------------------------------ JAPAN 229,000 Asahi Glass Co., Ltd. (4).......... 2,536,504 2,830,854 0.5 68,000 Bandai Co. (29).................... 2,243,363 2,904,523 0.6 165,000 Canon, Inc. (12)................... 2,315,252 2,802,513 0.5 165,000 Dai Nippon Printing Co., Ltd. (23)............................. 2,681,206 2,819,095 0.5 305,000 Hitachi Cable, Ltd. (8)............ 2,258,069 2,544,221 0.5 57,000 Ito-Yokado Co., Ltd. (25).......... 2,773,666 3,053,367 0.6 281,000 Kamigumi Co. (26).................. 3,327,164 2,993,568 0.6 146,000 Kandenko Co., Ltd. (4)............. 3,108,742 2,465,126 0.5 117,000 Kansai Electric Power Co. (32)..... 3,171,203 2,822,111 0.5 320,000 + Komatsu Ltd. (17).................. 2,495,093 2,894,472 0.6 242,000 Maeda Corp. (4).................... 2,444,979 2,529,447 0.5 407,000 Makino Milling Machine Co. (17).... 2,527,613 3,673,226 0.7 162,000 Makita Electric Works, Ltd. (12)... 2,941,609 2,930,653 0.6 166,000 Matsushita Electric Industries, Ltd. (12)........................ 2,324,954 2,736,080 0.5 430,000 Mitsubishi Electric Co. (11)....... 2,778,342 3,055,377 0.6 386,000 Mitsubishi Heavy Industry, Ltd. (8).............................. 2,363,424 2,948,342 0.6 415,000 Nippon Fire and Marine Insurance Co., Ltd. (16)................... 2,923,392 2,886,231 0.6 364,000 Nippon Oil Co., Ltd. (21).......... 2,469,057 2,425,447 0.5 310,000 Okumura Corp. (4).................. 2,626,893 2,321,106 0.5 294,000 Sekisui Chemical Co., Ltd. (9)..... 2,969,066 2,925,226 0.6 170,000 Sharp Corp. (12)................... 2,504,542 3,075,377 0.6 119,000 Shikoku Electric Power Co. (31).... 3,095,822 2,834,472 0.5 285,000 + Sumitomo Corp. (30)................ 2,414,459 2,921,608 0.6 225,000 Tokio Marine and Fire Insurance Co., Ltd. (16)................... 2,906,154 2,758,794 0.5 103,000 Tokyo Electric Power Co., Inc. (31)............................. 3,203,802 2,877,789 0.6 144,000 Tokyo Style Co. (10)............... 2,477,721 2,445,829 0.5 400,000 + Toray Industries Ltd. (28)......... 2,827,073 2,914,573 0.6 172,000 Toto Ltd. (4)...................... 3,106,946 2,817,688 0.5 87,000 Toyo Seikan Kaisha Corp. (20)...... 2,447,671 2,902,915 0.6
71 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF COUNTRY HELD FOREIGN STOCKS & WARRANTS++ COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ JAPAN 141,000 Toyota Motor Corp. (1)............. $ 2,461,767 $ 2,975,879 0.6% (CONCLUDED) 151,000 Yamazaki Banking Ltd. (3).......... 2,993,580 3,035,176 0.6 ------------ ------------ ---------- 83,719,128 88,121,085 17.3 - ------------------------------------------------------------------------------------------------------------------------ MALAYSIA 400,000 Hong Leong Industries BHD (5)...... 2,162,754 2,068,560 0.4 800,000 UMW Holdings BHD (2)............... 2,055,479 2,131,244 0.4 ------------ ------------ ---------- 4,218,233 4,199,804 0.8 - ------------------------------------------------------------------------------------------------------------------------ MEXICO 458,813 Cementos Mexicanos, S.A. de C.V. (Class B) (8).................... 2,998,578 2,439,200 0.5 1,399,000 + Cifra, S.A. de C.V. (Class C) (25)............................. 3,373,615 2,706,637 0.5 246,000 Consorcio G Grupo Dina, S.A. de C.V. (ADR)* (6).................. 3,781,859 2,337,000 0.5 130,000 Empresas ICA Sociedad Controladora, S.A. de C.V. (ADR)* (32)......... 3,203,355 2,015,000 0.4 71,600 Telefonos de Mexico, S.A. de C.V. (Telmex) (ADR)* (27)............. 3,705,673 2,935,600 0.6 ------------ ------------ ---------- 17,063,080 12,433,437 2.5 - ------------------------------------------------------------------------------------------------------------------------ 466 ABN Amro Holdings N.V. (Preferred) NETHERLANDS (3).............................. 15,383 15,540 0.0 23,000 Royal Dutch Petroleum Co. N.V. (ADR)* (21)...................... 2,269,122 2,472,500 0.5 29,400 Ver Ner Utigevers (23)............. 2,383,457 3,056,704 0.6 ------------ ------------ ---------- 4,667,962 5,544,744 1.1 - ------------------------------------------------------------------------------------------------------------------------ 16,200 Hafslund Nycomed, Inc. (ADR)* NORWAY (22)............................. 328,622 334,125 0.1 147,200 Hafslund Nycomed, Inc. (Class B) (22)............................. 2,587,241 3,072,114 0.6 72,200 Kvaerner, Inc. (Class B) (8)....... 2,934,292 3,270,160 0.6 ------------ ------------ ---------- 5,850,155 6,676,399 1.3 - ------------------------------------------------------------------------------------------------------------------------ PORTUGAL 169,200 Banco Commercial Portugues (ADR)* (3).............................. 2,313,645 2,136,150 0.4 - ------------------------------------------------------------------------------------------------------------------------ SINGAPORE 333,000 Jurong Shipyards Ltd. (4).......... 2,607,046 2,560,659 0.5 1,875,000 Neptune Orient Lines Ltd. (26)..... 2,302,432 2,574,665 0.5 ------------ ------------ ---------- 4,909,478 5,135,324 1.0 - ------------------------------------------------------------------------------------------------------------------------ 82,400 Repsol S.A. (Sponsored) (ADR)* SPAIN (21)............................. 2,379,669 2,245,400 0.4 76,700 Telefonica Nacional de Espana S.A. (ADR)* (27)...................... 2,873,677 2,694,087 0.5 ------------ ------------ ---------- 5,253,346 4,939,487 0.9 - ------------------------------------------------------------------------------------------------------------------------ SWEDEN 167,000 SKF AB 'B' Free (8)................ 2,580,434 2,758,637 0.5 - ------------------------------------------------------------------------------------------------------------------------ SWITZERLAND 3,300 BBC Brown Boveri & Cie (8)......... 2,297,018 2,844,436 0.6 3,340 Holderbank Financiere Glarus AG (8).............................. 1,776,158 2,531,503 0.5 3,890 Sulzer Gebrueder AG (17)........... 2,142,764 2,695,480 0.5 ------------ ------------ ---------- 6,215,940 8,071,419 1.6 - ------------------------------------------------------------------------------------------------------------------------ THAILAND 374,000 M.D.X. Corp., Ltd. (24)............ 1,925,555 1,266,786 0.2 - ------------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM 295,600 Allied Lyons PLC (13).............. 2,648,038 2,499,712 0.5 553,000 British Gas PLC (19)............... 2,565,455 2,701,914 0.5 345,000 British Telecommunications PLC (27)............................. 2,219,411 2,039,519 0.4 294,000 GKN PLC (6)........................ 2,318,167 2,704,873 0.5 585,000 General Electric PLC (11).......... 2,809,289 2,510,141 0.5 101,100 Grand Metropolitan PLC (Sponsored) (ADR)* (13)...................... 2,697,289 2,527,500 0.5 667,000 Hanson PLC (10).................... 2,615,796 2,412,846 0.5 1,052,000 Hillsdown Holdings PLC (10)........ 2,595,494 2,965,378 0.6 207,000 Imperial Chemical Industries PLC (9).............................. 2,402,001 2,426,353 0.5 737,000 Lucas Industries PLC (6)........... 1,866,692 2,377,533 0.5 ------------ ------------ ---------- 24,737,632 25,165,769 5.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL FOREIGN STOCKS & WARRANTS 234,612,842 235,973,083 45.9 - ------------------------------------------------------------------------------------------------------------------------
72 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
VALUE PERCENT OF COUNTRY FACE AMOUNT** FOREIGN BONDS++ COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ AUSTRALIA Queensland Treasury Corp. (15): A$ 4,125,000 8.00% due 7/14/1999................ $ 2,922,527 $ 2,938,942 0.6% 6,500,000 8.00% due 5/14/2003................ 4,820,875 4,394,136 0.9 ------------ ------------ ---------- 7,743,402 7,333,078 1.5 - ------------------------------------------------------------------------------------------------------------------------ CANADA C$ 15,800,000 Government of Canada, 7.25% due 6/01/2003 (15)......... 11,839,688 10,036,244 1.9 - ------------------------------------------------------------------------------------------------------------------------ GERMANY DM 24,000,000 Bundes Obligation, 6.375% due 5/20/1998 (15)........ 15,218,569 15,179,287 2.9 - ------------------------------------------------------------------------------------------------------------------------ ITALY Buoni Poliennali del Tesoro (15): Lit 6,000,000,000 8.50% due 1/01/1997................ 3,753,480 3,513,513 0.7 7,100,000,000 10.00% due 8/01/2003............... 4,508,125 3,912,864 0.8 ------------ ------------ ---------- 8,261,605 7,426,377 1.5 - ------------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM UK Gilt (15): Pound Sterling 8,190,000 7.25% due 3/30/1998................ 12,651,800 12,352,598 2.4 75,000 9.75% due 8/27/2002................ 149,409 123,066 0.0 3,000,000 8.00% due 6/10/2003................ 4,822,692 4,479,252 0.9 ------------ ------------ ---------- 17,623,901 16,954,916 3.3 - ------------------------------------------------------------------------------------------------------------------------ TOTAL FOREIGN BONDS 60,687,165 56,929,902 11.1 - ------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS - ------------------------------------------------------------------------------------------------------------------------ US Treasury Notes: US$ 300,000 7.875% due 8/15/2001............. 304,953 300,516 0.1 700,000 7.50% due 11/15/2001............. 714,297 687,312 0.1 1,400,000 6.375% due 8/15/2002............. 1,383,906 1,281,657 0.2 7,175,000 6.25% due 2/15/2003.............. 7,371,895 6,491,136 1.3 19,000,000 5.75% due 8/15/2003.............. 19,162,891 16,515,161 3.2 12,000,000 5.875% due 2/15/2004............. 11,185,391 10,470,000 2.0 19,000,000 7.25% due 5/15/2004.............. 19,248,281 18,254,839 3.5 40,000,000 7.25% due 8/15/2004.............. 40,330,469 38,418,760 7.5 35,000,000 7.875% due 11/15/2004............ 34,979,219 35,114,835 6.8 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT OBLIGATIONS.. 134,681,302 127,534,216 24.7 - ------------------------------------------------------------------------------------------------------------------------
73 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF AMOUNT** SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER*** $ 1,023,000 General Electric Capital Corp., 5.80% due 1/03/1995............ $ 1,022,505 $ 1,022,505 0.2% 19,000,000 Penney (J.C.) Funding Corp., 5.75% due 1/17/1995............ 18,948,410 18,948,410 3.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES 19,970,915 19,970,915 3.9 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS...................................... $ 524,369,249 512,141,013 99.4 ------------- ------------- UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS+++.................................. 559,659 0.1 OTHER ASSETS LESS LIABILITIES.......................... 2,706,644 0.5 ------------- ---------- NET ASSETS............................................. $ 515,407,316 100.0% ------------- ---------- ------------- ---------- - ------------------------------------------------------------------------------------------------------------------------
* American Depositary Receipt (ADR). ** Denominated in US dollars unless otherwise indicated. *** Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. + Non-income producing security. ++ Corresponding industry groups for foreign stocks and bonds:
(1) Automobiles (17) Machinery (2) Automotive & Equipment (18) Multi-Industry (3) Banking (19) Natural Gas (4) Building & Construction (20) Packaging (5) Building Materials (21) Petroleum (6) Business & Public Service (22) Pharmaceutical (7) Business Publishing (23) Printing & Publishing (8) Capital Goods (24) Real Estate (9) Chemicals (25) Retail Stores (10) Diversified (26) Shipping (11) Electrical Equipment (27) Telecommunications (12) Electronics (28) Textiles (13) Food (29) Toys (14) Glass (30) Trading (15) Government (Bonds) (31) Utilities (16) Insurance (32) Utilities--Electric
+++ Forward foreign exchange contracts as of December 31, 1994 were as follows:
- ------------------------------------------------------------------------------------------------------------------------ UNREALIZED EXPIRATION APPRECIATION FOREIGN CURRENCY SOLD DATE (NOTE 1B) - ------------------------------------------------------------------------------------------------------------------------ Yen 5,235,000,000................................................................... July 1995 $559,659 - ------------------------------------------------------------------------------------------------------------------------ TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS (US$ COMMITMENT--$54,492,984)........................... $559,659 - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 74 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF NET COUNTRY INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) ASSETS ARGENTINA TELECOMMUNICATIONS 7,900 Central Costanera S.A. (ADR)* (b)................ $ 261,847 $ 205,400 0.2% 25,600 Telecom Argentina Stet S.A. (ADR)*(b)................. 1,160,819 1,324,800 1.0 22,400 Telefonica de Argentina S.A. (ADR)*.................... 1,173,168 1,187,200 0.9 ------------ ------------ ---------- 2,595,834 2,717,400 2.1 TOTAL COMMON STOCKS IN ARGENTINA 2,595,834 2,717,400 2.1 AUSTRALIA UTILITIES--GAS 434,496 Australian Gas & Light Co., Ltd....................... 1,238,060 1,465,173 1.2 TOTAL COMMON STOCKS IN AUSTRALIA 1,238,060 1,465,173 1.2 AUSTRIA UTILITIES--GAS 11,300 Energie Versorgung Niederoesterreich AG (EVN)..................... 1,388,213 1,468,326 1.2 TOTAL COMMON STOCKS IN AUSTRIA 1,388,213 1,468,326 1.2 BRAZIL UTILITIES--ELECTRIC 140,000 Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR)* (b)................ 3,360,000 3,290,000 2.6 TOTAL COMMON STOCKS IN BRAZIL.................... 3,360,000 3,290,000 2.6 CANADA TELECOMMUNICATIONS 56,000 BC Telecom, Inc............. 1,052,989 958,220 0.8 UTILITIES--GAS 70,100 Transcanada Pipeline Co., Ltd. (ADR)*............... 1,045,275 849,963 0.7 93,000 Westcoast Energy Inc........ 1,594,099 1,476,375 1.2 ------------ ------------ ---------- 2,639,374 2,326,338 1.9 TOTAL COMMON STOCKS IN CANADA 3,692,363 3,284,558 2.7 CHILE TELECOMMUNICATIONS 14,400 Compana de Telefonos de Chile S.A. (ADR)*......... 1,254,995 1,134,000 0.9 UTILITIES--ELECTRIC 20,000 Chilgener S.A. (ADR)*....... 460,000 492,500 0.4 35,100 Distribuidora Chilectra Metropolitana S.A. (ADR)* (b)....................... 1,098,338 1,719,900 1.4 48,300 Enersis S.A. (ADR)*......... 1,026,061 1,340,325 1.1 ------------ ------------ ---------- 2,584,399 3,552,725 2.9 TOTAL COMMON STOCKS IN CHILE..................... 3,839,394 4,686,725 3.8 DENMARK TELECOMMUNICATIONS 77,000 Tele Danmark A/S (ADR)*..... 1,826,433 1,963,500 1.6 TOTAL COMMON STOCKS IN DENMARK 1,826,433 1,963,500 1.6 FRANCE UTILITIES--WATER 16,409 Compagnie Generale des Eaux...................... 1,872,761 1,597,200 1.3 7,111 Lyonnaise des Eaux-Dumez.... 722,326 625,480 0.5 ------------ ------------ ---------- 2,595,087 2,222,680 1.8 TOTAL COMMON STOCKS IN FRANCE 2,595,087 2,222,680 1.8 GERMANY UTILITIES--ELECTRIC 4,000 Veba AG..................... 1,305,397 1,395,349 1.1 TOTAL COMMON STOCKS IN GERMANY 1,305,397 1,395,349 1.1 HONG KONG TELECOMMUNICATIONS 894,000 Hong Kong Telecommunications, Ltd. PLC....................... 1,646,544 1,704,563 1.4 UTILITIES--ELECTRIC 355,200 China Light & Power Co., Ltd....................... 2,385,389 1,515,202 1.2 253,500 Hong Kong Electric Holdings, Ltd....................... 681,517 693,062 0.5 ------------ ------------ ---------- 3,066,906 2,208,264 1.7 UTILITIES--GAS 394,800 The Hong Kong & China Gas Co., Ltd. 755,615 637,927 0.5 32,900 + The Hong Kong & China Gas Co., Ltd. (Warrants) (a)....................... 0 6,252 0.0 ------------ ------------ ---------- 755,615 644,179 0.5 TOTAL COMMON STOCKS & WARRANTS IN HONG KONG 5,469,065 4,557,006 3.6
75 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF NET COUNTRY INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) ASSETS INDIA UTILITIES-ELECTRIC 4,500 CESC Ltd. (GDR)** (b)....... $ 40,950 $ 32,625 0.0% 7,500 CESC Ltd. (Units)........... 400,050 277,500 0.2 1,000 + Tata Electric Companies (GDR)** (b)............... 710,000 440,000 0.3 ------------ ------------ ---------- 1,151,000 750,125 0.5 TOTAL COMMON STOCKS IN INDIA 1,151,000 750,125 0.5 INDONESIA TELECOMMUNICATIONS 1,110 P.T. Indonesian Satellite Corp. (ADR)*.............. 35,575 39,683 0.0 TOTAL COMMON STOCKS IN INDONESIA 35,575 39,683 0.0 ITALY TELECOMMUNICATIONS 761,900 Societa Finanziara Telefonica S.p.A. (STET).................... 1,629,934 1,807,667 1.4 729,600 Telecom Italia S.p.A........ 1,635,193 1,899,859 1.5 ------------ ------------ ---------- 3,265,127 3,707,526 2.9 UTILITIES--GAS 513,400 Italgas Torino.............. 1,581,576 1,414,495 1.1 TOTAL COMMON STOCKS IN ITALY..................... 4,846,703 5,122,021 4.0 KOREA UTILITIES--ELECTRIC 40,800 Korea Electric Power Corp. (ADR)*.................... 821,100 872,100 0.7 TOTAL COMMON STOCKS IN KOREA..................... 821,100 872,100 0.7 MALAYSIA TELECOMMUNICATIONS 139,000 Telekom Malaysia BHD........ 962,438 942,096 0.7 TOTAL COMMON STOCKS IN MALAYSIA 962,438 942,096 0.7 MEXICO TELECOMMUNICATIONS 29,000 Telefonos de Mexico, S.A. de C.V. (Telemex) (ADR)*..... 1,706,306 1,189,000 0.9 TOTAL COMMON STOCKS IN MEXICO 1,706,306 1,189,000 0.9 NEW ZEALAND TELECOMMUNICATIONS 36,800 Telecom Corporation of New Zealand Ltd. (ADR)*....... 1,680,030 1,890,600 1.5 TOTAL COMMON STOCKS IN NEW ZEALAND 1,680,030 1,890,600 1.5 PHILIPPINES TELECOMMUNICATIONS 21,800 Philippine Long Distance Telephone Co. (ADR)*...... 1,270,791 1,201,725 1.0 UTILITIES--ELECTRIC 38,000 Manila Electric Co. (MERALCO) 'B'............. 518,117 521,721 0.4 TOTAL COMMON STOCKS IN THE PHILIPPINES 1,788,908 1,723,446 1.4 SPAIN TELECOMMUNICATIONS 28,700 Telefonica de Espana S.A. (ADR)*.................... 1,065,201 1,008,088 0.8 UTILITIES--ELECTRIC 36,400 Empresa Nacional de Electricidad, S.A. (Endesa) (ADR)*........... 1,634,684 1,474,200 1.2 15,000 Hidrocantabrico S.A......... 503,484 410,490 0.3 131,000 Iberdrola I S.A............. 879,896 808,605 0.6 ------------ ------------ ---------- 3,018,064 2,693,295 2.1 TOTAL COMMON STOCKS IN SPAIN..................... 4,083,265 3,701,383 2.9 THAILAND TELECOMMUNICATIONS 2,000 TelecomAsia Corp. Public Co., Ltd. (ADR)* (b)...... 43,740 56,000 0.0 UTILITIES--ELECTRIC 68,000 + Electricity Generating Public Co., Ltd. (b)...... 60,715 113,808 0.1 TOTAL COMMON STOCKS IN THAILAND 104,455 169,808 0.1
76 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF NET COUNTRY INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) ASSETS UNITED KINGDOM TELECOMMUNICATIONS 10,000 British Telecommunications PLC (ADR)*................ $ 741,450 $ 601,250 0.5% 57,000 British Telecommunications PLC (Ordinary)............ 406,712 336,964 0.3 87,000 Vodafone Group PLC (ADR)*... 2,549,289 2,925,375 2.3 ------------ ------------ ---------- 3,697,451 3,863,589 3.1 UTILITIES--ELECTRIC 86,000 London Electricity.......... 860,944 1,003,336 0.8 90,000 Powergen PLC................ 658,010 755,438 0.6 ------------ ------------ ---------- 1,518,954 1,758,774 1.4 TOTAL COMMON STOCKS IN THE UNITED KINGDOM 5,216,405 5,622,363 4.5 UNITED STATES TELECOMMUNICATIONS 36,400 AirTouch Communications, Inc....................... 879,157 1,060,150 0.8 45,800 Ameritech Corp.............. 1,864,458 1,849,175 1.5 31,800 Bell Atlantic Corp.......... 1,872,160 1,582,050 1.3 33,700 BellSouth Corp.............. 2,020,584 1,824,013 1.4 53,500 GTE Corp.................... 1,866,628 1,625,063 1.3 150,000 NYNEX Corp.................. 5,893,598 5,512,500 4.4 163,600 Pacific Telesis Group....... 4,956,976 4,662,600 3.7 45,300 Southwestern Bell Corp...... 1,921,580 1,828,988 1.4 66,900 U S West Inc................ 2,970,861 2,383,313 1.9 ------------ ------------ ---------- 24,246,002 22,327,852 17.7 UTILITIES--ELECTRIC 65,600 Allegheny Power System, Inc....................... 1,689,846 1,426,800 1.1 47,500 Boston Edison Co............ 1,386,299 1,134,063 0.9 84,192 CINergy Corp................ 2,052,668 1,967,988 1.6 42,300 Central & SouthWest Corp.... 1,326,363 957,037 0.8 49,300 Consolidated Edison Co. of New York.................. 1,597,050 1,269,475 1.0 31,500 Detroit Edison Co........... 989,953 822,937 0.7 26,400 Dominion Resources, Inc..... 1,242,516 943,800 0.7 61,000 Duke Power Co............... 2,452,906 2,325,625 1.8 54,300 Entergy Corp................ 1,905,240 1,187,812 0.9 85,200 General Public Utilities Corp...................... 2,559,840 2,236,500 1.8 73,100 Houston Industries, Inc..... 3,215,466 2,604,187 2.1 56,000 NIPSCO Industries, Inc...... 1,787,890 1,666,000 1.3 50,700 New York State Electric & Gas Corp.................. 1,537,761 963,300 0.8 42,300 Northeast Utilities Co...... 1,096,216 914,737 0.7 93,800 PECO Energy Co.............. 2,719,313 2,298,100 1.8 72,800 PacifiCorp.................. 1,401,416 1,319,500 1.0 35,307 Pennsylvania Power & Light Co........................ 958,939 670,833 0.5 44,000 Public Service Co. of Colorado.................. 1,312,146 1,292,500 1.0 39,900 Rochester Gas & Electric Corp...................... 1,077,409 832,912 0.7 64,000 SCEcorp..................... 1,220,732 936,000 0.7 86,200 Southern Co................. 1,846,654 1,724,000 1.4 40,000 Texas Utilities Co.......... 1,615,997 1,280,000 1.0 40,600 Western Resources Co........ 1,393,851 1,162,175 0.9 ------------ ------------ ---------- 38,386,471 31,936,281 25.2 UTILITIES--GAS 33,000 The Brooklyn Union Gas Co........................ 855,855 734,250 0.6 52,000 The Coastal Corp............ 1,509,758 1,339,000 1.1 24,800 El Paso Natural Gas Co...... 895,148 756,400 0.6 65,700 Enron Corp.................. 2,152,889 2,003,850 1.6 55,100 NICOR Inc................... 1,539,128 1,253,525 1.0 26,100 National Fuel Gas Company... 788,314 665,550 0.5 25,000 New Jersey Resources Corp...................... 656,623 565,625 0.4 53,500 Questar Corp................ 1,908,628 1,471,250 1.2 72,200 Sonat, Inc.................. 2,342,585 2,021,600 1.6 24,900 Washington Gas Light Co..... 1,046,197 834,150 0.7 78,600 Williams Co., Inc........... 2,298,643 1,974,825 1.6 ------------ ------------ ---------- 15,993,768 13,620,025 10.9 TOTAL COMMON STOCKS IN THE UNITED STATES 78,626,241 67,884,158 53.8 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN COMMON STOCKS & WARRANTS 128,332,272 116,957,500 92.7 - ------------------------------------------------------------------------------------------------------------------------
77 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL UTILITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF NET COUNTRY INDUSTRY AMOUNT FIXED-INCOME SECURITIES COST (NOTE 1A) ASSETS AUSTRALIA TELECOMMUNICATIONS $1,040,000 Telstra Corp. Ltd., 6.50% due 7/31/2003 (b)......... $ 1,084,062 $ 912,194 0.7% TOTAL FIXED-INCOME SECURITIES IN AUSTRALIA 1,084,062 912,194 0.7 - ------------------------------------------------------------------------------------------------------------------------ KOREA UTILITIES--ELECTRIC 1,000,000 Korea Electric Power Corp., 6.375% due 12/01/2003..... 985,510 848,890 0.7 TOTAL FIXED-INCOME SECURITIES IN KOREA 985,510 848,890 0.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN FIXED- INCOME SECURITIES 2,069,572 1,761,084 1.4 - ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES COMMERCIAL PAPER*** 6,000,000 Ford Motor Credit Company, 5.75% due 1/17/1995......... 5,982,900 5,982,900 4.7 1,491,000 General Electric Capital Corp., 5.80% due 1/03/1995................... 1,490,039 1,490,039 1.2 ------------ ------------ ---------- 7,472,939 7,472,939 5.9 TOTAL INVESTMENTS IN SHORT-TERM SECURITIES 7,472,939 7,472,939 5.9 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS............. $137,874,783 126,191,523 100.0 ------------ ------------ OTHER ASSETS LESS LIABILITIES................. 51,284 0.0 ------------ ---------- NET ASSETS.................... $126,242,807 100.0% ------------ ---------- ------------ ---------- - ------------------------------------------------------------------------------------------------------------------------
* American Depositary Receipt (ADR). ** Global Depositary Receipt (GDR). *** Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. (b) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $8,095,000, representing 6.41% of the net assets. - ------------------------------------------------------------------------------------------------------------------------
VALUE ISSUE ACQUISITION DATES COST (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ CESC Ltd. (GDR)................................................. 5/17/1994 $ 40,950 $ 32,625 Companhia Energetica de Minas Gerais S.A. (CEMIG) (ADR)......... 9/22/1994 3,360,000 3,290,000 Central Costanera S.A. (ADR).................................... 12/17/1993 261,847 205,400 Distribuidora Chilectra Metropolitana S.A. (ADR)................ 8/06/1993-12/21/1993 1,098,338 1,719,900 Electricity Generating Public Co., Ltd.......................... 10/27/1994 60,715 113,808 Tata Electric Companies (GDR)................................... 2/22/1994 710,000 440,000 Telecom Argentina Stet S.A. (ADR)............................... 10/05/1993-12/22/1993 1,160,819 1,324,800 TelecomAsia Corp. Public Co., Ltd. (ADR)........................ 11/15/1993 43,740 56,000 Telstra Corp. Ltd., 6.50% due 7/31/2003......................... 7/26/1993-9/29/1993 1,084,062 912,194 - ------------------------------------------------------------------------------------------------------------------------ TOTAL........................................................... $ 7,820,471 $ 8,094,727 ----------- ------------ ----------- ------------ - ------------------------------------------------------------------------------------------------------------------------
+ Non-income producing security. See Notes to Financial Statements. 78 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- AIRLINES--2.5% Delta Air Lines Inc.: BB+ Baa3 $ 1,000,000 9.30% due 1/02/2010................. $ 987,700 $ 935,216 BB+ Baa3 500,000 10.50% due 4/30/2016................ 506,875 490,755 United Air Lines, Inc.: BB+ Baa2 1,000,000 9.35% due 4/07/2016................. 1,016,260 883,500 BB+ Ba2 995,000 9.21% due 1/21/2017................. 991,938 857,849 BB B1 4,000,000 USAir, Inc., 10.375% due 3/01/2013......................... 3,935,000 3,260,000 ------------- ------------- 7,437,773 6,427,320 - ------------------------------------------------------------------------------------------------------------------------ AUTOMOBILE PARTS--0.8% B B3 2,000,000 SPX Corp., 11.75% due 6/01/2002..... 2,043,750 1,990,000 - ------------------------------------------------------------------------------------------------------------------------ BROADCASTING & BB- Ba3 750,000 Heritage Media Services Inc., 11.00% PUBLISHING--3.3% due 6/15/2002..................... 789,063 761,250 B B1 1,000,000 K-III Communications Corp., 10.25% due 6/01/2004..................... 995,000 955,000 B B3 1,200,000 The Katz Corp., 12.75% due 11/15/2002........................ 1,238,625 1,248,000 B Caa 3,800,000 NWCG Holding Corp., 13.50%** due 6/15/1999++....................... 2,122,486 1,938,000 BB- B3 2,500,000 SCI Television Inc., 11.00% due 6/30/2005(a)...................... 2,560,000 2,525,000 B+ B3 1,000,000 Sinclair Broadcast Group Inc., 10.00% due 12/15/2003............. 1,000,000 930,000 ------------- ------------- 8,705,174 8,357,250 - ------------------------------------------------------------------------------------------------------------------------ BUILDING & B B2 2,500,000 Del Webb Corp., 9.00% due CONSTRUCTION--0.9% 2/15/2006......................... 2,497,500 1,900,000 B B1 250,000 K Hovnanian Enterprises Inc., 11.25% due 4/15/2002..................... 247,813 208,750 BB- Ba3 250,000 Ryland Group Inc., 10.50% due 7/15/2002......................... 246,260 223,750 ------------- ------------- 2,991,573 2,332,500 - ------------------------------------------------------------------------------------------------------------------------ BUILDING MATERIALS--1.0% B+ B3 2,650,000 Pacific Lumber Co., 10.50% due 3/01/2003......................... 2,606,938 2,464,500 - ------------------------------------------------------------------------------------------------------------------------ BUILDING PRODUCTS--1.1% B+ B1 250,000 American Standard Inc., 9.25% due 12/01/2016........................ 251,875 228,750 B Ba3 1,750,000 Inter-City Products Corp., 9.75% due 3/01/2000......................... 1,718,750 1,631,875 B B2 1,000,000 USG Corp., 8.75% due 3/01/2017...... 904,375 850,000 ------------- ------------- 2,875,000 2,710,625 - ------------------------------------------------------------------------------------------------------------------------ CAPITAL GOODS--0.6% B+ B1 1,660,000 Essex Group, Inc., 10.00% due 5/01/2003......................... 1,668,925 1,560,400 - ------------------------------------------------------------------------------------------------------------------------ CELLULAR TELEPHONES--2.4% CCC Caa 3,750,000 Dial Page, Inc., 12.25% due 2/15/2000......................... 3,850,563 3,750,000 CCC+ B3 3,000,000 USA Mobile Communications Holdings, Inc., 9.50% due 2/01/2004......... 2,710,000 2,430,000 ------------- ------------- 6,560,563 6,180,000 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS--5.3% B B2 4,600,000 Agricultural Minerals & Chemicals Co., L.P., 10.75% due 9/30/2003... 4,623,188 4,646,000 B+ Ba3 7,310,000 G-I Holdings Inc., 11.38%** due 10/01/1998........................ 4,731,660 4,513,925 B B2 2,000,000 Harris Chemical North America, 11.95%** due 7/15/2001............ 1,654,408 1,645,000 B B3 3,000,000 Laroche Industries Inc., 13.00% due 8/15/2004......................... 2,991,250 2,760,000 ------------- ------------- 14,000,506 13,564,925 - ------------------------------------------------------------------------------------------------------------------------ COMMUNICATIONS--2.9% CCC- Caa 3,670,000 American Telecasting, Inc., 12.50%** due 6/15/2004..................... 2,137,449 1,578,100 BB- B2 4,000,000 Telefonica de Argentina, S.A., 11.875% due 11/01/2004............ 3,917,780 3,600,000 B+ B3 4,000,000 Videotron Holdings PLC, 11.817%** due 7/01/2004..................... 2,328,826 2,100,000 ------------- ------------- 8,384,055 7,278,100 - ------------------------------------------------------------------------------------------------------------------------
79 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- CONGLOMERATES--6.6% NR* B3 $ 2,000,000 Astrum International Corp., 11.50% due 6/08/2003..................... $ 2,017,500 $ 2,010,000 B+ B1 1,750,000 Coltec Industries, Inc., 10.25% due 4/01/2002......................... 1,866,250 1,715,000 Foamex L.P.: B+ B1 530,000 9.50% due 6/01/2000................. 517,413 484,950 B+ B1 1,450,000 11.25% due 10/01/2002............... 1,455,125 1,377,500 2,000,000 JB Poindexter & Co., 12.50% due 5/15/2004......................... 2,000,000 1,860,000 B+ B3 3,000,000 Jordan Industries Inc., 10.375% due 8/01/2003......................... 2,993,000 2,670,000 NR* B3 890,000 MacAndrews & Forbes Group, Inc., 13.00% due 3/01/1999.............. 868,373 881,100 Sequa Corp.: BB B2 750,000 9.625% due 10/15/1999............... 740,625 712,500 B+ B3 2,500,000 9.375% due 12/15/2003............... 2,512,813 2,200,000 BB- B1 3,000,000 Sherritt Gordon, Ltd., 9.75% due 4/01/2003......................... 2,985,938 2,880,000 ------------- ------------- 17,957,037 16,791,050 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER-- PRODUCTS--3.3% B NR* 4,950,000 Coleman Holdings, Inc., 11.28%** due 5/27/1998......................... 3,395,934 3,328,875 NR* Caa 750,000 Formica Corp., 14.843% due 9/15/2005 (a)..................... 750,000 874,232 Liggett Group, Inc.: NR* NR* 500,000 11.50% due 2/01/1999................ 451,760 350,000 NR* NR* 9,000 16.50% due 2/01/1999++.............. 9,000 7,740 B- Caa 4,000,000 Polymer Group Inc., 12.25% due 7/15/2002++....................... 3,967,500 3,890,000 ------------- ------------- 8,574,194 8,450,847 - ------------------------------------------------------------------------------------------------------------------------ CONTAINERS--4.5% B B2 3,500,000 Anchor Glass Container Co., 9.875% due 12/15/2008.................... 3,353,750 3,010,000 Owens-Illinois, Inc.: B+ B2 2,000,000 10.00% due 8/01/2002................ 2,000,000 1,955,000 BB Ba3 1,500,000 11.00% due 12/01/2003............... 1,624,688 1,556,250 B- B3 3,660,000 Silgan Holdings, Inc., 13.25%** due 12/15/2002........................ 3,121,703 3,074,400 B+ B1 1,000,000 Stone Consolidated Corp., 10.25% due 12/15/2000........................ 1,000,000 985,000 B+ Ba3 1,000,000 Sweetheart Cup Co., 9.625% due 9/01/2000......................... 1,000,000 945,000 ------------- ------------- 12,100,141 11,525,650 - ------------------------------------------------------------------------------------------------------------------------ CONVERTIBLE BONDS+--0.5% B- B3 400,000 Farm Fresh Inc., 7.50% due 3/01/2010 (1)..................... 208,000 246,705 B- B3 200,000 MEDIQ Inc., 7.25% due 6/01/2006 (2)............................... 138,000 126,000 B B2 1,200,000 OHM Corp., 8.00% due 10/01/2006 (3)............................... 1,070,500 936,000 B B2 250,000 UNC Inc., 7.50% due 3/31/2006 (4)... 145,625 196,250 ------------- ------------- 1,562,125 1,504,955 - ------------------------------------------------------------------------------------------------------------------------ COSMETICS--0.7% B B2 2,000,000 Revlon Group Inc., 9.375% due 4/01/2001......................... 1,738,721 1,790,000 - ------------------------------------------------------------------------------------------------------------------------ ENERGY--9.0% B+ B1 4,000,000 Clark Oil & Refining Corp., 10.54%** due 2/15/2000..................... 2,366,264 2,280,000 NR* NR* 1,500,000 Consolidated Hydro, Inc., 12.00%** due 7/15/2003..................... 999,961 870,000 BB- B1 2,925,000 Energy Ventures, Inc., 10.25% due 3/15/2004++....................... 2,901,875 2,749,500 BB B1 1,580,000 Gulf Canada Resources, Ltd., 9.00% due 8/15/1999..................... 1,517,450 1,501,000 Maxus Energy Corp.: BB- B1 2,500,000 9.375% due 11/01/2003............... 2,352,500 2,112,500 BB- B1 250,000 11.50% due 11/15/2015............... 246,562 230,000
80 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- ENERGY (CONCLUDED) BB- Ba3 $ 2,000,000 Noble Drilling Corp., 9.25% due 10/01/2003........................ $ 1,952,500 $ 1,890,000 BB- Ba3 2,500,000 Seagull Energy Corp., 8.625% due 8/01/2005......................... 2,493,750 2,131,250 NR* B3 250,000 Tesoro Petroleum Corp., 12.75% due 3/15/2001......................... 230,216 250,000 BB- B1 3,000,000 Trans Texas Gas Corp., 10.50% due 9/01/2000......................... 2,985,625 2,865,000 B+ B1 4,000,000 Triton Energy Corp., 9.68%** due 11/01/1997........................ 3,012,395 2,940,000 BB- B1 4,500,000 Yacimientos Petroliferos Fiscales S.A.-ADR, 8.00% due 2/15/2004 (e)............................... 3,694,375 3,240,000 ------------- ------------- 24,753,473 23,059,250 - ------------------------------------------------------------------------------------------------------------------------ ENTERTAINMENT--2.4% B B3 500,000 AMC Entertainment, Inc., 12.625% due 8/01/2002......................... 509,742 528,750 B+ B1 250,000 Cinemark USA, Inc., 12.00% due 6/01/2002......................... 250,000 260,000 B Caa 4,500,000 Marvel Holdings, Inc., 9.125% (d) due 2/15/1998..................... 3,999,375 3,915,000 CCC+ B2 3,415,000 Spectra Vision Inc., 11.50%** due 10/01/2001........................ 2,836,700 1,468,450 ------------- ------------- 7,595,817 6,172,200 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES--1.8% B+ B1 1,500,000 Lomas Mortgage USA Inc., 10.25% due 10/01/2002........................ 1,561,250 1,245,000 B- B3 250,000 Pioneer Finance Corp., 13.50% due 12/01/1998........................ 264,062 180,000 BB- B1 3,500,000 Reliance Group Holdings Inc., 9.75% due 11/15/2003.................... 3,432,500 3,062,500 ------------- ------------- 5,257,812 4,487,500 - ------------------------------------------------------------------------------------------------------------------------ FOOD & BEVERAGE--6.5% B+ B1 3,500,000 Canandaigua Wine Inc., 8.75% due 12/15/2003........................ 3,115,000 3,185,000 BB- B1 3,000,000 Chiquita Brands International Inc., 9.125% due 3/01/2004.............. 2,950,625 2,610,000 NR* NR* 2,000,000 Cumberland Farms, 10.50% due 10/01/2003++...................... 1,957,500 1,660,000 BB- B1 2,500,000 Del Monte Corp., 10.00% due 5/01/2003......................... 2,310,000 1,700,000 B B2 3,000,000 Envirodyne Industries, Inc., 10.25% due 12/01/2001.................... 3,056,250 2,100,000 CCC Caa 3,000,000 Grand Union Co., 12.25% due 7/15/2002......................... 3,090,000 1,185,000 D Ca 1,000,000 Kash N' Karry Food Stores, Inc., 14.00% due 2/01/2001(c)........... 996,250 345,000 BB- Ba3 250,000 P&C Food Markets, Inc., 11.50% due 10/15/2001........................ 260,156 253,750 B B2 1,000,000 Penn Traffic Co., 9.625% due 4/15/2005......................... 1,013,760 870,000 B- B2 2,000,000 Pueblo Xtra International Inc., 9.50% due 8/01/2003............... 2,004,375 1,680,000 B B2 1,000,000 Specialty Foods Corp., 10.25% due 8/15/2001......................... 1,000,000 890,000 ------------- ------------- 21,753,916 16,478,750 - ------------------------------------------------------------------------------------------------------------------------ HEALTH SERVICES--0.2% B B2 250,000 Continental Medical Systems Inc., 10.875% due 8/15/2002............. 248,125 201,250 B B2 250,000 Continental Medsystems, Inc., 10.375% due 4/01/2003............. 249,687 193,750 B+ B1 250,000 MEDIQ/PRN Life Support Services, Inc., 11.125% due 7/01/1999....... 250,625 232,500 ------------- ------------- 748,437 627,500 - ------------------------------------------------------------------------------------------------------------------------ HIGH TECHNOLOGY--0.1% B B2 250,000 ComputerVision Corp., 10.875% due 8/15/1997......................... 250,625 230,000 - ------------------------------------------------------------------------------------------------------------------------
81 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- HOTELS & CASINOS--8.3% B B2 $ 2,250,000 Aztar Corp., 11.00% due 10/01/2002........................ $ 2,295,000 $ 2,047,500 BB B1 3,000,000 Bally's Park Place Funding Corp., 9.25% due 3/15/2004............... 2,850,000 2,580,000 NR* NR* 158,000 Goldriver Hotel & Casino Finance Corp., 11.375% due 8/31/1999...... 222,801 137,460 B+ B2 3,000,000 Greater Bay Properties, Inc., 10.875% due 1/15/2004............. 2,755,000 2,430,000 BB+ B1 2,500,000 Harrah's Jazz Company, 14.25% due 11/15/2001........................ 2,500,000 2,625,000 BB- B1 3,260,000 Host Marriott Hospitality, Inc., 10.375% due 6/15/2011............. 3,317,227 3,260,000 BB- B1 3,500,000 JQ Hammons Hotel, 8.875% due 2/15/2004......................... 3,092,500 3,027,500 B B2 2,500,000 Showboat Inc., 13.00% due 8/01/2009......................... 2,500,000 2,375,000 B B3 3,000,000 Trump Plaza Funding, Inc., 10.875% due 6/15/2001..................... 2,963,277 2,280,000 NR* Caa 541,954 Trump Taj Mahal Funding, Inc., 11.35% due 11/15/1999 (a)......... 422,261 321,997 ------------- ------------- 22,918,066 21,084,457 - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIAL-- BB- B2 4,000,000 ADT Operations, 9.25% due 8/01/2003......................... 4,010,000 3,700,000 SERVICES--1.6% B- B3 500,000 Bell & Howell Co., 10.75% due 10/01/2002........................ 507,500 475,000 ------------- ------------- 4,517,500 4,175,000 - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIALS--2.2% B B2 3,000,000 Coca-Cola Bottling Co., 9.00% due 11/15/2003........................ 2,973,750 2,632,500 B+ B2 2,800,000 Navistar Financial Co., 8.875% due 11/15/1998........................ 2,754,500 2,632,000 Thermadyne Industries, Inc.: NR* Caa 154,000 10.25% due 5/01/2002................ 155,008 144,760 NR* Caa 215,000 10.75% due 11/01/2003............... 216,545 202,100 ------------- ------------- 6,099,803 5,611,360 - ------------------------------------------------------------------------------------------------------------------------ METALS & MINING--1.1% B- B2 1,000,000 Kaiser Aluminum Corp., 12.75% due 2/01/2003......................... 1,003,750 1,007,500 B- B3 3,000,000 Maxxam Group, Inc., 12.25%** due 8/01/2003......................... 1,957,826 1,710,000 ------------- ------------- 2,961,576 2,717,500 - ------------------------------------------------------------------------------------------------------------------------ PAPER--7.3% BB- Ba3 2,000,000 Doman Industries Ltd., 8.75% due 3/15/2004......................... 1,825,000 1,765,000 Fort Howard Corp.: B+ B1 250,000 9.25% due 3/15/2001................. 250,000 233,750 B B2 3,000,000 9.00% due 2/01/2006................. 2,935,000 2,580,000 BB Ba3 2,000,000 Indah Kiat International Finance, 11.875% due 6/15/2002............. 1,957,500 1,940,000 BB- Ba3 2,100,000 Rainy River Forest Products, Inc., 10.75% due 10/15/2001............. 2,094,897 2,084,250 B+ B1 3,000,000 Repap Wisconsin Finance, Inc., 9.25% due 2/01/2002..................... 2,760,000 2,700,000 B B1 1,250,000 Riverwood International Corp., 11.25% due 6/15/2002.............. 1,340,312 1,284,375 B+ B1 2,000,000 S.D. Warren Co., 12.00% due 12/15/2004........................ 2,000,000 2,045,000 Stone Container Corp.: B B1 1,950,000 9.875% due 2/01/2001................ 1,869,375 1,833,000 B+ B1 1,300,000 10.75% due 10/01/2002............... 1,287,000 1,293,500 BB B1 1,000,000 Tjiwa Kimia International N.V., 13.25% due 8/01/2001.............. 1,000,000 1,012,500 ------------- ------------- 19,319,084 18,771,375 - ------------------------------------------------------------------------------------------------------------------------ PAPER & PACKAGING--0.5% B- Caa 3,500,000 IVEX Holdings Corp., 13.25%** due 3/15/2005......................... 1,934,554 1,400,000 - ------------------------------------------------------------------------------------------------------------------------
82 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- POLLUTION CONTROL--1.4% B B3 $ 3,500,000 Mid-American Waste Systems, Inc., 12.25% due 2/15/2003.............. $ 3,555,000 $ 3,500,000 - ------------------------------------------------------------------------------------------------------------------------ RAILROADS--0.4% B+ Ba3 1,000,000 Southern Pacific Rail Co., 9.375% due 8/15/2005..................... 1,000,000 920,000 - ------------------------------------------------------------------------------------------------------------------------ RESTAURANTS--3.1% B B1 3,000,000 Family Restaurants Inc., 9.75% due 2/01/2002......................... 2,775,000 2,355,000 CCC+ Caa 3,890,000 Flagstar Corp., 11.375% due 9/15/2003......................... 3,701,100 3,228,700 Foodmaker, Inc.: B- B2 1,500,000 9.75% due 6/01/2002................. 1,502,812 1,125,000 B+ Ba3 1,750,000 9.75% due 11/01/2003................ 1,722,700 1,316,875 ------------- ------------- 9,701,612 8,025,575 - ------------------------------------------------------------------------------------------------------------------------ RETAIL SPECIALTY--2.2% B+ B2 4,500,000 Bradlees, Inc., 11.00% due 8/01/2002......................... 4,466,562 4,095,000 B- B3 1,500,000 Pamida Holdings, Inc., 11.75% due 3/15/2003......................... 1,502,187 1,402,500 ------------- ------------- 5,968,749 5,497,500 - ------------------------------------------------------------------------------------------------------------------------ STEEL--1.3% B B2 1,500,000 AK Steel Holding Corp., 10.75% due 4/01/2004......................... 1,500,000 1,485,000 B+ B1 2,000,000 WCI Steel Inc., 10.50% due 3/01/2002......................... 2,000,000 1,920,000 ------------- ------------- 3,500,000 3,405,000 - ------------------------------------------------------------------------------------------------------------------------ TEXTILES--1.2% B+ B3 3,500,000 Westpoint Stevens Industries, Inc., 9.375% due 12/15/2005............. 3,291,250 3,167,500 - ------------------------------------------------------------------------------------------------------------------------ TRANSPORTATION--0.6% B+ Ba3 1,750,000 Viking Star Shipping Co., 9.625% due 7/15/2003......................... 1,735,937 1,627,500 - ------------------------------------------------------------------------------------------------------------------------ TRANSPORTATION B+ B2 186,000 ACF Industries Inc., 11.60% due SERVICES--0.8% 5/15/2000......................... 177,630 186,000 NR* NR* 3,700,000 Transtar Holdings Inc., 13.375%** due 12/15/2003.................... 2,241,291 1,850,000 ------------- ------------- 2,418,921 2,036,000 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES--2.5% B+ B1 3,453,000 Beaver Valley Funding Corp., 9.00% due 6/01/2017..................... 3,252,225 2,451,630 CTC Mansfield Funding Corp.: B+ Ba3 500,000 10.25% due 3/30/2003................ 490,000 465,000 B+ Ba3 1,500,000 11.125% due 9/30/2016............... 1,612,500 1,389,855 Midland Cogeneration Venture L.P.: BB Ba3 946,678 ++10.33% due 7/23/2002.............. 927,745 893,980 B- B2 250,000 11.75% due 7/23/2005................ 250,000 228,357 Tucson Electric Power Co.++: NR* NR* 570,386 10.21% due 1/01/2009................ 529,034 490,025 NR* NR* 500,000 10.732% due 1/01/2013............... 461,050 440,440 ------------- ------------- 7,522,554 6,359,287 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN CORPORATE BONDS--90.9% 256,011,161 232,281,376 - ------------------------------------------------------------------------------------------------------------------------ SHARES HELD PREFERRED STOCKS - ------------------------------------------------------------------------------------------------------------------------ BROADCASTING & PUBLISHING--0.5% 36,600 K-III Communications Corp........... 998,487 924,150 2,959 K-III Communications Corp. (a)...... 302,184 284,464 ------------- ------------- 1,300,671 1,208,614 - ------------------------------------------------------------------------------------------------------------------------ STEEL--1.0% 120,000 USX Capital Corp. (c)............... 3,000,000 2,655,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN PREFERRED STOCKS--1.5% 4,300,671 3,863,614 - ------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS - ------------------------------------------------------------------------------------------------------------------------ ENERGY--0.0% 4,900 Petrolane Inc....................... 56,962 64,925 - ------------------------------------------------------------------------------------------------------------------------ FOOD & BEVERAGE--0.0% 4,169 Doskocil Companies, Inc. (c)........ 239,327 30,225 - ------------------------------------------------------------------------------------------------------------------------
83 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) - -------------------------------------------------------------------------------- HOTELS & CASINOS--0.0% 2,500 Goldriver Hotel & Casino Finance Corp.............................. $ 18,603 $ 7,031 500 Trump Taj Mahal Holding Corp. (Class A) (c)....... 250 5,000 ------------- ------------- 18,853 12,031 - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIALS--0.0% 311 Thermadyne Industries, Inc. (c)..... 4,495 3,538 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN COMMON STOCKS--0.0% 319,637 110,719 - ------------------------------------------------------------------------------------------------------------------------ TRUSTS & WARRANTS - ------------------------------------------------------------------------------------------------------------------------ COMMUNICATIONS--0.0% 18,350 American Telecasting, Inc. (Warrants) (b) (c)........................... 0 36,700 - ------------------------------------------------------------------------------------------------------------------------ ENERGY--0.0% 833 UGI Corp. (Warrants) (b) (c)........ 3,644 677 - ------------------------------------------------------------------------------------------------------------------------ HIGH TECHNOLOGY--0.0% 7,588 Anacomp, Inc. (Warrants) (b) (c) ++................................ 10,000 7,588 - ------------------------------------------------------------------------------------------------------------------------ HOTEL--0.0% 250 Goldriver Hotel & Casino Finance Corp. (Liquidating Trust) ++ (c)............................... 6,000 4,282 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN TRUSTS & WARRANTS--0.0% 19,644 49,247 - ------------------------------------------------------------------------------------------------------------------------ FACE AMOUNT SHORT-TERM SECURITIES - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER***--3.3% $ 4,000,000 CXC Inc., 6.00% due 1/13/1995......................... 3,990,667 3,990,667 4,632,000 General Electric Capital Corp., 5.80% due 1/03/1995............... 4,629,015 4,629,015 ------------- ------------- 8,619,682 8,619,682 - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & AGENCY 4,000,000 Federal Farm Credit Banks, 5.57% due OBLIGATIONS***--1.6% 1/11/1995......................... 3,992,573 3,992,573 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN SHORT-TERM SECURITIES--4.9% 12,612,255 12,612,255 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS--97.3%............ $ 273,263,368 248,917,211 ------------- ------------- OTHER ASSETS LESS LIABILITIES--2.7%................. 6,801,529 ------------- NET ASSETS--100.0%.................. $ 255,718,740 ------------- ------------- - ------------------------------------------------------------------------------------------------------------------------
* Not Rated. ** Represents the yield to maturity at time of purchase. *** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. (a) Represents a pay-in-kind security which may pay interest/dividend in additional face/shares. (b) Warrants entitle the portfolio to purchase a predetermined number of shares of common stock/face amount of bonds. The purchase price and number of shares/face amount are subject to adjustment under certain conditions until the expiration date. (c) Non-income producing security. (d) Represents a zero coupon or step bond, the interest rate shown is the effective yield at the time of purchase. (e) American Depositary Receipts. + Corresponding industry groups for convertible bonds: (1) Food & Beverage (2) Healthcare (2) Waste Management (4) Conglomerates
84 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - -------------------------------------------------------------------------------- ++ Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $12,082,000, representing 4.72% of net assets.
- --------------------------------------------------------------------------------
VALUE ISSUE ACQUISITION DATES COST (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ Anacomp Inc. (Warrants).......................................... 10/23/90 $ 10,000 $ 7,588 Cumberland Farms, 10.50% due 10/01/2003.......................... 2/18/94 1,957,500 1,660,000 Energy Ventures, Inc., 10.25% due 3/15/2004...................... 3/17/94 to 4/25/94 2,901,875 2,749,500 Goldriver Hotel & Casino Finance Corp. (Liquidating Trust)....... 8/31/92 6,000 4,282 Liggett Group, Inc., 16.50% due 2/01/1999........................ 2/12/92 to 5/20/93 9,000 7,740 Midland Cogeneration Venture L.P., 10.33% due 7/23/2002.......... 6/10/93 927,745 893,980 NWCG Holdings Corp., 13.50% due 6/15/1999........................ 6/28/94 2,122,486 1,938,000 Polymer Group Inc., 12.25% due 7/15/2002......................... 6/17/94 to 12/07/94 3,967,500 3,890,000 Tucson Electric Power Co., 10.21% due 1/01/2009.................. 6/16/93 529,034 490,025 Tucson Electric Power Co., 10.732% due 1/01/2013................. 3/01/93 461,050 440,440 - ------------------------------------------------------------------------------------------------------------------------ TOTAL............................................................ $ 12,892,190 $ 12,081,555 ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. 85 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERMEDIATE GOVERNMENT BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
FACE VALUE AMOUNT ISSUE COST (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & AGENCY OBLIGATIONS - ------------------------------------------------------------------------------------------------------------------------ FEDERAL NATIONAL MORTGAGE $ 500,000 Federal National Mortgage Association, 7.85% ASSOCIATIONS--2.7% due 9/10/2004............................... $ 499,297 $ 479,685 - ------------------------------------------------------------------------------------------------------------------------ TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 499,297 479,685 - ------------------------------------------------------------------------------------------------------------------------ US TREASURY NOTES--11.5% US Treasury Notes: 1,000,000 8.875% due 2/15/1999.......................... 1,086,250 1,035,000 1,000,000 7.875% due 11/15/2004......................... 992,690 1,002,810 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US TREASURY NOTES 2,078,940 2,037,810 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT & AGENCY OBLIGATIONS--14.2% 2,578,237 2,517,495 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM SECURITIES - ------------------------------------------------------------------------------------------------------------------------ US TREASURY BILLS*--84.5% US Treasury Bills: 14,641,000 4.05% due 1/05/1995........................... 14,631,117 14,631,117 103,000 4.10% due 1/05/1995........................... 102,930 102,930 80,000 4.09% due 1/19/1995........................... 79,818 79,818 93,000 4.45% due 2/02/1995........................... 92,609 92,609 152,000 4.20% due 2/09/1995........................... 151,273 151,273 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES--84.5% 15,057,747 15,057,747 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS--98.7%...................... $ 17,635,984 17,575,242 ------------ ------------ OTHER ASSETS LESS LIABILITIES--1.3%........... 235,409 ------------ NET ASSETS--100.0%............................ $ 17,810,651 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
*Certain US Government Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. See Notes to Financial Statements. 86 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS) - --------------------------------------------------------------------------------
VALUE PERCENT OF NET NORTH AMERICA FACE AMOUNT ISSUE COST (NOTE 1A) ASSETS Canadian Government CANADA FOREIGN GOVERNMENT Bonds: OBLIGATIONS C$ 140,000 7.75% due 9/01/1999.......... $ 96,443 $ 95,173 1.0% 600,000 9.00% due 12/01/2004......... 441,161 424,740 4.3 537,604 519,913 5.3 TOTAL INVESTMENTS IN CANADA 537,604 519,913 5.3 TOTAL INVESTMENTS IN NORTH AMERICA 537,604 519,913 5.3 PACIFIC BASIN AUSTRALIA FOREIGN GOVERNMENT Australian Government OBLIGATIONS Bonds: A$ 500,000 7.00% due 4/15/2000.......... 325,128 339,565 3.4 350,000 9.00% due 9/15/2004.......... 241,424 254,018 2.5 500,000 Queensland Treasury Corp., 8.00% due 7/14/1999.......... 356,672 356,464 3.6 923,224 950,047 9.5 TOTAL INVESTMENTS IN AUSTRALIA 923,224 950,047 9.5 JAPAN FOREIGN GOVERNMENT Japanese Government OBLIGATIONS Bonds: Yen 50,000,000 5.50% due 3/20/2002.......... 522,957 533,367 5.4 18,000,000 4.10% due 6/21/2004.......... 173,866 174,613 1.8 696,823 707,980 7.2 TOTAL INVESTMENTS IN JAPAN 696,823 707,980 7.2 TOTAL INVESTMENTS IN THE PACIFIC BASIN 1,620,047 1,658,027 16.7 WESTERN EUROPE DENMARK FOREIGN GOVERNMENT Dkr 3,000,000 Denmark Government OBLIGATIONS Bond, 6.00% due 12/10/1999......... 451,033 440,770 4.4 TOTAL INVESTMENTS IN DENMARK 451,033 440,770 4.4 EUROPEAN CURRENCY FOREIGN GOVERNMENT ECU 400,000 Republic of Portugal, UNIT OBLIGATIONS 6.00% due 2/16/2004.......... 404,448 404,990 4.1 TOTAL INVESTMENTS IN EUROPEAN CURRENCY UNITS 404,448 404,990 4.1 FINLAND FOREIGN GOVERNMENT Fmk 1,000,000 Finland Government OBLIGATIONS Bond, 6.50% due 9/15/1996.......... 199,459 205,878 2.1 TOTAL FIXED-INCOME INVESTMENTS IN FINLAND 199,459 205,878 2.1 FRANCE FOREIGN GOVERNMENT Frf 2,500,000 French Government OBLIGATIONS 'B-Tan', 4.75% due 4/12/1999.......... 423,692 415,416 4.2 1,750,000 French Government 'OAT', 6.75% due 10/25/2004......... 306,186 294,533 3.0 729,878 709,949 7.2 TOTAL INVESTMENTS IN FRANCE 729,878 709,949 7.2
87 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
WESTERN EUROPE FACE VALUE PERCENT OF NET (CONCLUDED) AMOUNT ISSUE COST (NOTE 1A) ASSETS GERMANY FOREIGN GOVERNMENT DM 750,000 Treuhand-Obligationen, OBLIGATIONS 5.75% due 4/29/1999.......... $ 462,861 $ 456,928 4.6% 750,000 Kingdom of Belgium, 7.25% due 10/18/1999......... 483,855 484,496 4.9 550,000 Treuhand-Obligationen, 6.25% due 7/29/1999.......... 354,485 341,014 3.4 1,301,201 1,282,438 12.9 TOTAL INVESTMENTS IN GERMANY 1,301,201 1,282,438 12.9 IRELAND FOREIGN GOVERNMENT Iep 300,000 Irish Gilts, 6.25% OBLIGATIONS due 4/01/1999...... 420,056 419,196 4.2 TOTAL INVESTMENTS IN IRELAND 420,056 419,196 4.2 ITALY FOREIGN GOVERNMENT Buoni Poliennali del OBLIGATIONS Tesoro (Italian Government Bonds): Lit 400,000,000 8.50% due 8/01/1999.. 228,653 216,562 2.2 400,000,000 8.50% due 4/01/1999.. 239,408 219,005 2.2 468,061 435,567 4.4 TOTAL INVESTMENTS IN ITALY 468,061 435,567 4.4 NETHERLANDS FOREIGN GOVERNMENT Nlg 700,000 Netherlands OBLIGATIONS Government Bond, 7.25% due 10/01/2004......... 386,865 389,540 3.9 TOTAL INVESTMENTS IN THE NETHERLANDS 386,865 389,540 3.9 SPAIN FOREIGN GOVERNMENT Government of Spain: OBLIGATIONS Pta 50,000,000 8.30% due 12/15/1998......... 360,283 341,125 3.4 30,000,000 8.00% due 5/30/2004.. 189,189 179,704 1.8 549,472 520,829 5.2 TOTAL INVESTMENTS IN SPAIN 549,472 520,829 5.2 UNITED FOREIGN GOVERNMENT Pound Sterling United Kingdom Gilt, KINGDOM OBLIGATIONS 800,000 9.00% due 3/03/2000.. 1,284,293 1,268,852 12.8 TOTAL INVESTMENTS IN THE UNITED KINGDOM 1,284,293 1,268,852 12.8 TOTAL INVESTMENTS IN WESTERN EUROPE 6,194,766 6,078,009 61.2
88 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF NET AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) ASSETS COMMERCIAL PAPER* $ 467,000 General Electric Capital Corp., 5.80% due 1/03/1995.......... $ 466,774 $ 466,774 4.7% US GOVERNMENT & AGENCY 800,000 Federal Home Loan OBLIGATIONS* Bank, 5.74% due 1/23/1995.......... 797,066 797,066 8.0 500,000 Federal Home Loan Mortgage Corp., 5.85% due 1/27/1995.......... 497,806 497,806 5.0 600,000 Federal National Mortgage Association, 5.90% due 1/05/1995...... 599,508 599,508 6.0 1,894,380 1,894,380 19.0 TOTAL INVESTMENTS IN SHORT-TERM SECURITIES......... 2,361,154 2,361,154 23.7 TOTAL INVESTMENTS.......................... $10,713,571 10,617,103 106.9 ----------- ----------- UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS**............... (66,829) (0.7) LIABILITIES IN EXCESS OF OTHER ASSETS...... (616,980) (6.2) ----------- ---------- NET ASSETS................................. $ 9,933,294 100.0% ----------- ---------- ----------- ---------- * Certain US Government & Agency Obligations and Commercial Paper are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund.
** Forward foreign exchange contracts as of December 31, 1994 were as follows: - --------------------------------------------------------------------------------
UNREALIZED APPRECIATION EXPIRATION (DEPRECIATION) FOREIGN CURRENCY PURCHASED DATE (NOTE 1B) - -------------------------------------------------------------------------------- A$ 140,319... January 1995 $ 1,158 C$ 267,506... January 1995 (2,263) DM 3,174,573... January 1995 20,110 Frf 463,735... January 1995 751 Lit 183,247,080... January 1995 (373) - -------------------------------------------------------------------------------- TOTAL (US$ COMMITMENT--$2,531,259) $ 19,383 -------- - -------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD - -------------------------------------------------------------------------------- A$ (589,235)... January 1995 $ (10,285) Dkr (1,046,077)... January 1995 (2,448) DM (6,305,200)... January 1995 (75,385) Frf (2,340,234)... January 1995 (1,483) Lit (530,387,580)... January 1995 4,092 Pta (18,597,466)... February 1995 (703) - -------------------------------------------------------------------------------- TOTAL (US$ COMMITMENT--$5,525,073) $ (86,212) -------- - -------------------------------------------------------------------------------- TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET $ (66,829) -------- -------- - --------------------------------------------------------------------------------
+ Non-income producing security. See Notes to Financial Statements. 89 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS) - --------------------------------------------------------------------------------
SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET AFRICA INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS SOUTH INVESTMENT MANAGEMENT 20,700 The Morgan Stanley Africa AFRICA Investment Fund, Inc. (e).... $ 239,340 $ 235,463 0.1% 3,000 New South Africa Fund, Inc..... 41,805 42,375 0.0 13,500 Southern Africa Fund, Inc. (e).......................... 200,143 187,313 0.1 ----------- ----------- --- 481,288 465,151 0.2 TOTAL INVESTMENTS IN SOUTH AFRICAN STOCKS 481,288 465,151 0.2 TOTAL INVESTMENTS IN AFRICA 481,288 465,151 0.2 LATIN AMERICA ARGENTINA ENERGY 56,000 Transportadora de Gas del Sur S.A.......................... 744,919 525,000 0.2 OIL & GAS PRODUCERS 41,000 Yacimientos Petroliferos Fiscales S.A. (Sponsored) (ADR) (a).................... 1,047,553 876,375 0.4 TOTAL INVESTMENTS IN ARGENTINEAN STOCKS 1,792,472 1,401,375 0.6 BRAZIL AUTOMOBILES 17,500 CAPCO Automotive Products Corp. S.A. (e)..................... 210,710 210,000 0.1 STEEL 25,000 Usinas Siderurgicas de Minas Gerais-Usiminas S.A. (d)..... 397,125 328,000 0.1 429,000,000 Usinas Siderurgicas de Minas Gerais-Usiminas S.A. (Preferred).................. 725,036 583,156 0.2 ----------- ----------- --- 1,122,161 911,156 0.3 TELECOMMUNICATIONS 55,250 Telecomunicacoes Brasileiras S.A.--Telebras (ADR) (a) (d).......................... 2,239,272 2,458,625 1.0 8,900,000 Telecomunicacoes Brasileiras S.A.--Telebras PN (Preferred).................. 393,159 398,712 0.2 ----------- ----------- --- 2,632,431 2,857,337 1.2 UTILITIES--ELECTRIC 2,170,000 Centrais Eletricas Brasileiras S.A.--Electrobras 'B' (Preferred).................. 735,350 754,113 0.3 UTILITIES--GAS 53,500 Companhia Generale des Eaux (ADR) (a).................... 1,252,271 1,257,250 0.5 TOTAL INVESTMENTS IN BRAZILIAN STOCKS 5,952,923 5,989,856 2.4 CHILE TELECOMMUNICATIONS 7,900 Compania de Telefonos de Chile S.A. (ADR) (a)............... 950,388 622,125 0.2 TOTAL INVESTMENTS IN CHILEAN STOCKS 950,388 622,125 0.2 MEXICO BEVERAGES 10,150 Panamerican Beverages, Inc. (ADR) (a).................... 295,626 320,994 0.1 BUILDING & 319,625 Cementos Mexicanos, S.A. de CONSTRUCTION C.V. (Cemex) (Series B)...... 2,283,655 1,699,231 0.7 FINANCIAL SERVICES 29,800 Servicios Financieros Quadrum, S.A. de C.V. (ADR) (a) (d)... 642,075 186,250 0.1 HOLDING COMPANY 9,600 Desc Sociedad de Fomento Industrial, S.A. de C.V. 'B'.......................... 72,459 46,041 0.0 LEISURE 233,500 Grupo Carso, S.A. de C.V. (Series A1).................. 2,081,150 1,748,867 0.7 TELECOMMUNICATIONS 59,500 Telefonos de Mexico, S.A. de C.V. (Telmex) (ADR) (a)...... 3,254,272 2,439,500 1.0 TOTAL INVESTMENTS IN MEXICAN STOCKS 8,629,237 6,440,883 2.6 TOTAL INVESTMENTS IN LATIN AMERICA 17,325,020 14,454,239 5.8
90 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
NORTH SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET AMERICA INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ CANADA DIVERSIFIED 127,500 Horsham Corp................... $ 2,065,790 $ 1,625,625 0.7% ENERGY SOURCES 12,000 Imperial Oil Ltd. (ADR) (a).... 390,385 396,000 0.1 51,000 Imperial Oil Ltd. (Ordinary)... 1,666,831 1,681,698 0.7 ----------- ----------- --- 2,057,216 2,077,698 0.8 FOREIGN GOVERNMENT Canadian Government Bonds: OBLIGATIONS C$ 1,400,000 6.50% due 8/01/1996............ 1,098,976 966,644 0.4 C$ 2,650,000 5.75% due 3/01/1999............ 1,918,555 1,680,685 0.7 ----------- ----------- --- 3,017,531 2,647,329 1.1 MULTI-INDUSTRY 129,671 American Barrick Resources Corp......................... 3,323,482 2,900,633 1.2 24,350 American Barrick Resources Corp. (ADR) (a).............. 617,883 541,788 0.2 ----------- ----------- --- 3,941,365 3,442,421 1.4 TOTAL INVESTMENTS IN CANADIAN STOCKS & BONDS 11,081,902 9,793,073 4.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN NORTH AMERICA 11,081,902 9,793,073 4.0 - ------------------------------------------------------------------------------------------------------------------------ PACIFIC BASIN - ------------------------------------------------------------------------------------------------------------------------ AUSTRALIA DIVERSIFIED 798,000 BTR Nylex Ltd.................. 1,901,058 1,484,663 0.6 FOOD & BEVERAGE 129,855 Coca-Cola Amatil, Ltd. (Ordinary)................... 702,346 825,441 0.3 FOOD & HOUSEHOLD 346,165 Burns Philp & Co., Ltd. PRODUCTS (Ordinary)................... 1,030,868 818,459 0.3 MEDIA 103,347 The News Corp., Ltd. (ADR) (a).......................... 510,504 404,579 0.2 51,674 The News Corp., Ltd. (Preferred).................. 219,425 177,856 0.1 ----------- ----------- --- 729,929 582,435 0.3 MERCHANDISING 30,850 Amway Asia Pacific Ltd......... 904,749 1,002,625 0.4 NATURAL GAS PIPELINES 56,521 Broken Hill Proprietary Co..... 754,227 858,776 0.3 PROPERTY 150,796 Lend Lease Corp................ 1,874,136 1,865,677 0.7 TOTAL INVESTMENTS IN AUSTRALIAN STOCKS 7,897,313 7,438,076 2.9 - ------------------------------------------------------------------------------------------------------------------------ HONG KONG BANKING 232,000 Winton Holdings Ltd............ 68,750 58,780 0.0 FOODS 5,337,000 C.P. Pokphand Co., Ltd. (Ordinary)................... 1,510,008 1,248,703 0.5 MULTI-INDUSTRY 63,000 Swire Pacific Ltd. (Class A)... 428,737 392,528 0.2 PROPERTY 343,000 Hang Lung Development Co., Ltd. (Ordinary)................... 585,187 487,720 0.2 34,300 Hang Lung Development Co., Ltd. (Warrants) (c) (e)........... 0 5,143 0.0 ----------- ----------- --- 585,187 492,863 0.2 TELECOMMUNICATIONS 1,863,000 Hong Kong Telecommunications Ltd. (Ordinary).............. 3,710,688 3,552,126 1.4 UTILITIES 282,000 The Hong Kong & China Gas Co., Ltd. (Ordinary).............. 529,795 455,662 0.2 UTILITIES--ELECTRIC 752,800 China Light & Power Co., Ltd. (Ordinary)................... 3,706,269 3,211,272 1.3 TOTAL INVESTMENTS IN HONG KONG STOCKS & WARRANTS 10,539,434 9,411,934 3.8 INDONESIA BANKING-- INTERNATIONAL 352,500 PT Bank Bali................... 1,016,998 994,766 0.4 FOOD & HOUSEHOLD 337,000 PT Wicaksana Overseas PRODUCTS International (e)............ 519,283 966,363 0.4 TELECOMMUNICATIONS 15,160 PT Indonesia Satellite (ADR) (a).......................... 560,218 541,970 0.2 TOTAL INVESTMENTS IN INDONESIAN STOCKS 2,096,499 2,503,099 1.0
91 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
PACIFIC BASIN SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET (CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ JAPAN AUTOMOBILES 257,000 Suzuki Motor Co. (Ordinary).... $ 2,913,077 $ 3,022,010 1.2% 90,000 Toyota Motor Corp.............. 1,936,140 1,899,497 0.8 ----------- ----------- --- 4,849,217 4,921,507 2.0 BEVERAGES 16,000 Chukyo Coca-Cola Bottling Co., Ltd. (Ordinary).............. 226,551 181,709 0.1 15,000 Hokkaido Coca-Cola Bottling Co., Ltd. (Ordinary)......... 249,702 203,518 0.1 17,000 Kinki Coca-Cola Bottling Co., Ltd. (Ordinary).............. 312,980 232,362 0.1 19,000 Mikuni Coca-Cola Bottling Co., Ltd.......................... 340,923 259,698 0.1 17,600 Sanyo Coca-Cola Bottling Co., Ltd.......................... 267,996 263,558 0.1 ----------- ----------- --- 1,398,152 1,140,845 0.5 CAPITAL GOODS 596,000 Mitsubishi Heavy Industries, Ltd.......................... 4,091,717 4,552,362 1.8 CHEMICALS 14,000 Shimachu Co. (Ordinary)........ 586,177 505,126 0.2 119,000 Shin-Etsu Chemical Co., Ltd. (Ordinary)................... 2,474,232 2,368,040 1.0 ----------- ----------- --- 3,060,409 2,873,166 1.2 CONSUMER 11,000 Sony Corp...................... 682,355 624,623 0.2 ELECTRONICS ELECTRICAL CONSTRUCTION 45,000 Chudenko Corp. (Ordinary)...... 1,688,835 1,650,754 0.7 63,000 Sanki Engineering Co., Ltd..... 888,004 747,136 0.3 44,000 Taihei Dengyo Kaisha, Ltd...... 1,174,357 1,052,462 0.4 ----------- ----------- --- 3,751,196 3,450,352 1.4 ELECTRICAL EQUIPMENT 300,000 Hitachi Ltd.................... 2,980,233 2,981,910 1.2 133,000 Murata Manufacturing Co., Ltd.......................... 5,003,881 5,146,231 2.1 74,000 The Nippon Signal Co., Ltd..... 1,013,087 758,593 0.3 85,000 Rohm Co........................ 3,261,820 3,605,025 1.5 240,000 Sumitomo Electric Industries, Ltd.......................... 3,394,542 3,425,126 1.4 ----------- ----------- --- 15,653,563 15,916,885 6.5 INSURANCE 230,000 Dai-Tokyo Fire & Marine Insurance Co., Ltd........... 1,715,601 1,678,191 0.7 70,000 Fuji Fire & Marine Insurance Co., Ltd.......................... 477,842 448,141 0.2 292,000 Koa Fire & Marine Insurance Co., Ltd.......................... 2,008,042 2,013,186 0.8 149,000 Mitsui Marine & Fire Insurance Co., Ltd..................... 1,217,441 1,127,608 0.5 282,000 Nichido Fire & Marine Insurance Co., Ltd..................... 2,210,110 2,445,889 1.0 117,000 Nippon Fire & Marine Insurance Co., Ltd..................... 858,344 813,709 0.3 245,000 Sumitomo Marine & Fire Insurance Co., Ltd........... 2,084,181 2,117,588 0.8 236,000 Tokio Marine & Fire Insurance Co., Ltd. (Ordinary)......... 2,855,929 2,893,668 1.2 201,000 Yasuda Fire & Marine Insurance Co., Ltd..................... 1,505,908 1,474,673 0.6 ----------- ----------- --- 14,933,398 15,012,653 6.1 OFFICE EQUIPMENT 435,000 Canon, Inc. (Ordinary)......... 7,169,831 7,388,442 3.0 PACKAGING 133,000 Toyo Seikan Kaisha, Ltd. (Ordinary)................... 4,075,420 4,437,789 1.8 PHARMACEUTICALS 122,000 Sankyo Co., Ltd. (Ordinary).... 2,950,570 3,040,804 1.2 124,000 Taisho Pharmaceutical Co., Ltd. (Ordinary)................... 2,478,234 2,380,302 1.0 ----------- ----------- --- 5,428,804 5,421,106 2.2 RETAILING 87,000 Ito Yokado Co., Ltd. (Ordinary)................... 4,474,880 4,660,402 1.9 30,000 Sangetsu Co., Ltd.............. 1,120,547 904,523 0.4 ----------- ----------- --- 5,595,427 5,564,925 2.3
STEEL 48,000 Maruichi Steel Tube, Ltd. (Ordinary)................... 840,875 863,518 0.3 TRANSPORTATION 185,000 Nippon Express Co., Ltd........ 1,925,618 1,859,296 0.7 TOTAL INVESTMENTS IN JAPANESE STOCKS 73,455,982 74,027,469 30.0 - ------------------------------------------------------------------------------------------------------------------------
92 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
PACIFIC BASIN SHARES HELD/ STOCKS, BONDS, VALUE PERCENT OF NET (CONCLUDED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ MALAYSIA BANKING 83,000 Public Bank (Malaysia) BHD 'Foreign'.................... $ 188,648 $ 165,837 0.1% BROADCAST--MEDIA 367,000 Sistem Televisyen Malaysia BHD.......................... 1,060,002 797,982 0.3 FINANCIAL SERVICES 198,000 Commerce Asset Holdings BHD.... 1,016,180 798,981 0.3 FOOD 134,000 Nestle (Malaysia) BHD.......... 893,373 892,458 0.3 LEISURE 22,500 Genting BHD.................... 138,632 193,046 0.1 NEWSPAPER/PUBLISHING 231,000 New Straits Times Press BHD.... 931,391 742,096 0.3 TOTAL INVESTMENTS IN MALAYSIAN STOCKS 4,228,226 3,590,400 1.4 NEW FOREIGN ZEALAND GOVERNMENT New Zealand Government Bonds: NZ$ OBLIGATIONS 1,600,000 9.00% due 11/15/1996........... 973,385 1,010,864 0.4 NZ$ 1,650,000 6.50% due 2/15/2000............ 921,954 959,224 0.4 NZ$ 10,000,000 New Zealand Treasury Bills, 7.54%++ due 1/11/1995........ 6,017,116 6,386,880 2.6 ----------- ----------- --- 7,912,455 8,356,968 3.4 PAPER & FOREST 1,306,000 Carter Holt Harvey, Ltd........ 3,097,064 2,673,852 1.1 PRODUCTS TOTAL INVESTMENTS IN NEW ZEALAND STOCKS & BONDS 11,009,519 11,030,820 4.5 PHILIPPINES MULTI--INDUSTRY 39,000 Benpres Holdings Corp. (d) (e).......................... 421,200 351,000 0.1 TOTAL INVESTMENTS IN PHILIPPINE STOCKS 421,200 351,000 0.1 TAIWAN MERCHANDISING 74,360 Hocheng Group Corp. (ADR) (a) (d).......................... 2,149,131 1,673,100 0.7 TOTAL INVESTMENTS IN TAIWANESE STOCKS 2,149,131 1,673,100 0.7 THAILAND REAL ESTATE 106,000 Bangkok Land Ltd. 'Foreign'.... 349,820 263,997 0.1 TOTAL INVESTMENTS IN THAI STOCKS 349,820 263,997 0.1 TOTAL INVESTMENTS IN THE PACIFIC BASIN 112,147,124 110,289,895 44.5
SOUTHEAST ASIA INDIA MEDIA 203,000 Videocon International Ltd. (ADR) (a) (e)...................... 1,900,666 939,890 0.4 TOBACCO 151,000 Indian Tobacco Co. Ltd. (e).... 2,015,375 1,510,000 0.6 TOTAL INVESTMENTS IN INDIAN STOCKS 3,916,041 2,449,890 1.0 TOTAL INVESTMENTS IN SOUTHEAST ASIA 3,916,041 2,449,890 1.0 WESTERN EUROPE AUSTRIA UTILITIES 8,395 Verbund Oesterreichische Elekrizitats AG.............. 489,227 484,993 0.2 TOTAL INVESTMENTS IN AUSTRIAN STOCKS 489,227 484,993 0.2
93 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
WESTERN EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET (CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ BELGIUM BANKING 2,300 Generale de Banque S.A. (Ordinary)................... $ 567,216 $ 583,863 0.2% BUILDING MATERIALS-- GLASS 670 Glaverbel S.A. (Ordinary)...... 89,188 88,729 0.1 TOTAL INVESTMENTS IN BELGIAN STOCKS 656,404 672,592 0.3 FINLAND BANKING 414,400 Kansallis-Osake-Pankki (e)..... 695,163 484,540 0.2 330,000 Unitas Bank Ltd. (Ordinary) (e).......................... 908,262 851,253 0.3 ----------- ----------- --- 1,603,425 1,335,793 0.5 DIVERSIFIED 27,500 Outokumpu OY (e)............... 402,133 505,867 0.2 PAPER & FOREST PRODUCTS 75,400 Enso-Gutzeit OY (Registered)... 555,578 648,859 0.3 15,050 Metsa Serla OY................. 610,058 661,888 0.3 33,775 Repola OY S (d)................ 568,828 610,585 0.2 ----------- ----------- --- 1,734,464 1,921,332 0.8 TOTAL INVESTMENTS IN FINNISH STOCKS 3,740,022 3,762,992 1.5 FRANCE AUTOMOBILES 9,400 Peugeot S.A.................... 1,392,143 1,290,473 0.5 BANKING 7,400 Compagnie Financiere de Paribas...................... 556,543 492,686 0.2 8,400 Compagnie Financiere de Suez... 471,127 385,971 0.2 2,500 Societe Generale de Surveillance S.A. (Class A) (Ordinary)................... 272,615 263,035 0.1 ----------- ----------- --- 1,300,285 1,141,692 0.5 CHEMICALS 18,000 Rhone-Poulenc S.A.............. 454,174 418,267 0.2 INSURANCE 6,270 Societe Centrale du Groupe des Assurances Nationales S.A.... 548,917 321,026 0.1 MULTI-INDUSTRY 1,765 EuraFrance S.A................. 588,784 542,542 0.2 PACKAGING 12,700 Pechiney International S.A..... 353,880 381,095 0.2 UTILITIES 5,984 Compagnie Generale des Eaux.... 684,057 582,464 0.2 TOTAL INVESTMENTS IN FRENCH STOCKS 5,322,240 4,677,559 1.9 GERMANY AUTOMOBILE PARTS 2,620 Continental AG................. 394,839 382,506 0.2 4,440 Continental AG (Warrants) (c) (e).......................... 252,413 195,039 0.1 ----------- ----------- --- 647,252 577,545 0.3 AUTOMOBILES 3,100 Daimler-Benz AG................ 1,480,090 1,525,969 0.6 3,350 Volkswagen AG (Ordinary)....... 919,646 921,899 0.4 3,500 Volkswagen AG (Preferred)...... 788,556 769,864 0.3 2,659 Volkswagen AG (Preferred) (Warrants) (c) (e)........... 239,121 237,043 0.1 ----------- ----------- --- 3,427,413 3,454,775 1.4 BANKING 2,400 Deutsche Bank AG (Ordinary).... 1,139,399 1,116,279 0.4 CHEMICALS 4,500 BASF AG (Ordinary)............. 858,048 928,779 0.4 2,900 Bayer AG (Ordinary)............ 663,276 680,039 0.3 ----------- ----------- --- 1,521,324 1,608,818 0.7 INSURANCE 340 Munich Reinsurance Co. (Ordinary) (e)............... 599,135 636,951 0.3 MACHINERY 17,250 Kloeckner Werke AG (e)......... 1,232,262 1,376,211 0.6 6,100 Mannesmann AG.................. 1,547,131 1,662,920 0.7 ----------- ----------- --- 2,779,393 3,039,131 1.3 METALS & MINING 10,200 Thyssen AG (Ordinary) (e)...... 1,737,040 1,947,093 0.8 UTILITIES 6,500 Vereinigte Elektrizitaets & Bergwerks AG (Veba) (Warrants) (c) (e)........... 279,834 332,642 0.1 TOTAL INVESTMENTS IN GERMAN STOCKS & WARRANTS 12,130,790 12,713,234 5.3
94 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
WESTERN EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET (CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ GREECE BEVERAGES 13,000 Hellenic Bottling Co........... $ 382,927 $ 460,609 0.2% TOTAL INVESTMENTS IN GREEK STOCKS 382,927 460,609 0.2 HUNGARY FOODS 1,633 Pick Szeged Reszvenytarsasag (ADR) (a).................... 111,887 95,922 0.0 TOTAL INVESTMENTS IN HUNGARIAN STOCKS 111,887 95,922 0.0 IRELAND BANKING 21,200 Allied Irish Banks PLC (Ordinary)................... 84,167 88,379 0.0 BANKING & FINANCIAL 640,000 Anglo Irish Bank Corp.......... 507,043 553,370 0.2 BUILDING & 70,000 CRH PLC (Ordinary)............. 335,762 385,846 0.2 CONSTRUCTION CLOSED-END FUNDS 520,000 First Ireland Investment Co.... 782,598 814,320 0.3 TOTAL INVESTMENTS IN IRISH STOCKS 1,709,570 1,841,915 0.7 ITALY BUILDING & CONSTRUCTION 96,100 Fochi Filippo S.p.A............ 304,917 210,215 0.1 DIVERSIFIED 335,500 CIR NC Savings................. 157,313 229,588 0.1 477,700 Compagnie Industrial Riunite S.p.A. (CIR)................. 494,269 557,110 0.2 ----------- ----------- --- 651,582 786,698 0.3 TELECOMMUNICATIONS 468,816 Stet Savings Telecom........... 1,130,247 1,112,303 0.5 TOTAL INVESTMENTS IN ITALIAN STOCKS 2,086,746 2,109,216 0.9 NETHERLANDS BANKING 25,000 ABN Amro Bank (Ordinary)....... 875,455 869,778 0.3 CHEMICALS 9,000 Akzo N.V. (Ordinary)........... 983,573 1,040,619 0.4 8,500 European Vinyls Corporation International N.V. (e)....... 375,244 377,135 0.1 ----------- ----------- --- 1,358,817 1,417,754 0.5 ELECTRICAL EQUIPMENT 68,000 Philips Industries Inc......... 1,794,160 2,016,617 0.8 INSURANCE 15,600 AEGON N.V. (Ordinary).......... 813,328 999,077 0.4 20,000 Amev N.V. (Ordinary)........... 825,683 850,450 0.3 19,300 Internationale Nederlanden Groep N.V.................... 816,416 913,109 0.4 ----------- ----------- --- 2,455,427 2,762,636 1.1 PAPER & FOREST PRODUCTS 800 Koninklijke KNP (Preferred) (e).......................... 3,250 3,309 0.0 22,055 Koninklijke KNP (Warrants) (c) (e).......................... 76,134 81,822 0.0 ----------- ----------- --- 79,384 85,131 0.0 TELECOMMUNICATIONS 11,500 Koninklijke Ptt Nederland N.V.......................... 359,562 388,155 0.2 TRANSPORTATION 42,000 KLM Royal Dutch Airlines....... 1,057,842 1,032,310 0.4 TOTAL INVESTMENTS IN NETHERLANDS STOCKS 7,980,647 8,572,381 3.3 NORWAY OIL & GAS PRODUCERS 13,100 Saga Petroleum A.S. (Class A)........................... 154,863 142,518 0.1 84,000 Saga Petroleum A.S. (Class B)........................... 951,425 870,337 0.3 ----------- ----------- --- 1,106,288 1,012,855 0.4 TOTAL INVESTMENTS IN NORWEGIAN STOCKS 1,106,288 1,012,855 0.4 PORTUGAL BANKING 80,400 Banco Commercial Portugues S.A. (ADR) (a).................... 1,256,303 1,015,050 0.4
95 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
WESTERN EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET (CONTINUED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ PORTUGAL BUILDING & (CONCLUDED) CONSTRUCTION 11,500 Sociedade de Construsoes Soares de Costa S.A................. $ 228,190 $ 217,008 0.1% 2,300 Sociedade de Construsoes Soares de Costa S.A. (Baby Shares)...................... 0 43,402 0.0 1,150 Sociedade de Construsoes Soares de Costa S.A. (Ordinary)..... 14,384 21,701 0.0 ----------- ----------- --- 242,574 282,111 0.1 RETAIL 7,800 Estabelecimentes Jeronimo Martins & Filho...................... 308,013 334,068 0.1 42,750 Sonae Investimentos S.A........ 887,629 984,449 0.4 ----------- ----------- --- 1,195,642 1,318,517 0.5 TOTAL INVESTMENTS IN PORTUGUESE STOCKS 2,694,519 2,615,678 1.0 SPAIN BANKING 4,800 Banco Popular Espanol (Ordinary)................... 545,778 571,038 0.2 OIL--RELATED 51,000 Repsol S.A..................... 1,551,028 1,384,036 0.6 TELECOMMUNICATIONS 84,800 Telefonica Nacional de Espana S.A. (Ordinary).............. 1,107,347 1,002,387 0.4 TOTAL INVESTMENTS IN SPANISH STOCKS 3,204,153 2,957,461 1.2 SWEDEN APPLIANCES 15,181 Electrolux AB.................. 758,842 771,763 0.3 AUTOMOBILES & EQUIPMENT 110,000 Volvo AB 'B'................... 2,026,886 2,076,647 0.8 BANKING 34,700 Svenska Handelsbanken, Inc. (Class A) (e)................ 463,127 458,561 0.2 BUILDING RELATED 19,100 Svedala Industry (d)........... 388,692 445,576 0.2 ENGINEERING 38,850 SKF AB 'A' (e)................. 716,222 644,374 0.3 15,300 SKF AB 'B' Free (e)............ 297,054 252,737 0.1 ----------- ----------- --- 1,013,276 897,111 0.4 INSURANCE 10,260 Skandia Group Forsakrings AB... 154,301 177,784 0.1 METALS & MINING 105,000 Avesta Sheffield AB (e)........ 917,807 1,040,683 0.4 TOTAL INVESTMENTS IN SWEDISH STOCKS 5,722,931 5,868,125 2.4 SWITZERLAND CHEMICALS 1,400 Ciba-Geigy AG (Registered)..... 786,967 836,252 0.3 ELECTRICAL EQUIPMENT 1,500 BBC Brown Boveri & Cie......... 1,152,901 1,292,925 0.5 INSURANCE 135 Baloise Holding Insurance...... 240,990 245,736 0.1 TOTAL INVESTMENTS IN SWISS STOCKS 2,180,858 2,374,913 0.9
TURKEY AUTOMOBILES 53,200 Turk Otomobil Fabrikasi A.S. (GDS) (b) (e)................ 426,100 228,760 0.1 BEVERAGES 215,000 Erciyas Biracilik Ve Malt Sanayii A.S.................. 171,663 159,156 0.1 BUILDING MATERIALS 138,250 Alarko Holdings A.S............ 103,023 118,500 0.0 230,900 Cimentas Izmir Cimento Fabrikasi T.A.S. (e)......... 169,259 161,930 0.1 ----------- ----------- --- 272,282 280,430 0.1 INSURANCE 918,000 Aksigorta A.S.................. 229,500 185,984 0.1 STEEL 11,019,000 Izmir Demir Celik Sanayii A.S. (e).......................... 753,889 601,036 0.2 TOTAL INVESTMENTS IN TURKISH STOCKS 1,853,434 1,455,366 0.6 UNITED KINGDOM AEROSPACE 316,500 Rolls Royce PLC (Ordinary)..... 782,759 892,150 0.4 BEVERAGE 154,100 Grand Metropolitan PLC (Ordinary)................... 1,025,810 984,588 0.4
96 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
WESTERN EUROPE SHARES HELD/ STOCK, BONDS, VALUE PERCENT OF NET (CONCLUDED) INDUSTRY FACE AMOUNT WARRANTS & RIGHTS COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ UNITED BUILDING MATERIALS 248,000 Tarmac PLC (Ordinary).......... $ 623,831 $ 464,100 0.2% KINGDOM CHEMICALS 104,100 Imperial Chemical Industries (CONCLUDED) PLC (ADR) (a).................... 1,278,683 1,220,209 0.5 CONSUMER--GOODS 82,600 Vendome Luxury Group (Units)... 485,376 649,345 0.3
ELECTRICAL EQUIPMENT 239,200 General Electric Co., Ltd. PLC (Ordinary)................... 1,122,649 1,026,369 0.4 FOOD & BEVERAGE 80,300 Tate & Lyle PLC (Ordinary)..... 517,020 533,179 0.2 FOOD MANUFACTURING 42,300 Unilever Capital Corp.......... 660,311 766,749 0.3 FOREIGN GOVERNMENT Pound3,100,000 UK Treasury Gilt, 8.75% due OBLIGATIONS Sterling 9/01/1997.................... 5,123,042 4,894,044 2.0 INDUSTRIAL--OTHER 356,300 Tomkins PLC.................... 1,235,028 1,238,684 0.5 INSURANCE 86,200 Commercial Union Assurance Co. PLC (Ordinary)............... 764,061 684,395 0.3 LEISURE & ENTERTAINMENT 343,100 Forte PLC...................... 1,262,708 1,300,253 0.5 174,500 The Rank Organisation PLC (Ordinary)................... 1,070,424 1,139,523 0.5 ----------- ----------- --- 2,333,132 2,439,776 1.0 METALS & MINING 96,100 The RTZ Corp. PLC.............. 1,251,499 1,247,584 0.5 MULTI-INDUSTRY 73,000 BTR PLC (Ordinary)............. 354,879 336,095 0.1 OIL--RELATED 91,100 British Petroleum Co., Ltd..... 538,573 607,029 0.2 74,300 The Shell Transport & Trading Co. PLC...................... 828,784 813,313 0.3 ----------- ----------- --- 1,367,357 1,420,342 0.5 PHARMACEUTICALS 45,500 Glaxo Holdings PLC............. 475,215 472,407 0.2 203,600 SmithKline Beecham Corp. PLC (Class A).................... 1,294,680 1,445,929 0.6 ----------- ----------- --- 1,769,895 1,918,336 0.8 RETAIL TRADE 272,100 Sears PLC...................... 489,342 468,719 0.2 TELECOMMUNICATIONS 300,000 Racal Electronics PLC.......... 1,015,204 1,057,050 0.4 UTILITIES 252,100 British Telecommunications PLC (Ordinary)................... 1,471,567 1,490,327 0.6 TOTAL INVESTMENTS IN THE UNITED KINGDOM STOCKS & BONDS 23,671,445 23,732,041 9.6 TOTAL INVESTMENTS IN WESTERN EUROPE 75,044,088 75,407,852 30.4
FACE AMOUNT SHORT-TERM SECURITIES COMMERCIAL PAPER* $ 7,180,000 General Electric Capital Corp., 5.80% due 1/03/1995.......... 7,175,373 7,175,373 2.9 TOTAL INVESTMENTS IN COMMERCIAL PAPER 7,175,373 7,175,373 2.9
97 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
VALUE PERCENT OF NET FACE AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) ASSETS - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & AGENCY OBLIGATIONS* $20,000,000 Federal Home Loan Mortgage Association, 5.75% due 1/31/1995.................... $19,897,778 $19,897,778 8.0% US Treasury Bills: 250,000 5.649% due 3/23/1995........... 246,743 246,868 0.1 70,000 5.68% due 3/23/1995............ 69,083 69,123 0.0 165,000 5.25% due 3/30/1995............ 162,834 162,727 0.1 820,000 5.34% due 3/30/1995............ 809,053 808,705 0.3 430,000 5.37% due 3/30/1995............ 424,227 424,077 0.2 2,000,000 5.55% due 3/30/1995............ 1,972,250 1,972,450 0.8 100,000 5.76% due 3/30/1995............ 98,649 98,622 0.1 TOTAL INVESTMENTS IN US GOVERNMENT & AGENCY OBLIGATIONS 23,680,617 23,680,350 9.6 TOTAL INVESTMENTS IN SHORT-TERM SECURITIES 30,855,990 30,855,723 12.5 NUMBER OF CONTRACTS/ PREMIUMS FACE AMOUNT ISSUE PAID OPTIONS CALL OPTIONS PURCHASED PURCHASED US$ 15,000 Nikkei, expiring March 1995 at Yen 1950.................... 50,500 77,638 0.0 35,905 + Topix Second Section, expiring May 1995 at Yen 2330........ 80,000 15,755 0.0 50,750 + Topix Second Section, expiring July 1995 at Yen 2512.93.... 137,151 21,754 0.0 65,535 + Topix Second Section, expiring August 1995 at Yen 2453.64..................... 193,711 50,788 0.0 42,919 + Topix Second Section, expiring September 1995 at Yen 2311.10..................... 100,000 45,024 0.0 ------------ ------------ ---------- 561,362 210,959 0.0 CURRENCY PUT OPTIONS PURCHASED Yen4,000,000 Japanese Yen, expiring February 1995 at Yen 101.... 80,000 24,400 0.0 8,000,000 Japanese Yen, expiring February 1995 at Yen 100.... 167,200 78,400 0.0 7,000,000 Japanese Yen, expiring March 1995 at Yen 98.5............ 109,900 128,100 0.1 1,500,000 Japanese Yen, expiring June 1995 at Yen 100............. 45,300 26,700 0.0 ------------ ------------ ---------- 402,400 257,600 0.1 TOTAL OPTIONS PURCHASED 963,762 468,559 0.1 TOTAL INVESTMENTS 251,815,215 244,184,382 98.5 NOMINAL PREMIUMS VALUE RECEIVED OPTIONS CURRENCY CALL OPTIONS WRITTEN WRITTEN Yen4,000,000 Japanese Yen, expiring February 1995 at Yen 95.75....................... (80,000) (13,200) 0.0 8,000,000 Japanese Yen, expiring February 1995 at Yen 94.6... (167,200) (12,000) 0.0 7,000,000 Japanese Yen, expiring March 1995 at Yen 93.06........... (109,900) (11,900) 0.0 ------------ ------------ ---------- (357,100) (37,100) 0.0 PUT OPTIONS WRITTEN US$ 1,500 FTSE, expiring January 1995 at Pound Sterling 2800......... (63,211) (7,940) 0.0 65,535 + Topix Second Section, expiring August 1995 at Yen 2453.64..................... (136,111) (227,581) (0.1) ------------ ------------ ---------- (199,322) (235,521) (0.1) CURRENCY PUT OPTIONS WRITTEN Yen1,500,000 Japanese Yen, expiring June 1995 at Yen 108............. (16,500) (4,200) 0.0 TOTAL OPTIONS WRITTEN (572,922) (276,821) (0.1) TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN............................. $251,242,293 243,907,561 98.4 ------------ ------------ 0.0 VARIATION MARGIN ON STOCK INDEX FUTURES CONTRACTS**................... (99,903) 0.1 UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS***...... 300,276 1.5 OTHER ASSETS LESS LIABILITIES......................................... 3,775,841 ------------ ---------- 100.0% NET ASSETS............................................................ $247,883,775 ------------ ---------- ------------ ----------
98 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS) - -------------------------------------------------------------------------------- (a) American Depositary Receipt (ADR). (b) Global Depositary Shares (GDS). (c) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and the number of shares are subject to adjustment under certain conditions until the expiration date. (d) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $6,053,000, representing 2.44% of net assets.
ACQUISITION VALUE ISSUE DATE COST (NOTE 1A) Benpres Holdings Corp.......................................................... 10/25/1994 $ 421,200 $ 351,000 Hocheng Group Corp............................................................. 8/09/1994 2,149,131 1,673,100 Repola OY S.................................................................... 8/03/1993 568,828 610,585 Servicios Financieros Quadrum, S.A. de C.V. (ADR).............................. 11/02/1993 642,075 186,250 Svedala Industry............................................................... 10/28/1993 388,692 445,576 Telecomunicacoes Brasileiras S.A.--Telebras (ADR).............................. 10/08/1993 2,239,272 2,458,625 Usinas Siderurgicas de Minas Gerais--Usiminas S.A.............................. 10/05/1994 397,125 328,000 TOTAL.......................................................................... $ 6,806,323 $ 6,053,136 ----------- ----------- ----------- -----------
(e) Non-income producing security. + All Topix 2nd Section OTCs are with Morgan Stanley & Co. International Ltd. as counterparty. ++ Represents the yield to maturity on this foreign discount security. * Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the rates paid at the time of purchase by the Fund. ** Stock index futures contracts purchased as of December 31, 1994 were as follows:
NUMBER OF EXPIRATION VALUE CONTRACTS ISSUE EXCHANGE DATE (NOTE 1B) 81 Nikkei 225.............................................................CME March 1995 $ 8,006,850 213 Nikkei 225...........................................................SIMEX March 1995 21,160,854 TOTAL STOCK INDEX FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT PRICE--$28,472,945) $ 29,167,704 ------------- ------------- **Stock index futures contracts sold as of December 31, 1994 were as follows: NUMBER OF EXPIRATION VALUE CONTRACTS ISSUE EXCHANGE DATE (NOTE 1B) 20 EOE....................................................................EOE January 1995 $ (957,904) 10 DAX....................................................................DTB March 1995 (1,363,049) TOTAL STOCK INDEX FUTURES CONTRACTS SOLD (TOTAL CONTRACT PRICE--$2,304,772)................ $ (2,320,953) ------------- ------------- The market value of pledged securities is $3,782,572.
***Forward foreign exchange contracts as of December 31, 1994 were as follows: - --------------------------------------------------------------------------------
UNREALIZED APPRECIATION EXPIRATION (DEPRECIATION) FOREIGN CURRENCY SOLD DATE (NOTE 1B) - ------------------------------------------------------------------------------------------------------------------------ DM 10,391,435......................................................................... March 1995 38,486 Nlg 7,098,115......................................................................... March 1995 11,821 Yen 397,200,000....................................................................... February 1995 (9,360) Yen 1,400,572,500..................................................................... March 1995 191,837 Yen 1,263,080,000..................................................................... June 1995 74,003 Yen 155,480,000....................................................................... August 1995 (6,511) - ------------------------------------------------------------------------------------------------------------------------ TOTAL UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS (US$ COMMITMENT--$43,861,208)......................................................... $ 300,276 -------------- -------------- - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 99 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
VALUE PERCENT OF INDUSTRY SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ ALUMINUM 15,000 Alcan Aluminium Ltd.................. $ 314,175 $ 380,625 1.0 7,700 Reynolds Metals Co................... 349,628 377,300 0.9 663,803 757,925 1.9 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS 68,000 Asahi Chemical Industry Co., Ltd..... 502,124 522,131 1.3 10,400 Dow Chemical Co...................... 646,664 699,400 1.8 10,700 duPont (E.I.) de Nemours & Co........ 534,988 601,875 1.5 1,683,776 1,823,406 4.6 - ------------------------------------------------------------------------------------------------------------------------ DIVERSIFIED RESOURCES 19,000 Canadian Pacific Limited............. 302,765 285,000 0.7 COMPANIES 18,500 Coastal Corp......................... 493,653 476,375 1.2 30,000 Cyprus Amax Minerals Co.............. 843,290 783,750 2.0 4,800 Equitable Resources, Inc............. 118,772 130,200 0.3 24,000 Freeport-McMoran Inc................. 472,088 426,000 1.1 38,500 Norcen Energy Resources Ltd.......... 600,603 456,340 1.1 20,000 Occidental Petroleum Corp............ 391,200 385,000 1.0 43,000 Renison Goldfields Consolidated 171,823 163,335 Ltd.................................. 0.4 3,394,194 3,106,000 7.8 - ------------------------------------------------------------------------------------------------------------------------ GAS DISTRIBUTION/ 12,100 Consolidated Natural Gas Co.......... 586,109 429,550 1.1 TRANSMISSION - ------------------------------------------------------------------------------------------------------------------------ GOLD 20,300 + Delta Gold NL........................ 43,832 44,377 0.1 175,000 Newcrest Mining Ltd.................. 816,087 780,045 2.0 15,864 Newmont Mining Corp.................. 664,211 571,104 1.4 35,000 Placer Dome Inc...................... 797,957 761,250 1.9 28,000 Santa Fe Pacific Gold Corp........... 413,022 360,500 0.9 2,735,109 2,517,276 6.3 - ------------------------------------------------------------------------------------------------------------------------ INTEGRATED OIL 10,500 Amoco Corp........................... 554,378 620,813 1.6 COMPANIES 8,500 Exxon Corp........................... 527,985 516,375 1.3 15,800 Imperial Oil Ltd..................... 576,846 521,400 1.3 17,900 Norsk Hydro a.s. (ADS)*.............. 471,629 700,337 1.8 39,000 Petro-Canada......................... 325,876 316,288 0.8 17,700 Phillips Petroleum Co................ 517,938 579,675 1.5 5,200 Royal Dutch Petroleum Co............. 452,860 559,000 1.4 12,000 Societe Nationale Elf Aquitaine 427,829 423,000 (ADS)*............................... 1.1 9,000 Total S.A. (Class B)................. 536,001 523,593 1.3 21,000 YPF S.A. (ADS)*...................... 523,296 448,875 1.1 4,914,638 5,209,356 13.2 - ------------------------------------------------------------------------------------------------------------------------ METAL & MINING 6,900 ASARCO Inc........................... 193,079 196,650 0.5 21,000 CRA Ltd.............................. 258,884 289,770 0.7 4,365 + Eramet............................... 287,729 282,432 0.7 31,500 + Falconbridge Ltd..................... 436,776 550,228 1.4 900 Freeport-McMoran Copper & Gold 21,338 19,125 Inc.................................. 0.0 283,000 M.I.M. Holdings Ltd.................. 618,436 471,670 1.2 43,500 Noranda Inc.......................... 835,357 821,867 2.1 10,000 Phelps Dodge Corp.................... 556,143 618,750 1.6 60,000 The RTZ Corp. PLC.................... 776,284 778,928 2.0 26,000 Trelleborg 'B' Fria.................. 353,318 380,404 1.0 134,000 Western Mining Corp. Holdings Ltd.... 784,884 774,921 2.0 5,122,228 5,184,745 13.2 - ------------------------------------------------------------------------------------------------------------------------
100 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
VALUE PERCENT OF INDUSTRY SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ OIL & GAS PRODUCERS 104,000 Ampolex Ltd.......................... $ 325,645 $ 280,560 0.7% 10,500 Anadarko Petroleum Corp.............. 513,411 404,250 1.0 18,000 Apache Corp.......................... 482,356 450,000 1.1 13,500 Burlington Resources Inc............. 528,438 472,500 1.2 24,000 Enron Oil & Gas Co................... 514,140 450,000 1.1 65,000 Enterprise Oil PLC................... 418,650 398,762 1.0 13,000 Oryx Energy Co....................... 216,739 154,375 0.4 63,000 Ranger Oil Ltd....................... 416,247 370,125 0.9 15,000 Sonat Inc............................ 477,890 420,000 1.1 7,100 The Louisiana Land and Exploration 282,233 258,262 Co................................... 0.6 9,000 + Triton Energy Corp................... 293,016 306,000 0.8 9,800 Vastar Resources Inc................. 268,604 243,775 0.6 4,737,369 4,208,609 10.5 - ------------------------------------------------------------------------------------------------------------------------ OIL SERVICE 16,800 Baker Hughes, Inc.................... 322,264 306,600 0.8 8,000 + Coflexip............................. 172,000 184,000 0.5 18,000 IHC Caland........................... 400,101 455,920 1.1 64,400 Rowan Companies Inc.................. 602,479 394,450 1.0 11,400 Schlumberger Ltd..................... 693,409 574,275 1.4 13,400 Tidewater Inc........................ 271,679 247,900 0.6 2,461,932 2,163,145 5.4 - ------------------------------------------------------------------------------------------------------------------------ PAPER & FOREST 18,400 Aracruz Celulose A.S. (ADS)*......... 196,788 234,600 0.6 PRODUCTS 10,000 Georgia-Pacific Corp................. 710,723 715,000 1.8 7,400 International Paper.................. 497,368 557,775 1.4 9,800 Metsa-Serla OY 'B'................... 424,632 430,997 1.1 6,700 Mo Och Domsjo AB Co.................. 269,783 312,603 0.8 12,000 Scott Paper Co....................... 479,340 829,500 2.1 12,200 Union Camp Corp...................... 530,591 574,925 1.4 20,000 Weyerhaeuser Co...................... 796,864 750,000 1.9 9,000 Willamette Industries Inc............ 376,875 423,000 1.1 4,282,964 4,828,400 12.2 - ------------------------------------------------------------------------------------------------------------------------ PLANTATIONS 86,000 Golden Hope Plantations BHD.......... 158,974 157,007 0.4 60,000 Kuala Lumpur Kepong BHD.............. 120,553 159,843 0.4 279,527 316,850 0.8 - ------------------------------------------------------------------------------------------------------------------------ POWER GENERATION 33,100 + Destec Energy Inc.................... 562,619 351,687 0.9 - ------------------------------------------------------------------------------------------------------------------------ REFINING 22,300 Total Petroleum (North America), 328,442 278,750 Ltd.................................. 0.7 - ------------------------------------------------------------------------------------------------------------------------ STEEL 21,000 Allegheny Ludlum Corp................ 493,494 393,750 1.0 4,600 + Koninklijke Nederlandsche Hoogovens en Staalfabrieken N.V................ 196,722 209,139 0.5 150,000 + Sumimoto Metal Industries, Ltd....... 497,497 486,935 1.2 1,187,713 1,089,824 2.7 - ------------------------------------------------------------------------------------------------------------------------ WOOD PRODUCTS 18,000 Louisiana-Pacific Corp............... 689,580 490,500 1.2 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS 33,630,003 32,756,023 82.5 - ------------------------------------------------------------------------------------------------------------------------
101 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER** $1,733,000 General Electric Capital Corp., 5.80% $ 1,731,883 $ 1,731,883 due 1/03/1995........................ 4.4% - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & AGENCY 5,000,000 US Treasury Bills, 4.85% due 4,967,667 4,967,667 OBLIGATIONS** 2/16/1995............................ 12.5 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES 6,699,550 6,699,550 16.9 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS.................... $ 40,329,553 39,455,573 99.4 ------------ ------------ OTHER ASSETS LESS LIABILITIES........ 259,288 0.6 NET ASSETS........................... $ 39,714,861 100.0% ------------ ---------- ------------ ---------- - ------------------------------------------------------------------------------------------------------------------------ * American Depositary Shares (ADS). ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security.
See Notes to Financial Statements. 102 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS & NOTES - ------------------------------------------------------------------------------------------------------------------------ BANKS & THRIFTS--9.5% A+ Aa3 $ 8,000,000 Boatmen's Bancshares, Inc., 4.34% due 6/14/1995................... $ 8,000,000 $ 7,991,376 A- A2 6,000,000 Comerica Inc., 8.375% due 7/15/2024....................... 5,706,180 5,574,600 A- A3 3,000,000 First Interstate Bancorp, 11.00% due 3/05/1998................... 3,605,145 3,191,280 A- A3 5,000,000 First Union Corp., 8.125% due 6/24/2002....................... 5,541,690 4,861,700 Golden West Financial Corp.: A- A3 2,000,000 9.15% due 5/23/1998............... 2,271,480 2,047,480 A- A3 2,000,000 8.375% due 4/15/2002.............. 2,014,380 1,971,980 A- A3 1,000,000 Huntington National Bank, 7.625% due 1/15/2003................... 1,066,660 945,560 A- A3 6,500,000 NationsBank Corp., 10.50% due 3/15/1999....................... 6,808,555 6,678,750 AA+ Aa2 5,000,000 Wachovia Bank, 6.55% due 6/09/1997....................... 4,996,350 4,839,650 ------------- ------------ 40,010,440 38,102,376 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES-- CAPTIVE--3.3% Chrysler Finance Corp.: A A3 1,000,000 7.13% due 9/30/1996............... 985,130 984,340 BBB+ A3 2,500,000 9.50% due 12/15/1999.............. 2,747,175 2,593,900 BBB+ A3 6,500,000 10.95% due 8/01/2017.............. 7,380,520 7,136,805 A A2 2,115,000 Ford Motor Credit Corp., 7.75% due 11/15/2002...................... 2,161,943 2,016,927 ------------- ------------ 13,274,768 12,731,972 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES-- A+ A1 2,000,000 American General Finance Corp., CONSUMER--7.7% 8.50% due 8/15/1998............. 2,278,920 2,006,000 Associates Corp. of North America: AA- A1 5,000,000 8.375% due 1/15/1998.............. 5,016,100 4,999,950 AA- A1 1,500,000 8.80% due 8/01/1998............... 1,690,365 1,513,560 AA- A1 1,000,000 8.25% due 12/01/1999.............. 996,740 994,150 A A2 10,000,000 Beneficial Corp., 6.68% due 10/14/1997...................... 10,000,000 9,994,000 A+ Aa3 3,000,000 CIT Group Holdings, Inc., 7.625% due 12/05/1996...................... 2,990,340 2,980,500 Commercial Credit Co.: A A2 3,250,000 10.00% due 5/01/1999.............. 3,626,350 3,403,043 A A2 3,000,000 6.70% due 8/01/1999............... 3,022,580 2,800,080 A+ A2 1,000,000 Transamerica Financial Corp., 6.80% due 3/15/1999............. 999,730 941,660 ------------- ------------ 30,621,125 29,632,943 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES-- OTHER--9.3% Dean Witter, Discover & Co.: A A2 5,000,000 6.50% due 11/01/2005.............. 4,942,250 4,246,300 A A2 4,750,000 6.75% due 10/15/2013.............. 4,691,575 3,866,785 A+ A2 2,000,000 Dillard Investment Co., 9.25% due 2/01/2001................... 2,354,230 2,066,040 General Electric Capital Corp.: AAA Aaa 3,000,000 14.00% due 7/01/1996.............. 3,405,570 3,256,020 AAA Aaa 3,500,000 8.125% due 5/15/2012.............. 3,553,725 3,438,750 A A3 10,000,000 Lehman Brothers Holdings, Inc., 7.375% due 8/15/1997............ 9,987,000 9,693,800 PaineWebber Group, Inc.: BBB+ A3 1,000,000 6.25% due 6/15/1998............... 1,026,020 919,610 BBB+ A3 4,000,000 9.25% due 12/15/2001.............. 4,670,870 4,041,360 A- A3 4,000,000 Smith Barney Holdings, 7.875% due 10/01/1999...................... 3,986,160 3,889,920 A+ A2 1,000,000 The Travelers Corp., 9.50% due 3/01/2002....................... 1,084,200 1,047,940 ------------- ------------ 39,701,600 36,466,525 - ------------------------------------------------------------------------------------------------------------------------
103 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES - ------------------------------------------------------------------------------------------------------------------------ FOREIGN*--11.4% AA- A1 $ 4,000,000 Aegon N.V., 8.00% due 8/15/2006 (5)............................. $ 3,963,480 $ 3,832,680 CRA Finance Ltd. (4): A+ A2 3,000,000 6.50% due 12/01/2003.............. 3,001,380 2,626,290 A+ A2 3,000,000 7.125% due 12/01/2013............. 2,982,600 2,560,680 AAA Aaa 2,000,000 Export-Import Bank of Japan, 8.35% due 12/01/1999 (2).............. 2,113,320 2,016,600 A A3 5,413,000 Hydro-Quebec, 10.75% due 6/15/2010 (1)................... 5,959,821 5,687,439 Metropolis of Tokyo (Japan) (3): AAA Aaa 3,000,000 8.70% due 10/05/1999.............. 3,469,410 3,064,620 AAA Aaa 250,000 9.25% due 11/08/2000.............. 268,428 261,510 AAA Aaa 2,000,000 8.65% due 7/18/2001............... 2,288,720 2,038,800 Province of Ontario (Canada) (3): AA Aa2 5,000,000 8.00% due 10/17/2001.............. 5,082,900 4,928,900 AA Aa2 6,000,000 7.75% due 6/04/2002............... 5,917,560 5,795,580 Province of Quebec (Canada) (3): A+ A1 1,000,000 8.80% due 4/15/2003............... 1,038,020 1,009,410 A+ A1 9,000,000 7.125% due 2/09/2024.............. 7,384,440 7,231,860 AA A1 3,000,000 Republic of Italy, 6.875% due 9/27/2023 (3)................... 2,898,730 2,363,160 ------------- ------------ 46,368,809 43,417,529 - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIAL--CONSUMER GOODS--9.0% Anheuser-Busch Cos., Inc.: AA- A1 2,500,000 8.75% due 12/01/1999.............. 2,839,090 2,551,350 AA- A1 5,000,000 7.375% due 7/01/2023.............. 5,127,300 4,343,750 A+ A1 2,500,000 Bass America, Inc., 8.125% due 3/31/2002....................... 2,668,930 2,458,250 Dillard Department Stores, Inc.: A+ A2 5,000,000 7.375% due 6/15/1999.............. 5,305,840 4,825,200 A+ A2 3,000,000 9.125% due 8/01/2011.............. 3,240,150 3,146,040 Grand Metropolitan Investment Corp.: A+ A2 5,500,000 6.50% due 9/15/1999............... 5,615,810 5,113,295 A+ A2 1,000,000 8.625% due 8/15/2001.............. 1,049,910 1,006,640 AAA Aaa 3,000,000 Johnson & Johnson Co., 8.72% due 11/01/2024...................... 3,000,000 3,035,130 A A1 1,000,000 PepsiCo, Inc., 6.125% due 1/15/1998....................... 993,060 944,290 A A2 4,000,000 Philip Morris Corp. Inc., 9.00% due 1/01/2001................... 4,071,540 4,048,360 AA Aa1 4,000,000 Wal-Mart Stores, Inc., 8.50% due 9/15/2024....................... 3,926,560 3,911,280 ------------- ------------ 37,838,190 35,383,585 - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIAL--ENERGY-- 4.0% BP America Inc.: A+ Aa3 1,000,000 9.50% due 1/01/1998............... 1,169,680 1,029,790 A+ Aa3 4,865,000 9.375% due 11/01/2000............. 5,363,565 5,104,601 AA- A1 5,500,000 7.875% due 5/15/2002.............. 5,972,510 5,376,910 Texaco Capital Inc.: A+ A1 1,500,000 9.00% due 12/15/1999.............. 1,731,670 1,542,975 A+ A1 1,000,000 8.875% due 2/15/2021.............. 999,860 1,048,440 A+ A1 1,000,000 8.625% due 11/15/2031............. 1,045,390 993,930 ------------- ------------ 16,282,675 15,096,646 - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIAL--OTHER--5.8% AA- Aa2 2,000,000 Archer-Daniels-Midland Co., 8.875% due 4/15/2011................... 2,159,000 2,079,680 AA- A1 5,000,000 Capital Cities/ABC, Inc., 8.875% due 12/15/2000.................. 5,846,030 5,124,500 A- A3 1,000,000 Carnival Cruise Lines, Inc., 6.15% due 10/01/2003.................. 891,530 853,840 AA+ Aa1 2,000,000 Ford Motor Credit Company, 9.50% due 6/01/2010................... 2,217,880 2,113,320
104 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE INDUSTRY RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES - ------------------------------------------------------------------------------------------------------------------------ INDUSTRIAL--OTHER (CONCLUDED) A- A3 $ 6,250,000 International Paper Co., 9.70% due 3/15/2000....................... $ 7,418,447 $ 6,595,750 AA Aa2 5,890,000 Kaiser Foundation Hospital, 9.55% due 7/15/2005................... 6,625,366 6,325,035 ------------- ------------ 25,158,253 23,092,125 - ------------------------------------------------------------------------------------------------------------------------ SUPRANATIONAL--5.3% Asian Development Bank: AAA Aaa 1,000,000 10.75% due 6/01/1997.............. 1,084,890 1,055,610 AAA Aaa 3,000,000 8.50% due 5/02/2001............... 3,224,400 3,039,870 European Investment Bank: AAA Aaa 2,000,000 8.875% due 3/01/2001.............. 2,380,320 2,061,020 AAA Aaa 5,000,000 9.125% due 6/01/2002.............. 6,147,500 5,246,450 Inter-American Development Bank Co.: AAA Aaa 2,000,000 8.875% due 6/01/2009.............. 2,481,700 2,117,000 AAA Aaa 4,000,000 8.50% due 3/15/2011............... 4,910,200 4,070,320 AAA Aaa 3,000,000 International Bank for Reconstruction & Development, 12.375% due 10/15/2002.......... 3,817,430 3,692,850 ------------- ------------ 24,046,440 21,283,120 - ------------------------------------------------------------------------------------------------------------------------ TRANSPORTATION SERVICES--5.2% AA A1 9,500,000 Boeing Co. (The), 6.35% due 6/15/2003....................... 8,549,905 8,362,945 A A2 3,640,000 Conrail Inc., 9.75% due 6/01/2000....................... 4,047,134 3,823,856 Southwest Airlines, Inc.: A- Baa1 3,500,000 9.40% due 7/01/2001............... 4,021,990 3,629,990 A- Baa1 4,000,000 8.75% due 10/15/2003.............. 4,417,060 4,054,000 A- Baa1 1,000,000 7.875% due 9/01/2007.............. 992,600 935,530 ------------- ------------ 22,028,689 20,806,321 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES-- COMMUNICATIONS--1.3% GTE Corp.: BBB+ A3 1,000,000 8.85% due 3/01/1998............... 1,143,360 1,009,580 BBB+ Baa1 1,000,000 9.10% due 6/01/2003............... 1,221,680 1,024,850 AA- Aa3 2,000,000 Pacific Bell, Inc., 8.70% due 6/15/2001....................... 2,293,800 2,039,200 A+ A1 1,000,000 Southwestern Bell Telecommunications Corp., 6.125% due 3/01/2000................... 1,005,000 913,890 ------------- ------------ 5,663,840 4,987,520 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES--ELECTRIC--4.6% AA- Aa2 7,000,000 Duke Power Co., 8.00% due 11/01/1999...................... 6,966,520 6,957,440 A- A3 3,000,000 Georgia Power Co., 6.125% due 9/01/1999....................... 2,892,720 2,767,770 A A2 1,000,000 Pennsylvania Power & Light Co., 7.75% due 5/01/2002............. 995,100 960,400 A A2 7,500,000 Virginia Electric & Power Co., 8.625% due 10/01/2024........... 7,416,540 7,396,028 ------------- ------------ 18,270,880 18,081,638 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES--GAS--1.8% AA- A1 7,000,000 Consolidated Natural Gas Co., 8.75% due 6/01/1999............. 7,448,861 7,089,880 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CORPORATE BONDS & NOTES-- 78.2% 326,714,570 306,172,180 - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & AGENCY OBLIGATIONS - ------------------------------------------------------------------------------------------------------------------------ NR+ Aaa 5,000,000 Federal Home Loan Bank, 5.00% due FEDERAL AGENCY 5/06/1996....................... OBLIGATIONS--4.4% 4,980,500 4,989,950 Federal National Mortgage Association: NR+ Aaa 7,000,000 7.85% due 9/10/2004............... 6,925,569 6,715,590 NR+ Aaa 2,000,000 8.25% due 10/12/2004.............. 1,975,937 1,963,120 NR+ Aaa 3,500,000 8.55% due 12/10/2004.............. 3,497,266 3,469,375 ------------- ------------ 17,379,272 17,138,035 - ------------------------------------------------------------------------------------------------------------------------
105 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
S&P MOODY'S FACE VALUE RATINGS RATINGS AMOUNT ISSUE COST (NOTE 1A) - -------------------------------------------------------------------------------- US GOVERNMENT OBLIGATIONS - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT US Treasury Notes & Bonds: OBLIGATIONS--7.3% AAA Aaa $ 2,500,000 8.75% due 8/15/2000............... $ 2,976,172 $ 2,602,350 AAA Aaa 9,500,000 7.875% due 11/15/2004............. 9,440,785 9,526,695 AAA Aaa 2,000,000 7.50% due 11/15/2016.............. 2,219,480 1,898,120 AAA Aaa 1,000,000 8.125% due 8/15/2021.............. 1,227,187 1,016,870 AAA Aaa 14,000,000 7.50% due 11/15/2024.............. 13,688,151 13,391,840 ------------- ------------ 29,551,775 28,435,875 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT OBLIGATIONS-- 11.7% 46,931,047 45,573,910 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM SECURITIES - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER**--6.5% 12,000,000 American Express Credit Corp., 5.875% due 1/03/1995............ 11,992,167 11,992,167 13,300,000 General Electric Capital Corp., 5.25% due 1/06/1995............. 13,286,423 13,286,423 ------------- ------------ 25,278,590 25,278,590 - ------------------------------------------------------------------------------------------------------------------------ REPURCHASE 1,698,000 UBS Securities Funding Inc., AGREEMENT***--2.0% purchased on 12/30/1994 to yield 3.50% to 1/03/1995.............. 1,698,000 1,698,000 6,077,000 UBS Securities Funding Inc., purchased on 12/30/1994 to yield 5.75% to 1/03/1995.............. 6,077,000 6,077,000 ------------- ------------ 7,775,000 7,775,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES--8.5% 33,053,590 33,053,590 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS--98.4%.......... $ 406,699,207 384,799,680 ------------- ------------- OTHER ASSETS LESS LIABILITIES-- 1.6%............................ 6,434,495 ------------ NET ASSETS--100.0%................ $391,234,175 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
* Corresponding industry groups for foreign securities, which are denominated in US dollars. (1) Electric Utility (2) Financial Institution (3) Government Entity (4) Industrial Mining (5) Insurance ** Commercial Paper is traded on a discount basis and amortized to maturity. The interest rate shown is the discount rate paid at the time of purchase by the Fund. *** Repurchase Agreements are fully collateralized by US Government Obligations. + Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. 106 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ ALUMINUM 45,000 Aluminum Co. of America.............. $ 3,824,580 $ 3,898,125 0.8% - ------------------------------------------------------------------------------------------------------------------------ APPLIANCES 395,300 Singer Co., N.V...................... 13,068,067 11,809,588 2.5 550,000 Sunbeam-Oster Inc.................... 11,293,706 14,162,500 3.1 ------------- ------------- ---------- 24,361,773 25,972,088 5.6 - ------------------------------------------------------------------------------------------------------------------------ AUTO & TRUCK 30,000 Consorcio G Grupo Dina S.A. de C.V. (ADR) (a).......................... 577,769 285,000 0.1 - ------------------------------------------------------------------------------------------------------------------------ BANKING 60,000 + Bank of New York Co. (Warrants) (b)................................ 433,750 577,500 0.1 220,000 Bank of New York, Inc................ 6,267,283 6,380,000 1.4 175,000 BankAmerica Corp..................... 8,029,172 6,912,500 1.5 207,000 Espirito Santo Financial Holdings S.A. (ADR) (a)..................... 2,944,953 2,768,625 0.6 ------------- ------------- ---------- 17,675,158 16,638,625 3.6 - ------------------------------------------------------------------------------------------------------------------------ BEVERAGES 39,000 Panamerican Beverage, Inc. (Class A)................................. 1,418,965 1,233,375 0.3 - ------------------------------------------------------------------------------------------------------------------------ CHEMICALS 133,000 du Pont (E.I.) de Nemours & Co....... 7,786,636 7,481,250 1.6 238,100 Eastman Chemical Co.................. 12,207,346 12,024,050 2.6 150,000 IMC Global Inc....................... 5,797,935 6,487,500 1.4 100,000 Rohm and Haas Co..................... 5,741,215 5,712,500 1.2 ------------- ------------- ---------- 31,533,132 31,705,300 6.8 - ------------------------------------------------------------------------------------------------------------------------ COMMUNICATION EQUIPMENT 350,000 ADC Telecommunications Inc........... 12,373,105 17,325,000 3.7 315,000 DSC Communications Corp.............. 7,527,792 11,340,000 2.5 75,000 Motorola, Inc........................ 3,879,432 4,340,625 0.9 85,000 Tellabs, Inc......................... 2,227,494 4,717,500 1.0 ------------- ------------- ---------- 26,007,823 37,723,125 8.1 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER SERVICES 385,000 Computer Sciences Corp............... 12,262,440 19,635,000 4.2 65,000 General Motors Corp. (Class E)....... 2,552,056 2,502,500 0.5 ------------- ------------- ---------- 14,814,496 22,137,500 4.7 - ------------------------------------------------------------------------------------------------------------------------ COMPUTER EQUIPMENT 35,000 International Business Machines Corp............................... 2,486,568 2,572,500 0.6 220,000 + Solectron Corp....................... 5,164,478 6,050,000 1.3 ------------- ------------- ---------- 7,651,046 8,622,500 1.9 - ------------------------------------------------------------------------------------------------------------------------ CONSUMER-- 100,000 Duracell International, Inc.......... 4,202,024 4,337,500 0.9 MISCELLANEOUS - ------------------------------------------------------------------------------------------------------------------------ CONSUMER--SERVICES 200,000 Block (H & R), Inc................... 8,204,393 7,425,000 1.6 - ------------------------------------------------------------------------------------------------------------------------ DRUG STORES 50,000 + Revco D.S., Inc. 1,158,190 1,181,250 0.3 - ------------------------------------------------------------------------------------------------------------------------ ELECTRICAL EQUIPMENT 215,000 Grainger (W.W.) Inc.................. 13,189,353 12,416,250 2.7 - ------------------------------------------------------------------------------------------------------------------------ ENERGY RELATED 350,000 + California Energy Co., Inc........... 6,491,715 5,468,750 1.2 - ------------------------------------------------------------------------------------------------------------------------ ENGINEERING & 135,000 + Empresas ICA Sociedad Controladora, CONSTRUCTION S.A. de C.V. (ADR) (a)............. 3,612,410 2,092,500 0.4 - ------------------------------------------------------------------------------------------------------------------------ ENVIRONMENTAL CONTROL 775,000 + Wheelabrator Technologies, Inc....... 13,330,204 11,431,250 2.5 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--AUSTRALIA 130,000 News Corp., Ltd. (ADR) (a) (8)....... 2,733,083 2,031,250 0.4 65,000 News Corp., Ltd. (Preferred) (ADR) (a) (8)............................ 839,808 901,875 0.2 ------------- ------------- ---------- 3,572,891 2,933,125 0.6 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--CANADA 180,000 NOVA Corp. (2)....................... 1,891,620 1,665,000 0.4 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--CHILE 39,000 + Banco O'Higgins (ADR) (a) (9)........ 581,650 667,875 0.1 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--DENMARK 40,000 + Tele Danmark A/S (ADR) (a) (7)....... 941,040 1,020,000 0.2 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--ITALY 30,000 Istituto Mobiliare Italiano S.p.A. (ADR) (a) (9)............................ 664,580 551,250 0.1 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN--MEXICO 125,000 Grupo Financiero Serfin, S.A. de C.V. (ADR) (a) (9)...................... 3,216,645 937,500 0.2 - ------------------------------------------------------------------------------------------------------------------------
107 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
SHARES VALUE PERCENT OF INDUSTRY HELD COMMON STOCKS & WARRANTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ FOREIGN-- UNITED KINGDOM 30,220 British Petroleum PLC (ADR) (a) (6)................................ $ 2,239,380 $ 2,413,822 0.5% 35,000 Hanson PLC (ADR) (a) (5)............. 774,681 630,000 0.1 80,000 Reuters Holdings PLC (ADR) (a) (1)... 2,583,407 3,510,000 0.8 ------------- ------------- ---------- 5,597,468 6,553,822 1.4 - ------------------------------------------------------------------------------------------------------------------------ HEALTHCARE 550,000 + Humana Inc........................... 10,126,201 12,443,750 2.7 260,000 Physician Corp....................... 5,391,368 5,265,000 1.1 50,000 Vivra Inc............................ 965,297 1,400,000 0.3 ------------- ------------- ---------- 16,482,866 19,108,750 4.1 - ------------------------------------------------------------------------------------------------------------------------ HOUSEHOLD PRODUCTS 220,000 Procter & Gamble Co.................. 11,868,180 13,640,000 2.9 - ------------------------------------------------------------------------------------------------------------------------ INSURANCE 177,100 ITT Corp............................. 15,055,943 15,695,488 3.4 - ------------------------------------------------------------------------------------------------------------------------ MULTI-INDUSTRY 100,000 Allied Signal Inc.................... 3,616,074 3,400,000 0.7 - ------------------------------------------------------------------------------------------------------------------------ OFFICE EQUIPMENT 650,000 Danka Business Systems PLC (ADR) (a)................................ 10,368,086 13,893,750 3.0 - ------------------------------------------------------------------------------------------------------------------------ OIL--INTEGRATED 165,000 Mobil Corp........................... 12,823,266 13,901,250 3.0 150,000 Phillips Petroleum Co................ 5,106,545 4,912,500 1.1 80,000 Royal Dutch Petroleum Co. N.V. (ADR) (a)................................ 8,236,860 8,600,000 1.9 ------------- ------------- ---------- 26,166,671 27,413,750 6.0 - ------------------------------------------------------------------------------------------------------------------------ PACKAGING 120,000 Crown Cork & Seal Co., Inc........... 4,427,472 4,530,000 1.0 - ------------------------------------------------------------------------------------------------------------------------ PHARMACEUTICALS 70,000 American Home Products Corp.......... 4,364,147 4,392,500 0.9 325,000 Merck & Co., Inc..................... 11,818,350 12,390,625 2.7 ------------- ------------- ---------- 16,182,497 16,783,125 3.6 - ------------------------------------------------------------------------------------------------------------------------ PHOTOGRAPHY 110,000 Eastman Kodak Co..................... 5,427,692 5,252,500 1.1 - ------------------------------------------------------------------------------------------------------------------------ RAILROADS 405,000 + Southern Pacific Rail Corp........... 8,405,529 7,340,625 1.6 - ------------------------------------------------------------------------------------------------------------------------ RETAIL 95,000 Phillips-Van Heusen Corp............. 2,715,283 1,448,750 0.3 - ------------------------------------------------------------------------------------------------------------------------ SOAP 25,000 Unilever N.V. (ADR) (a).............. 2,900,362 2,912,500 0.6 - ------------------------------------------------------------------------------------------------------------------------ TIRES & RUBBER 50,000 Cooper Tire & Rubber Co.............. 1,313,940 1,181,250 0.3 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES-- COMMUNICATIONS 60,000 + ALC Communications Corp.............. 1,797,300 1,867,500 0.4 200,000 GTE Corp............................. 6,392,691 6,075,000 1.3 500,000 LDDS Communications Inc.............. 10,793,071 9,687,500 2.1 340,000 MCI Communications Corp.............. 9,152,123 6,247,500 1.3 180,000 + Southwestern Bell Corp............... 7,664,078 7,267,500 1.6 110,000 Telefonos de Mexico, S.A. de C.V. (ADR) (a).......................... 6,696,820 4,510,000 1.0 ------------- ------------- ---------- 42,496,083 35,655,000 7.7 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS & WARRANTS 361,945,603 375,152,198 80.8 - ------------------------------------------------------------------------------------------------------------------------ FACE AMOUNT SHORT-TERM SECURITIES - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER* 10,000,000 Ciesco L.P., 5.60% due 1/05/1995.... 9,990,667 9,990,667 2.1 5,000,000 Corporate Receivables Corp., 6.00% due 1/10/1995..................... 4,990,833 4,990,833 1.1 19,806,000 General Electric Capital Corp., 5.80% due 1/03/1995............... 19,793,236 19,793,236 4.3 5,000,000 Heinz (H.J.) Co., 5.65% due 1/09/1995......................... 4,992,222 4,992,222 1.1 12,000,000 IBM Credit Corp., 5.78% due 1/19/1995......................... 11,961,800 11,961,800 2.6 10,103,000 Premium Funding, Inc., 6.12% due 2/06/1995......................... 10,037,735 10,037,735 2.1 10,000,000 USL Capital Corp., 6.05% due 1/23/1995......................... 9,959,667 9,959,667 2.1 ------------- ------------- ---------- 71,726,160 71,726,160 15.4 - ------------------------------------------------------------------------------------------------------------------------
108 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
FACE VALUE PERCENT OF AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT & $ 11,000,000 Federal Home Loan Bank, 5.72% due AGENCY OBLIGATION* 1/17/1995......................... $ 10,968,760 $ 10,968,760 2.4% 7,000,000 Federal National Mortgage Association, 5.77% due 1/27/1995......................... 6,968,585 6,968,585 1.5 ------------- ------------- ---------- 17,937,345 17,937,345 3.9 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES 89,663,505 89,663,505 19.3 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS 451,609,108 464,815,703 100.1 - ------------------------------------------------------------------------------------------------------------------------ OPTIONS SHARES PREMIUMS WRITTEN COVERED ISSUE RECEIVED - ------------------------------------------------------------------------------------------------------------------------ CALL OPTIONS WRITTEN 8,700 ADC Telecommunications Inc., expiring January 1995 at US$ 50... (10,976) (9,788) 0.0 20,000 ITT Corp., expiring January 1995 at US$ 90............................ (24,191) (22,500) 0.0 ------------- ------------- ---------- (35,167) (32,288) 0.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL OPTIONS WRITTEN (35,167) (32,288) 0.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN.............. $ 451,573,941 464,783,415 100.1 ------------- ------------- LIABILITIES IN EXCESS OF OTHER ASSETS.................. (423,533) (0.1) ------------- ---------- NET ASSETS............................................. $ 464,359,882 100.0% ------------- ---------- ------------- ---------- - ------------------------------------------------------------------------------------------------------------------------
(a) American Depositary Receipt (ADR). (b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustments under certain conditions until the expiration date. * Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. + Non-income producing security.
Corresponding industry groups for foreign securities: (1) Business Services (6) Petroleum (2) Chemicals (7) Telecommunications (3) Financial Services (8) Media-Publishing (4) Food-Processing (9) Banking (5) Multi-Industry (10) Soap
See Notes to Financial Statements. 109 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
FACE INTEREST MATURITY VALUE AMOUNT ISSUE RATE* DATE (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ BANK NOTES--3.1% $1,000,000 PNC Bank N.A..................................... 5.15 % 2/22/95 $ 998,406 - ------------------------------------------------------------------------------------------------------------------------ TOTAL BANK NOTES (COST--$999,900) 998,406 - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER--57.6% 1,500,000 ABN-AMRO North American Finance Inc.............. 5.42 1/04/95 1,498,854 500,000 ANZ (Delaware), Inc.............................. 5.05 1/20/95 498,338 1,000,000 Abbey National N.A. Corp......................... 5.075 3/02/95 989,322 1,500,000 Allomon Funding Corp............................. 5.80 1/17/95 1,495,650 500,000 Avco Financial Services, Inc..................... 5.68 2/14/95 496,167 204,000 BTR Dunlop Finance, Inc.......................... 5.50 1/23/95 203,218 500,000 Bankers Trust New York Corp...................... 5.41 1/27/95 497,764 1,000,000 Bankers Trust New York Corp...................... 5.58 4/12/95 981,975 500,000 Cheltenham & Glouster Building Society........... 5.08 3/09/95 494,058 1,300,000 Deer Park Refining L.P........................... 6.10 1/19/95 1,295,594 500,000 Ford Motor Credit Co............................. 5.42 1/11/95 499,080 1,000,000 General Electric Capital Corp.................... 5.48 1/24/95 996,007 300,000 Goldman Sachs Group L.P.......................... 5.15 3/01/95 296,848 300,000 Goldman Sachs Group L.P.......................... 5.25 3/13/95 296,228 218,000 Hanson Finance (UK) PLC.......................... 5.40 1/17/95 217,379 1,000,000 MCA Funding Corp................................. 5.50 1/25/95 995,847 1,400,000 Norfolk Southern Corporation..................... 5.75 2/07/95 1,391,021 1,000,000 Ontario Hydro.................................... 5.44 1/06/95 998,931 1,000,000 Panasonic Finance, Inc........................... 5.50 1/26/95 995,688 1,320,000 Preferred Receivables Funding Corp............... 5.90 2/02/95 1,312,645 609,000 Transamerica Finance Corp........................ 5.32 1/03/95 608,628 1,000,000 Transamerica Finance Corp........................ 5.40 1/18/95 996,992 500,000 WCP Funding Inc.................................. 6.17 3/03/95 494,575 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COMMERCIAL PAPER (COST--$18,558,638) 18,550,809 - ------------------------------------------------------------------------------------------------------------------------ CORPORATE NOTES+--3.1% 1,000,000 Goldman Sachs Group L.P.......................... 6.07 5/26/95 1,000,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CORPORATE NOTES--(COST--$1,000,000) 1,000,000 - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT, AGENCY & INSTRUMENTALITY 320,000 Federal National Mortgage Association............ 5.04 2/22/95 317,144 OBLIGATIONS-- 1,000,000 US Treasury Bills................................ 4.905 3/16/95 988,537 DISCOUNT--5.9% 600,000 US Treasury Bills................................ 6.335 7/06/95 580,738 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT & AGENCY OBLIGATIONS-- DISCOUNT (COST--$1,888,010) 1,886,419 - ------------------------------------------------------------------------------------------------------------------------ US GOVERNMENT, AGENCY & INSTRUMENTALITY 500,000 Federal Farm Credit Bank......................... 5.19 3/01/95 499,063 OBLIGATIONS-- 1,000,000 Federal Home Loan Bank........................... 5.79 4/28/95 997,500 NON-DISCOUNT--31.8% 500,000 Federal Home Loan Bank+.......................... 5.93 12/28/95 500,000 1,000,000 Federal National Mortgage Association+........... 5.83 5/13/96 1,000,000 1,000,000 Federal National Mortgage Association+........... 6.0925 10/11/96 1,000,000 1,000,000 Federal National Mortgage Association+........... 5.95 5/19/97 1,000,000 1,000,000 Federal National Mortgage Association+........... 6.00 5/14/98 1,000,000 500,000 Student Loan Marketing Association+.............. 6.32 3/01/95 500,412 1,000,000 Student Loan Marketing Association+.............. 6.32 3/20/95 1,001,148 1,000,000 Student Loan Marketing Association+.............. 6.32 3/23/95 1,000,539 450,000 Student Loan Marketing Association+.............. 6.07 3/20/96 450,000 100,000 Student Loan Marketing Association+.............. 5.94 4/16/96 100,084 300,000 US Treasury Notes................................ 3.875 3/31/95 298,875 250,000 US Treasury Notes................................ 3.875 4/30/95 248,164 250,000 US Treasury Notes................................ 4.125 6/30/95 247,109 400,000 US Treasury Notes................................ 3.875 8/31/95 392,125 - ------------------------------------------------------------------------------------------------------------------------ TOTAL US GOVERNMENT & AGENCY OBLIGATIONS--NON-DISCOUNT (COST--$10,252,029) 10,235,019 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST--$32,698,577)--101.5%.......................... 32,670,653 LIABILITIES IN EXCESS OF OTHER ASSETS--(1.5%).......................... (474,622) NET ASSETS--100.0%..................................................... $32,196,031 - ------------------------------------------------------------------------------------------------------------------------
* Commercial Paper and certain US Government, Agency & Instrumentality Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. Other securities bear interest rate at the rates shown, payable at fixed dates or upon maturity. The interest rates on variable rate securities are adjusted periodically based upon appropriate indexes. The interest rates shown are the rates in effect at December 31, 1994. + Variable Rate Note.
See Notes to Financial Statements. 110 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (IN US DOLLARS) - --------------------------------------------------------------------------------
VALUE PERCENT OF AFRICA INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ SOUTH AFRICA FOREIGN GOVERNMENT US $ 1,000,000 Republic of South Africa, OBLIGATIONS 9.625% due 12/15/1999... $ 996,850 $ 970,000 1.3% TOTAL FIXED-INCOME INVESTMENTS IN AFRICA 996,850 970,000 1.3 - ------------------------------------------------------------------------------------------------------------------------ LATIN AMERICA AND THE CARIBBEAN - ------------------------------------------------------------------------------------------------------------------------ ARGENTINA TELECOMMUNICATIONS 500,000 Telefonica de Argentina, S.A., 11.875% due11/01/2004........... 490,040 450,000 0.6 TOTAL FIXED-INCOME INVESTMENTS IN ARGENTINA............... 490,040 450,000 0.6 - ------------------------------------------------------------------------------------------------------------------------ MEXICO ENERGY 500,000 Petroleos Mexicanos, 8.25% due 2/04/1998 (ADR) (d)..................... 521,875 447,500 0.6 RETAIL STORES 250,000 Controladora Comercial Mexicana, S.A. de C.V., 8.75% due 4/21/1998..... 263,125 210,000 0.3 TOTAL FIXED-INCOME INVESTMENTS IN MEXICO 785,000 657,500 0.9 - ------------------------------------------------------------------------------------------------------------------------ TRINIDAD & FOREIGN GOVERNMENT 350,000 Republic of Trinidad & TOBAGO OBLIGATIONS Tobago, 11.50% due 11/20/1997.............. 368,500 350,000 0.5 TOTAL FIXED-INCOME INVESTMENTS IN TRINIDAD & TOBAGO 368,500 350,000 0.5 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN LATIN AMERICAN AND CARIBBEAN SECURITIES 1,643,540 1,457,500 2.0 - ------------------------------------------------------------------------------------------------------------------------ NORTH AMERICA - ------------------------------------------------------------------------------------------------------------------------ CANADA FOREIGN GOVERNMENT OBLIGATIONS C $ 2,005,000 Canadian Government Bond, 7.75% due 9/01/1999..... 1,437,271 1,363,017 1.8 TOTAL FIXED-INCOME INVESTMENTS IN CANADA 1,437,271 1,363,017 1.8 - ------------------------------------------------------------------------------------------------------------------------ UNITED STATES AIR TRANSPORT US $ 250,000 Delta Air Lines, Inc., 9.30% due 1/02/2010..... 246,925 233,804 0.3 500,000 USAir Inc., 10.375% due 3/01/2013............... 504,688 407,500 0.5 100,000 United Air Pass-Through, 10.125% due 3/22/2015... 109,036 93,935 0.1 ----------- ----------- ---------- 860,649 735,239 0.9 BROADCASTING & 250,000 Continental Cablevision PUBLISHING Inc., 9.50% due 8/01/2013............... 250,000 228,750 0.3 500,000 SCI Television Inc., 11.00% due 6/30/2005.... 520,625 505,000 0.7 ----------- ----------- ---------- 770,625 733,750 1.0 BUILDING MATERIALS 250,000 Inter-City Products Corp., 9.75% due 3/01/2000..... 242,500 233,125 0.3 500,000 Pacific Lumber Co., 10.50% due 3/01/2003........... 492,000 465,000 0.6 ----------- ----------- ---------- 734,500 698,125 0.9 BUILDING PRODUCTS 250,000 American Standard Inc., 9.25% due 12/01/2016...... 251,875 228,750 0.3 CELLULAR TELEPHONES 760,000 Dial Page, Inc., 12.25% & PAGING due 2/15/2000........... 787,150 760,000 1.0 CHEMICALS 500,000 Agriculture Minerals Co., L.P., 10.75% due 9/30/2003............... 501,875 505,000 0.7 500,000 Envirodyne Industries Inc., 10.25% due 12/01/2001.............. 509,375 350,000 0.5 1,225,000 G-I Holdings, Inc., 11.38%* due 10/01/1998.............. 792,766 747,250 1.0 500,000 Laroche Industries Inc., 13.00% due 8/15/2004.... 500,000 460,000 0.6 ----------- ----------- ---------- 2,304,016 2,062,250 2.8
111 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
NORTH AMERICA VALUE PERCENT OF (CONTINUED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ UNITED STATES COMMUNICATIONS US $ 940,000 + American Telecasting Inc., (CONTINUED) 12.50%* due 6/15/1999... $ 525,521 $ 430,050 0.6% 250,000 Panamsat L.P., 9.75% due 8/01/2000............... 233,750 235,625 0.3 ----------- ----------- ---------- 759,271 665,675 0.9 CONGLOMERATES Coltec Industries Inc.: 150,000 9.75% due 11/01/1999...... 159,000 147,000 0.2 100,000 10.25% due 4/01/2002...... 107,000 98,000 0.1 Foamex L.P.: 191,000 9.50% due 6/01/2000....... 186,464 174,765 0.2 500,000 11.25% due 10/01/2002..... 498,125 475,000 0.6 500,000 JB Poindexter Co., Inc., 12.50% due 5/15/2004.... 500,000 465,000 0.6 500,000 Jordan Industries, Inc., 10.375% due 8/01/2003... 495,688 445,000 0.6 500,000 Sequa Corp., 9.375% due 12/15/2003.............. 508,750 440,000 0.6 500,000 Sherritt Gordon, Ltd., 9.75% due 4/01/2003..... 503,625 480,000 0.6 ----------- ----------- ---------- 2,958,652 2,724,765 3.5 CONSUMER-- 500,000 Coleman Holdings, Inc., PRODUCTS 11.09%* due 5/27/1998... 346,300 336,250 0.4 250,000 + Formica Corp., 14.843% due 9/15/2005 (c)........... 250,000 291,984 0.4 1,000,000 + Polymer Group Inc., 12.25% due 7/15/2002........... 1,001,250 980,000 1.3 1,000,000 Revlon Consumer Products Corp., 9.375% due 4/01/2001............... 870,055 895,000 1.2 ----------- ----------- ---------- 2,467,605 2,503,234 3.3 CONTAINERS 500,000 Anchor Glass Container Co., 9.875% due 12/15/2008.............. 493,125 430,000 0.6 500,000 Owens-Illinois, Inc., 11.00% due 12/01/2003... 512,500 518,750 0.7 500,000 Silgan Holdings, Inc., 13.25%* due 6/15/1996... 428,338 420,000 0.6 250,000 Stone-Consolidated Corp., 10.25% due 12/15/2000... 251,250 246,250 0.3 ----------- ----------- ---------- 1,685,213 1,615,000 2.2 ENERGY 100,000 + Clark Oil Co., 10.50% due 12/01/2001.............. 106,375 102,500 0.1 1,000,000 Clark R & M Holdings, Inc., 11.00%* due 2/15/2000............... 578,372 570,000 0.8 250,000 + Consolidated-Hydro Inc., 11.80%* due 7/15/2003... 166,660 145,000 0.2 250,000 Noble Drilling Corp., 9.25% due 10/01/2003.... 250,000 236,250 0.3 500,000 Trans Texas Gas Corp., 10.50% due 9/01/2000.... 493,750 477,500 0.6 500,000 Triton Energy Corp., 9.68%* due 11/01/1997... 377,714 367,500 0.5 ----------- ----------- ---------- 1,972,871 1,898,750 2.5 ENTERTAINMENT 300,000 Marvel Holdings, Inc., 9.125%* due 2/15/1998... 265,500 261,000 0.3 350,000 Spectravision Inc., 11.50%* due 10/01/1996.............. 287,709 150,500 0.2 1,000,000 Videotron Holdings PLC, 11.817%* due 7/01/1999.. 582,206 525,000 0.7 ----------- ----------- ---------- 1,135,415 936,500 1.2 FINANCIAL SERVICES 500,000 Penn Financial Corp., 9.25% due 12/15/2003.... 498,750 440,000 0.6 500,000 Reliance Group Holdings, Inc., 9.00% due 11/15/2000.............. 460,000 455,000 0.6 ----------- ----------- ---------- 958,750 895,000 1.2
112 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
NORTH AMERICA VALUE PERCENT OF (CONTINUED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ UNITED STATES FOOD & BEVERAGE US $ 500,000 Chiquita Brands (CONTINUED) International Corp., 9.125% due 3/01/2004.... $ 497,500 $ 435,000 0.6% 250,000 Coca-Cola Bottling Co., 9.00% due 11/15/2003.... 250,625 219,375 0.3 500,000 Cumberland Farms, 10.50% due 10/01/2003.......... 489,375 415,000 0.6 750,000 Del Monte Corp., 10.00% due 5/01/2003........... 740,000 510,000 0.7 1,000,000 Grand Union Co., 12.25% due 7/15/2002........... 917,438 395,000 0.5 300,000 Penn Traffic Co., 9.625% due 4/15/2005........... 309,000 261,000 0.3 500,000 Pueblo Xtra International Inc., 9.50% due 8/01/2003............... 500,938 420,000 0.6 250,000 Specialty Foods Corp., 10.25% due 8/15/2001.... 250,000 222,500 0.3 ----------- ----------- ---------- 3,954,876 2,877,875 3.9 HOLDING COMPANY 500,000 Astrum International Corp., 11.50% due 6/08/2003............... 504,375 505,000 0.7 HOME BUILDING 500,000 Del E. Webb Corp., 9.00% due 2/15/2006........... 500,000 380,000 0.5 250,000 Ryland Group, Inc., 9.625% due 6/01/2004........... 250,000 210,000 0.3 ----------- ----------- ---------- 750,000 590,000 0.8 HOTELS & CASINOS 500,000 Aztar Corp., 11.00% due 10/01/2002.............. 507,813 455,000 0.6 1,000,000 Bally's Park Place Funding, Inc., 9.25% due 3/15/2004............... 920,000 860,000 1.1 1,100,000 Greater Bay Properties, Inc., Property Funding Corp., 10.875% due 1/15/2004............... 990,750 891,000 1.2 423,000 Host Marriott Hospitality Corp., 10.375% due 6/15/2011............... 431,989 423,000 0.6 1,000,000 JQ Hammons Hotel, 8.875% due 2/15/2004........... 887,500 865,000 1.2 250,000 Mirage Resorts Inc., 9.25% due 3/15/2003........... 248,750 240,000 0.3 500,000 Showboat, Inc., 13.00% due 8/01/2009............... 500,000 477,500 0.6 750,000 Trump Plaza Funding, Inc., 10.875% due 6/15/2001... 741,250 570,000 0.8 101,626 Trump Taj Mahal Funding, Inc., 11.35% due 11/15/1999 (a) (c)...... 95,717 65,112 0.1 ----------- ----------- ---------- 5,323,769 4,846,612 6.5 INDUSTRIAL SERVICES 1,050,000 ADT Operations, 9.25% due 8/01/2003............... 1,041,062 971,250 1.3 INDUSTRIALS 500,000 Repap Wisconsin, Inc., 9.25% due 2/01/2002..... 436,250 450,000 0.6 METALS & MINING 250,000 Maxxam Group, Inc., 12.25%* due 8/01/2003... 163,152 142,500 0.2 PAPER 500,000 S.D. Warren Co., 12.00% due 12/15/2004.......... 500,000 508,750 0.7 PAPER & FOREST 500,000 Fort Howard Corp., 9.00% PRODUCTS due 2/01/2006........... 500,000 430,000 0.6 250,000 Riverwood International Corp., 11.25% due 6/15/2002............... 274,812 256,875 0.3 100,000 Stone Container Group, 10.75% due 10/01/2002... 99,000 99,500 0.1 ----------- ----------- ---------- 873,812 786,375 1.0 POLLUTION CONTROL 500,000 Mid-American Waste System, Inc., 12.25% due 2/15/2003............... 511,250 502,500 0.7
113 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
NORTH AMERICA VALUE PERCENT OF (CONCLUDED) INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ UNITED STATES RESTAURANTS & FOOD US $ 750,000 Flagstar Corp., 11.375% (CONCLUDED) SERVICES due 9/15/2003........... $ 762,500 $ 622,500 0.8% Foodmaker, Inc.: 250,000 9.75% due 6/01/2002....... 251,250 187,500 0.3 250,000 9.75% due 11/01/2003...... 246,562 188,125 0.3 ----------- ----------- ---------- 1,260,312 998,125 1.4 RETAIL 500,000 Bradlees Inc., 11.00% due 8/01/2002............... 489,375 455,000 0.6 STEEL 500,000 WCI Steel Inc., 10.50% due 3/01/2002............... 500,000 480,000 0.6 TELECOMMUNICATIONS 500,000 USA Mobile Communications Holdings, Inc., 9.50% due 2/01/2004........... 454,375 405,000 0.5 TEXTILES 1,500,000 WestPoint Stevens Inc., 9.375% due 12/15/2005... 1,451,875 1,357,500 1.8 TRANSPORT SERVICES 250,000 Eletson Holdings Inc., 9.25% due 11/15/2003.... 250,000 225,000 0.3 1,050,000 Transtar Holdings, 11.00%* due 12/15/1999.......... 636,260 525,000 0.7 250,000 Viking Star Shipping Co., 9.625% due 7/15/2003.... 250,937 230,000 0.3 ----------- ----------- ---------- 1,137,197 980,000 1.3 US GOVERNMENT & 1,000,000 Federal National Mortgage AGENCY OBLIGATIONS Association, 8.55% due 12/10/2004.............. 999,219 990,750 1.3 UTILITIES 494,000 Beaver Valley Funding Corp., 9.00% due 6/01/2017............... 466,212 350,740 0.5 94,668 + Midland Funding Corp. II, 10.33% due 7/23/2002.... 92,774 89,461 0.1 233,382 + Tucson Electric Power Co., 10.732% due 1/01/2013... 223,464 213,545 0.3 ----------- ----------- ---------- 782,450 653,746 0.9 TOTAL FIXED-INCOME INVESTMENTS IN THE UNITED STATES 38,779,941 34,958,021 46.5 - ------------------------------------------------------------------------------------------------------------------------ SHARES CONVERTIBLE PREFERRED STOCKS & HELD WARRANTS - ------------------------------------------------------------------------------------------------------------------------ UNITED STATES BROADCASTING & 9,000 K-III Communications Corp. PUBLISHING (Preferred)............. 245,250 229,500 0.3 COMMUNICATIONS 4,700 American Telecasting Inc. (Warrants) (b).......... 11,222 9,400 0.0 TOTAL CONVERTIBLE PREFERRED STOCKS & WARRANTS IN THE UNITED STATES 256,472 238,900 0.3 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN NORTH AMERICAN SECURITIES 40,473,684 36,559,938 48.6 - ------------------------------------------------------------------------------------------------------------------------
114 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
PACIFIC VALUE PERCENT OF BASIN INDUSTRY FACE AMOUNT FIXED-INCOME INVESTMENTS COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ AUSTRALIA A $ 2,400,000 Australian Government Bond, FOREIGN GOVERNMENT 9.50% due 8/15/2003..... $ 1,765,774 $ 1,802,024 2.4% OBLIGATIONS-- REGIONAL & AGENCY 2,000,000 Queensland Treasury Corp., Global Notes, 8.00% due 7/14/1999............... 1,426,689 1,425,128 1.9 ----------- ----------- ---------- 3,192,463 3,227,152 4.3 TOTAL FIXED-INCOME INVESTMENTS IN AUSTRALIA 3,192,463 3,227,152 4.3 - ------------------------------------------------------------------------------------------------------------------------ NEW ZEALAND FOREIGN GOVERNMENT NZ$ 500,000 New Zealand Government OBLIGATIONS Bond, 10.00% due 3/15/2002............... 315,976 342,936 0.5 TOTAL FIXED-INCOME INVESTMENTS IN NEW ZEALAND 315,976 342,936 0.5 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN PACIFIC BASIN SECURITIES 3,508,439 3,570,088 4.8 - ------------------------------------------------------------------------------------------------------------------------ WESTERN EUROPE - ------------------------------------------------------------------------------------------------------------------------ DENMARK FOREIGN GOVERNMENT Denmark Government Bonds: OBLIGATIONS Dkr 9,500,000 9.00% due 11/15/1998.... 1,554,615 1,576,300 2.1 2,000,000 9.00% due 11/15/2000...... 344,014 329,944 0.4 ----------- ----------- ---------- 1,898,629 1,906,244 2.5 TOTAL FIXED-INCOME INVESTMENTS IN DENMARK 1,898,629 1,906,244 2.5 - ------------------------------------------------------------------------------------------------------------------------ ITALY FOREIGN GOVERNMENT Buoni Poliennali del OBLIGATIONS Tesoro (Italian Government Bonds): Lit 5,000,000,000 8.50% due 8/01/1997....... 3,003,205 2,861,594 3.8 1,000,000,000 12.00% due 9/18/1998...... 657,255 618,289 0.8 1,600,000,000 9.00% due 10/01/1998...... 968,720 908,923 1.2 2,000,000,000 8.50% due 1/01/1999....... 1,195,380 1,107,229 1.5 ----------- ----------- ---------- 5,824,560 5,496,035 7.3 TOTAL FIXED-INCOME INVESTMENTS IN ITALY 5,824,560 5,496,035 7.3 - ------------------------------------------------------------------------------------------------------------------------ SPAIN FOREIGN GOVERNMENT Government of Spain: OBLIGATIONS Esp 200,000,000 11.00% due 6/15/1997.... 1,556,019 1,510,452 2.0 340,000,000 10.25% due 11/30/1998..... 2,584,845 2,473,949 3.3 ----------- ----------- ---------- 4,140,864 3,984,401 5.3 TOTAL FIXED-INCOME INVESTMENTS IN SPAIN 4,140,864 3,984,401 5.3 - ------------------------------------------------------------------------------------------------------------------------ Government of Sweden: SWEDEN FOREIGN GOVERNMENT SEK 5,000,000 11.00% due 1/21/1999.... 661,734 686,440 0.9 OBLIGATIONS-- REGIONAL & AGENCY 6,000,000 SBAB, 11.00% due 1/21/1999............... 816,978 809,180 1.1 ----------- ----------- ---------- 1,478,712 1,495,620 2.0 TOTAL FIXED-INCOME INVESTMENTS IN SWEDEN 1,478,712 1,495,620 2.0 - ------------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM FOREIGN GOVERNMENT United Kingdom Gilt: OBLIGATIONS Pound 300,000 10.50% due 2/21/1997.... 498,511 489,620 0.7 Sterling 2,200,000 9.00% due 3/03/2000....... 3,494,087 3,489,342 4.6 1,400,000 7.00% due 11/06/2001...... 2,075,730 1,997,139 2.7 ----------- ----------- ---------- 6,068,328 5,976,101 8.0 TOTAL FIXED-INCOME INVESTMENTS IN THE UNITED KINGDOM 6,068,328 5,976,101 8.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN WESTERN EUROPEAN SECURITIES 19,411,093 18,858,401 25.1 - ------------------------------------------------------------------------------------------------------------------------
115 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONTINUED) (IN US DOLLARS) - --------------------------------------------------------------------------------
VALUE PERCENT OF FACE AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS - ------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER** $ 3,000,000 CXC Inc., 6.00% due 1/13/1995.............. $ 2,993,500 $ 2,993,500 4.0% 2,661,000 General Electric Capital Corp., 5.80% due 1/03/1995.............. 2,659,714 2,659,714 3.5 2,000,000 Matterhorn Capital Corp., 5.95% due 1/20/1995.... 1,993,389 1,993,389 2.7 ----------- ----------- ---------- 7,646,603 7,646,603 10.2 US GOVERNMENT & AGENCY 1,000,000 Federal Farm Credit Bank, OBLIGATIONS** 5.57% due 1/11/1995.... 998,298 998,298 1.3 Federal National Mortgage Association: 1,000,000 5.78% due 1/03/1995...... 999,518 999,518 1.3 2,500,000 5.45% due 1/11/1995...... 2,495,875 2,495,875 3.3 ----------- ----------- ---------- 4,493,691 4,493,691 5.9 TOTAL SHORT-TERM SECURITIES 12,140,294 12,140,294 16.1 - ------------------------------------------------------------------------------------------------------------------------ PREMIUMS OPTIONS PURCHASED FACE AMOUNT ISSUE PAID - ------------------------------------------------------------------------------------------------------------------------ CURRENCY PUT Pound 1,000,000 British Pound, expiring OPTIONS PURCHASED Sterling January 1995 at Pound Sterling1.545.......... 5,700 5,300 0.0 Esp 3,000,000 Spanish Peseta, expiring January 1995 at Pta 135.5.................. 14,250 11,400 0.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL OPTIONS PURCHASED 19,950 16,700 0.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS 78,193,850 73,572,921 97.9 - ------------------------------------------------------------------------------------------------------------------------ PREMIUMS RECEIVED OPTIONS WRITTEN - ------------------------------------------------------------------------------------------------------------------------ CURRENCY CALL Pound 1,000,000 British Pound, expiring OPTIONS WRITTEN Sterling January 1995 at Pound Sterling1.582.......... (4,100) (4,500) 0.0 Esp 3,000,000 Spanish Peseta, expiring January 1995 at Pta 129.5.................. (6,000) (7,500) 0.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL OPTIONS WRITTEN (10,100) (12,000) 0.0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS, NET OF OPTIONS WRITTEN............................ $78,183,750 73,560,921 97.9 ----------- ----------- UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS***..... (217,104) (0.3) OTHER ASSETS LESS LIABILITIES........................................ 1,806,099 2.4 ----------- ---------- NET ASSETS........................................................... $75,149,916 100.0% ----------- ---------- ----------- ---------- - ------------------------------------------------------------------------------------------------------------------------
(a) Each $1,000 face amount contains one non-detachable share of Taj Mahal Holding Corp.'s Class B redeemable Common Stock. (b) Warrants entitle the Fund to purchase a predetermined number of shares of common stock. The purchase price and number of shares are subject to adjustments under certain conditions until the expiration date. (c) Represents a pay-in-kind security which may pay interest/dividends in additional face/shares. (d) American Depositary Receipts. * Represents the yield to maturity. ** Commercial Paper and certain US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund.
116 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--WORLD INCOME FOCUS FUND SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 1994 (CONCLUDED) (IN US DOLLARS) - -------------------------------------------------------------------------------- *** Forward foreign exchange contracts as of December 31, 1994 were as follows:
- --------------------------------------------------------------------------------
UNREALIZED APPRECIATION EXPIRATION (DEPRECIATION) FOREIGN CURRENCY PURCHASED DATE (NOTE 1B) - ------------------------------------------------------------------------------------------------------------------------ C$ 1,370,000 ............................................ January 1995 $ (11,589) DM 763,647 ........................................... February 1995 2,462 Lit 939,020,000 ............................................ January 1995 7,709 - ------------------------------------------------------------------------------------------------------------------------ (TOTAL US$ COMMITMENT--$2,050,834) $ (1,418) ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ FOREIGN CURRENCY SOLD - ------------------------------------------------------------------------------------------------------------------------ DM 16,627,988 ............................................. January 1995 $ (190,946) Dkr 8,388,437 .............................................. January 1995 (19,633) Esp 65,070,400 ............................................. February 1995 (2,459) Lit 2,141,150,970 ............................................... January 1995 16,520 SEK 11,778,323 ............................................. January 1995 (19,168) - ------------------------------------------------------------------------------------------------------------------------ (TOTAL US$ COMMITMENT--$15,314,835) $ (215,686) ------------ - ------------------------------------------------------------------------------------------------------------------------ TOTAL UNREALIZED DEPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET... $ (217,104) ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
+Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $2,253,000, representing 3.00% of net assets. - --------------------------------------------------------------------------------
ACQUISITION VALUE ISSUE DATES COST (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ American Telecasting Inc., 12.50% due 6/15/2004............................... 10/25/1994 $ 525,521 $ 430,050 Clark Oil Co., 10.50% due 12/01/2001.......................................... 10/25/1994 106,375 102,500 Consolidated-Hydro Inc., 11.80%* due 7/15/2003................................ 7/01/1993 166,660 145,000 Formica Corp., 14.843% due 9/15/2005.......................................... 7/08/1993 250,000 291,984 Midland Funding Corp. II, 10.33% due 7/23/2002................................ 9/17/1993- 92,774 89,461 6/17/1994 Polymer Group Inc., 12.25% due 7/15/2002...................................... 7/07/1994 1,001,250 980,000 Tucson Electric Power Co., 10.732% due 1/01/2013.............................. 8/03/1993 223,464 213,545 - ------------------------------------------------------------------------------------------------------------------------ TOTAL......................................................................... $ 2,366,044 $2,252,540 ----------- ---------- ----------- ---------- - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 117 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 - --------------------------------------------------------------------------------
BASIC DEVELOPING DOMESTIC AMERICAN VALUE CAPITAL MONEY BALANCED FOCUS MARKETS MARKET FUND FUND FOCUS FUND FUND - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments, at value* (Note 1a)................................................... $156,864,556 $163,908,366 $ 37,930,023 $ 369,119,126 Options purchased, at value (cost-$0) (Notes 1a & 1b)......... -- -- -- -- Unrealized appreciation on forward foreign exchange contracts (Note 1b)................................................... -- -- -- -- Cash.......................................................... 24,432 -- 511,162 117,724 Receivable for options written................................ -- -- -- -- Interest receivable........................................... 1,904,617 -- 133,580 1,020,024 Dividends receivable.......................................... 149,262 672,554 60,277 -- Receivable for securities sold................................ -- 622,683 -- -- Receivable for capital shares sold............................ 267,236 1,496,022 756,701 -- Receivable from investment adviser (Note 2)................... -- -- -- -- Receivable for variation margin on stock index futures contracts (Note 1b)................................................... -- -- -- -- Receivable for forward foreign exchange contracts (Note 1b)... -- -- -- -- Deferred organization expenses (Note 1f)...................... -- 2,880 3,467 2,680 Prepaid registration fees and other assets (Note 1f).......... 7,938 7,436 6,996 16,604 Foreign cash.................................................. -- -- -- -- ------------ ------------ ------------ -------------- Total assets................................................ 159,218,041 166,709,941 39,402,206 370,276,158 ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Options written, at value (premiums received--$0) (Notes 1a & 1b)............................................. -- -- -- -- Unrealized depreciation on forward foreign exchange contracts (Note 1b)................................................... -- -- -- -- Payable for capital shares redeemed........................... 152,494 2,044 414 -- Payable for securities purchased.............................. -- 1,615,738 2,667,845 6,775,811 Payable to investment adviser (Note 2)........................ 71,388 78,215 30,271 146,721 Accrued expenses and other liabilities........................ 43,419 707,225 27,924 154,526 ------------ ------------ ------------ -------------- Total liabilities........................................... 267,301 2,403,222 2,726,454 7,077,058 ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS.................................................... $158,950,740 $164,306,719 $ 36,675,752 $ 363,199,100 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Common Stock, $0.10 par value+................................ $ 1,215,117 $ 1,480,240 $ 385,591 $ 36,339,542 Paid-in capital in excess of par.............................. 161,253,879 159,005,944 38,977,033 327,055,873 Undistributed investment income--net.......................... 3,297,750 1,591,385 330,561 -- Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5).......................................................... (251,964) 6,953,099 (672,256) -- Accumulated distributions in excess of capital gains--net..... (382,403) -- -- -- Unrealized appreciation (depreciation) on investments and foreign currency transactions--net.................................. (6,181,639) (4,723,949) (2,345,177) (196,315) ------------ ------------ ------------ -------------- NET ASSETS.................................................... $158,950,740 $164,306,719 $ 36,675,752 $ 363,199,100 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARES OUTSTANDING.................................... 12,151,167 14,802,400 3,855,911 363,395,415 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...... $ 13.08 $ 11.10 $ 9.51 $ 1.00 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ * Identified cost............................................. $163,046,195 $168,632,315 $ 40,275,572 $ 369,315,441 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- + Authorized shares........................................... 100,000,000 100,000,000 100,000,000 1,300,000,000 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 118 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
GLOBAL GLOBAL FLEXIBLE STRATEGY UTILITY EQUITY STRATEGY FOCUS FOCUS GROWTH FUND FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments, at value* (Note 1a).............................. $169,929,115 $273,718,417 $512,141,013 $ 126,191,523 Options purchased, at value (cost-$0) (Notes 1a & 1b)......... -- -- -- -- Unrealized appreciation on forward foreign exchange contracts (Note 1b)................................................... -- -- 559,659 -- Cash.......................................................... 20,700 9,065 -- 46,470 Receivable for options written................................ -- 7,257 -- -- Interest receivable........................................... -- 1,408,479 3,905,068 33,000 Dividends receivable.......................................... 141,668 251,197 832,441 516,217 Receivable for securities sold................................ 748,125 4,559,730 -- -- Receivable for capital shares sold............................ 1,145,985 612,064 1,024,634 141,262 Receivable from investment adviser (Note 2)................... -- -- -- -- Receivable for variation margin on stock index futures contracts (Note 1b)................................................... -- -- -- -- Receivable for forward foreign exchange contracts (Note 1b)... -- -- -- -- Deferred organization expenses (Note 1f)...................... -- -- 2,680 4,139 Prepaid registration fees and other assets (Note 1f).......... 7,983 10,015 9,009 7,649 Foreign cash.................................................. -- -- 135,671 31,393 ------------ ------------ ------------ -------------- Total assets................................................ 171,993,576 280,576,224 518,610,175 126,971,653 ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Options written, at value (premiums received--$20,528) (Notes 1a & 1b)............................................. -- 18,000 -- -- Unrealized depreciation on forward foreign exchange contracts (Note 1b)................................................... -- -- -- -- Payable for capital shares redeemed........................... 15,774 68,041 124,363 33,855 Payable for securities purchased.............................. 1,430,646 5,768,001 1,306,886 562,632 Payable to investment adviser (Note 2)........................ 99,663 144,884 276,128 62,764 Accrued expenses and other liabilities........................ 403,870 79,032 1,495,482 69,595 ------------ ------------ ------------ -------------- Total liabilities........................................... 1,949,953 6,077,958 3,202,859 728,846 ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS.................................................... $170,043,623 $274,498,266 $515,407,316 $ 126,242,807 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Common Stock, $0.10 par value+................................ $ 883,084 $ 1,867,412 $ 4,395,430 $ 1,335,955 Paid-in capital in excess of par.............................. 168,115,089 263,415,116 515,603,136 136,710,139 Undistributed investment income--net.......................... 383,328 3,474,388 7,256,695 1,361,234 Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5).......................................................... (1,982,006) 4,982,943 -- (1,447,878) Accumulated distributions in excess of capital gains--net..... -- -- (169,671) (33,521) Unrealized appreciation (depreciation) on investments and foreign currency transactions--net.................................. 2,644,128 758,407 (11,678,274) (11,683,122) ------------ ------------ ------------ -------------- NET ASSETS.................................................... $170,043,623 $274,498,266 $515,407,316 $ 126,242,807 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARES OUTSTANDING.................................... 8,830,838 18,674,116 43,954,297 13,359,556 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...... $ 19.26 $ 14.70 $ 11.73 $ 9.45 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ * Identified cost............................................. $167,284,987 $272,969,088 $524,369,249 $ 137,874,783 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- + Authorized shares........................................... 100,000,000 100,000,000 100,000,000 100,000,000 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 119 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
HIGH INTERMEDIATE CURRENT GOVERNMENT INTERNATIONAL INTERNATIONAL INCOME BOND BOND EQUITY FOCUS FUND FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments, at value* (Note 1a).............................. $248,917,211 $ 17,575,242 $ 10,617,103 $ 243,715,823 Options purchased, at value (cost--$963,762) (Notes 1a & 1b)......................................................... -- -- -- 468,559 Unrealized appreciation on forward foreign exchange contracts (Note 1b)................................................... -- -- -- 300,276 Cash.......................................................... 22,860 288 4,544 221,657 Receivable for options written................................ -- -- -- -- Interest receivable........................................... 6,181,269 54,647 206,379 241,288 Dividends receivable.......................................... -- -- -- 219,430 Receivable for securities sold................................ -- -- 378,451 1,973,053 Receivable for capital shares sold............................ 767,743 221,435 85,602 1,596,976 Receivable from investment adviser (Note 2)................... -- 19,250 24,543 -- Receivable for forward foreign exchange contracts (Note 1b)... -- -- 8,673 98,212 Deferred organization expenses (Note 1f)...................... -- -- 3,467 4,856 Prepaid registration fees and other assets (Note 1f).......... 58,109 9,365 7,318 18,749 Foreign cash.................................................. -- -- -- 2,155,248 ------------ ------------ ------------ -------------- Total assets.................................................. 255,947,192 17,880,227 11,336,080 251,014,127 ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Options written, at value (premiums received--$572,922) (Notes 1a & 1b)............................................. -- -- -- 276,821 Unrealized depreciation on forward foreign exchange contracts (Note 1b)................................................... -- -- 66,829 -- Payable for variation margin on stock index futures contracts (Note 1b)................................................... -- -- -- 99,903 Payable for forward foreign exchange contracts (Note 1b)...... -- -- 3,738 210,076 Payable for capital shares redeemed........................... 48,459 60,201 41,556 34,739 Payable for securities purchased.............................. -- -- 1,278,189 2,203,033 Payable to investment adviser (Note 2)........................ 101,917 -- -- 149,750 Accrued expenses and other liabilities........................ 78,076 9,375 12,474 156,030 ------------ ------------ ------------ -------------- Total liabilities........................................... 228,452 69,576 1,402,786 3,130,352 ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS.................................................... $255,718,740 $ 17,810,651 $ 9,933,294 $ 247,883,775 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Common Stock, $0.10 par value+................................ $ 2,409,799 $ 178,632 $ 102,432 $ 2,274,065 Paid-in capital in excess of par.............................. 277,181,703 17,674,702 10,038,837 247,618,706 Undistributed investment income--net.......................... 2,509,688 73,375 54,400 382,131 Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5).......................................................... (2,036,293) (55,316) (98,691) 3,904,078 Accumulated distributions in excess of capital gains--net..... -- -- -- -- Unrealized appreciation (depreciation) on investments and foreign currency transactions--net.................................. (24,346,157) (60,742) (163,684) (6,295,205) ------------ ------------ ------------ -------------- NET ASSETS.................................................... $255,718,740 $ 17,810,651 $ 9,933,294 $ 247,883,775 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARES OUTSTANDING.................................... 24,097,990 1,786,321 1,024,322 22,740,650 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...... $ 10.61 $ 9.97 $ 9.70 $ 10.90 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------ * Identified cost............................................. $273,263,368 $ 17,635,984 $ 10,713,571 $ 250,851,453 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- + Authorized shares........................................... 100,000,000 100,000,000 100,000,000 100,000,000 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 120 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
NATURAL RESOURCES PRIME QUALITY FOCUS BOND EQUITY FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments, at value* (Note 1a).............................................. $ 39,455,573 $384,799,680 $464,815,703 Options purchased, at value (cost-$0) (Notes 1a & 1b)......................... -- -- -- Unrealized appreciation on forward foreign exchange contracts (Note 1b)....... -- -- -- Cash.......................................................................... 134,274 1,093 167 Receivable for options written................................................ -- -- 35,168 Interest receivable........................................................... -- 6,368,933 -- Dividends receivable.......................................................... 32,417 -- 559,641 Receivable for securities sold................................................ -- -- -- Receivable for capital shares sold............................................ 353,492 581,420 1,941,009 Receivable from investment adviser (Note 2)................................... -- -- -- Receivable for forward foreign exchange contracts (Note 1b)................... -- -- -- Deferred organization expenses (Note 1f)...................................... -- -- -- Prepaid registration fees and other assets (Note 1f).......................... 7,181 31,058 10,676 Foreign cash.................................................................. -- -- -- ------------ ------------ ------------ Total assets................................................................ 39,982,937 391,782,184 467,362,364 ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Options written, at value (premiums received--$35,167) (Notes 1a & 1b)........ -- -- 32,288 Unrealized depreciation on forward foreign exchange contracts (Note 1b)....... -- -- -- Payable for capital shares redeemed........................................... 2,115 308,607 127,639 Payable for securities purchased.............................................. 221,257 -- 2,644,351 Payable to investment adviser (Note 2)........................................ 20,728 146,922 77,519 Accrued expenses and other liabilities........................................ 23,976 92,480 120,685 ------------ ------------ ------------ Total liabilities........................................................... 268,076 548,009 3,002,482 ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS.................................................................... $ 39,714,861 $391,234,175 $464,359,882 ------------ ------------ ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Common Stock, $0.10 par value+................................................ $ 367,092 $ 3,517,366 $ 1,674,095 Paid-in capital in excess of par.............................................. 39,880,039 426,013,937 436,450,499 Undistributed investment income--net.......................................... 289,267 2,399,783 3,329,753 Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5)................................. 52,494 (14,592,431) 9,696,061 Accumulated distributions in excess of capital gains--net..................... -- (4,204,953) -- Unrealized appreciation (depreciation) on investments and foreign currency transactions--net........................................................... (874,031) (21,899,527) 13,209,474 ------------ ------------ ------------ NET ASSETS.................................................................... $ 39,714,861 $391,234,175 $464,359,882 ------------ ------------ ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARES OUTSTANDING.................................................... 3,670,928 35,173,662 16,740,944 ------------ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE...................... $ 10.82 $ 11.12 $ 27.74 ------------ ------------ ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ * Identified cost............................................................. $ 40,329,553 $406,699,207 $451,609,108 ------------ ------------ ------------ ------------ ------------ ------------ + Authorized shares........................................................... 100,000,000 100,000,000 100,000,000 ------------ ------------ ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 121 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
RESERVE WORLD INCOME ASSETS FOCUS FUND FUND - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments, at value* (Note 1a)............................................................ $ 32,670,653 $ 73,556,221 Options purchased, at value (cost-$19,950) (Notes 1a & 1b).................................. -- 16,700 Unrealized appreciation on forward foreign exchange contracts (Note 1b)................................................................................. -- -- Cash........................................................................................ 45,109 281 Receivable for options written.............................................................. -- -- Interest receivable......................................................................... 89,637 1,753,034 Dividends receivable........................................................................ -- -- Receivable for securities sold.............................................................. -- 1,483,407 Receivable for capital shares sold.......................................................... -- 96,076 Receivable from investment adviser (Note 2)................................................. -- -- Receivable for forward foreign exchange contracts (Note 1b)................................. -- 18,870 Receivable for foreign exchange contracts (Note 1c)......................................... -- 8,963 Deferred organization expenses (Note 1f).................................................... -- 5,522 Prepaid registration fees and other assets (Note 1f)........................................ 8,452 7,325 Foreign cash................................................................................ -- -- ------------ ------------ Total assets.............................................................................. 32,813,851 76,946,399 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Options written, at value (premium received--$10,100) (Notes 1a & 1b)....................... -- 12,000 Unrealized depreciation on forward foreign exchange contracts (Note 1b)..................... -- 217,104 Payable for capital shares redeemed......................................................... -- 50,604 Payable for securities purchased............................................................ 580,784 1,423,345 Payable to investment adviser (Note 2)...................................................... 13,480 36,922 Payable for forward foreign exchange contacts (Note 1b)..................................... -- 15,313 Accrued expenses and other liabilities...................................................... 23,556 41,195 ------------ ------------ Total liabilities......................................................................... 617,820 1,796,483 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS.................................................................................. $ 32,196,031 $ 75,149,916 ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Common Stock, $0.10 par value+.............................................................. $ 3,222,396 $ 819,675 Paid-in capital in excess of par............................................................ 29,001,559 81,931,992 Undistributed investment income--net........................................................ -- 409,286 Undistributed (accumulated) realized capital gains (losses) on investments and foreign currency transactions--net (Note 5)....................................................... -- (3,076,667) Accumulated distributions in excess of capital gains--net................................... -- (101,589) Unrealized appreciation (depreciation) on investments and foreign currency transactions--net......................................................................... (27,924) (4,832,781) ------------ ------------ NET ASSETS.................................................................................. $ 32,196,031 $ 75,149,916 ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARES OUTSTANDING.................................................................. 32,223,956 8,196,750 ------------ ------------ ------------ ------------ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE.................................... $ 1.00 $ 9.17 ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ * Identified cost........................................................................... $ 32,698,577 $ 78,173,900 ------------ ------------ ------------ ------------ + Authorized shares......................................................................... 500,000,000 100,000,000 ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 122 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 - --------------------------------------------------------------------------------
DEVELOPING BASIC CAPITAL AMERICAN VALUE MARKETS DOMESTIC BALANCED FOCUS FOCUS MONEY MARKET FUND FUND FUND+ FUND - ------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME (NOTES 1D & 1E): Interest and discount earned*................................. $ 4,958,617 $ 414,252 $ 401,983 $ 12,848,322 Dividends**................................................... 1,706,808 2,765,969 123,937 -- Other income.................................................. -- -- -- -- ------------ ------------ --------------- ------------ Total income.................................................. 6,665,425 3,180,221 525,920 12,848,322 ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ EXPENSES: Investment advisory fees (Note 2)............................. 803,973 683,107 151,621 1,418,479 Transfer agent fees (Note 2).................................. 4,610 4,979 3,335 4,963 Custodian fees................................................ 20,073 21,954 19,805 21,488 Professional fees............................................. 11,626 9,878 197 19,750 Registration fees (Note 1f)................................... 21,826 46,761 10,932 61,060 Directors' fees and expenses.................................. 3,460 1,906 1,273 5,255 Accounting services (Note 2).................................. 47,773 36,941 3,357 88,336 Pricing services.............................................. 879 148 705 -- Amortization of organization expenses (Note 1f)............... -- 720 533 1,340 Other......................................................... 7,713 7,774 12,516 9,011 ------------ ------------ --------------- ------------ Total expenses before reimbursement........................... 921,933 814,168 204,274 1,629,682 Reimbursement of expenses (Note 2)............................ -- -- (8,915) (201,286) ------------ ------------ --------------- ------------ Expenses after reimbursement.................................. 921,933 814,168 195,359 1,428,396 ------------ ------------ --------------- ------------ Investment income--net........................................ 5,743,492 2,366,053 330,561 11,419,926 ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3): Realized gain (loss) on investments--net...................... (634,222) 7,037,711 (673,696) 5,347 Realized gain (loss) on foreign currency transactions--net.... -- -- 1,440 -- Change in unrealized appreciation/depreciation on investments--net............................................ (11,011,500) (6,328,115) (2,345,549) (199,049) Change in unrealized appreciation/depreciation on foreign currency transactions....................................... -- -- 372 -- ------------ ------------ --------------- ------------ Total realized and unrealized gain (loss) on investments and foreign currency transactions--net.......................... (11,645,722) 709,596 (3,017,433) (193,702) ------------ ------------ --------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................................. $ (5,902,230) $ 3,075,649 $ (2,686,872) $ 11,226,224 ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ * Net of withholding tax on interest......................... $ -- $ -- $ -- $ -- ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ ** Net of withholding tax on dividends........................ $ -- $ 8,543 $ 6,598 $ -- ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ + The Fund commenced operations on May 2, 1994.
See Notes to Financial Statements. 123 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
GLOBAL FLEXIBLE GLOBAL STRATEGY UTILITY EQUITY STRATEGY FOCUS FOCUS GROWTH FUND FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME (NOTES 1D & 1E): Interest and discount earned*................................. $ 895,389 $ 5,787,799 $ 10,067,955 $ 1,231,526 Dividends**................................................... 669,729 2,196,302 5,567,639 4,474,341 Other income.................................................. -- -- -- -- ------------ ------------ --------------- ------------ Total income.................................................. 1,565,118 7,984,101 15,635,594 5,705,867 ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ EXPENSES: Investment advisory fees (Note 2)............................. 1,062,086 1,598,769 2,818,040 777,517 Transfer agent fees (Note 2).................................. 4,834 4,590 5,036 5,151 Custodian fees................................................ 26,377 52,658 197,855 46,034 Professional fees............................................. 12,853 20,917 25,776 14,198 Registration fees (Note 1f)................................... 31,434 35,224 119,809 27,605 Directors' fees and expenses.................................. 3,186 5,455 7,619 3,081 Accounting services (Note 2).................................. 33,230 68,115 145,219 50,614 Pricing services.............................................. -- 1,755 4,692 7,173 Amortization of organization expenses (Note 1f)............... -- -- 1,340 863 Other......................................................... 7,790 10,653 10,788 10,997 ------------ ------------ --------------- ------------ Total expenses before reimbursement........................... 1,181,790 1,798,136 3,336,174 943,233 Reimbursement of expenses (Note 2)............................ -- -- -- -- ------------ ------------ --------------- ------------ Expenses after reimbursement.................................. 1,181,790 1,798,136 3,336,174 943,233 ------------ ------------ --------------- ------------ Investment income--net........................................ 383,328 6,185,965 12,299,420 4,762,634 ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3): Realized gain (loss) on investments--net...................... (1,981,763) 5,023,562 144,657 (1,490,181) Realized gain (loss) on foreign currency transactions--net.... -- (278,822) (347,617) 8,194 Change in unrealized appreciation/depreciation on investments--net............................................ (8,755,921) (21,116,778) (23,945,864) (14,248,450) Change in unrealized appreciation/depreciation on foreign currency transactions....................................... -- 12,489 562,516 (7,346) ------------ ------------ --------------- ------------ Total realized and unrealized gain (loss) on investments and foreign currency transactions--net.......................... (10,737,684) (16,359,549) (23,586,308) (15,737,783) ------------ ------------ --------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................................. $(10,354,356) $(10,173,584) $ (11,286,888) $(10,975,149) ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ * Net of withholding tax on interest......................... $ -- $ 4,718 $ 85,307 $ -- ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ ** Net of withholding tax on dividends........................ $ 5,943 $ 42,946 $ 488,165 $ 154,407 ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 124 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
HIGH INTERMEDIATE CURRENT GOVERNMENT INTERNATIONAL INTERNATIONAL INCOME BOND BOND EQUITY FOCUS FUND FUND+ FUND+ FUND - ------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME (NOTES 1D & 1E): Interest and discount earned*................................. $ 22,778,469 $ 295,427 $ 325,753 $ 1,496,583 Dividends**................................................... 334,916 -- -- 2,235,384 Other income.................................................. 235,375 -- -- -- ------------ ------------ --------------- ------------ Total income.................................................. 23,348,760 295,427 325,753 3,731,967 ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ EXPENSES: Investment advisory fees (Note 2)............................. 1,176,777 31,692 30,838 1,355,159 Transfer agent fees (Note 2).................................. 5,379 3,336 3,334 4,958 Custodian fees................................................ 30,104 3,082 8,867 229,925 Professional fees............................................. 21,025 140 105 13,648 Registration fees (Note 1f)................................... 48,801 2,855 3,273 70,488 Directors' fees and expenses.................................. 4,813 1,040 548 2,559 Accounting services (Note 2).................................. 61,084 2,152 2,401 58,093 Pricing services.............................................. 16,562 200 10 7,688 Amortization of organization expenses (Note 1f)............... -- -- 533 1,389 Other......................................................... 7,037 6,445 5,566 14,660 ------------ ------------ --------------- ------------ Total expenses before reimbursement........................... 1,371,582 50,942 55,475 1,758,567 Reimbursement of expenses (Note 2)............................ -- (50,942) (55,475) -- ------------ ------------ --------------- ------------ Expenses after reimbursement.................................. 1,371,582 0 0 1,758,567 ------------ ------------ --------------- ------------ Investment income--net........................................ 21,977,178 295,427 325,753 1,973,400 ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3): Realized gain (loss) on investments--net...................... (1,918,504) (55,316) (41,625) 8,428,685 Realized gain (loss) on foreign currency transactions--net.... -- -- (57,066) (4,578,468) Change in unrealized appreciation/depreciation on investments--net............................................ (28,517,478) (60,742) (96,468) (10,859,913) Change in unrealized appreciation/depreciation on foreign currency transactions....................................... -- -- (67,216) 179,572 ------------ ------------ --------------- ------------ Total realized and unrealized gain (loss) on investments and foreign currency transactions--net.......................... (30,435,982) (116,058) (262,375) (6,830,124) ------------ ------------ --------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................................. $ (8,458,804) $ 179,369 $ 63,378 $ (4,856,724) ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ * Net of withholding tax on interest......................... $ -- $ -- $ 2,261 $ -- ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ ** Net of withholding tax on dividends........................ $ -- $ -- $ -- $ 289,260 ------------ ------------ --------------- ------------ ------------ ------------ --------------- ------------ - ------------------------------------------------------------------------------------------------------------------------ + The Fund commenced operations on May 2, 1994.
See Notes to Financial Statements. 125 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED) - --------------------------------------------------------------------------------
NATURAL RESOURCES PRIME QUALITY FOCUS BOND EQUITY FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME (NOTES 1D & 1E): Interest and discount earned*................................................. $ 214,093 $ 26,769,262 $ 2,816,268 Dividends**................................................................... 553,399 -- 4,900,901 Other income.................................................................. -- 72,032 18,659 ------------ ------------ ------------ Total income.................................................................. 767,492 26,841,294 7,735,828 ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ EXPENSES: Investment advisory fees (Note 2)............................................. 179,492 1,740,429 1,889,188 Transfer agent fees (Note 2).................................................. 4,937 2,518 4,612 Custodian fees................................................................ 25,200 41,220 43,242 Professional fees............................................................. 4,920 21,696 27,111 Registration fees (Note 1f)................................................... 9,221 38,164 65,571 Directors' fees and expenses.................................................. 977 8,524 8,360 Accounting services (Note 2).................................................. 10,096 125,342 122,099 Pricing services.............................................................. 1,620 1,472 345 Amortization of organization expenses (Note 1f)............................... -- -- -- Other......................................................................... 4,900 10,091 11,242 ------------ ------------ ------------ Total expenses before reimbursement........................................... 241,363 1,989,456 2,171,770 Reimbursement of expenses (Note 2)............................................ -- -- -- ------------ ------------ ------------ Expenses after reimbursement.................................................. 241,363 1,989,456 2,171,770 ------------ ------------ ------------ Investment income--net........................................................ 526,129 24,851,838 5,564,058 ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3): Realized gain (loss) on investments--net...................................... 108,631 (18,783,776) 10,329,151 Realized gain (loss) on foreign currency transactions--net.................... (6,578) -- 36 Change in unrealized appreciation/depreciation on investments--net............ (810,334) (23,383,983) (20,646,284) Change in unrealized appreciation/depreciation on foreign currency transactions................................................................ (31) -- -- ------------ ------------ ------------ Total realized and unrealized gain (loss) on investments and foreign currency transactions--net........................................................... (708,312) (42,167,759) (10,317,097) ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............... $ (182,183) $(17,315,921) $ (4,753,039) ------------ ------------ ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ * Net of withholding tax on interest......................................... $ -- $ -- $ -- ------------ ------------ ------------ ------------ ------------ ------------ ** Net of withholding tax on dividends........................................ $ 29,892 $ -- $ 66,254 ------------ ------------ ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 126 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CONCLUDED) - --------------------------------------------------------------------------------
WORLD RESERVE INCOME ASSETS FOCUS FUND FUND - --------------------------------------------------------------------------------- INVESTMENT INCOME (NOTES 1D & 1E): Interest and discount earned*....................... $ 1,465,320 $ 6,249,764 Dividends**......................................... -- 19,406 Other income........................................ -- -- ------------ ------------ Total income........................................ 1,465,320 6,269,170 ------------ ------------ - --------------------------------------------------------------------------------- EXPENSES: Investment advisory fees (Note 2)................... 166,992 429,608 Transfer agent fees (Note 2)........................ 4,335 5,033 Custodian fees...................................... 16,221 29,585 Professional fees................................... 7,017 12,113 Registration fees (Note 1f)......................... 3,028 12,157 Directors' fees and expenses........................ 1,316 1,820 Accounting services (Note 2)........................ 9,822 28,623 Pricing services.................................... -- 5,070 Amortization of organization expenses (Note 1f)..... -- 1,578 Other............................................... 7,711 9,911 ------------ ------------ Total expenses before reimbursement................. 216,442 535,498 Reimbursement of expenses (Note 2).................. -- -- ------------ ------------ Expenses after reimbursement........................ 216,442 535,498 ------------ ------------ Investment income--net.............................. 1,248,878 5,733,672 ------------ ------------ - --------------------------------------------------------------------------------- REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1B, 1C, 1E & 3): Realized gain (loss) on investments--net............ 1,901 (2,736,044) Realized gain (loss) on foreign currency transactions--net................................ -- (500,659) Change in unrealized appreciation/depreciation on investments--net................................. (35,001) (5,331,495) Change in unrealized appreciation/depreciation on foreign currency transactions.................... -- (221,597) ------------ ------------ Total realized and unrealized gain (loss) on investments and foreign currency transactions--net................................ (33,100) (8,789,795) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS....................................... $ 1,215,778 $ (3,056,123) ------------ ------------ ------------ ------------ - --------------------------------------------------------------------------------- * Net of withholding tax interest.................. $ -- $ 34,112 ------------ ------------ ------------ ------------ ** Net of withholding tax on dividends.............. $ -- $ -- ------------ ------------ ------------ ------------ - ---------------------------------------------------------------------------------
See Notes to Financial Statements. 127 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
AMERICAN BALANCED FUND FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ASSETS: 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment Income--net.......................................................... $ 5,743,492 $ 1,898,709 Realized gain (loss) on investments and foreign currency transactions--net...... (634,222 ) 381,401 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net...................................................... (11,011,500 ) 3,571,478 ------------ ------------- Net increase (decrease) in net assets resulting from operations................. (5,902,230 ) 5,851,588 ------------ ------------- - ------------------------------------------------------------------------------------------------------------------------ DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G): Investment income--net.......................................................... (3,724,806 ) (975,251 ) Realized gain on investments--net............................................... -- (227,751 ) In excess of realized gain on investments--net.................................. (382,403) -- ------------ ------------- Net decrease in net assets resulting from dividends and distributions to shareholders.................................................................... (4,107,209 ) (1,203,002 ) ------------ ------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 4): Net increase in net assets derived from capital share transactions.............. 53,540,259 85,853,104 ------------ ------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS: Total increase (decrease) in net assets......................................... 43,530,820 90,501,690 Beginning of period............................................................. 115,419,920 24,918,230 ------------ ------------- End of period*.................................................................. $158,950,740 $115,419,920 ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- *Undistributed investment income--net........................................... $ 3,297,750 $ 1,279,064 ------------ ------------- ------------ ------------- - ------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements. 128 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - --------------------------------------------------------------------------------
BASIC VALUE FOCUS FUND FOR THE YEAR ENDED FOR THE PERIOD DEC. 31, JULY 1, 1993+ 1994 TO DEC. 31, 1993 - --------------------------------------- $ 2,366,053 $ 153,585 7,037,711 (84,612) (6,328,115 ) 1,604,166 - ------------ ---------------- 3,075,649 1,673,139 - ------------ ----------------
- --------------------------------------- (928,253 ) -- -- -- -- -- - ------------ ---------------- (928,253 ) -- - ------------ ----------------
- --------------------------------------- 114,952,060 43,534,024 - ------------ ----------------
- --------------------------------------- 117,099,456 45,207,163 47,207,263 2,000,100 - ------------ ---------------- $164,306,719 $ 47,207,263 - ------------ ---------------- - ------------ ----------------
- --------------------------------------- $ 1,591,385 $ 153,585 - ------------ ---------------- - ------------ ----------------
- --------------------------------------- 129 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - --------------------------------------------------------------------------------
DEVELOPING CAPITAL DOMESTIC MONEY MARKETS FOCUS FUND MARKET FUND FOR THE PERIOD FOR THE YEAR ENDED MAY 2, 1994+ DECEMBER 31, INCREASE (DECREASE) IN NET ASSETS: TO DEC. 31, 1994 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment Income (loss)--net.................................... $ 330,561 $11,419,926 $ 2,754,970 Realized gain (loss) on investments and foreign currency transactions--net................................................ (672,256) 5,347 41,187 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net............................... (2,345,177) (199,049 ) (1,652) ------------------- ------------ ---------------- Net increase (decrease) in net assets resulting from operations....................................................... (2,686,872) 11,226,224 2,794,505 ------------------- ------------ ----------------
- -------------------------------------------------------------------------------- DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G): Investment income--net........................................... -- (11,419,926 ) (2,754,970) Realized gain on investments--net................................ -- (5,347 ) (41,187) In excess of realized gain on investments--net................... -- -- -- ------------------- ------------ ---------------- Net decrease in net assets resulting from dividends and distributions to shareholders.................................... -- (11,425,273 ) (2,796,157) ------------------- ------------ ----------------
- -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4): Net increase in net assets derived from capital share transactions..................................................... 31,362,624 192,866,796 129,405,088 ------------------- ------------ ----------------
- -------------------------------------------------------------------------------- NET ASSETS: Total increase (decrease) in net assets.......................... 28,675,752 192,667,747 129,403,436 Beginning of period.............................................. 8,000,000 170,531,353 41,127,917 ------------------- ------------ ---------------- End of period*................................................... $36,675,752 $363,199,100 $170,531,353 ------------------- ------------ ---------------- ------------------- ------------ ----------------
- -------------------------------------------------------------------------------- *Undistributed investment income--net............................ $ 330,561 $ -- $ -- ------------------- ------------ ---------------- ------------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements. 130 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
EQUITY GROWTH FUND FOR THE YEAR ENDED DECEMBER 31, 1994 1993 - -------------------------------------- $ 383,328 $ (24,896) (1,981,763 ) 3,639,264 (8,755,921 ) 7,724,322 - ------------ ---------------- (10,354,356 ) 11,338,690 - ------------ ----------------
- -------------------------------------- -- (5,834) (895,916 ) -- -- -- - ------------ ---------------- (895,916 ) (5,834) - ------------ ----------------
- -------------------------------------- 82,317,471 64,476,433 - ------------ ----------------
- -------------------------------------- 71,067,199 75,809,289 98,976,424 23,167,135 - ------------ ---------------- $170,043,623 $ 98,976,424 - ------------ ---------------- - ------------ ----------------
- -------------------------------------- $ 383,328 $ -- - ------------ ---------------- - ------------ ----------------
- -------------------------------------- 131 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - --------------------------------------------------------------------------------
FLEXIBLE STRATEGY FUND -------------------------------------- FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- INCREASE (DECREASE) IN NET ASSETS: 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment income--net........................................................ $ 6,185,965 $ 2,797,378 Realized gain (loss) on investments and foreign currency transactions--net.... 4,744,740 6,698,385 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net.................................................... (21,104,289 ) 11,282,893 ------------ ---------------- Net increase (decrease) in net assets resulting from operations............... (10,173,584 ) 20,778,656 ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G): Investment income--net........................................................ (4,296,790 ) (1,224,834) Realized gain on investments--net............................................. (6,450,353 ) (235,661) In excess of realized gain on investments--net................................ -- -- ------------ ---------------- Net decrease in net assets resulting from dividends and distributions to shareholders.................................................................. (10,747,143 ) (1,460,495) ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 4) Net increase in net assets derived from capital share transactions............ 100,642,477 92,909,143 ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS: Total increase (decrease) in net assets....................................... 79,721,750 112,227,304 Beginning of year............................................................. 194,776,516 82,549,212 ------------ ---------------- End of year*.................................................................. $274,498,266 $194,776,516 ------------ ---------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ *Undistributed investment income--net......................................... $ 3,474,388 $ 1,585,213 ------------ ---------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 132 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
GLOBAL STRATEGY FOCUS FUND GLOBAL UTILITY FOCUS FUND - -------------------------------------- -------------------------------------- FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31, - -------------------------------------- -------------------------------------- 1994 1993 1994 1993
- -------------------------------------------------------------------------------- $ 12,299,420 $ 2,159,624 $ 4,762,634 $ 677,491 (202,960) 1,265,216 (1,481,987 ) 34,110 (23,383,348) 11,694,466 (14,255,796 ) 2,572,674 - ------------ ------------- ------------ ------------- (11,286,888) 15,119,306 (10,975,149 ) 3,284,275 - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- (6,805,684) (531,339 ) (3,959,983 ) (118,908 ) (1,046,779) -- -- -- (169,671) -- (33,522) -- - ------------ ------------- ------------ ------------- (8,022,134) (531,339 ) (3,993,505 ) (118,908 ) - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- 265,089,157 239,511,867 36,694,148 99,351,846 - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- 245,780,135 254,099,834 21,725,494 102,517,213 269,627,181 15,527,347 104,517,313 2,000,100 - ------------ ------------- ------------ ------------- $515,407,316 $269,627,181 $126,242,807 $104,517,313 - ------------ ------------- ------------ ------------- - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- $ 7,256,695 $ 1,762,959 $ 1,361,234 $ 558,583 - ------------ ------------- ------------ ------------- - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- 133 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - --------------------------------------------------------------------------------
HIGH CURRENT INCOME FUND FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ASSETS: 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment income--net......................................................... $21,977,178 $ 6,889,208 Realized gain (loss) on investments and foreign currency transactions--net..... (1,918,504 ) 615,071 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net..................................................... (28,517,478 ) 4,541,949 ------------ ------------ Net increase (decrease) in net assets resulting from operations................ (8,458,804 ) 12,046,228 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G): Investment income--net......................................................... (20,563,966 ) (6,035,740 ) Realized gain on investments--net.............................................. -- -- In excess of realized gain on investments--net................................. -- -- ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders................................................................... (20,563,966 ) (6,035,740 ) ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 4): Net increase in net assets derived from capital share transactions............. 121,313,338 131,074,555 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS: Total increase (decrease) in net assets........................................ 92,290,568 137,085,043 Beginning of period............................................................ 163,428,172 26,343,129 ------------ ------------ End of period*................................................................. $255,718,740 $163,428,172 ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ *Undistributed investment income--net.......................................... $ 2,509,684 $ 1,096,472 ------------ ------------ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements. 134 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND FUND INTERNATIONAL BOND FUND FOR THE PERIOD FOR THE PERIOD MAY 2, 1994+ TO MAY 2, 1994+ TO DECEMBER 31, 1994 DECEMBER 31, 1994 - ------------------------------------------------------ $ 295,427 $ 325,753 (55,316) (98,691) (60,742) (163,684) - ------------------------ ------------ 179,369 63,378 - ------------------------ ------------
- ------------------------------------------------------ (222,052) (271,353) -- -- -- -- - ------------------------ ------------ (222,052) (271,353) - ------------------------ ------------
- ------------------------------------------------------ 15,853,334 5,141,269 - ------------------------ ------------
- ------------------------------------------------------ 15,810,651 4,933,294 2,000,000 5,000,000 - ------------------------ ------------ $ 17,810,651 $9,933,294 - ------------------------ ------------ - ------------------------ ------------
- ------------------------------------------------------ $ 73,375 $ 54,400 - ------------------------ ------------ - ------------------------ ------------
- ------------------------------------------------------ 135 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND FOR THE YEAR FOR THE PERIOD ENDED JULY 1, 1993+ TO DECEMBER 31, DECEMBER 31, INCREASE (DECREASE) IN NET ASSETS: 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment income--net..................................................... $ 1,973,400 $ 53,487 Realized gain (loss) on investments and foreign currency transactions--net.......................................................... 3,850,217 115,051 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net................................................. (10,680,341 ) 4,385,136 ------------ ---------------- Net increase (decrease) in net assets resulting from operations............ (4,856,724 ) 4,553,674 ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G): Investment income--net..................................................... (1,644,756 ) -- Realized gain on investments--net.......................................... (61,190 ) -- In excess of realized gain on investments--net............................. -- -- ------------ ---------------- Net decrease in net assets resulting from dividends and distributions to shareholders............................................................... (1,705,946 ) -- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTES 4): Net increase in net assets derived from capital share transactions......... 177,540,023 64,352,648 ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS: Total increase (decrease) in net assets.................................... 170,977,353 68,906,322 Beginning of period........................................................ 76,906,422 8,000,100 ------------ ---------------- End of period*............................................................. $247,883,775 $ 76,906,422 - - ------------ ---------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ *Undistributed investment income--net...................................... $ 382,131 $ 53,487 ------------ ---------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements. 136 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND PRIME BOND FUND FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31, 1994 1993 1994 1993
- -------------------------------------------------------------------------------- $ 526,129 $ 122,897 $24,851,838 $ 10,814,492 102,053 64,691 (18,783,776 ) 4,199,723 (810,365 ) (85,134) (23,383,983 ) 200,559 - ------------ ------------- ------------ ------------- (182,183 ) 102,454 (17,315,921 ) 15,214,774 - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- (319,496 ) (40,449) (23,986,615 ) (9,710,533 ) -- -- -- (752,637 ) -- -- (4,204,953 ) -- - ------------ ------------- ------------ ------------- (319,496 ) (40,449) (28,191,568 ) (10,463,170 ) - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- 25,438,978 10,571,877 122,650,200 224,530,037 - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- 24,937,299 10,633,882 77,142,711 229,281,641 14,777,562 4,143,680 314,091,464 84,809,823 - ------------ ------------- ------------ ------------- $39,714,861 $14,777,562 $391,234,175 $314,091,464 - ------------ ------------- ------------ ------------- - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- $ 289,267 $ 82,634 $ 2,399,783 $ 1,534,560 - ------------ ------------- ------------ ------------- - ------------ ------------- ------------ -------------
- -------------------------------------------------------------------------------- 137 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (CONCLUDED) - --------------------------------------------------------------------------------
QUALITY EQUITY FUND FOR THE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) IN NET ASSETS: 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Investment income--net..................................................... $ 5,564,058 $ 1,870,132 Realized gain (loss) on investments and foreign currency transactions--net.......................................................... 10,329,187 6,568,044 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net................................................. (20,646,284 ) 20,450,896 ------------ ---------------- Net increase (decrease) in net assets resulting from operations............ (4,753,039 ) 28,889,072 ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1G): Investment income--net..................................................... (3,345,688 ) (758,750) Realized gain on investments--net.......................................... (7,187,525 ) (236,123) In excess of realized gain on investments--net............................. -- -- ------------ ---------------- Net decrease in net assets resulting from dividends and distributions to shareholders............................................................... (10,533,213 ) (994,873) ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTES 4): Net increase in net assets derived from capital share transactions......... 170,226,497 193,548,727 ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS: Total increase (decrease) in net assets.................................... 154,940,245 221,442,926 Beginning of period........................................................ 309,419,637 87,976,711 ------------ ---------------- End of period*............................................................. $464,359,882 $309,419,637 ------------ ---------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------ *Undistributed investment income--net...................................... $ 3,329,753 $ 1,111,383 ------------ ---------------- ------------ ---------------- - ------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements. 138 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND FOR THE YEAR RESERVE ASSETS FUND ENDED FOR THE PERIOD FOR THE YEAR ENDED DECEMBER 31, DEC. 31, JULY 1, 1993+ TO 1994 1993 1994 DEC. 31, 1993 - -------------------------------------------------------------------------------- $ 1,248,878 $ 757,449 $ 5,733,672 $ 904,488 1,901 15,302 (3,236,703 ) 176,780 (35,001 ) (173 ) (5,553,092 ) 720,311 - ------------ ------------- ------------ ---------------- 1,215,778 772,578 (3,056,123 ) 1,801,579 - ------------ ------------- ------------ ----------------
- -------------------------------------------------------------------------------- (1,248,878 ) (757,449 ) (5,598,199 ) (647,419) (1,901 ) (15,302 ) -- -- -- -- (101,589 ) -- - ------------ ------------- ------------ ---------------- (1,250,779 ) (772,751 ) (5,699,788 ) (647,419) - ------------ ------------- ------------ ----------------
- -------------------------------------------------------------------------------- 2,063,127 3,400,720 33,168,379 41,583,188 - ------------ ------------- ------------ ----------------
- -------------------------------------------------------------------------------- 2,028,126 3,400,547 24,412,468 42,737,348 30,167,905 26,767,358 50,737,448 8,000,100 - ------------ ------------- ------------ ---------------- $32,196,031 $ 30,167,905 $75,149,916 $ 50,737,448 - ------------ ------------- ------------ ---------------- - ------------ ------------- ------------ ----------------
- -------------------------------------------------------------------------------- $ -- $ -- $ 409,286 $ 257,069 - ------------ ------------- ------------ ---------------- - ------------ ------------- ------------ ----------------
- -------------------------------------------------------------------------------- 139 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
AMERICAN BALANCED FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......................... $ 14.08 $ 12.85 $ 12.82 $ 11.26 $ 11.74 ------------ -------- -------- ------- ------- Investment income (loss)--net.............................. .48 .32 .31 .47 .47 Realized and unrealized gain (loss) on investments and foreign currency transactions--net....................... (1.06) 1.37 .37 1.76 (.35) ------------ -------- -------- ------- ------- Total from investment operations........................... (.58) 1.69 .68 2.23 .12 ------------ -------- -------- ------- ------- Less dividends and distributions: Investment income--net................................... (.37) (.34) (.37) (.49) (.46) Realized gain on investments--net........................ -- (.12) (.28) (.18) (.14) In excess of realized gain on investments--net (.05) -- -- -- -- ------------ -------- -------- ------- ------- Total dividends and distributions.......................... (.42) (.46) (.65) (.67) (.60) ------------ -------- -------- ------- ------- Net asset value, end of year............................... $ 13.08 $ 14.08 $ 12.85 $ 12.82 $ 11.26 ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN*: Based on net asset value per share......................... (4.19%) 13.49% 5.72% 20.65% 1.22% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............................. .63% .70% .97% 1.20% 1.25% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Expenses................................................... .63% .70% .97% 1.20% 1.50% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Investment income--net..................................... 3.95% 3.20% 3.71% 4.16% 4.71% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands)..................... $158,951 $115,420 $ 24,918 $ 7,937 $ 5,675 ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Portfolio turnover......................................... 35.36% 12.55% 36.34% 50.82% 23.52% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 140 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
BASIC VALUE FOCUS FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ----------------------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE FOR THE PERIOD YEAR ENDED JULY 1, 1993+ TO INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1994 DECEMBER 31, 1993 - ----------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.................................... $ 10.95 $ 10.00 ----------------- -------- Investment income (loss)--net........................................... .17 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................................................... .08 .91 ----------------- -------- Total from investment operations........................................ .25 .95 ----------------- -------- Less dividends and distributions: Investment income--net................................................ (.10) -- Realized gain on investments--net..................................... -- -- ----------------- -------- Total dividends and distributions....................................... (.10) -- ----------------- -------- Net asset value, end of period.......................................... $ 11.10 $ 10.95 ----------------- -------- ----------------- -------- - ----------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT RETURN**: Based on net asset value per share...................................... 2.36% 9.50%++ ----------------- -------- ----------------- -------- - ----------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......................................... .72% .86%* ----------------- -------- ----------------- -------- Expenses................................................................ .72% .86%* ----------------- -------- ----------------- -------- Investment income--net.................................................. 2.08% 1.69%* ----------------- -------- ----------------- -------- - ----------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................................ $ 164,307 $47,207 ----------------- -------- ----------------- -------- Portfolio turnover...................................................... 60.55% 30.86% ----------------- -------- ----------------- -------- - -----------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 141 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED -------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE PERIOD MAY 2, 1994+ INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31,1994 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.................................................... $ 10.00 -------- Investment income (loss)--net........................................................... .09 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................................................................... (.58) -------- Total from investment operations........................................................ (.49) -------- Less dividends and distributions: Investment income--net................................................................ -- Realized gain on investments--net..................................................... -- -------- Total dividends and distributions....................................................... -- -------- 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% -------- -------- - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 142 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
DOMESTIC MONEY MARKET FUND --------------------------------------------------------------- THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. DECEMBER 31, FOR THE PERIOD --------------------------------------- FEBRUARY 20, 1992+ INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 TO DECEMBER 31, 1992 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period..................... $ 1.00 $ 1.00 $ 1.00 ---------- ----------------- ---------- Investment income (loss)--net............................ .0386 .0302 .0302 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................... (.0007) .0005 .0013 ---------- ----------------- ---------- Total from investment operations......................... .0379 .0307 .0315 ---------- ----------------- ---------- Less dividends and distributions: Investment income--net................................. (.0386) (.0302) (.0302) Realized gain on investments--net...................... -- (.0005) (.0010) ---------- ----------------- ---------- Total dividends and distributions........................ (.0386) (.0307) (.0312) ---------- ----------------- ---------- Net asset value, end of period........................... $ 1.00 $ 1.00 $ 1.00 ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share....................... 3.94% 3.10% 3.16%++ ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........................... .50% .36% .32%* ---------- ----------------- ---------- ---------- ----------------- ---------- Expenses................................................. .57% .63% .88%* ---------- ----------------- ---------- ---------- ----------------- ---------- Investment income--net, and realized gain (loss) on investments--net....................................... 4.02% 3.03% 3.48%* ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................. $363,199 $ 170,531 $ 41,128 ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 143 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
EQUITY GROWTH FUND -------------------------------------------------------------------- THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED DECEMBER 31, FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. -------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994* 1993* 1992* 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year....................... $ 20.96 $ 17.80 $ 17.96 $ 11.98 $ 13.70 ------------ -------- -------- ------- -------- Investment income (loss)--net............................ .05 (.01) .01 .09 .05 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................... (1.56) 3.17 (.10) 5.91 (1.77) ------------ -------- -------- ------- -------- Total from investment operations......................... (1.51) 3.16 (.09) 6.00 (1.72) ------------ -------- -------- ------- -------- Less dividends and distributions: Investment income--net................................. -- --+ (.07) (.02) -- Realized gain on investments--net...................... (.19) -- -- -- -- ------------ -------- -------- ------- -------- Total dividends and distributions........................ (.19) -- (.07) (.02) -- ------------ -------- -------- ------- -------- Net asset value, end of year............................. $ 19.26 $ 20.96 $ 17.80 $ 17.96 $ 11.98 ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share....................... (7.27%) 17.78% (0.53%) 50.10% (12.55%) ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........................... .83% .96% 1.18% 1.25% 1.25% ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- Expenses................................................. .83% .96% 1.18% 1.28% 1.47% ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- Investment income (loss)--net............................ .27% (.05%) .04% .51% .14% ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands)................... $170,044 $ 98,976 $ 23,167 $11,318 $ 6,851 ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- Portfolio turnover....................................... 88.48% 131.75% 98.64% 79.10% 135.24% ------------ -------- -------- ------- -------- ------------ -------- -------- ------- -------- - ------------------------------------------------------------------------------------------------------------------------
* Based on average shares outstanding during the year. ** Total investment returns exclude insurance-related fees and expenses. + Amount is less than $.01 per share.
See Notes to Financial Statements. 144 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
FLEXIBLE STRATEGY FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994* 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........................ $ 16.19 $ 14.15 $ 14.79 $ 12.55 $ 12.44 ------------ -------- -------- ------- ------- Investment income (loss)--net............................. .37 .28 .33 .47 .65 Realized and unrealized gain (loss) on investments and foreign currency transactions--net...................... (1.02) 1.94 .25 2.52 (.08) ------------ -------- -------- ------- ------- Total from investment operations.......................... (.65) 2.22 .58 2.99 .57 ------------ -------- -------- ------- ------- Less dividends and distributions: Investment income--net.................................. (.30) (.15) (.54) (.66) (.46) Realized gain on investments--net....................... (.54) (.03) (.68) (.09) -- In excess of realized gain on investments--net -- -- -- -- -- ------------ -------- -------- ------- ------- Total dividends and distributions......................... (.84) (.18) (1.22) (.75) (.46) ------------ -------- -------- ------- ------- Net asset value, end of year.............................. $ 14.70 $ 16.19 $ 14.15 $ 14.79 $ 12.55 ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share........................ (4.20%) 15.80% 4.25% 24.98% 4.81% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............................ .73% .80% .90% .96% 1.08% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Expenses.................................................. .73% .80% .90% .96% 1.08% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Investment income--net.................................... 2.52% 2.26% 2.62% 3.51% 5.19% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands).................... $274,498 $194,777 $ 82,549 $55,221 $47,428 ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Portfolio turnover........................................ 65.54% 56.42% 55.25% 67.13% 52.95% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
* Based on average shares outstanding during the year. ** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 145 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
GLOBAL STRATEGY FOCUS FUND --------------------------------------------------------------- THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE YEAR ENDED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. DECEMBER 31, FOR THE PERIOD --------------------------------------- FEBRUARY 28, 1992+ INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 TO DECEMBER 31, 1992 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period..................... $ 12.17 $ 10.22 $ 10.00 ---------- ----------------- ---------- Investment income (loss)--net............................ .30 .16 .13 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................... (.48) 1.96 .13 ---------- ----------------- ---------- Total from investment operations......................... (.18) 2.12 .26 ---------- ----------------- ---------- Less dividends and distributions: Investment income--net................................. (.21) (.17) (.04) Realized gain on investments--net...................... (.04) -- -- In excess of realized gain on investments--net (.01) -- -- ---------- ----------------- ---------- Total dividends and distributions........................ (.26) (.17) (.04) ---------- ----------------- ---------- Net asset value, end of period........................... $ 11.73 $ 12.17 $ 10.22 ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share....................... (1.46%) 21.03% 2.62%++ ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........................... .77% .88% 1.25%* ---------- ----------------- ---------- ---------- ----------------- ---------- Expenses................................................. .77% .88% 1.35%* ---------- ----------------- ---------- ---------- ----------------- ---------- Investment income--net................................... 2.85% 2.41% 2.66%* ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................. $515,407 $ 269,627 $ 15,527 ---------- ----------------- ---------- ---------- ----------------- ---------- Portfolio turnover....................................... 21.03% 17.07% 14.47% ---------- ----------------- ---------- ---------- ----------------- ---------- - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 146 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
GLOBAL UTILITY FOCUS FUND ------------------------------------- THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FOR THE FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. YEAR ENDED FOR THE PERIOD DECEMBER 31, JULY 1, 1993+ TO INCREASE (DECREASE) IN NET ASSET VALUE: 1994 DECEMBER 31, 1993 - ---------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................................... $ 10.66 $ 10.00 ------------- ----------------- Investment income (loss)--net.............................................. .35 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................................................ (1.25) .64 ------------- ----------------- Total from investment operations........................................... (.90) .68 ------------- ----------------- Less dividends and distributions: Investment income--net................................................... (.29) (.02) Realized gain on investments--net........................................ -- -- In excess of realized gain on investments--net (.02) -- ------------- ----------------- Total dividends and distributions.......................................... (.31) (.02) ------------- ----------------- Net asset value, end of period............................................. $ 9.45 $ 10.66 ------------- ----------------- ------------- ----------------- - ---------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT RETURN**: Based on net asset value per share......................................... (8.51%) 6.85%++ ------------- ----------------- ------------- ----------------- - ---------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............................................. .73% .89%* ------------- ----------------- ------------- ----------------- Expenses................................................................... .73% .89%* ------------- ----------------- ------------- ----------------- Investment income--net..................................................... 3.68% 2.84%* ------------- ----------------- ------------- ----------------- - ---------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................................... $ 126,243 $ 104,517 ------------- ----------------- ------------- ----------------- Portfolio turnover......................................................... 9.52% 1.72% ------------- ----------------- ------------- ----------------- - ----------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 147 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
HIGH CURRENT INCOME FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........................ $ 12.06 $ 11.13 $ 10.23 $ 8.14 $ 10.21 ------------ -------- -------- ------- ------- Investment income (loss)--net............................. 1.05 .95 1.07 1.19 1.40 Realized and unrealized gain (loss) on investments and foreign currency transactions--net...................... (1.47) .95 .90 2.10 (2.08) ------------ -------- -------- ------- ------- Total from investment operations.......................... (.42) 1.90 1.97 3.29 (.68) ------------ -------- -------- ------- ------- Less dividends and distributions: Investment income--net.................................. (1.03) (.97) (1.07) (1.20) (1.39) Realized gain on investments--net....................... -- -- -- -- -- ------------ -------- -------- ------- ------- Total dividends and distributions......................... (1.03) (.97) (1.07) (1.20) (1.39) ------------ -------- -------- ------- ------- Net asset value, end of year.............................. $ 10.61 $ 12.06 $ 11.13 $ 10.23 $ 8.14 ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN*: Based on net asset value per share........................ (3.59%) 17.84% 20.05% 43.00% (7.63%) ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............................ .61% .72% .89% 1.10% 1.15% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Expenses.................................................. .61% .72% .89% 1.10% 1.15% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Investment income--net.................................... 9.73% 8.62% 10.06% 12.49% 14.52% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands).................... $255,719 $163,428 $ 26,343 $ 9,649 $ 8,106 ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- Portfolio turnover........................................ 51.88% 35.67% 28.21% 51.54% 26.43% ------------ -------- -------- ------- ------- ------------ -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 148 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED -------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE PERIOD MAY 2, 1994+ INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31,1994 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.................................................. $ 10.00 ------------ Investment income (loss)--net......................................................... .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net................................................................... (.07) ------------ Total from investment operations...................................................... .18 ------------ Less dividends and distributions: Investment income--net.............................................................. (.21) Realized gain on investments--net................................................... -- ------------ Total dividends and distributions..................................................... (.21) ------------ Net asset value, end of period........................................................ $ 9.97 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share.................................................... 1.79%++ ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement........................................................ .00%* ------------ ------------ Expenses.............................................................................. .80%* ------------ ------------ Investment income--net................................................................ 4.66%* ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands).............................................. $ 17,811 ------------ ------------ Portfolio turnover.................................................................... 103.03% ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 149 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED INTERNATIONAL BOND FUND FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. --------------------------- FOR THE PERIOD MAY 2, 1994+ INCREASE (DECREASE) IN NET ASSET VALUE: TO DECEMBER 31, 1994 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period................................................. $ 10.00 ---------- Investment income (loss)--net........................................................ .38 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................................................................. (.35) ---------- Total from investment operations..................................................... .03 ---------- Less dividends and distributions: Investment income--net............................................................. (.33) Realized gain on investments--net.................................................. -- ---------- Total dividends and distributions.................................................... (.33) ---------- Net asset value, end of period....................................................... $ 9.70 ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share................................................... 0.37%++ ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement....................................................... .00%* ---------- ---------- Expenses............................................................................. 1.08%* ---------- ---------- Investment income--net............................................................... 6.34%* ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............................................. $ 9,933 ---------- ---------- Portfolio turnover................................................................... 152.20% ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 150 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FOCUS FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------ FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR FOR THE PERIOD ENDED JULY 1, 1993+ TO INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1994 DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.................................... $ 11.03 $ 10.00 ---------- -------- Investment income (loss)--net........................................... .19 .01 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................................................... (.13) 1.02 ---------- -------- Total from investment operations........................................ .06 1.03 ---------- -------- Less dividends and distributions: Investment income--net................................................ (.18) -- Realized gain on investments--net..................................... (.01) -- ---------- -------- Total dividends and distributions....................................... (.19) -- ---------- -------- Net asset value, end of period.......................................... $ 10.90 $ 11.03 ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share...................................... 0.55% 10.30%++ ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......................................... .97% 1.14%* ---------- -------- ---------- -------- Expenses................................................................ .97% 1.14%* ---------- -------- ---------- -------- Investment income--net.................................................. 1.09% .30%* ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................................ $247,884 $76,906 ---------- -------- ---------- -------- Portfolio turnover...................................................... 58.84% 17.39% ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 151 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
NATURAL RESOURCES FOCUS FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM -------------------------------------------------------------- INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year............................. $ 10.82 $ 9.84 $ 10.06 $ 10.17 $ 11.09 ------- -------- -------- ------- ------- Investment income (loss)--net.................................. .17 .11 .18 .25 .22 Realized and unrealized gain (loss) on investments and foreign currency transactions--net................................... (.02) .92 (.05) (.11) (.90) ------- -------- -------- ------- ------- Total from investment operations............................... .15 1.03 .13 .14 (.68) ------- -------- -------- ------- ------- Less dividends and distributions: Investment income--net....................................... (.15) (.05) (.29) (.25) (.24) Realized gain on investments--net............................ -- -- (.06) -- -- ------- -------- -------- ------- ------- Total dividends and distributions.............................. (.15) (.05) (.35) (.25) (.24) ------- -------- -------- ------- ------- Net asset value, end of year................................... $ 10.82 $ 10.82 $ 9.84 $ 10.06 $ 10.17 ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN*: Based on net asset value per share............................. 1.44% 10.47% 1.36% 1.36% (6.21%) ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................................. .87% 1.13% 1.25% 1.25% 1.25% ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- Expenses....................................................... .87% 1.13% 1.27% 1.30% 1.38% ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- Investment income--net......................................... 1.91% 1.34% 2.00% 2.31% 2.26% ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......................... $39,715 $ 14,778 $ 4,144 $ 3,084 $ 3,247 ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- Portfolio turnover............................................. 10.94% 58.44% 22.88% 31.38% 27.61% ------- -------- -------- ------- ------- ------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 152 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
PRIME BOND FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------------------------ FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........................... $ 12.64 $ 12.04 $ 12.02 $ 11.18 $ 11.29 -------- -------- -------- -------- -------- Investment income (loss)--net................................ .77 .70 .79 .90 .88 Realized and unrealized gain (loss) on investments and foreign currency transactions--net......................... (1.36) .71 .04 .84 (.12) -------- -------- -------- -------- -------- Total from investment operations............................. (.59) 1.41 .83 1.74 .76 -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net..................................... (.76) (.70) (.81) (.90) (.87) Realized gain on investments--net.......................... -- (.11) -- -- -- In excess of realized gain on investments--net............. (.17) -- -- -- -- -------- -------- -------- -------- -------- Total dividends and distributions............................ (.93) (.81) (.81) (.90) (.87) -------- -------- -------- -------- -------- Net asset value, end of year................................. $ 11.12 $ 12.64 $ 12.04 $ 12.02 $ 11.18 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN*: Based on net asset value per share........................... (4.80%) 12.02% 7.27% 16.41% 7.13% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............................... .54% .63% .78% .78% 1.06% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Expenses..................................................... .54% .63% .78% .78% 1.06% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Investment income--net....................................... 6.74% 5.86% 6.76% 7.94% 8.01% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands)....................... $391,234 $314,091 $ 84,810 $ 39,743 $ 34,655 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Portfolio turnover........................................... 139.89% 115.26% 82.74% 152.18% 155.17% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 153 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
QUALITY EQUITY FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ---------------------------------------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994* 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.............................. $ 29.02 $ 25.48 $ 26.35 $ 21.72 $ 22.88 -------- -------- -------- ------- ------- Investment income (loss)--net................................... .38 .24 .34 .43 .47 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................................... (.74) 3.46 .32 5.75 (.38) -------- -------- -------- ------- ------- Total from investment operations................................ (.36) 3.70 .66 6.18 .09 -------- -------- -------- ------- ------- Less dividends and distributions: Investment income--net........................................ (.25) (.12) (.58) (.50) (.41) Realized gain on investments--net............................. (.67) (.04) (.95) (1.05) (.84) -------- -------- -------- ------- ------- Total dividends and distributions............................... (.92) (.16) (1.53) (1.55) (1.25) -------- -------- -------- ------- ------- Net asset value, end of year.................................... $ 27.74 $ 29.02 $ 25.48 $ 26.35 $ 21.72 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share.............................. (1.20%) 14.57% 2.69% 30.18% .66% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.................................. .54% .62% .74% .79% .94% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Expenses........................................................ .54% .62% .74% .79% .94% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Investment income--net.......................................... 1.39% 1.07% 1.54% 1.87% 2.36% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands).......................... $464,360 $309,420 $ 87,977 $55,005 $39,470 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Portfolio turnover.............................................. 60.57% 88.25% 62.54% 55.83% 69.05% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
* Based on average shares outstanding during the year. ** Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 154 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
RESERVE ASSETS FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED --------------------------------------------------------------- FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- ------- ------- Investment income (loss)--net................................. .0371 .0268 .0320 .0546 .0730 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................................. (.0009) .0005 .0007 .0014 .0019 -------- -------- -------- ------- ------- Total from investment operations.............................. .0362 .0273 .0327 .0560 .0749 -------- -------- -------- ------- ------- Less dividends and distributions: Investment income--net...................................... (.0362) (.0268) (.0320) (.0546) (.0730) Realized gain on investments--net........................... -- (.0005) (.0005) (.0014)+ (.0019)+ -------- -------- -------- ------- ------- Total dividends and distributions............................. (.0362) (.0273) (.0325) (.0560) (.0749) -------- -------- -------- ------- ------- 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............................ 3.80% 2.77% 3.29% 5.68% 7.65% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses...................................................... .65% .70% .79% .79% .97% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Investment income--net, and realized gain (loss) on investments--net......................................... 3.75% 2.73% 3.36% 5.64% 7.46% -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of year (in thousands)........................ $ 32,196 $ 30,168 $ 26,767 $34,362 $35,871 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
+ Includes unrealized gain (loss). (See Note 1g). * Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements. 155 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS (CONCLUDED) - --------------------------------------------------------------------------------
WORLD INCOME FOCUS FUND THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED ------------------------------------------ FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE YEAR FOR THE PERIOD ENDED JULY 1, 1993+ TO INCREASE (DECREASE) IN NET ASSET VALUE: DECEMBER 31, 1994 DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.................................... $ 10.38 $ 10.00 ---------- -------- Investment income (loss)--net........................................... .76 .25 Realized and unrealized gain (loss) on investments and foreign currency transactions--net..................................................... (1.19) .33 ---------- -------- Total from investment operations........................................ (.43) .58 ---------- -------- Less dividends and distributions: Investment income--net................................................ (.76) (.20) Realized gain on investments--net..................................... -- -- In excess of realized gain on investments--net........................ (.02) -- ---------- -------- Total dividends and distributions....................................... (.78) (.20) ---------- -------- Net asset value, end of period.......................................... $ 9.17 $ 10.38 ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT RETURN**: Based on net asset value per share...................................... (4.21%) 5.90%++ ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.......................................... .75% .94%* ---------- -------- ---------- -------- Expenses................................................................ .75% .94%* ---------- -------- ---------- -------- Investment income--net.................................................. 8.01% 6.20%* ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................................ $ 75,150 $50,737 ---------- -------- ---------- -------- Portfolio turnover...................................................... 117.58% 54.80% ---------- -------- ---------- -------- - ------------------------------------------------------------------------------------------------------------------------
* Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return.
See Notes to Financial Statements. 156 - -------------------------------------------------------------------------------- MERRILL LYNCH VARIABLE SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES: Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end management investment company which is comprised of 17 separate funds ('Funds' or 'Fund') offering 17 separate classes of shares to the Merrill Lynch Life Insurance Company, ML Life Insurance Company of New York (indirect wholly-owned subsidiaries of Merrill Lynch & Co., Inc. 'ML & Co.'), and Family Life Insurance Company (an insurance company not affiliated with ML & Co.) for their separate accounts to fund benefits under certain variable annuity contracts. Each Fund is classified as 'diversified', as defined in the Investment Company Act of 1940, except for Developing Capital Markets Fund, Global Strategy Focus Fund, International Bond Fund, Natural Resources Focus Fund and the World Income Focus Fund, all of which are classified as 'non-diversified.' The following is a summary of significant accounting policies followed by the Funds. (a) Valuation of investments--Money market securities maturing more than sixty days after the valuation date are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in the securities. When such securities are valued with sixty days or less to maturity, the difference between the valuation existing on the sixty-first day before maturity and maturity value is amortized on a straight-line basis to maturity. Investments maturing within sixty days from their date of acquisition are valued at amortized cost, which approximates market value. Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are being valued, or lacking any sales, at the closing bid price. Securities traded in the over-the-counter market are valued at the bid price or yield equivalent as obtained from one or more dealers that make markets in such securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Options which are traded on exchanges are valued at the last bid price in the case of options purchased and last asked price in the case of options written. (b) Derivative financial instruments--The Fund may engage in various portfolio strategies to seek to increase its returns by hedging its portfolio against adverse movements in the equity, debt and currency markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. *Forward foreign exchange contracts--Certain Funds are authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Fund's records. However, the effect on net investment income is recorded from the date the Fund enters into such contracts. Premiums or discount is amortized over the life of the contracts. *Options--Certain Funds may write or purchase call options and put options. When a Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current value of the option written. When a security is sold through an exercise of an option, the related premium received (or paid) is deducted from (or added to) the basis of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). *Foreign currency options and futures--Certain Funds may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-US dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. *Futures contracts--Certain Funds may purchase or sell futures contracts and options on such futures contracts. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transactions is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Written and purchased options are non-income producing investments. (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) 157 - -------------------------------------------------------------------------------- or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Company's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Dividend income is recorded on the ex-dividend dates except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Interest income (including amortization of premium and discount) is recognized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (f) Deferred organization expenses and prepaid registration fees--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period. Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Funds are recorded on the ex-dividend dates. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Company has entered into an Investment Advisory Agreement with Merrill Lynch Asset Management, L.P. ('MLAM'). The general partner of MLAM is Princeton Services, Inc. ('PSI'), an indirect, wholly-owned subsidiary of ML & Co., which is the limited partner. MLAM is responsible for the management of the Company's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Funds. For such services, the Company pays a monthly fee based upon the average daily value of each Fund's net assets at the following annual rates: 0.75% of the average daily net assets of the Equity Growth Fund, 0.65% of the average daily net assets of each of the Flexible Strategy Fund, 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, 0.60% of the average daily net assets of the Basic Value Focus Fund, 0.60% of the average daily net assets of the International Bond Fund, 0.60% of the average daily net assets of the World Income Focus Fund, 0.60% of the average daily net assets of the Global Utility Focus Fund, 0.75% of the average daily net assets of the International Equity Focus Fund, 1.00% of the average daily net assets of the Developing Capital Markets Focus Fund and 0.50% of the average daily net assets of the Intermediate Government Bond Fund, and at the following annual rates with respect to the other Funds:
RESERVE ASSETS FUND Portion of average daily value of net assets of the Fund: - ------------------------------------------------- ADVISORY FEE - ------------------------------------------------- Not exceeding $500 million............ 0.500% In excess of $500 million but not exceeding $750 million................ 0.425% In excess of $750 million but not exceeding $1 billion.................. 0.375% - ------------------------------------------------- QUALITY EQUITY FUND - ------------------------------------------------- Portion of average daily value of net assets of the Fund: Not exceeding $250 million............ 0.500% In excess of $250 million but not exceeding $300 million................ 0.450% In excess of $300 million but not exceeding $400 million................ 0.425% In excess of $400 million............. 0.400% - ------------------------------------------------- PRIME BOND FUND AND HIGH CURRENT INCOME FUND - ------------------------------------------------- PORTION OF AGGREGATE AVERAGE DAILY VALUE OF NET ASSETS OF BOTH FUNDS:
ADVISORY FEE - ---------------------------------------------------------- HIGH CURRENT PRIME INCOME BOND FUND FUND - ---------------------------------------------------------- Not exceeding $250 million......... 0.55% 0.50 % In excess of $250 million but not more than $500 million............. 0.50% 0.45 % - ----------------------------------------------------------
The Investment Advisory Agreement obligates MLAM to reimburse the Company, if in any year the aggregate ordinary operating expenses of any Fund exceed the most restrictive expense limitations then in effect under any state securities laws or the regulations thereunder. Under the most restrictive state regulations presently in effect, the Investment Adviser would be required to reimburse each Fund for advisory fees received by it from the Fund, to the extent that such Fund's aggregate ordinary operating expenses (excluding interest, taxes, brokerage fees and commissions, and extraordinary items) exceed in any fiscal year 2.5% of each Fund's first $30 million of average daily net assets, 2.0% of the Fund's next $70 million of average daily net assets, and 1.5% of average daily net assets in excess thereof. In addition, the Investment Adviser, MLAM, and Merrill Lynch Life Agency, Inc. ('MLLA') have entered into an agreement which limits the operating expenses paid by each Fund to 1.25% of its average daily net assets. Any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. For Developing Capital Markets Focus Fund for the period May 2, 1994 to December 31, 1994, MLAM 158 - -------------------------------------------------------------------------------- earned fees of $151,621, of which $8,915 was voluntarily waived. For Domestic Money Market Fund for the year ended December 31, 1994, MLAM earned fees of $1,418,479, of which $201,286 was voluntarily waived. For Intermediate Government Bond Fund for the period May 2, 1994 to December 31, 1994, MLAM earned fees of $31,692, all of which was voluntarily waived. MLAM has also reimbursed the Fund $19,250 in additional expenses. For the International Bond Fund for the period May 2, 1994 to December 31, 1994, MLAM earned fees of $30,838, all of which was voluntarily waived. MLAM has also reimbursed the Fund for $24,637 in additional expenses. Merrill Lynch, Pierce, Fenner & Smith Inc. ('MLPF&S'), an affiliate of MLIM, earned commissions on the execution of portfolio security transactions aggregating $10,806 in the American Balance Fund, $18,504 in the Basic Value Focus Fund, $5,501 in the Developing Capital Markets Focus Fund, $4,020 in the Equity Growth Fund, $29,097 in the Flexible Strategy Fund, $44,456 in the Global Strategy Focus Fund, $2,346 in the Global Utility Focus Fund, $33,386 in the International Equity Focus Fund, $1,344 in the Natural Resources Focus Fund, $58,618 in the Quality Equity Fund, and $625 in the World Income Focus Fund. Accounting services are provided to the Company by MLAM at cost. American Balanced Fund, Global Utility Focus Fund, High Current Income Fund, Intermediate Government Bond Fund, Prime Bond Fund and World Income Focus Fund paid Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, $879, $7,173, $16,562, $200, $1,472, and $5,070, respectively, for security price quotations to compute the net asset value of the Fund. Financial Data Services, Inc. ('FDS'), a wholly-owned subsidiary of ML & Co., is the company's transfer agent. Certain officers and/or directors of the Company are officers and/or directors of MLAM, PSI, FDS, Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary of Merrill Lynch Group, Inc., which is the Fund's distributor, and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities for the year ended December 31, 1994, were as follows: PURCHASES SALES - ---------------------------------------------------------- American Balanced Fund............................ $ 113,205,848 $ 47,004,890 Basic Value Focus Fund............................ 179,580,610 62,940,173 Developing Capital Markets Focus Fund............. 35,559,221 4,471,508 Domestic Money Market Fund........................ -- -- Equity Growth Fund................................ 186,468,001 109,194,836 Flexible Strategy Fund............................ 193,165,367 130,314,357 Global Strategy Focus Fund........................ 385,300,323 85,076,823 Global Utility Focus Fund......................... 60,441,616 9,826,860 High Current Income Fund.......................... 222,031,621 107,197,912 Intermediate Government Bond Fund................. 4,079,287 1,445,980 International Bond Focus Fund..................... 15,849,508 7,568,834 International Equity Focus Fund................... 244,503,377 90,821,367 Natural Resources Focus Fund...................... 23,122,635 2,472,626 Prime Bond Fund................................... 573,637,572 461,357,101 Quality Equity Fund............................... 304,407,076 204,149,998 Reserve Assets Fund............................... -- -- World Income Focus Fund........................... 93,538,055 70,565,612 - ----------------------------------------------------------
Transactions in options written for the year ended December 31, 1994, were as follows: FLEXIBLE STRATEGY FUND - ----------------------------------------------------------
SHARES PREMIUMS CALL OPTIONS WRITTEN COVERED RECEIVED - ---------------------------------------------------------- Outstanding call options written, beginning of year.......................................... -- -- Options written................................ 21,500 $ 26,693 Options closed................................. (500) (891) Options exercised.............................. (5,000) (5,274) -------------- ------------ Outstanding call options written, end of year.......................................... 16,000 $ 20,528 -------------- ------------ -------------- ------------ - ---------------------------------------------------------- INTERNATIONAL EQUITY FOCUS FUND - ---------------------------------------------------------- NUMBER OF PREMIUMS CALL OPTIONS WRITTEN CONTRACTS RECEIVED - ---------------------------------------------------------- Outstanding call options written, beginning of year.......................................... 1 $ 15,500 Options written................................ 12 575,993 Options expired................................ (5) (148,143) Options closed................................. (5) (86,250) -------------- ------------ Outstanding call options written end of year... 3 $ 357,100 -------------- ------------ -------------- ------------ - ---------------------------------------------------------- NUMBER OF PREMIUMS PUT OPTIONS WRITTEN CONTRACTS RECEIVED - ---------------------------------------------------------- Outstanding put options written, beginning of year.......................................... 4 $ 103,350 Options written................................ 5 277,979 Options expired................................ (3) (67,405) Options closed................................. (3) (98,102) -------------- ------------ Outstanding put options written, end of year... 3 $ 215,822 -------------- ------------ -------------- ------------ - ----------------------------------------------------------
159 - --------------------------------------------------------------------------------
QUALITY EQUITY FUND - ---------------------------------------------------------- NUMBER OF SHARES PREMIUMS CALL OPTIONS WRITTEN COVERED RECEIVED - ---------------------------------------------------------- Outstanding call options written, beginning of year.......................................... -- -- Options written................................ 49,700 $ 57,999 Options closed................................. (21,000) (22,832) -------------- ------------ Outstanding call options written, end of year.......................................... 28,700 $ 35,167 -------------- ------------ -------------- ------------ - ---------------------------------------------------------- WORLD INCOME FOCUS FUND - ---------------------------------------------------------- NUMBER OF PREMIUMS CALL OPTIONS WRITTEN CONTRACTS RECEIVED - ---------------------------------------------------------- Outstanding call options written, beginning of year.......................................... -- -- Options written................................ 2 $ 10,100 -------------- ------------ Outstanding call options written, end of year.......................................... 2 $ 10,100 -------------- ------------ -------------- ------------ - ----------------------------------------------------------
At December 31, 1994, net unrealized appreciation/depreciation and aggregate cost for Federal income tax purposes were as follows:
DEVELOPING BASIC CAPITAL DOMESTIC AMERICAN VALUE MARKETS MONEY BALANCED FOCUS FOCUS MARKET FUND FUND FUND FUND - ---------------------------------------------------------- Appreciated securities............. $ 5,377,922 $ 7,250,050 $ 1,389,196 -- Depreciated securities............. (11,559,561) (12,127,815) (3,734,745) $ (196,315) ------------ ------------ ----------- ------------ Net unrealized depreciation........... $ (6,181,639) $ (4,877,765) $(2,345,549) $ (196,315) ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Cost for Federal income tax purposes*.......... $163,046,195 $168,786,131 $40,275,572 $369,315,441 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ - ----------------------------------------------------------
GLOBAL GLOBAL EQUITY FLEXIBLE STRATEGY UTILITY GROWTH STRATEGY FOCUS FOCUS FUND FUND FUND FUND - ---------------------------------------------------------- Appreciated securities.... $ 12,859,867 $ 14,334,233 $ 19,946,186 $ 3,330,334 Depreciated securities.... (10,215,739) (13,622,415) (32,174,422) (15,013,594) ------------ ------------ ------------- ------------ Net unrealized appreciation (depreciation)............ $ 2,644,128 $ 711,818 $ (12,228,236) $(11,683,260) ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ Cost for Federal income tax purposes*............. $167,284,987 $272,988,599 $ 524,369,249 $137,874,783 ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ - ---------------------------------------------------------- HIGH INTERMEDIATE INTERNATIONAL CURRENT GOVERNMENT INTERNATIONAL EQUITY INCOME BOND BOND FOCUS FUND FUND FUND FUND - ---------------------------------------------------------- Appreciated securities.... $ 809,848 $ 10,120 $ 48,465 $ 7,392,821 Depreciated securities.... (25,408,864) (70,862) (144,933) (14,915,053) ------------ ------------ ------------- ------------ Net unrealized depreciation.............. $(24,599,016) $ (60,742) $ (96,468) $ (7,522,232) ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ Cost for Federal income tax purposes*............. $273,516,227 $ 17,635,984 $ 10,713,571 $251,213,493 ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ - ---------------------------------------------------------- NATURAL RESOURCES PRIME QUALITY RESERVE FOCUS BOND EQUITY ASSETS FUND FUND FUND FUND - ---------------------------------------------------------- Appreciated securities.... $ 1,673,801 $ 179,070 $ 36,163,539 -- Depreciated securities.... (2,547,781) (22,272,625) (23,217,895) $ (27,924) ------------ ------------ ------------- ------------ Net unrealized appreciation (depreciation)............ $ (873,980) $(22,093,555) $ 12,945,644 $ (27,924) ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ Cost for Federal income tax purposes*............. $ 40,329,553 $406,893,235 $ 451,837,771 $ 32,698,577 ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ - ----------------------------------------------------------
WORLD INCOME FOCUS FUND - ---------------------------------------------------------- Appreciated securities.......................................... $ 175,154 Depreciated securities.......................................... (5,135,915) ------------ Net unrealized depreciation..................................... $ (4,960,761) ------------ ------------ Cost for Federal income tax purposes*........................... $ 78,516,982 ------------ ------------ - ----------------------------------------------------------
* Net of premiums received on options written. At December 31, 1994, net realized and unrealized gains (losses) were as follows: - ----------------------------------------------------------
AMERICAN BASIC VALUE BALANCED FUND FOCUS FUND -------------------------- --------------------------- Realized Realized Gains Unrealized Gains Unrealized (Losses) Losses (Losses) Losses - ---------------------------------------------------------- Long-term investments.... $ (635,513) $ (6,181,639) $ 7,037,866 $ (4,723,949) Short-term investments... 1,291 -- (155) -- Foreign currency transactions............. -- -- -- -- ----------- ------------ ------------ ------------ $ (634,222) $ (6,181,639) $ 7,037,711 $ (4,723,949) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ----------------------------------------------------------
DEVELOPING CAPITAL DOMESTIC MONEY MARKETS FUND MARKET FUND -------------------------- --------------------------- Realized Unrealized Gains Gains Realized Unrealized (Losses) (Losses) Gains Losses - ---------------------------------------------------------- Long-term investments.... $ (673,658) $ (2,334,256) -- -- Short-term investments... (38) (11,293) $ 5,347 $ (196,315) Foreign currency transactions............. 1,440 372 -- -- ----------- ------------ ------------ ------------ $ (672,256) $ (2,345,177) $ 5,347 $ (196,315) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ---------------------------------------------------------- EQUITY GROWTH FLEXIBLE STRATEGY FUND FUND -------------------------- --------------------------- Realized Realized Gains Unrealized Gains Unrealized (Losses) Gains (Losses) Gains - ---------------------------------------------------------- Long-term investments.... $(1,981,831) $ 2,644,128 $ 5,023,198 $ 749,329 Short-term investments... 68 -- (28) -- Investment options written.................. -- -- 392 2,528 Foreign currency transactions............. -- -- (278,822) 6,550 ----------- ------------ ------------ ------------ $(1,981,763) $ 2,644,128 $ 4,744,740 $ 758,407 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ----------------------------------------------------------
160 - --------------------------------------------------------------------------------
GLOBAL STRATEGY GLOBAL UTILITY FOCUS FUND FOCUS FUND -------------------------- --------------------------- Realized Unrealized Realized Unrealized Gains Gains Gains Gains (Losses) (Losses) (Losses) (Losses) - ---------------------------------------------------------- Long-term investments.... $ 146,995 $(12,228,236) $ (1,489,424) $(11,683,260) Short-term investments... (2,338) -- (757) -- Foreign currency transactions............. (370,007) (9,697) 8,194 138 Forward foreign exchange contracts................ 22,390 559,659 -- -- ----------- ------------ ------------ ------------ $ (202,960) $(11,678,274) $ (1,481,987) $(11,683,122) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ---------------------------------------------------------- HIGH CURRENT INTERMEDIATE GOVERNMENT INCOME FUND BOND FUND -------------------------- --------------------------- Realized Unrealized Realized Unrealized Losses Losses Losses Losses - ---------------------------------------------------------- Long-term investments.... $(1,918,271) $(24,346,157) $ (55,070) $ (60,742) Short-term investments... (233) -- (246) -- ----------- ------------ ------------ ------------ $(1,918,504) $(24,346,157) $ (55,316) $ (60,742) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ---------------------------------------------------------- INTERNATIONAL BOND INTERNATIONAL EQUITY FUND FOCUS FUND -------------------------- --------------------------- Realized Unrealized Realized Unrealized Gains Gains Gains Gains (Losses) (Losses) (Losses) (Losses) - ---------------------------------------------------------- Long-term investments.... $ (41,534) $ (96,468) $ 7,743,365 $ (7,135,363) Short-term investments... (91) -- (2,798) (267) Foreign currency transactions............. 108,688 (387) (108,210) 28,311 Forward foreign exchange contracts................ (165,754) (66,829) (3,691,954) 300,276 Financial futures contracts................ -- -- 726,501 710,940 Currency option written.................. -- -- (133,883) 332,300 Currency option purchased................ -- -- (644,421) (144,800) Investment option purchased................ -- -- (226,045) (350,403) Investment option written.................. -- -- 187,662 (36,199) ----------- ------------ ------------ ------------ $ (98,691) $ (163,684) $ 3,850,217 $ (6,295,205) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ---------------------------------------------------------- NATURAL RESOURCES PRIME BOND FOCUS FUND FUND -------------------------- --------------------------- Realized Gains Unrealized Realized Unrealized (Losses) Losses Losses Losses - ---------------------------------------------------------- Long-term investments.... $ 108,896 $ (873,980) $(18,783,001) $(21,899,527) Short-term investments... (265) -- (775) -- Foreign currency transactions............. (6,578) (51) -- -- ----------- ------------ ------------ ------------ $ 102,053 $ (874,031) $(18,783,776) $(21,899,527) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ---------------------------------------------------------- QUALITY EQUITY RESERVE ASSETS FUND FUND -------------------------- --------------------------- Realized Unrealized Realized Unrealized Gains Gains Gains Losses - ---------------------------------------------------------- Long-term investments.... $10,328,366 $ 13,206,594 -- -- Short-term investments... -- -- $ 1,901 $ (27,924) Investment options written.................. 785 2,880 -- -- Foreign currency transactions............. 36 -- -- -- ----------- ------------ ------------ ------------ $10,329,187 $ 13,209,474 $ 1,901 $ (27,924) ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - ---------------------------------------------------------- WORLD INCOME FOCUS FUND -------------------------- Realized Unrealized Gains Gains (Losses) (Losses) - ---------------------------------------------------------- Long-term investments.... $(2,735,565) $ (4,617,679) Short-term investments... (479) -- Currency options purchased................ -- (3,250) Currency options written.................. -- (1,900) Foreign currency transactions............. 334,364 7,152 Forward foreign exchange contracts................ (835,023) (217,104) ----------- ------------ $(3,236,703) $ (4,832,781) ----------- ------------ ----------- ------------ - ----------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS: Transactions in capital shares were as follows: AMERICAN BALANCED FUND - ----------------------------------------------------------
For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 4,208,232 $ 56,940,222 Shares issued to shareholders in reinvestment of dividends and distributions...................... 308,791 4,107,209 ------------ ------------ Total issued....................................... 4,517,023 61,047,431 Shares redeemed.................................... (565,599) (7,507,172) ------------ ------------ Net increase....................................... 3,951,424 $ 53,540,259 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 6,659,885 $ 91,353,359 Shares issued to shareholders in reinvestment of dividends and distributions...................... 92,618 1,203,002 ------------ ------------ Total issued....................................... 6,752,503 92,556,361 Shares redeemed.................................... (491,212) (6,703,257) ------------ ------------ Net increase....................................... 6,261,291 $ 85,853,104 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
BASIC VALUE FOCUS FUND - ----------------------------------------------------------
For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 10,501,448 $115,102,779 Shares issued to shareholders in reinvestment of dividends........................................ 87,071 928,253 ------------ ------------ Total issued....................................... 10,588,519 116,031,032 Shares redeemed.................................... (99,204) (1,078,972) ------------ ------------ Net increase....................................... 10,489,315 $114,952,060 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Period July 1, 1993+ to Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 4,116,053 $ 45,688,307 Shares issued to shareholders in reinvestment of dividends and distributions...................... -- -- ------------ ------------ Total issued....................................... 4,116,053 45,688,307 Shares redeemed.................................... (202,978) (2,154,283) ------------ ------------ Net increase....................................... 3,913,075 $ 43,534,024 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to July 1, 1993 (commencement of operations), the Fund issued 200,010 shares to MLAM for $2,000,100. 161 - --------------------------------------------------------------------------------
DEVELOPING CAPITAL MARKETS FOCUS FUND - ---------------------------------------------------------- For the Period May 2, 1994+ to Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 3,089,579 $ 31,702,122 Shares issued to shareholders in reinvestment of dividends and distributions...................... -- -- ------------ ------------ Total issued....................................... 3,089,579 31,702,122 Shares redeemed.................................... (33,668) (339,498) ------------ ------------ Net increase....................................... 3,055,911 $ 31,362,624 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 800,000 shares to MLAM for $8,000,000.
DOMESTIC MONEY MARKET FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 458,988,915 $458,988,915 Shares issued to shareholders in reinvestment of dividends and distributions...................... 11,425,228 11,425,228 ------------ ------------ Total issued....................................... 470,414,143 470,414,143 Shares redeemed.................................... (277,547,347) (277,547,347) ------------ ------------ Net increase....................................... 192,866,796 $192,866,796 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 371,125,144 $371,125,144 Shares issued to shareholders in reinvestment of dividends and distributions...................... 2,796,153 2,796,153 ------------ ------------ Total issued....................................... 373,921,297 373,921,297 Shares redeemed.................................... (244,516,209) (244,516,209) ------------ ------------ Net increase....................................... 129,405,088 $129,405,088 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
EQUITY GROWTH FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 4,244,767 $ 84,908,525 Shares issued to shareholders in reinvestment of distributions.................................... 43,323 895,916 ------------ ------------ Total issued....................................... 4,288,090 85,804,441 Shares redeemed.................................... (178,315) (3,486,970) ------------ ------------ Net increase....................................... 4,109,775 $ 82,317,471 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 3,715,936 $ 69,928,165 Shares issued to shareholders in reinvestment of dividends and distributions...................... 330 5,834 ------------ ------------ Total issued....................................... 3,716,266 69,933,999 Shares redeemed.................................... (296,830) (5,457,567) ------------ ------------ Net increase....................................... 3,419,436 $ 64,476,432 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- FLEXIBLE STRATEGY FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 6,842,583 $103,469,524 Shares issued to shareholders in reinvestment of dividends and distributions...................... 708,891 10,747,143 ------------ ------------ Total issued....................................... 7,551,474 114,216,667 Shares redeemed.................................... (904,823) (13,574,190) ------------ ------------ Net increase....................................... 6,646,651 $100,642,477 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 6,911,886 $103,761,462 Shares issued to shareholders in reinvestment of dividends and distributions...................... 100,932 1,460,495 ------------ ------------ Total issued....................................... 7,012,818 105,221,957 Shares redeemed.................................... (820,921) (12,312,814) ------------ ------------ Net increase....................................... 6,191,897 $ 92,909,143 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- GLOBAL STRATEGY FOCUS FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 22,592,355 $274,822,981 Shares issued to shareholders in reinvestment of dividends and distributions...................... 668,929 8,022,134 ------------ ------------ Total issued....................................... 23,261,284 282,845,115 Shares redeemed.................................... (1,462,140) (17,755,958) ------------ ------------ Net increase....................................... 21,799,144 $265,089,157 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 20,813,811 $241,520,508 Shares issued to shareholders in reinvestment of dividends and distributions...................... 35,643 394,216 ------------ ------------ Total issued....................................... 20,849,454 241,914,724 Shares redeemed.................................... (213,171) (2,402,857) ------------ ------------ Net increase....................................... 20,636,283 $239,511,867 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
GLOBAL UTILITY FOCUS FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 4,446,449 $ 45,407,839 Shares issued to shareholders in reinvestment of dividends and distributions...................... 408,041 3,993,505 ------------ ------------ Total issued....................................... 4,854,490 49,401,344 Shares redeemed.................................... (1,299,696) (12,707,196) ------------ ------------ Net increase....................................... 3,554,794 $ 36,694,148 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Period July 1, 1993+ to Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 9,794,562 $101,325,529 Shares issued to shareholders in reinvestment of dividends and distributions...................... 11,422 118,908 ------------ ------------ Total issued....................................... 9,805,984 101,444,437 Shares redeemed.................................... (201,232) (2,092,591) ------------ ------------ Net increase....................................... 9,604,752 $ 99,351,846 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to July 1, 1993 (commencement of operations), the Fund issued 200,010 shares to MLAM for $2,000,000.
HIGH CURRENT INCOME FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 10,081,695 $116,511,262 Shares issued to shareholders in reinvestment of dividends and distributions...................... 1,840,902 20,563,966 ------------ ------------ Total issued....................................... 11,922,597 137,075,228 Shares redeemed.................................... (1,381,220) (15,761,890) ------------ ------------ Net increase....................................... 10,541,377 $121,313,338 ------------ ------------ ------------ ------------
162 - --------------------------------------------------------------------------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 11,096,856 $130,007,224 Shares issued to shareholders in reinvestment of dividends........................................ 517,507 6,035,740 ------------ ------------ Total issued....................................... 11,614,363 136,042,964 Shares redeemed.................................... (424,381) (4,968,409) ------------ ------------ Net increase....................................... 11,189,982 $131,074,555 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND FUND - ---------------------------------------------------------- For the Period May 2, 1994+ to Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 1,580,746 $ 15,798,020 Shares issued to shareholders in reinvestment of dividends........................................ 22,294 222,052 ------------ ------------ Total issued....................................... 1,603,040 16,020,072 Shares redeemed.................................... (16,719) (166,738) ------------ ------------ Net increase....................................... 1,586,321 $ 15,853,334 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 200,000 shares to MLAM for $2,000,000.
INTERNATIONAL BOND FUND - ---------------------------------------------------------- For the Period May 2, 1994+ to Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 532,215 $ 5,218,763 Shares issued to shareholders in reinvestment of dividends........................................ 27,759 271,353 ------------ ------------ Total issued....................................... 559,974 5,490,116 Shares redeemed.................................... (35,652) (348,847) ------------ ------------ Net increase....................................... 524,322 $ 5,141,269 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to May 2, 1994 (commencement of operations), the Fund issued 500,000 shares to MLAM for $5,000,000.
INTERNATIONAL EQUITY FOCUS FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 15,762,751 $177,512,550 Shares issued to shareholders in reinvestment of dividends and distributions...................... 155,170 1,705,946 ------------ ------------ Total issued....................................... 15,917,921 179,218,496 Shares redeemed.................................... (149,766) (1,678,473) ------------ ------------ Net increase....................................... 15,768,155 $177,540,023 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Period July 1, 1993+ to Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 6,976,839 $ 72,732,083 Shares issued to shareholders in reinvestment of dividends and distributions...................... -- -- ------------ ------------ Total issued....................................... 6,976,839 72,732,083 Shares redeemed.................................... (804,344) (8,379,435) ------------ ------------ Net increase....................................... 6,172,495 $ 64,352,648 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to July 1, 1993 (commencement of operations), the Fund issued 800,010 shares to MLAM for $8,000,100.
NATURAL RESOURCES FOCUS FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 2,431,502 $ 26,836,585 Shares issued to shareholders in reinvestment of dividends........................................ 7,751 83,948 ------------ ------------ Total issued....................................... 2,439,253 26,920,533 Shares redeemed.................................... (134,053) (1,481,555) ------------ ------------ Net increase....................................... 2,305,200 $ 25,438,978 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 1,268,742 $ 14,115,826 Shares issued to shareholders in reinvestment of dividends........................................ 3,674 40,449 ------------ ------------ Total issued....................................... 1,272,416 14,156,275 Shares redeemed.................................... (327,587) (3,584,398) ------------ ------------ Net increase....................................... 944,829 $ 10,571,877 ------------ ------------ ------------ ------------
- ----------------------------------------------------------
PRIME BOND FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 9,962,468 $118,092,307 Shares issued to shareholders in reinvestment of dividends and distributions...................... 2,421,862 28,191,568 ------------ ------------ Total issued....................................... 12,384,330 146,283,875 Shares redeemed.................................... (2,052,800) (23,633,675) ------------ ------------ Net increase....................................... 10,331,530 $122,650,200 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 18,166,471 $229,284,947 Shares issued to shareholders in reinvestment of dividends and distributions...................... 835,307 10,463,170 ------------ ------------ Total issued....................................... 19,001,778 239,748,117 Shares redeemed.................................... (1,205,821) (15,218,080) ------------ ------------ Net increase....................................... 17,795,957 $224,530,037 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- QUALITY EQUITY FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 6,335,594 $177,474,655 Shares issued to shareholders in reinvestment of dividends and distributions...................... 218,564 6,013,863 ------------ ------------ Total issued....................................... 6,554,158 183,488,518 Shares redeemed.................................... (476,786) (13,262,021) ------------ ------------ Net increase....................................... 6,077,372 $170,226,497 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 7,584,386 $204,488,643 Shares issued to shareholders in reinvestment of dividends and distributions...................... 38,501 99,487 ------------ ------------ Total issued....................................... 7,622,887 204,588,130 Shares redeemed.................................... (412,554) (11,039,403) ------------ ------------ Net increase....................................... 7,210,333 $193,548,727 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
163 - --------------------------------------------------------------------------------
RESERVE ASSETS FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 19,180,364 $ 19,180,364 Shares issued to shareholders in reinvestment of dividends and distributions...................... 1,250,777 1,250,777 ------------ ------------ Total issued....................................... 20,431,141 20,431,141 Shares redeemed.................................... (18,368,014) (18,368,014) ------------ ------------ Net increase....................................... 2,063,127 $ 2,063,127 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Year Ended Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 18,903,263 $ 18,903,263 Shares issued to shareholders in reinvestment of dividends and distributions...................... 772,770 772,770 ------------ ------------ Total issued....................................... 19,676,033 19,676,033 Shares redeemed.................................... (16,275,313) (16,275,313) ------------ ------------ Net increase....................................... 3,400,720 $ 3,400,720 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- WORLD INCOME FOCUS FUND - ---------------------------------------------------------- For the Year Ended Dollar December 31, 1994 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 3,613,258 $ 35,765,361 Shares issued to shareholders in reinvestment of dividends and distributions...................... 565,499 5,699,784 ------------ ------------ Total issued....................................... 4,178,757 41,465,145 Shares redeemed.................................... (870,578) (8,296,766) ------------ ------------ Net increase....................................... 3,308,179 $ 33,168,379 ------------ ------------ ------------ ------------
- ---------------------------------------------------------- For the Period July 1, 1993+ to Dollar December 31, 1993 Shares Amount - ---------------------------------------------------------- Shares sold........................................ 4,880,334 $ 49,656,106 Shares issued to shareholders in reinvestment of dividends........................................ 63,693 647,784 ------------ ------------ Total issued....................................... 4,944,027 50,303,890 Shares redeemed.................................... (855,476) (8,720,702) ------------ ------------ Net increase....................................... 4,088,551 $ 41,583,188 ------------ ------------ ------------ ------------ - ----------------------------------------------------------
+ Prior to July 1,1993 (commencement of operations), the Fund issued 800,010 shares to MLAM for $8,000,100. 5. CAPITAL LOSS CARRYFORWARD: At December 31, 1994, the Company had capital loss carryforwards of approximately $634,000 in the American Balanced Fund, all of which expires in 2002; $91,000 in the Developing Capital Markets Focus Fund, all of which expires in 2002; $1,982,000 in the Equity Growth Fund, all of which expires in 2002; $1,462,000 in the Global Utility Focus Fund, all of which expires in 2002; $420,000 in the High Current Income Fund, of which $119,000 expires in 1999 and $301,000 expires in 2002; $5,000 in the Intermediate Government Bond Fund, all of which expires in 2002; $27,000 in the International Bond Fund, all of which expires in 2002; $15,024,000 in the Prime Bond Fund, all of which expires in 2002; and $2,008,000 in the World Income Focus Fund, all of which expires in 2002. 6. LOANED SECURITIES: At December 31, 1994, the Prime Bond Fund held US Treasury bonds having an aggregate value of approximately $23,421,000 as collateral for portfolio securities loaned having a market value of approximately $22,983,000. 7. COMMITMENTS: At December 31, 1994, the International Equity Focus Fund and World Income Focus Fund had entered into foreign exchange contracts under which they agreed to sell various foreign currencies with values of approximately $354,000 and $9,000, respectively, and Global Strategy Focus Fund, International Equity Focus Fund and Natural Resources Focus Fund had entered into foreign exchange contracts under which it agreed to purchase various foreign currencies with values of approximately $110,000, $253,000 and $222,000, respectively. 8. SUBSEQUENT EVENT: On January 3, 1995, the Board of Directors declared ordinary income dividends and long-term capital gains distributions per share payable on January 10, 1995 to shareholders of record as of December 31, 1994 as follows:
- ---------------------------------------------------------- LONG-TERM ORDINARY CAPITAL FUND INCOME-NET GAINS - ---------------------------------------------------------- American Balanced Fund........................... $ 0.271394 -- Basic Value Focus Fund........................... 0.570135 $0.015911 Developing Capital Markets Focus Fund............ 0.086102 -- Domestic Money Market Fund....................... -- -- Equity Growth Fund............................... 0.043408 -- Flexible Strategy Fund........................... 0.189923 0.270745 Global Strategy Focus Fund....................... 0.174053 0.004539 Global Utility Focus Fund........................ 0.102569 -- High Current Income Fund......................... -- -- Intermediate Government Bond Fund................ -- -- International Bond Fund.......................... -- -- International Equity Focus Fund.................. 0.330050 0.080300 Natural Resources Focus Fund..................... 0.077104 0.031612 Prime Bond Fund.................................. -- -- Quality Equity Fund.............................. 0.281519 0.512323 Reserve Assets Fund.............................. -- -- World Income Focus Fund.......................... -- --
164 PROSPECTUS APRIL 28, 1995 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800 ------------------------ Merrill Lynch Variable Series Funds, Inc. (the 'Company') is an open-end management investment company which has a wide range of investment objectives among its seventeen separate funds. Shares of six of the funds are offered hereby (hereinafter referred to as the 'Funds' or individually as a 'Fund'). A separate class of common stock ('Common Stock') is issued for each Fund. The shares of the Funds will be sold to Merrill Lynch Life Insurance Company ('MLLIC') and ML Life Insurance Company of New York ('ML of New York') for certain separate accounts ('Separate Accounts') to fund benefits under variable life insurance contracts ('Variable Life Contracts') issued by MLLIC and ML of New York. Shares of the Funds may also be sold in the future to Separate Accounts of insurance companies other than MLLIC or ML of New York (together with MLLIC and ML of New York, 'Insurance Companies') to fund Contracts issued by them. The Insurance Companies will redeem shares to the extent necessary to provide benefits under the respective Contracts or for such other purposes as may be consistent with the respective Contracts. MLLIC and ML of New York are wholly-owned subsidiaries of Merrill Lynch & Co., Inc., as is the Company's investment adviser, Merrill Lynch Asset Management, L.P. (the 'Investment Adviser'). The investment objectives of the Funds, each of whose name is preceded by 'Merrill Lynch,' are as follows: BASIC VALUE FOCUS FUND. Capital appreciation and, secondarily, income by investing in securities, primarily equities that management of the Fund believes are undervalued and therefore represent basic investment value. WORLD INCOME FOCUS FUND. High current income by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currency units. The Fund may invest in United States and foreign government and corporate fixed income securities, including high yield, high risk, lower rated and unrated securities. GLOBAL UTILITY FOCUS FUND. Capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. INTERNATIONAL EQUITY FOCUS FUND. Capital appreciation through investment in securities, principally equities of issuers in countries other than the United States. DEVELOPING CAPITAL MARKETS FOCUS FUND. Long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. INTERNATIONAL BOND FUND. High total investment return by investing in a non-U.S. international portfolio of debt instruments denominated in various currencies and multi-national currency units. For more information on the Funds' investment objectives and policies, please see 'Investment Objectives and Policies of the Funds,' page 7. THE WORLD INCOME FOCUS FUND AND DEVELOPING CAPITAL MARKETS FOCUS FUND INVEST OR MAY INVEST IN HIGH YIELD BONDS (COMMONLY KNOWN AS 'JUNK BONDS'), WHICH INVOLVE SPECIAL RISKS. SEE 'INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS--RISKS OF HIGH YIELD SECURITIES.' ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THIS PROSPECTUS SETS FORTH IN CONCISE FORM THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING IN THE COMPANY. INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A STATEMENT CONTAINING ADDITIONAL INFORMATION ABOUT THE COMPANY HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 28, 1995, AND IS AVAILABLE ON REQUEST AND WITHOUT CHARGE BY CALLING OR WRITING THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. THE STATEMENT OF ADDITIONAL INFORMATION IS HEREBY INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY THE FUND OR BY THE DISTRIBUTOR IN ANY STATE IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY MAY NOT LAWFULLY BE MADE. ------------------------ TABLE OF CONTENTS
PAGE ---- Finanical Highlights........................... 3 The Insurance Companies........................ 7 Investment Objectives and Policies of the Funds........................................ 7 Directors...................................... 25 Investment Adviser............................. 26 Portfolio Transactions and Brokerage........... 28 Purchase of Shares............................. 28 Redemption of Shares........................... 28 Dividends, Distributions and Taxes............. 28 Performance Data............................... 29 Additional Information......................... 30 Appendix A..................................... A-1
2 FINANCIAL HIGHLIGHTS The following table presents supplementary financial information with respect to each of the Funds. The table has been audited by Deloitte & Touche LLP, independent auditors, in connection with their annual audits of the Company's financial statements. Financial statements for the year ended December 31, 1994 and the independent auditors' report thereon appear in the Statement of Additional Information. The information in the following table should be read in conjunction with the financial statements.
DEVELOPING CAPITAL BASIC VALUE MARKETS The following per share data and FOCUS FUND FOCUS FUND ratios have been derived from ---------------------------------------- ---------------------- information provided in the FOR THE YEAR FOR THE PERIOD JULY 1, FOR THE PERIOD financial statements. ENDED 1993+ TO MAY 2 1994+ TO INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31, DECEMBER 31, VALUE: 1994 1993 1994 ------------ ----------------------- ---------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period............................ $ 10.95 $ 10.00 $ 10.00 ------------ ------ ------ Investment income--net............. .17 .04 .09 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........ .08 .91 (.58) ------------ ------ ------ Total from investment operations... .25 .95 (.49) ------------ ------ ------ Less dividends and distributions: Investment income--net.......... (.10) -- -- Realized gain on investments--net................ -- -- -- ------------ ------ ------ Total dividends and distributions..................... (.10) -- -- ------------ ------ ------ Net asset value, end of period..... $ 11.10 $ 10.95 $ 9.51 ------------ ------ ------ ------------ ------ ------ TOTAL INVESTMENT RETURN:** Based on net asset value per share............................. 2.36% 9.50%++ (4.90)%++ ------------ ------ ------ ------------ ------ ------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement..... .72% .86%* 1.29%* ------------ ------ ------ ------------ ------ ------ Expenses........................... .72% .86%* 1.35%* ------------ ------ ------ ------------ ------ ------ Investment income--net............. 2.08% 1.69%* 2.18%* ------------ ------ ------ ------------ ------ ------ Investment income--net, and realized gain (loss) on investments--net.................. -- -- -- ------------ ------ ------ ------------ ------ ------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........................ $164,307 $47,207 $ 36,676 ------------ ------ ------ ------------ ------ ------ Portfolio turnover................. 60.55% 30.86% 29.79% ------------ ------ ------ ------------ ------ ------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + The Basic Value Focus Fund commenced operations on July 1, 1993. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 3 FINANCIAL HIGHLIGHTS (CONTINUED)
GLOBAL UTILITY FOCUS FUND ----------------------------- The following per share data FOR THE and ratios have been derived PERIOD from information provided in FOR THE JULY 1, the financial statements. YEAR ENDED 1993+ TO INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31, ASSET VALUE: 1994 1993 ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................... $ 10.66 $ 10.00 ------------ ------------ Investment income--net........ .35 .04 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (1.25) .64 ------------ ------------ Total from investment operations................... (.90) .68 ------------ ------------ Less dividends and distributions: Investment income--net..... (.29) (.02) Realized gain on investments--net......... -- -- In excess of realized gain on investments--net...... (.02) -- ------------ ------------ Total dividends and distributions................ (.31) (.02) ------------ ------------ Net asset value, end of period....................... $ 9.45 $ 10.66 ------------ ------------ ------------ ------------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ (8.51)% 6.85%++ ------------ ------------ ------------ ------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .73% .89%* ------------ ------------ ------------ ------------ Expenses...................... .73% .89%* ------------ ------------ ------------ ------------ Investment income--net........ 3.68% 2.84%* ------------ ------------ ------------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................... $126,243% $104,517 ------------ ------------ ------------ ------------ Portfolio turnover............ 9.52% 1.72% ------------ ------------ ------------ ------------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + The Global Utility Focus Fund commenced operations on July 1, 1993. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 4 FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL BOND FUND INTERNATIONAL EQUITY FOCUS FUND ------------ ------------------------------- The following per share data FOR THE FOR THE and ratios have been derived PERIOD PERIOD from information provided in MAY 2, FOR THE YEAR JULY 1, the financial statements. 1994+ TO ENDED 1993+ TO INCREASE (DECREASE) IN NET DECEMBER 31, DECEMBER 31, DECEMBER 31, ASSET VALUE: 1994 1994 1993 ------------ ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................... $10.00 $ 11.03 $ 10.00 ----- ------------ ------ Investment income--net........ .38 .19 .01 Realized and unrealized gain (loss) on investments and foreign currency transactions--net............ (.35) (.13) 1.02 ----- ------------ ------ Total from investment operations................... .03 .06 1.03 ----- ------------ ------ Less dividends and distributions: Investment income--net..... (.33) (.18) -- Realized gain on investments--net........... -- (.01) -- In excess of realized gain on investments--net........ -- -- -- ----- ------------ ------ Total dividends and distributions................ (.33) (.19) -- ----- ------------ ------ Net asset value, end of period....................... $ 9.70 $ 10.90 $ 11.03 ----- ------------ ------ ----- ------------ ------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........................ 0.37%++ 0.55% 10.30%++ ----- ------------ ------ ----- ------------ ------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement................ .00%* .97% 1.14%* ----- ------------ ------ ----- ------------ ------ Expenses...................... 1.08%* .97% 1.14%* ----- ------------ ------ ----- ------------ ------ Investment income--net........ 6.34%* 1.09% 0.30%* ----- ------------ ------ ----- ------------ ------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................... $9,933 $247,884 $ 76,906 ----- ------------ ------ ----- ------------ ------ Portfolio turnover............ 152.20% 58.84% 17.39% ----- ------------ ------ ----- ------------ ------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of Operations. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 5 FINANCIAL HIGHLIGHTS (CONTINUED)
WORLD INCOME FOCUS FUND --------------------------- FOR THE PERIOD The following per share data and ratios have FOR THE YEAR JULY 1, been derived from information provided in ENDED 1993+ TO the financial statements. DECEMBER 31, DECEMBER 31, INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period......... $ 10.38 $ 10.00 ------------ Investment income--net....................... .76 Realized and unrealized gain (loss) on investments and foreign currency transactions--net........................... (1.19) .33 ------------ ------------ Total from investment operations............. (.43) .58 ------------ ------------ Less dividends and distributions Investment income--net.................... (.76) (.20) Realized gain on investments--net......... -- -- In excess of realized gain on investments--net.......................... (.02) -- ------------ ------------ Total dividends and distributions............ (.78) (.20) ------------ ------------ Net asset value, end of period............... $ 9.17 $ 10.38 ------------ ------------ ------------ ------------ TOTAL INVESTMENT RETURN:** Based on net asset value per share........... (4.21)% 5.90%++ ------------ ------------ ------------ ------------ RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............... .75% .94%* ------------ ------------ ------------ ------------ Expenses..................................... .75% .94%* ------------ ------------ ------------ ------------ Investment income--net....................... 8.01% 6.20%* ------------ ------------ ------------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..... $ 75,150 $ 50,737 ------------ ------------ ------------ ------------ Portfolio turnover........................... 117.58 54.80% ------------ ------------ ------------ ------------
- ------------------ * Annualized. ** Total investment returns exclude insurance-related fees and expenses. + Commencement of operations. ++ Aggregate total investment return. Further information about each Fund's performance is contained in the Company's Annual Report, which can be obtained, without charge, upon request. 6 THE INSURANCE COMPANIES The Company was organized to fund benefits under variable annuity and variable life Contracts issued by the Insurance Companies. Through this Prospectus, the Company is offering shares in six Funds to certain separate accounts (the 'Separate Accounts') of MLLIC and ML of New York to fund benefits under Variable Life Contracts. Those six Funds are: the Basic Value Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund. Through a separate Prospectus, the Company offers shares in all of its funds to certain other separate accounts of the Insurance Companies to fund benefits under variable annuity contracts issued by them. The rights of the Insurance Companies as shareholders should be distinguished from the rights of a Contract owner, which are set forth in the Contract. A Contract owner has no interest in the shares of a Fund, but only in the Contract. The Contract is described in the Prospectus for each Contract. That Prospectus describes the relationship between increases or decreases in the net asset value of shares of a Fund, and any distributions on such shares, and the benefits provided under a Contract. The Prospectus for the Contracts also describes various fees payable to the Insurance Companies and charges to the Separate Accounts made by the Insurance Companies with respect to the Contracts. Since shares of the Funds will be sold only to the Insurance Companies for the Separate Accounts, the terms 'shareholder' and 'shareholders' in this Prospectus refer to the Insurance Companies. MLLIC and ML of New York are wholly-owned subsidiaries of ML&Co., as is the Investment Adviser. INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS INVESTMENT OBJECTIVES Each Fund of the Company has a different investment objective which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. Each Fund is classified as 'diversified,' as defined in the Investment Company Act of 1940, except for the World Income Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund, each of which is classified as 'non-diversified.' The investment objectives and classification of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of each Fund affected. The investment objectives and policies of each Fund are discussed below. Fixed Income Security Ratings. No Fund other than the World Income Focus Fund and Developing Capital Markets Focus Fund invests in fixed-income securities which are rated below investment grade (i.e., securities rated Ba or below by Moody's Investors Service, Inc. ('Moody's') or BB or below by Standard & Poor's Rating Group ('Standard & Poor's')). However, securities purchased by a Fund may subsequently be downgraded. Such securities may continue to be held and will be sold only if, in the judgment of the Investment Adviser, it is advantageous to do so. Securities in the lowest category of investment grade debt securities may have speculative characteristics which may lead to weakened capacity to pay interest and principal during periods of adverse economic conditions. See Appendix A for a fuller description of corporate bond ratings. BASIC VALUE FOCUS FUND The investment objective of the Basic Value Focus Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price-earnings ratio. 7 The investment policy of the Basic Value Focus Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relatively high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price-earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated, events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above-average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Basic Value Focus Fund's portfolio generally will have significant representation in this secondary segment of the market. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Basic Value Focus Fund also may invest in preferred stocks and non-convertible debt securities and utilize covered call options with respect to portfolio securities as described below and in the Statement of Additional Information. It reserves the right as a defensive measure to hold other types of securities, including U.S. government and government agency securities, money market securities or other fixed-income securities deemed by the Investment Adviser to be consistent with a defensive posture, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. WORLD INCOME FOCUS FUND The investment objective of the World Income Focus Fund is to seek to provide shareholders with high current income by investing in a global portfolio of fixed income securities denominated in various currencies, including multi-national currency units. The Fund may invest in United States and foreign government and corporate fixed income securities, including high yield, high risk securities (commonly known as 'junk bonds'). The Fund will, under normal conditions, invest at least 90% of its total assets in such fixed income securities and may invest up to 100% of its total assets in lower-rated, high yield, high risk securities. In pursuing its investment objective, the Fund will allocate its investments among different types of fixed income securities denominated in various currencies based upon the Investment Adviser's analysis of the yield, maturity and currency considerations affecting such securities. Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The Fund may purchase fixed income securities issued by United States or foreign corporations or financial institutions, including debt securities of all types and maturities, convertible securities and preferred stocks. The Fund also may purchase securities issued or guaranteed by United States or foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ('governmental entities') or issued or guaranteed by international organizations designated or supported by multiple governmental entities to promote economic reconstruction or development ('supranational entities'). International Investing. The Fund may invest in fixed income securities denominated in any currency or multinational currency unit. An illustration of a multinational currency unit is the European Currency Unit ('ECU') which is a 'basket' consisting of specified amounts of the currencies of certain of the twelve member 8 states of the European Community, a Western European economic cooperative association including France, Germany, the Netherlands and the United Kingdom. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. The Investment Adviser does not believe that such adjustments will adversely affect holders of ECU-denominated obligations or the marketability of such securities. European supranational entities (described further below), in particular, issue ECU-denominated obligations. The Fund may invest in securities denominated in the currency of one nation although issued by a governmental entity, corporation or financial institution of another nation. For example, the Fund may invest in a British pound sterling-denominated obligation issued by a United States corporation. Such investments involve credit risks associated with the issuer and currency risks associated with the currency in which the obligation is denominated. It is anticipated that under current conditions the Fund will invest primarily in marketable securities denominated in the currencies of the United States, Canada, Western European nations, New Zealand and Australia, as well as in ECUs. Further, it is anticipated that such securities will be issued primarily by entities located in such countries and by supranational entities. Under normal conditions, the Fund's investments will be denominated in at least three currencies or multinational currency units. Under certain adverse conditions, the Fund may restrict the financial markets or currencies in which its assets will be invested. The Fund presently intends to invest its assets solely in the United States financial markets or United States dollar-denominated obligations only for temporary defensive purposes. United States Government securities include: (i) U.S. Treasury obligations (bills, notes and bonds), which differ in their interest rates, maturities and times of issuance, all of which are backed by the full faith and credit of the United States; and (ii) obligations issued or guaranteed by U.S. Government agencies or instrumentalities, including government guaranteed mortgage-related or asset-backed securities, some of which are backed by the full faith and credit of the U.S. Treasury (e.g., direct pass-through certificates of the Government National Mortgage Association), some of which are supported by the right of the issuer to borrow from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and some of which are backed only by the credit of the issuer itself (e.g., obligations of the Student Loan Marketing Association). In the case of mortgage-related securities, prepayments occur when the holder of an individual mortgage prepays the remaining principal before the mortgage's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, a mortgage-related security is often subject to more rapid prepayment of principal than its stated maturity would indicate. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the realized yield or average life of a particular issue of the mortgage-related securities. (Asset-backed securities, other than those backed by home equity loans, generally do not prepay in response to changes in interest rates but may be subject to prepayment in response to other factors.) Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments adversely impact yields for securities purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for securities purchased at a discount. The Fund may purchase mortgage-related (and asset-backed) securities at a premium or at a discount. The obligations of foreign governmental entities have various kinds of government support and include obligations issued or guaranteed by foreign governmental entities with taxing power. These obligations may or may not be supported by the full faith and credit of a foreign government. The Fund will invest in foreign government securities of issuers considered stable by the Fund's Investment Adviser. The Investment Adviser does not believe that the credit risk inherent in the obligations of stable foreign governments is significantly greater than that of U.S. Government securities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American 9 Development Bank. The government members, or 'stockholders,' usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. Allocation of Investments and Risks of High Yield, High Risk Securities. In seeking high current income, the Fund will allocate its investments among fixed income securities of various types, maturities and issuers in the various global markets based upon the analysis of the Investment Adviser of yield and price differentials, currency considerations and general market and economic conditions. In making such allocations, the Investment Adviser will assess the overall quality of the portfolio considering in particular the extent to which the differences in yield justify investments in higher risk securities. In its evaluations, the Investment Adviser will utilize its internal financial, economic and credit analysis resources as well as information in this regard obtained from other sources. The Fund has established no rating criteria for the fixed income securities in which it may invest, and a substantial portion of the securities in the Fund's portfolio may be securities rated in the medium to low rating categories of nationally recognized statistical rating organizations such as Moody's or Standard & Poor's, or in unrated securities of comparable quality. See Appendix A to this Prospectus for a description of these rating categories. See also 'Risks of High Yield Securities' below. The average maturity of the World Income Focus Fund's portfolio securities will vary based upon the Investment Adviser's assessment of economic and market conditions. As with all fixed income securities, changes in market yields will affect the Fund's asset value as the prices of portfolio securities generally increase when interest rates decline and decrease when interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. The Fund does not expect the average maturity of its portfolio to exceed ten years. The table below shows the average monthly dollar-weighted market value, by Standard & Poor's rating category, of the securities held by the Fund during the year ended December 31, 1994.
% MARKET VALUE % NET CORPORATE RATING* ASSETS BONDS - --------------------------------------------- ----------- ------------- A............................................ 0.35% 0.44% AA........................................... 1.60 2.03 BBB.......................................... 0.04 0.09 BB........................................... 17.88 22.53 B............................................ 38.59 48.54 CCC.......................................... 3.15 3.83 NR........................................... 12.06 15.19 NA........................................... 5.42 6.85 UR........................................... 0.28 0.50 ------------- 100.00%
- --------------- *A description of corporate bond ratings of Standard & Poor's is set forth in Appendix A to the Prospectus. GLOBAL UTILITY FOCUS FUND The investment objective of the Global Utility Focus Fund is to seek both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk, as described below under 'Transactions in Options, Futures and Currency.' Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. 10 The Global Utility Focus Fund at all times, except during temporary defensive periods, will maintain at least 65% of its total assets invested in equity and debt securities issued by domestic and foreign companies in the utilities industries. The Fund reserves the right to hold, as a tempororary defensive measure or as a reserve for redemptions, short-term U.S. Government securities, money market securities, including repurchase agreements, or cash in such proportions as, in the opinion of the Investment Adviser, prevailing market or economic conditions warrant. Except during temporary defensive periods, such securities or cash will not exceed 20% of its total assets. Under normal circumstances, the Fund will invest at least 65% of its total assets in issuers domiciled in at least three countries, one of which may be the United States, although the Investment Adviser expects the Fund's portfolio to be more geographically diversified. Under normal conditions, it is anticipated that the percentage of assets invested in U.S. securities will be higher than that invested in securities of any other single country. It is possible that at times the Fund may have 65% or more of its total assets invested in foreign securities. The Fund will invest in common stocks (including preferred or debt securities convertible into common stocks), preferred stocks and debt securites. The relative weightings among common stocks, debt securities and preferred stocks will vary from time to time based upon the Investment Adviser's judgement of the extent to which investments in each category will contribute to meeting the Fund's investment objective. Fixed income securities in which the Fund will invest generally will be limited to those rated investment grade, that is, rated in one of the four highest rating categories by Standard & Poor's or Moody's, or deemed to be of equivalent quality (i.e., securities rated at least BBB by Standard & Poor's or Baa by Moody's) in the judgment of the Investment Adviser. Securities rated Baa by Moody's are described by it as having speculative characteristics and, according to Standard & Poor's, fixed income securities rated BBB normally exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal. The Fund's commercial paper investments at the time of purchase will be rated 'A-1' or 'A-2' by Standard & Poor's or 'Prime-1' or 'Prime-2' by Moody's or, if not rated, will be of comparable quality as determined by the Investment Adviser. The Fund may also invest up to 5% of its total assets at the time of purchase in fixed income securities having a minimum rating no lower than Caa by Moody's or CCC by Standard & Poor's. The Fund may, but need not, dispose of any security if it is subsequently downgraded. For a description of ratings of debt securities, see Appendix A to this Prospectus. The Fund may invest in the securities of foreign issuers in the form of American Depository Receipts ('ADRs'), European Depository Receipts ('EDRs') or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designated for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in ADRs and EDRs through both sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some or all of the depository's transaction fees, whereas in an unsponsored arrangement the foreign issuer assumes no obligations and the depository's transaction fees are paid by the ADR or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs or EDRs have been issued are not necessarily obligated to disclose material information in the markets in which the unsponsored ADRs or EDRs are traded and, therefore, there may not be a correlation between such information and the market value of such securities. A change in prevailing interest rates is likely to affect the Fund's net asset value because prices of debt and equity securities of utility companies tend to increase when interest rates decline and decrease when interest rates rise. Utility Industries--Description and Risks. Under normal circumstances, the Fund will invest at least 65% of its total assets in common stocks (including preferred or debt securities convertible into common stocks), debt securities and preferred stocks of domestic and/or foreign companies in the utility industries. To meet its objective of current income, the Fund may invest in domestic utility companies that pay higher than average dividends, but have a lesser potential for capital appreciation. The average dividend yields of common stocks issued by domestic utility companies historically have significantly exceeded those of industrial companies' common stocks, while the prices of domestic utility stocks have tended to be less volatile than stocks of industrial 11 companies. Total returns on domestic utility stocks have also generally exceeded those on stocks of industrial companies. Debt securities of domestic utility companies historically also have yielded slightly more than similar debt securities of industrial companies, and have had higher total returns. For certain periods, the total return of utility companies' securities has underperformed that of industrial companies' securities. There can be no assurance that positive relative returns on utility securities will occur in the future. The Investment Adviser believes that the average dividend yields of common stocks issued by foreign utility companies have also historically exceeded those of foreign industrial companies' common stocks. To meet its objective of capital appreciation, the Fund may invest in foreign utility companies which pay lower than average dividends, but have a greater potential for capital appreciation. The utility companies in which the Fund will invest include companies which are, in the opinion of the Investment Adviser, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Risks that are intrinsic to the utility industries include difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations which may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availabilty of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, the effects of energy conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences between the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common stocks. Additionally, existing and possible future regulatory legislation may make it even more difficult for these utilities to obtain adequate relief. Certain of the issuers of securities of the portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies, and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Utility companies in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future. The nature of regulation of the utility industries is evolving both in the United States and in foreign countries. Changes in regulation in the United States increasingly allow utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The Investment Adviser believes that the emergence of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated rates of return, while others may be forced to defend their core businesses from increased competition and may be less profitable. The Investment Adviser seeks to take advantage of favorable investment opportunities that are expected to arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the future. Foreign utility companies are also subject to regulation, although such regulations may or may not be comparable to that in the United States. Foreign utility companies may be more heavily regulated by their 12 respective governments than utilities in the United States and, as in the U.S., generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels that cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation in the United States. The Global Utility Focus Fund's investment policies are designed to enable it to capitalize on evolving investment opportunities throughout the world. For example, the rapid growth of certain foreign economies will necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently are government-owned, thereby limiting current investment opportunities for the Fund, the Investment Adviser believes that, in order to attract significant capital for growth, foreign governments are likely to seek global investors through the privatization of their utility industries. Privatization, which refers to the trend toward investor ownership of assets rather than government ownership, is expected to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that such favorable developments will occur or that investment opportunities in foreign markets for the Fund will increase. The revenues of domestic and foreign utility companies generally reflect the economic growth and developments in the geographic areas in which they do business. The Investment Adviser will take into account anticipated economic growth rates and other economic developments when selecting securities of utility companies. The principal sectors of the global utility industries are discussed below. Electric. The electric utility industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. Domestic electric utility companies, in general, recently have been favorably affected by lower fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies recently have generated cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory climate. As interest rates have declined, many utilities have refinanced high cost debt and in doing so have improved their fixed charges coverage. Regulators, however, have lowered allowed rates of return as interest rates have declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In the United States, the construction and operation of nuclear power facilities is subject to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies having comparable jurisdiction. Increased scrutiny might result in higher operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning of such plants. In October 1993, S&P stiffened its debt-ratings formula for the electric utility industry, stating that the industry is in long-term decline. In addition, Moody's stated that it expected a drop in the next three years in its average credit ratings for the industry. Reasons set forth for these outlooks included slowing demand and increasing cost pressures as a result of competition from rival providers. Telecommunications. The telephone industry is large and highly concentrated. Companies that distribute telephone services and provide access to the telephone networks comprise the greatest portion of this segment. Telephone companies in the United States are still experiencing the effects of the breakup of American Telephone & Telegraph Company, which occurred in 1984. Since 1984, companies engaged in telephone communication services have expanded their non-regulated activities into other businesses, including cellular telephone services, data processing, equipment retailing, computer software and hardware services, and financial services. This expansion has provided significant opportunities for certain telephone companies to increase their earnings and dividends at faster rates than had been allowed in traditional regulated businesses. Increasing competition, technological innovations and other structural changes, however, could adversely affect the 13 profitability of such utilities. Technological breakthroughs and the merger of telecommunications with video and entertainment is now associated with the expansion of the role of cable companies as providers of utility services in the telecommunications industry and the competitive response of traditional telephone companies. Given mergers and certain marketing tests currently underway, it is likely that both traditional telephone companies and cable companies will soon provide a greatly expanded range of utility services, including two-way video and informational services. Gas. Gas transmission companies and gas distribution companies are also undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decades, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. In the opinion of the Investment Adviser, however, environmental considerations could improve the gas industry outlook in the future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal. Water. Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world, the industry is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per capita volume growth. In the opinion of the Investment Adviser, there may be opportunities for certain companies to acquire other water utility companies and for foreign acquisition of domestic companies. The Investment Adviser believes that favorable investment opportunities may result from consolidation of this segment. There can be no assurance that the positive developments noted above, including those relating to privatization and changing regulation, will occur or that risk factors other than those noted above will not develop in the future. Investment Outside the Utility Industries. The Global Utility Focus Fund is permitted to invest up to 35% of its assets in securities of issuers that are outside the utility industries. Such investments may include common stocks, debt securities or preferred stocks and will be selected to meet the Fund's investment objective of both capital appreciation and current income. These securities may be issued by either U.S. or non-U.S. companies. Some of these issuers may be in industries related to utility industries and, therefore, may be subject to similar risks. Securities that are issued by foreign companies or are denominated in foreign currencies are subject to the risks outlined above. The Global Utility Focus Fund is also permitted to invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ('U.S. Government Securities'). Such investments may be backed by the 'full faith and credit' of the United States, including U.S. Treasury bills, notes and bonds as well as certain agency securities and mortgage-backed securities issued by the Government National Mortgage Association (GNMA). The guarantees on these securities do not extend to the securities' yield or value or to the yield or value of the Fund's shares. Other investments in agency securities are not necessarily backed by the 'full faith and credit' of the United States, such as certain securities issued by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing Association and the Farm Credit Bank. The Global Utility Focus Fund may invest in securities issued or guaranteed by foreign governments. Such securities are typically denominated in foreign currencies and are subject to the currency fluctuation and other risks of foreign securities investments. The foreign government securities in which the Fund intends to invest generally will consist of obligations supported by national, state or local governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, including international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Investment Bank, the Asian Development Bank and the Inter-American Development Bank. 14 Foreign government securities also include debt securities of 'quasi-governmental agencies' and debt securities denominated in multinational currency units. An example of a multinational currency unit is the European Currency Unit. A European Currency Unit represents specified amounts of the currencies of certain of the twelve member states of the European Economic Community. Debt securities of quasi-governmental agencies are issued by entities owned by either a national or local government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. Foreign government securities also include mortgage-related securities issued or guaranteed by national or local governmental instrumentalities including quasi-governmental agencies. Foreign government securities will not be considered government securities for purposes of determining the Fund's compliance with diversification and concentration policies. INTERNATIONAL EQUITY FOCUS FUND The investment objective of the International Equity Focus Fund is to seek capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of issuers located in countries other than the United States. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. The International Equity Focus Fund will invest in an international portfolio of securities of foreign companies located thoughout the world. While there are no prescribed limits on the geographic allocation of the Fund's investments, management of the Fund anticipates that a substantial portion of its assets will be invested in the developed countries of Europe and the Far East. However, for the reasons stated below, management of the Fund will give special attention to investment opportunities in the developing countries of the world, including, but not limited to Latin America, the Far East and Eastern Europe. It is anticipated that a significant portion of the Fund's assets may be invested in such developing countries. The allocation of the Fund's assets among the various foreign securities markets will be determined by the Investment Adviser based primarily on its assessment of the relative condition and growth potential of the various economies and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. Within such allocations, the Investment Adviser will seek to identify equity investments in each market which are expected to provide a total return which equals or exceeds the return of such market as a whole. A significant portion of the Fund's assets may be invested in developing countries. This allocation of the Fund's assets reflects the belief that attractive investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain developing countries with smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called 'emerging' countries (such as Malaysia, Mexico and Thailand), which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Because of the general illiquidity of the capital markets in certain developing countries, the Fund may invest in a relatively small number of leading or relatively actively traded companies in such countries' capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the countries' capital markets as a whole. While the Fund will primarily emphasize investments in common stock, the Fund may also invest in preferred stocks and convertible debt securities. The Fund reserves the right, as a temporary defensive measure and to provide for redemptions, to hold cash or cash equivalents in U.S. dollars or foreign currencies and short-term securities including money market securities. Under certain adverse investment conditions, the Fund may restrict the markets in 15 which its assets will be invested and may increase the proportion of assets invested in temporary defensive obligations of U.S. issuers. Under normal conditions, at least 65% of the Fund's total assets will be invested in the securities of issuers from at least three different foreign countries. Investments made for defensive purposes will be maintained only during periods in which the Investment Adviser determines that economic or financial conditions are adverse for holding or being fully invested in equity securities of foreign issuers. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Recipts (GDRs) or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. GDRs are receipts issued throughout the world which evidence a similar ownership arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradeable both in the U.S. and Europe and are designed for use throughout the world. DEVELOPING CAPITAL MARKETS FOCUS FUND The investment objective of the Developing Capital Markets Focus Fund is to seek long-term capital appreciation by investing in securities, principally equities, of issuers in countries having smaller capital markets. Under normal conditions, at least 65% of the Fund's net assets will be invested in such equity securities. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of investments and techniques to hedge against market and currency risk. Investing on an international basis involves special considerations. Investing in smaller capital markets entails the risk of significant volatility in the Fund's security prices. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a long-term investment and a vehicle for diversification and not as a balanced investment program. For purposes of its investment objective, the Fund considers countries having smaller capital markets to be all countries other than the four countries having the largest equity market capitalizations. Currently, these four countries are Japan, the United Kingdom, the United States and Germany. At March 31, 1995, those countries' equity market capitalizations totalled approximately 78% of the world's equity market capitalization according to data provided by Morgan Stanley Capital International. The Fund will at all times, except during defensive periods, maintain investments in at least three countries having smaller capital markets. The Fund seeks to benefit from economic and other developments in smaller capital markets. The investment objective of the Fund reflects the belief that investment opportunities may result from an evolving long-term international trend favoring more market-oriented economies, a trend that may especially benefit certain countries having smaller capital markets. This trend may be facilitated by local or international political, economic or financial developments that could benefit the capital markets of such countries. Certain such countries, particularly so-called 'emerging' countries (such as Malaysia, Mexico and Thailand) which may be in the process of developing more market-oriented economies, may experience relatively high rates of economic growth. Other countries (such as France, the Netherlands and Spain), although having relatively mature smaller capital markets, may also be in a position to benefit from local or international developments encouraging greater market orientation and diminishing governmental intervention in economic affairs. Many investors, particularly individuals, lack the information, capability or inclination to invest in countries having smaller capital markets. It also may not be permissible for such investors to invest directly in certain such markets. Unlike many intermediary investment vehicles, such as closed-end investment companies that invest in a single country, the Fund intends to diversify investment risk among the capital markets of a number of countries. The Fund will not necessarily seek to diversify investments on a geographical basis or on the basis of the level of economic development of any particular country. 16 In its investment decision-making, the Investment Adviser will emphasize the allocation of assets among certain countries' capital markets, rather than the selection of particular industries or issuers. Because of the general illiquidity of the capital markets in some countries, the Fund may invest in a relatively small number of leading or actively traded companies in a country's capital markets in the expectation that the investment experience of the securities of such companies will substantially represent the investment experience of the country's capital markets as a whole. The Fund also may invest in debt securities of issuers in countries having smaller capital markets. Capital appreciation in debt securities may arise as a result of a favorable change in relative foreign exchange rates, in relative interest rate levels, or in the creditworthiness of issuers. In accordance with its investment objective, the Fund will not seek to benefit from anticipated short-term fluctuations in currency exchange rates. The Fund may, from time to time, invest in debt securities with relatively high yields (as compared to other debt securities meeting the Fund's investment criteria), notwithstanding that the Fund may not anticipate that such securities will experience substantial capital appreciation. See 'Risks of High Yield Securities' below. Such income can be used, however, to offset the operating expenses of the Fund. The Fund may invest in debt securities issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ('governmental entities'), issued or guaranteed by international organizations designated or supported by multiple foreign governmental entities (which are not obligations of foreign governments) to promote economic reconstruction or development ('supranational entities'), or issued by foreign corporations or financial institutions. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the 'World Bank'), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or 'stockholders,' usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. The Fund has established no rating criteria for the debt securities in which it may invest, and such securities may not be rated at all for creditworthiness. Securities rated in the medium to lower rating categories of nationally recognized statistical rating organizations and unrated securities of comparable quality are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser's judgment, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. See 'Other Portfolio Strategies--Foreign Securities' and 'Risks of High Yield Securities' below. For purposes of the Fund's investment objective, an issuer ordinarily will be considered to be located in the country where the primary trading market of its securities is located. The Fund, however, may consider a company to be located in countries having smaller capital markets, without reference to its domicile or to the primary trading market of its securities, when at least 50% of its non-current assets, capitalization, gross revenues or profits in any one of the two most recent fiscal years represents (directly or indirectly through subsidiaries) assets or activities located in such countries. The Fund also may consider closed-end investment companies to be located in the country or countries in which they primarily make their portfolio investments. Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital 17 markets. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable in certain capital markets. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in countries having smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities convertible into securities of foreign issuers. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States, and therefore, there may not be a correlation between such information and the market value of such ADRs. INTERNATIONAL BOND FUND The investment objective of the International Bond Fund is to seek a high total investment return by investing in an international portfolio of non-U.S. debt instruments denominated in various currencies and multinational currency units. Total investment return consists of interest, dividends, discount accruals and capital changes, including changes in the value of non-dollar denominated securities and other assets and liabilities resulting from currency fluctuations. The investment objective of the Fund is a fundamental policy and may not be changed without approval of a majority of the Fund's outstanding shares. There can be no assurance that the Fund's investment objective will be achieved. Under normal circumstances, the Fund will invest at least 65% of its assets in non-U.S. debt instruments. The Fund may seek to hedge against interest rate and currency risks through the use of option, futures and currency transactions. Investing on an international basis involves special considerations. See 'Other Portfolio Strategies--Foreign Securities' below. The Fund is designed for investors seeking to complement their U.S. holdings through foreign investments. The Fund should be considered as a vehicle for diversification and not as a balanced investment program. The Fund may purchase debt obligations issued or guaranteed by foreign governments (including foreign states, provinces and municipalities) or their agencies and instrumentalities ('governmental entities'), or issued or guaranteed by international organizations designated or supported by multiple governmental entities to promote economic reconstruction or development ('supranational entities') such as the International Bank for Reconstruction and Development (the 'World Bank') and the European Coal and Steel Community, or issued by foreign corporations or financial institutions. With respect to the creditworthiness of the Fund's portfolio securities, under normal conditions all of the securities owned by the Fund will be obligations which have a credit rating of A or better by S&P or by Moody's or commercial paper rated A-1 by S&P or Prime-1 by Moody's or obligations that the Fund's Investment Adviser has determined to be of similar creditworthiness. The Fund's Investment Adviser may determine that a non-dollar denominated obligation of a foreign government is of similar creditworthiness notwithstanding S&P's or Moody's less favorable rating of a dollar denominated obligation of the same issuer, provided that the Investment Adviser believes that such dollar denominated obligation is assigned a lower rating because it is denominated in a currency other than the foreign government's own currency. In evaluating obligations, the Investment Adviser will utilize its internal credit analysis resources as well as financial and economic information obtained from other sources. With respect to foreign corporate issuers, the Investment Adviser will consider the financial condition of the issuer and market and economic conditions 18 relevant to its operations. In terms of foreign governmental obligations, the Investment Adviser will review the financial position of the issuer and political and economic conditions in the country. Investment in securities of supranational entities is subject to the additional risk to be considered by the Investment Adviser that member governments will fail to make required capital contributions and that a supranational entity will thus be unable to meet its obligations. The Fund's fully managed approach enables it to seek high total investment return by investing in debt instruments denominated in various currencies and currency units on the basis of the potential capital appreciation of such instruments in U.S. dollars and the rates of income paid on such instruments. As a general matter, in evaluating investments, the Fund will consider, among other factors, the relative levels of interest rates prevailing in various countries, the potential appreciation of such investments in their denominated currencies and, for debt instruments not denominated in U.S. dollars, the potential movement in the value of such currencies compared to the U.S. dollar. In seeking capital appreciation, the Fund may invest in relatively low-yielding instruments in expectation of favorable currency fluctuations or interest rate movements, thereby potentially reducing the Fund's current yield. In seeking income, the Fund may invest in short-term instruments with relatively high yields (as compared to other debt securities) meeting the Fund's investment criteria, notwithstanding that the Fund may not anticipate that such instruments will experience substantial capital appreciation. The average maturity of the Fund's portfolio securities will vary based upon the Investment Adviser's assessment of economic and market conditions. As with all debt securities, changes in market yields will affect the Fund's asset value as the prices of portfolio securities generally increase when interest rates decline and decrease when interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. The Fund does not expect the average maturity of its portfolio to exceed ten years. The Fund may invest in debt instruments denominated in any currency or multinational currency unit. An illustration of a multinational currency unit is the European Currency Unit ('ECU') which is a 'basket' consisting of specified amounts of the currencies of certain of the twelve member states of the European Community, a Western European economic cooperative association including France, Germany, the Netherlands and the United Kingdom. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. The Investment Adviser does not believe that such adjustments will adversely affect holders of ECU-denominated obligations or the marketability of such securities. European supranationals, in particular, issue ECU-denominated obligations. The Fund may invest in debt instruments denominated in the currency of one nation although issued by a governmental entity, corporation or financial institution of another nation. For example, the Fund may invest in a Japanese yen-denominated obligation issued by a German corporation. Such investments involve credit risks associated with the issuer and currency risks associated with the currency in which the obligation is denominated. It is anticipated that the Fund will invest primarily in marketable instruments denominated in the currencies of the U.S., Japan, Canada, Western European nations, New Zealand and Australia as well as in ECUs. Further, it is anticipated that such instruments will be issued primarily by entities located in such countries and by supranational entities. Under certain adverse conditions, the Fund may restrict the financial markets or currencies in which its assets will be invested and may invest its assets solely in U.S. dollar-denominated obligations. The Fund reserves the right, as a temporary defensive measure or to provide for redemptions or in anticipation of investment in foreign markets, to hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-term securities, including money market securities. NON-DIVERSIFIED FUNDS The World Income Focus, Developing Capital Markets Focus and International Bond Funds are classified as non-diversified investment companies under the Investment Company Act of 1940. However, each Fund will have to limit its investments to the extent required by the diversification requirements applicable to regulated 19 investment companies under the Internal Revenue Code. To qualify as a regulated investment company, a Fund, at the close of each fiscal quarter, may not have more than 25% of its total assets invested in the securities (except obligations of the U.S. Government, its agencies or instrumentalities) of any one issuer and with respect to 50% of its assets, (i) may not have more than 5% of its total assets invested in the securities of any one issuer and (ii) may not own more than 10% of the outstanding voting securities of any one issuer. INVESTMENT RESTRICTIONS The Company has adopted a number of restrictions and policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of the Company's outstanding voting securities (including a majority of the shares of each Fund). Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. OTHER PORTFOLIO STRATEGIES Restricted Securities. Each of the Funds is subject to limitations on the amount of illiquid securities they may purchase; however, each Fund may purchase without regard to that limitation certain securities that are not registered under the Securities Act of 1933 (the 'Securities Act'), including (a) commercial paper exempt from registration under Section 4(2) of the Securities Act, and (b) securities that can be offered and sold to 'qualified institutional buyers' under Rule 144A under the Securities Act, provided that the Company's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities sold under Rule 144A which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will carefully monitor the Funds' investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Indexed and Inverse Securities. A Fund may invest in securities whose potential return is based on the change in particular measurements of value or rate (an 'index'). As an illustration, a Fund may invest in a security that pays interest and returns principal based on the change in an index of interest rates or on the value of a precious or industrial metal. Interest and principal payable on a security may also be based on relative changes among particular indices. In addition, certain of the Funds may invest in securities whose potential investment return is inversely based on the change in particular indices. For example, a Fund may invest in securities that pay a higher rate of interest and principal when a particular index decreases and pay a lower rate of interest and principal when the value of the index increases. To the extent that a Fund invests in such types of securities, it will be subject to the risks associated with changes in the particular indices, which may include reduced or eliminated interest payments and losses of invested principal. Certain indexed securities, including certain inverse securities, may have the effect of providing a degree of investment leverage, because they may increase or decrease in value at a rate that is a multiple of the changes in applicable indices. As a result, the market value of such securities will generally be more volatile than the market values of fixed-rate securities. The Company believes that indexed securities, including inverse securities, represent flexible portfolio management instruments that may allow a Fund to seek potential investment rewards, hedge other portfolio positions, or vary the degree of portfolio leverage relatively efficiently under different market conditions. 20 Foreign Securities. The Basic Value Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may invest in securities of foreign issuers. Investments in foreign securities, particularly those of non-governmental issuers, involve considerations and risks which are not ordinarily associated with investing in domestic issuers. These considerations and risks include changes in currency rates, currency exchange control regulations, the possibility of expropriation, the unavailability of financial information or the difficulty of interpreting financial information prepared under foreign accounting standards, less liquidity and more volatility in foreign securities markets, the impact of political, social or diplomatic developments, and the difficulty of assessing economic trends in foreign countries. If it should become necessary, a Fund could encounter greater difficulties in invoking legal processes abroad than would be the case in the United States. Transaction costs in foreign securities may be higher. The operating expense ratio of a Fund investing in foreign securities can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial costs, are higher. In addition, net investment income earned by a Fund on a foreign security may be subject to withholding and other taxes imposed by foreign governments which will reduce a Fund's net investment income. The Investment Adviser will consider these and other factors before investing in foreign securities, and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. No Fund which may invest in foreign securities will concentrate its investments in any particular country. The World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may from time to time be substantially invested in non-dollar-denominated securities of foreign issuers. A Fund's return on investments in non-dollar-denominated securities may be reduced or enhanced as a result of changes in foreign currency rates during the period in which the Fund holds such investments. Each Fund other than the Basic Value Focus, World Income Focus, Global Utility Focus and International Equity Focus, Developing Capital Markets Focus and International Bond Funds will purchase only securities issued in dollar denominations. Each of the International Equity Focus Fund and Developing Capital Markets Focus Fund may invest a significant portion of its assets in securities of foreign issuers in smaller capital markets, while each of the other Funds which is permitted to invest in foreign securities may from time to time invest in securities of such foreign issuers. Foreign investments in smaller capital markets involve risks not involved in domestic investment, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. These risks are often heightened for investments in small capital markets. Because a Fund which invests in foreign securities will invest in securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments which could affect investment in those countries. In addition, certain foreign investments may be subject to foreign withholding taxes. There may be less publicly available information about an issuer in a smaller capital market than would be available about a United States company, and it may not be subject to accounting, auditing and financial reporting 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 21 States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in a Fund which invests in these markets incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement could result in temporary periods when assets of such a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there is in the United States. As a result, management of a Fund which invests in foreign securities may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience. Due to its emphasis on securities of issuers located in smaller capital markets, the Developing Capital Markets Focus Fund and the International Equity Focus Fund should be considered as a vehicle for diversification and not as a balanced investment program. Certain of the Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors. As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. The issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements. The Developing Capital Markets Focus and International Equity Focus Funds intend to invest in securities of foreign issuers in smaller capital markets. Some countries with smaller capital markets prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain 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. 22 A number of countries, such as South Korea, Taiwan and Thailand, have authorized the formation of closed-end investment companies to facilitate indirect foreign investment in their capital markets. In accordance with the Investment Company Act of 1940, as amended (the 'Investment Company Act' or 'the Act'), the Developing Capital Markets Focus and International Equity Focus Funds each may invest up to 10% of its total assets in securities of such closed-end investment companies. This restriction on investments in securities of closed-end investment companies may limit opportunities for the Fund to invest indirectly in certain smaller capital markets. Shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. If a Fund acquires shares in closed-end investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies. A Fund also may seek, at its own cost, to create its own investment entities under the laws of certain countries. In some countries, banks or other financial institutions may constitute a substantial number of the leading companies or the companies with the most actively traded securities. Also, the Investment Company Act restricts a Fund's investments in any equity security of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from 'securities related activities,' as defined by the rules thereunder. These provisions may also restrict a Fund's investments in certain foreign banks and other financial institutions. Lending of Portfolio Securities. Each Fund of the Company may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government which, while the loan is outstanding, will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities plus accrued interest. Such cash collateral will be invested in short-term securities, the income from which will increase the return to the Fund. Forward Commitments. Each of the Funds may purchase securities on a when-issued basis, and they may purchase or sell such securities for delayed delivery. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. The value of the security on the delivery date may be more or less than its purchase price. A Fund entering into such transactions will maintain a segregated account with its custodian of cash or liquid, high-grade debt obligations in an aggregate amount equal to the amount of its commitments in connection with such delayed delivery and purchase transactions. Standby Commitment Agreements. The Global Utility Focus and Developing Capital Markets Focus Funds may from time to time enter into standby commitment agreements. Such agreements commit the respective Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will at all times maintain a segregated account with its custodian of cash or liquid, high-grade debt obligations in an amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY The Basic Value Focus, World Income Focus, Global Utility Focus, International Equity Focus, Developing Capital Markets Focus and International Bond Funds may engage in certain of the options, futures and currency transactions discussed in Appendix A to this Prospectus. A Fund may engage in transactions in futures contracts, options on futures contracts, forward foreign exchange contracts, currency options and options on portfolio securities and on stock indexes only for hedging purposes and not for speculation. A Fund may write call options on portfolio securities and on stock indexes for the purpose of achieving, through receipt of premium income, a greater average total return than it would otherwise realize from holding portfolio securities alone. There can be no assurance that the objectives sought to be obtained from the use of these instruments will be achieved. A Fund's use of such instruments may be limited by certain Internal Revenue Code requirements for qualification 23 of the Fund for the favorable tax treatment afforded investment companies. There can be no assurance that a Fund's hedging transactions will be effective. Furthermore, a Fund will only engage in hedging activities from time to time and will not necessarily engage in hedging transactions in all the smaller capital markets in which certain of the Funds may be invested at any given time. RISKS OF HIGH YIELD SECURITIES The World Income Focus Fund and Developing Capital Markets Focus Fund may invest a substantial portion of their assets in high yield, high risk securities or junk bonds, which are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During recessionary periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. While the high yield securities in which the World Income Focus Fund or Developing Capital Markets Focus Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after a Fund purchases a particular security, in which case a Fund may experience losses and incur costs. In an effort to minimize the risk of issuer default or bankruptcy, the World Income Focus Fund and Developing Capital Markets Focus Fund each will diversify its holdings among many issuers. However, there can be no assurance that diversification will protect a Fund from widespread defaults brought about by a sustained economic downturn. High yield securities tend to be more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on their prices and yields than on higher-rated fixed-income securities. Zero coupon bonds and bonds which pay interest and/or principal in additional bonds rather than in cash are especially volatile. Like higher-rated fixed-income securities, junk bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in this market, which may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for such bonds by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market, and may cause the prices the World Income Focus Fund and Developing Capital Markets Focus Fund receive for their junk bonds to be reduced, or a Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Under such conditions, judgment may play a greater role in valuing certain of each Fund's portfolio securities than in the case of securities trading in a more liquid market. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the net asset value of the World Income Focus Fund and Developing Capital Markets Focus Fund. In addition, each Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. 24 INSURANCE LAW RESTRICTIONS In order for shares of the Company's Funds to remain eligible investments for the Separate Accounts, it may be necessary, from time to time, for a Fund to limit its investments in certain types of securities in accordance with the insurance laws or regulations of the various states in which the Contracts are sold. The New York insurance law requires that investments of each Fund be made with the degree of care of an 'ordinarily prudent person.' In addition, each Fund has undertaken, at the request of the State of California Department of Insurance, to observe certain investment related requirements of the Insurance Code of the State of California. The Investment Adviser believes that compliance with these standards will not have any negative impact on the performance of any of the Funds. OTHER CONSIDERATIONS The Investment Adviser will use its best efforts to assure that each Fund of the Company complies with certain investment limitations of the Internal Revenue Service to assure favorable income tax treatment for the Contracts. It is not expected that such investment limitations will materially affect the ability of any Fund to achieve its investment objective. DIRECTORS The Directors of the Company consist of six individuals, five of whom are not 'interested persons' of the Company as defined in the Investment Company Act of 1940. The Directors of the Company are responsible for the overall supervision of the operations of the Company and perform the various duties imposed on the directors of the investment companies by the Investment Company Act of 1940. The Board of Directors elects officers of the Company annually. The Directors of the Company and their principal employment are as follows: ARTHUR ZEIKEL*--President of the Investment Adviser; Executive Vice President of Merrill Lynch & Co., Inc. ('ML&Co.'); Executive Vice President of Merrill Lynch; Director of the Distributor. WALTER MINTZ--Special Limited Partner of Cumberland Partners (investment partnership). MELVIN R. SEIDEN--President of Silbanc Properties, Ltd. (real estate, consulting and investments). STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial consultants). JOE GRILLS--Member of the Committee on Investment of Employee Benefits Assets of the Financial Executives Institute. HARRY WOOLF--Professor and former Director of the Institute for Advanced Study (private institution devoted to the encouragement, support and patronage of learning). - --------------- * Interested person, as defined in the Investment Company Act of 1940, of the Company. 25 INVESTMENT ADVISER Merrill Lynch Asset Management L.P. ('MLAM'), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the investment adviser for the Fund. The principal address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: Box 9011, Princeton, New Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset Management, L.P. ('FAM'), acts as the investment adviser for over 130 other registered investment companies. MLAM also offers portfolio management and portfolio analysis services to individuals and institutions. In the aggregate, as of March 31, 1995, MLAM and FAM had a total of approximately $170.3 billion in investment company and other portfolio assets under management including accounts of certain affiliates of FAM. MLAM (the general partner of which is Princeton Services, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc.) is itself a wholly-owned affiliate of Merrill Lynch & Co., Inc. and has its principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. While the Investment Adviser is at all times subject to the direction of the Board of Directors of the Company, the Investment Advisory Agreements provide that the Investment Adviser, subject to review by the Board of Directors, is responsible for the actual management of the Funds and has responsibility for making decisions to buy, sell or hold any particular security. The Investment Adviser provides the portfolio managers for the Funds, who consider information from various sources, make the necessary investment decisions and effect transactions accordingly. The Investment Adviser is also obligated to perform certain administrative and management services for the Company (certain of which it may delegate to third parties) and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreements. The Investment Adviser has access to the full range of the securities and economic research facilities of Merrill Lynch. During the Company's fiscal year ended December 31, 1994, the advisory fees expense incurred by the Company totalled $16,313,767 of which $683,107 related to the Basic Value Focus Fund (representing .60% of its average net assets), $429,608 related to the World Income Focus Fund (representing .60% of its average net assets), $777,517 related to the Global Utility Focus Fund (representing .60% of its average net assets), $1,355,159 related to the International Equity Focus Fund (representing .75% of its average net assets), $30,838 related to the International Bond Fund (representing (.60%) of its average net assets), and $151,621 related to the Developing Capital Markets Focus Fund (representing 1.00% of its average net assets). Although the 1.00% investment advisory fee of the Developing Capital Markets Focus Fund is higher than that of many other mutual funds, the Fund believes it is justified by the high degree of care that must be given to the initial selection and continuous supervision of the types of portfolio securities in which the Fund invests. During the Company's fiscal year ended December 31, 1994, the total operating expenses of the Company's Funds (including the advisory fees paid to the Investment Adviser), before reimbursement of a portion of such expenses, were as follows: $814,168 related to the Basic Value Focus Fund (representing .72% of its average net assets), $535,498 related to the World Income Focus Fund (representing .75% of its average net assets), $943,233 related to the Global Utility Focus Fund (representing .73% of its net assets), $1,758,567 related to the International Equity Focus Fund (representing .97% of its net assets), $204,274 related to the Developing Capital Markets Focus Fund (representing 1.35% of its average net assets), and $55,475 related to the International Bond Fund (representing 1.08% of its average net assets). The Investment Advisory Agreements require the Investment Adviser to reimburse the Company's Funds if and to the extent that in any fiscal year the operating expenses of each Fund exceeds the most restrictive expense limitations then in effect under any state securities laws or published regulations thereunder. At present the most restrictive expense limitation requires the Investment Adviser to reimburse expenses which exceed 2.5% of each Fund's first $30 million of average daily net assets, 2.0% of its average daily net assets in excess of $30 million but less than $100 million, and 1.5% of its average daily net assets in excess of $100 million. Expenses for this purpose include the Investment Adviser's fee but exclude interest, taxes, brokerage fees and commissions and extraordinary charges, such as litigation. No fee payments will be made to the Investment Adviser with respect to any Fund during any fiscal year which would cause the expenses of such Fund to exceed the pro rata expense limitation applicable to such Fund at the time of such payment. 26 The Investment Adviser and Merrill Lynch Life Agency, Inc. ('MLLA') have entered into two agreements which limit the operating expenses paid by each Fund in a given year to 1.25% of its average daily net assets (the 'Reimbursement Agreements'), which is less than the expense limitations imposed by state securities laws or published regulations thereunder. The reimbursement agreements, dated April 30, 1985 and February 11, 1992, provide that any expenses in excess of 1.25% of average daily net assets will be reimbursed to the Fund by the Investment Adviser which, in turn, will be reimbursed by MLLA. During the Company's fiscal year ended December 31, 1994, the Developing Capital Markets Focus Fund and International Bond Fund were reimbursed for operating expenses. Such reimbursements amounted to $8,915 and $55,475, respectively. See 'Investment Advisory Arrangements' in the Statement of Additional Information. MLLA sells the Contracts described in the Prospectus for the Contracts. The Investment Adviser has entered into an Administrative Services Agreement with 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 MLLIC and ML of New York. The Investment Adviser may enter into similar agreements with other Insurance Companies in the future. 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 Adviser (together, the 'Codes'). The Codes significantly restrict the personal investing activities of all employees of the Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the 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 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 Adviser. Furthermore, the Codes provide for trading 'blackout periods' which prohibit trading by investment personnel of the Company within periods of trading by the Company in the same (or equivalent) security (15 or 30 days depending upon the transaction). PORTFOLIO MANAGERS The following is information with respect to the Portfolio Managers for each of the Company's Funds. Kevin Rendino has served as the Basic Value Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since December 1993; Senior Research Analyst from 1990 to 1992; Corporate Analyst from 1988 to 1990. Walter Rogers has served as the Global Utility Focus Fund's Portfolio Manager since July 1993, and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1987. Andrew Bascand, Adrian Holmes, Grace Pineda and Steve Silverman have served as the International Equity Focus Fund's Portfolio Managers since July 1993, and are primarily responsible for the Fund's day-to-day management. Andrew Bascand has been the director of MLAM, U.K. and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM) since 1993; Chief Economist with A.M.P. Investment (NZ) in New Zealand from 1989 to 1993; Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989; and Senior Research Officer of the Bank of England's International Department from 1986 to 1987. Adrian Holmes has been the Managing Director of MLAM, U.K. since 1993; Vice President from 1990 to 1993; and an employee since 1987. Grace Pineda and Steve Silverman have served as Vice Presidents of MLAM since 1989 and 1983, respectively. Vincent Lathbury, III and Robert Parish have served as the World Income Focus Fund's Portfolio Managers since July 1993 and are primarily responsible for the Fund's day-to-day management. They have served as Vice 27 Presidents of MLAM since 1982 and 1991, respectively. Mr. Parish was the Vice President and Senior Portfolio Manager for Templeton International from 1987 to 1991. Grace Pineda has served as the Developing Capital Markets Focus Fund's Portfolio Manager since May 1994, and is primarily responsible for the Fund's day-to-day management. She has served as Vice President of MLAM since 1989. Robert Parish has served as the International Bond Fund's Portfolio Manager since May 1994 and is primarily responsible for the Fund's day-to-day management. He has served as Vice President of MLAM since 1991, and was Vice President and Senior Portfolio Manager for Templeton International from 1987 to 1991. PORTFOLIO TRANSACTIONS AND BROKERAGE None of the Company's Funds has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Board of Directors of the Company, the Investment Adviser is primarily responsible for the Company's portfolio decisions and the placing of the Company's portfolio transactions. In placing orders, it is the policy of each Fund to obtain the most favorable net results, taking into account various factors, including price, dealer spread or commission, if any, size of the transactions and difficulty of execution. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Company will not necessarily be paying the lowest spread or commission available. Under the Investment Company Act of 1940, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of the Company's portfolio securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Affiliated persons of the Company may serve as its broker in over-the-counter transactions conducted on an agency basis. During the year ended December 31, 1994, the Company engaged in 33 transactions pursuant to such order involving $154.9 million of securities. For the year ended December 31, 1994, the Company paid brokerage commissions of $3,526,815, of which $219,686 was paid to Merrill Lynch. PURCHASE OF SHARES The Company will offer shares in the Funds, without sales charge, only for purchase by the Insurance Companies for the Separate Accounts to fund benefits under the Contracts. Shares of the Basic Value Focus Fund, World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund are currently sold only to MLLIC and ML of New York, but may be sold to other Insurance Companies if the Company is granted an exemptive order by the Securities and Exchange Commission permitting such sales. The Company continuously offers shares in each of its Funds to the Insurance Companies at prices equal to the respective per share net asset value of the Funds. Merrill Lynch Funds Distributor, Inc., a wholly-owned subsidiary of the Investment Adviser, acts as the distributor of the shares. Net asset value is determined in the manner set forth below under 'Additional Information-Determination of Net Asset Value.' REDEMPTION OF SHARES The Company is required to redeem all full and fractional shares of the Funds for cash. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. DIVIDENDS, DISTRIBUTIONS AND TAXES It is the Company's intention to distribute substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund, other than the Domestic Money Market and Reserve Assets Funds, will consist of all payments of dividends or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Investment Adviser). Dividends from net investment income of the World Income Focus and International Bond Funds are declared and reinvested monthly in additional full and fractional shares of the respective Funds at net asset value. 28 Dividends from net investment income of the Global Utility Focus Fund are declared and reinvested quarterly in additional full and fractional shares of the Fund. Dividends from net investment income of the International Equity Focus, Basic Value Focus and Developing Capital Markets Focus Funds are declared and reinvested at least annually in additional full and fractional shares of the respective Funds. All net realized long-term or short-term capital gains of the Company, if any, are declared and distributed annually after the close of the Company's fiscal year to the shareholders of the Fund or Funds to which such gains are attributable. Short-term capital gains are taxable as ordinary income. TAX TREATMENT OF THE COMPANY Each Fund intends to continue to qualify as a regulated investment company under certain provisions of the Internal Revenue Code of 1986, as amended (the 'Code'). Under such provisions, a Fund will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains which it distributes to shareholders. One of the requirements to qualify for treatment as a regulated investment company under the Code is that a Fund, among other things, derive less than 30% of its gross income in each taxable year from gains (without deduction of losses) from the sale or other disposition of stocks, securities and certain options, futures or forward contracts held for less than three months. This requirement may limit the ability of certain Funds to dispose of certain securities at times when management of the Company might otherwise deem such disposition appropriate or desirable. If a Fund earns original issue discount income in a taxable year which is not represented by correlative cash income, or if a Fund receives property rather than cash in payment of interest, shareholders will be allocated income greater than the amount of cash distributed to them. In addition, the Fund may have to dispose of securities and use the proceeds thereof to make distributions in amounts necessary to satisfy its distribution requirements under the Code. TAX TREATMENT OF MLLIC AND ML OF NEW YORK AS SHAREHOLDERS Dividends paid by the Company from its ordinary income and distributions of the Company's net realized capital gains are includable in the respective Insurance Company's gross income. Distributions of the Company's net realized long-term capital gains retain their character as long-term capital gains in the hands of the Insurance Companies if certain requirements are met. The tax treatment of such dividends and distributions depends on the respective Insurance Company's tax status. To the extent that income of the Company represents dividends on common or preferred stock, rather than interest income, its distributions to the Insurance Companies will be eligible for the present 70% dividends received deduction applicable in the case of a life insurance company as provided in the Code. See the Prospectus for the Contracts for a description of the respective Insurance Company's tax status and the charges which may be made to cover any taxes attributable to the Separate Account. Not later than 60 days after the end of each calendar year, the Company will send to the Insurance Companies a written notice required by the Code designating the amount and character of any distributions made during such year. PERFORMANCE DATA From time to time the average annual total return and yield of one or more of the Company's Funds for various specified time periods may be included in advertisements or information furnished by the Insurance Companies to present or prospective Contract owners. Average annual total return and yield are computed in accordance with formulas specified by the Securities and Exchange Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses. 29 Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield to maturity of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the offering price per share on the last day of the period. The yield for the 30-day period ending December 31, 1994 was 9.96% for the World Income Fund and 7.62% for the International Bond Fund. Total return and yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return and yield will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The yield and total return quotations may be of limited use for comparative purposes because they do not reflect charges imposed at the Separate Account level which, if included, would decrease the yield. On occasion, one or more of the Company's Funds may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., or Variable Annuity Research Data Service or contained in publications such as Morningstar Publications, Inc., Chase Investment Performance Digest, Money Magazine, U.S. News & World Report, Business Week, Financial Services Weekly, Kiplinger Personal Finances, CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine, Wall Street Journal, USA Today, Barrons, Strategic Insight, Donaghues, Investors Business Daily and Ibbotson Associates. As with other performance data, performance comparisons should not be considered representative of the Fund's relative performance for any future period. ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Investment Adviser immediately after the declaration of dividends, if any, and is determined as of fifteen minutes following the close of trading on each day the New York Stock Exchange is open for business. The New York Stock Exchange is open on business days other than national holidays (except for Martin Luther King Day, when it is open) and Good Friday. The net asset value per share of each Fund other than the Domestic Money Market Fund is computed by dividing the sum of the value of the securities held by that Fund plus any cash or other assets (including interest and dividends accrued) minus all liabilities (including accrued expenses) by the total number of shares outstanding of that Fund at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser, are accrued daily. Securities held by each Fund will be valued as follows: Portfolio securities which are traded on stock exchanges are valued at the last sale price (regular way) as of the close of business on the day the securities are being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter market are valued at the last available bid price in the over-the-counter market prior to the time of valuation. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. When a Portfolio writes a call option, the amount of the premium received is recorded on the books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options being traded in the over-the-counter market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the last bid price. Futures contracts are valued at settlement price at the close of the applicable exchange. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Company. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. 30 ORGANIZATION OF THE COMPANY The Company was incorporated on October 16, 1981. The Basic Value Focus, World Income Focus, Global Utility Focus and International Equity Focus Funds commenced operations on July 1, 1993. The Developing Capital Markets Focus Fund and International Bond Fund commenced operations on May 2, 1994. The authorized capital stock of the Company consists of 2,300,000,000 shares of Common Stock, par value $0.10 per share. The shares of Common Stock are divided into seventeen classes designated Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock, Merrill Lynch Flexible Strategy Fund Common Stock, Merrill Lynch Natural Resources Focus Fund Common Stock, Merrill Lynch American Balanced Fund Common Stock, Merrill Lynch Global Strategy Focus Fund Common Stock, Merrill Lynch Domestic Money Market Fund Common Stock, Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock, Merrill Lynch International Equity Focus Fund Common Stock, Merrill Lynch Developing Capital Markets Focus Fund Common Stock, Merrill Lynch International Bond Fund Common Stock and Merrill Lynch Intermediate Government Bond Fund Common Stock, respectively. The Company may, from time to time, at the sole discretion of its Board of Directors and without the need to obtain the approval of its shareholders or of Contract Owners, offer and sell shares of one or more of such classes. Each class consists of 100,000,000 shares except for Domestic Money Market Fund Common Stock which consists of 300,000,000 shares Reserve Assets Fund Common Stock which consists of 500,000,000 shares. All shares of Common Stock have equal voting rights, except that only shares of the respective classes are entitled to vote on matters concerning only that class. Pursuant to the Investment Company Act of 1940 and the rules and regulations thereunder, certain matters approved by a vote of all shareholders of the Company may not be binding on a class whose shareholders have not approved such matter. Each issued and outstanding share of a class is entitled to one vote and to participate equally in dividends and distributions declared with respect to such class and in net assets of such class upon liquidation or dissolution remaining after satisfaction of outstanding liabilities. The shares of each class, when issued, will be fully paid and nonassessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any class are entitled to redeem their shares as set forth under 'Redemption of Shares.' Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Company voting for the election of directors can elect all of the directors of the Company if they choose to do so and in such event the holders of the remaining shares would not be able to elect any directors. The Company does not intend to hold meetings of shareholders unless under the Investment Company Act of 1940 shareholders are required to act on any of the following matters: (i) election of directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of the selection of independent accountants. MLLIC purchased $100 worth of shares of each of the Basic Value Focus, World Income 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 World Income 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 $5,000,000 worth of shares of the International Bond Fund. The organizational expenses of each of the Company's Funds are paid by the Investment Adviser. The Investment Adviser is reimbursed by MLLIC for all such expenses over a five-year period. 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. 31 CUSTODIAN The Bank of New York ('BONY'), 110 Washington Street, New York, New York 10286, acts as custodian of the Company's assets, except that Chase Manhattan Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245, acts as custodian for assets of the Company's Developing Capital Markets Focus Fund. TRANSFER AND DIVIDEND DISBURSING AGENT 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. Prior to June 1, 1990, BONY was the Company's transfer agent. LEGAL COUNSEL Rogers & Wells, New York, New York, is counsel for the Company. REPORTS TO SHAREHOLDERS The fiscal year of the Company ends on December 31 of each year. The Company will send to its shareholders at least semi-annually reports showing the Funds' portfolio securities and other information. An annual report containing financial statements, audited by independent auditors, will be sent to shareholders each year. ADDITIONAL INFORMATION This Prospectus does not contain all of the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940, with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated April 28, 1995, 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. 32 APPENDIX A U.S. GOVERNMENT SECURITIES For temporary or defensive purposes, each of the Funds may invest in the various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES For temporary or defensive purposes, each of the Funds may invest in government agency securities, which are debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Funds may invest in all types of government agency securities currently outstanding or to be issued in the future. DEPOSITORY INSTITUTIONS MONEY INSTRUMENTS For temporary or defensive purposes, each of the Funds may invest in depositary institutions money instruments, such as certificates of deposit, including variable rate certificates of deposit, bankers' acceptances, time deposits and bank notes. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks, savings banks or savings and loan associations against funds deposited in the issuing institution. Variable rate certificates of deposit are certificates of deposit on which the interest rate is periodically adjusted prior to their stated maturity, usually at 30, 90 or 180 day intervals ('coupon dates'), based upon a specified market rate. As a result of these adjustments, the interest rate on these obligations may be increased or decreased periodically. Often, dealers selling variable rate certificates of deposit to the Funds agree to repurchase such instruments, at the Funds' option, at par on the coupon dates. The dealers' obligations to repurchase these instruments are subject to conditions imposed by the various dealers; such conditions typically are the continued credit standing of the issuer and the existence of reasonably orderly market conditions. The Funds are also able to sell variable rate certificates of deposit in the secondary market. Variable rate certificates of deposit normally carry a higher interest rate than comparable fixed rate certificates of deposit because variable rate certificates of deposit generally have a longer stated maturity than comparable fixed rate certificates of deposit. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. For temporary or defensive purposes, the World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund may invest in certificates of deposit and bankers' acceptances issued by foreign branches or subsidiaries of U.S. banks ('Eurodollar' obligations) or U.S. branches or subsidiaries of foreign banks ('Yankeedollar' obligations). The Fund may invest only in Eurodollar obligations which by their terms are general obligations of the U.S. parent bank and meet the other criteria discussed below. Yankeedollar obligations in which the Fund may invest must be issued by U.S. branches or subsidiaries of foreign banks which are subject to state or federal banking regulations in the U.S. and by their terms must be general obligations of the foreign parent. In addition, the Fund will limit its investments in Yankeedollar obligations to obligations issued by banking institutions with more than $1 billion in assets. For temporary or defensive purposes, the World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund may also invest in U.S. dollar-denominated obligations of foreign depository institutions and their foreign branches and A-1 subsidiaries, such as certificates of deposit, bankers' acceptances, time deposits and deposit notes. The obligations of such foreign branches and subsidiaries may be the general obligation of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. Except as otherwise provided above with respect to investment in Yankeedollar and other foreign bank obligations no Fund may invest in any bank money instrument issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least $1 billion and its deposits are insured by the Federal Deposit Insurance Corporation (the 'FDIC'); provided that this limitation shall not prohibit the investment of up to 10% of the total assets of a Fund (taken at market value at the time of each investment) in certificates of deposit issued by banks and savings and loan associations with assets of less than $1 billion if the principal amount of each such certificate of deposit is fully insured by the FDIC. SHORT-TERM DEBT INSTRUMENTS For temporary or defensive purposes, each of the Funds may invest in commercial paper (including variable amount master demand notes), which refers to short-term, unsecured promissory notes issued by corporations, partnerships, trusts and other entities to finance short-term credit needs and by trusts issuing asset-backed commercial paper. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis, in accordance with a stated short-term interest rate benchmark. Because the interest rate of a variable amount master note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Investment Adviser values such a note in accordance with the amortized cost basis described under 'Determination of Net Asset Value' in the Statement of Additional Information. For temporary or defensive purposes, the World Income Focus Fund, Global Utility Focus Fund, International Equity Focus Fund, Developing Capital Markets Focus Fund and International Bond Fund may also invest in U.S. dollar-denominated commercial paper and other short-term obligations issued by foreign entities. Such investments are subject to quality standards similar to those applicable to investments in comparable obligations of domestic issuers. Investments in foreign entities in general involve the same risks as those described in the Statement of Additional Information in connection with investments in Eurodollar, Yankeedollar and foreign bank obligations. REPURCHASE AGREEMENTS Repurchase Agreements; Purchase and Sale Contracts. Each Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Under a repurchase agreement, the seller agrees, upon entering into the contract with the Fund, to repurchase a security (typically a security issued or guaranteed by the U.S. government) at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed yield for the Fund insulated from fluctuations in the market value of the underlying security during such period, although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System, a primary dealer in U.S. government securities or an affiliate thereof. A purchase and sale contract is similar to a repurchase agreement, but purchase and sale contracts, unlike repurchase agreements, allocate interest on the underlying security to the purchaser during the term of the agreement and generally do not require the seller to provide additional securities in the event of a decline in the market value of the purchased security during the term of the agreement. In all instances, the Fund takes possession of the underlying securities when investing in repurchase agreements or purchase and sale A-2 contracts. Nevertheless, if the seller were to default on its obligation to repurchase a security under a repurchase agreement or purchase and sale contract and the market value of the underlying security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. Repurchase agreements and purchase and sale contracts maturing in more than seven days will be considered 'illiquid securities.' DESCRIPTION OF CORPORATE BOND RATINGS Moody's Investors Service, Inc.: Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as 'gilt-edge.' Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded both during good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other market shortcomings. C--Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Standard & Poor's Corporation: AAA--This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A-3 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. TRANSACTIONS IN OPTIONS, FUTURES AND CURRENCY Options on Portfolio Securities. Each of the Basic Value Focus, World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may from time to time sell ('write') covered call options on its portfolio securities in which it may invest and may engage in closing purchase transactions with respect to such options. A covered call option is an option where the Fund, in return for a premium, gives another party a right to buy particular securities held by the Fund at a specified future date and at a price set at the time of the contract. The principal reason for writing call options is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, a Fund gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, the Fund's ability to sell the underlying security will be limited while the option is in effect unless the Fund effects a closing purchase transaction. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options serve as a partial hedge against the price of the underlying security declining. The Basic Value Focus Fund may not write covered call options on underlying securities exceeding 15% of the value of its total assets. Each of the World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds also may write put options, which give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. The Fund will receive a premium for writing a put option which increases the Fund's return. A Fund will write only covered put options which means that so long as the Fund is obligated as the writer of the option, it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for as long as the option is outstanding. A Fund may engage in closing transactions in order to terminate put options that it has written. The World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may purchase put options on portfolio securities. In return for payment of a premium, the purchase of a put option gives the holder thereof the right to sell the security underlying the option to another party at a specified price until the put option is closed out, expires or is exercised. Each Fund will only purchase put options to seek to reduce the risk of a decline in value of the underlying security. The total return on the security may be reduced by the amount of the premium paid for the option by the Fund. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction A-4 costs. A closing sale transaction cancels out the Fund's position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, a Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities which it intends to purchase. The Fund will not purchase options on securities if as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Each of the Funds may engage in options transactions on exchanges and in the over-the-counter ('OTC') markets. In general, exchange traded contracts are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates. OTC options transactions are two-party contracts with terms negotiated by the buyer and seller. See 'Over-the-Counter Options' below for information as to restrictions on the use of OTC options. Options on Stock Indices. The World Income Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may purchase and write call options and put options on stock indices traded on a national securities exchange to seek to reduce the general market risk of their securities or specific industry sectors which the Fund invests in. Options on indices are similar to options on securities except that, on exercise or assignment, the parties to the contract pay or receive an amount of cash equal to the difference between the closing value of the index and the exercise price of the option times a specified multiple. The Funds may invest in index options based on a broad market index, e.g., the S&P 500, or on a narrow index representing an industry or market segment, e.g., the Amex Oil & Gas Index. The effectiveness of a hedge employing stock index options will depend primarily on the degree of correlation between movements in the value of the index underlying the option and in the portion of the portfolio being hedged. For further discussion concerning such options, see 'Risk Factors in Options, Futures and Currency Transactions' below and the Company's Statement of Additional Information. Stock Index and Financial Futures Contracts. The World Income Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may purchase and sell stock index futures contracts and financial futures contracts to hedge their portfolios. The Funds may sell stock index futures contracts and financial futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Funds' securities portfolios that might otherwise result. When the Funds are not fully invested in the securities market and anticipate a significant market advance, they may purchase stock index or financial futures in order to gain rapid market exposure that may in part or entirely offset increases in the cost of securities that the Funds intend to purchase. A stock index or financial futures contract is a bilateral agreement pursuant to which the Funds will agree to buy or deliver at settlement an amount of cash equal to a dollar multiplied by the difference between the value of a stock index or financial instrument at the close of the last trading day of the contract and the price at which the futures contract is originally entered into. The Funds may engage in transactions in stock index futures contracts based on broad market indexes or on indexes on industry or market segments. A Fund may effect transactions in stock index futures contracts in connection with the equity securities in which it invests and in financial futures contracts in connection with the debt securities in which it invests. As with stock index options, the effectiveness of the Funds' hedging strategies depend primarily upon the degree of correlation between movements in the value of the securities subject to the hedge and the index or securities underlying the futures contract. See 'Risk Factors in Options, Futures and Currency Transactions' below. Hedging Foreign Currency Risks. The World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds are authorized to deal in forward foreign exchange contracts between currencies of the different countries in which they will invest, including multi-national currency units, as a hedge against possible variations in the foreign exchange rate between these currencies. This is accomplished through contractual agreements to purchase or sell a specified currency at a specified future date (up to one year) and price at the time of the contract. The dealings of the Funds in forward foreign exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward foreign currency with respect to specific receivables or payables of the Funds accruing in connection with the purchase and sale of their portfolio securities, the sale and A-5 redemption of shares of the Funds or the payment of dividends and distributions by the Funds. Position hedging is the sale of forward foreign currency with respect to portfolio security positions denominated or quoted in such foreign currency. The Funds will not speculate in forward foreign exchange. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Funds to hedge against a devaluation that is so generally anticipated that the Funds are not able to contract to sell the currency at a price above the devaluation level they anticipate. The Funds are also authorized to purchase or sell listed foreign currency options and foreign currency futures contracts as a hedge against possible adverse variations in foreign exchange rates. Foreign currency options provide the holder thereof the right to buy or to sell a currency at a fixed price on or before a future date. A futures contract on a foreign currency is an agreement between two parties to buy and sell a specified amount of a currency for a set price on a future date. Such transactions may be effected with respect to hedges on non-U.S. dollar-denominated securities (including securities denominated in multi-national currency units) owned by the Funds, sold by the Funds but not yet delivered, or committed or anticipated to be purchased by the Funds. As an illustration, the Funds may use such techniques to hedge the stated value in United States dollars of an investment in a Japanese yen-denominated security. In such circumstances, for example, the Funds may purchase a foreign currency put option enabling them to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Funds may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a 'straddle'). By selling such call option in this illustration, the Funds give up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. The Funds will not speculate in foreign currency options or futures. Accordingly, the Funds will not hedge a currency substantially in excess of the market value of the securities denominated in such currency which they own, the expected acquisition price of securities which they have committed or anticipate to purchase which are denominated in such currency, and, in the case of securities which have been sold by the Funds but not yet delivered, the proceeds thereof in its denominated currency. Further, if a security with respect to which a currency hedging transaction has been executed should subsequently decrease in value, the Funds will direct their custodian to segregate liquid, high-grade debt securities having a market value equal to such decrease in value, less any initial or variation margin held in the account of their broker. As in the case of forward foreign exchange contracts, employing currency futures and options in hedging transactions does not eliminate fluctuations in the market price of a security and such transactions preclude or reduce the opportunity for gain if the hedged currency should move in a favorable direction. Options on Futures Contracts. The World Income Focus, Global Utility Focus and International Equity Focus Funds may also purchase and write call and put options on futures contracts in connection with their hedging activities. Generally, these strategies are utilized under the same market conditions (i.e., conditions relating to specific types of investments) in which the Funds enter into futures transactions. The Funds may purchase put options or write call options on futures contracts rather than selling the underlying futures contract in anticipation of a decline in the equities markets or in the value of a foreign currency. Similarly, the Funds may purchase call options, or write put options on futures contracts, as a substitute for the purchase of such futures to hedge against the increased cost resulting from appreciation of equity securities or in the currency in which securities which the Funds intend to purchase are denominated. Limitations on transactions in options on futures contracts are described below. Over-the-Counter Options. The World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds may engage in options transactions in the over-the-counter markets. In general, over-the-counter ('OTC') options are two-party contracts with price and terms negotiated by the buyer and seller, whereas exchange-traded options are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices A-6 and expiration dates. OTC options include put and call options on individual securities, cash settlement options on groups of securities, and options on currency. The Funds may engage in an OTC options transaction only if they are permitted to enter into transactions in exchange-traded options of the same general type. The Funds will engage in OTC options only with member banks of the Federal Reserve System and primary dealers in U.S. Government securities or their affiliates which have a capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Restrictions on Use of Futures Transactions. Regulations of the Commodity Futures Trading Commission applicable to the Company require that each of the World Income Focus, Global Utility Focus, International Equity Focus, International Bond and Developing Capital Markets Focus Funds' futures transactions constitute bona fide hedging transactions or, with respect to non-hedging transactions, that the Fund not enter into such transactions, if, immediately thereafter, the sum of the amount of initial margin deposits on the respective Fund's existing non-hedging futures positions and premiums paid for related options would exceed 5% of the market value of the Fund's total assets. When a Fund purchases a futures contract, a call option thereon or writes a put option, an amount of cash and cash equivalents will be deposited in a segregated account with the Company's custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the market value of the futures contract, thereby insuring that the use of such futures is unleveraged. An order has been obtained from the Securities and Exchange Commission which exempts the Company from certain provisions of the Investment Company Act of 1940 in connection with transactions involving futures contracts and options thereon. Risk Factors in Options, Futures and Currency Transactions. A Fund's ability to effectively hedge all or a portion of its portfolio of securities through transactions in options on stock indexes, stock index futures and financial futures depends on the degree to which price movements in the index underlying the hedging instrument correlates with price movements in the relevant portion of the securities portfolio. The securities portfolio will not duplicate the components of the index. As a result, the correlation will not be perfect. Consequently, a Fund bears the risk that the price of the portfolio securities being hedged will not move in the same amount or direction as the underlying index or securities and that the Fund would experience a loss on one position which is not completely offset by a gain on the other position. It is also possible that there may be a negative correlation between the index or securities underlying an option or futures contract in which a Fund has a position and the portfolio securities the Fund is attempting to hedge, which could result in a loss on both the securities and the hedging instrument. A Fund will invest in a hedging instrument only if, in the judgment of the Investment Adviser, there is expected to be a sufficient degree of correlation between movements in the value of the instrument and movements in the value of the relevant portion of the portfolio of securities for such hedge to be effective. There can be no assurance that the judgment will be accurate. Investment in stock index and currency futures, financial futures and options thereon entail the additional risk of imperfect correlation between movements in the futures price and the price of the underlying index or currency. The anticipated spread between the prices may be distorted due to differences in the nature of the markets, such as differences in margin and maintenance requirements, the liquidity of such markets and the participation of speculators in the futures market. However, the risk of imperfect correlation generally tends to diminish as the maturity date of the futures contract or termination date of the option approaches. The Funds intend to enter into exchange-traded options and futures transactions only if there appears to be a liquid secondary market for such options or futures. However, there can be no assurance that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an options or futures transaction. The inability to close options and futures positions could have an adverse impact on a Fund's ability to effectively hedge its portfolio. There is also the risk of loss by a Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom a Fund has an open position in an option or futures contract. A-7 PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS Contained in Part A: Financial Highlights: American Balanced Fund for each of the years in the six-year period ended December 31, 1994 and the period June 1, 1988 (commencement of operations) to December 31, 1988. Basic Value Focus Fund for the year ended December 31, 1994 and the period July 1, 1993 (commencement of operations) to December 31, 1993. Developing Capital Markets Focus Fund for the period May 2, 1994 (commencement of operations) to December 31, 1994. Domestic Money Market Fund for each of the years in the two-year period ended December 31, 1994 and the period February 20, 1992 (commencement of operations) to December 31, 1992. Equity Growth Fund for each of the years in the ten-year period ended December 31, 1994. Flexible Strategy Fund for each of the years in the eight-year period ended December 31, 1994 and the period May 1, 1986 (commencement of operations) to December 31, 1986. Global Strategy Focus Fund for each of the years in the two-year period ended December 31, 1994 and the period February 28, 1992 (commencement of operations) to December 31, 1992. Global Utility Focus Fund for the year ended December 31, 1994 and the period July 1, 1993 (commencement of operations) to December 31, 1993. High Current Income Fund for each of the years in the ten-year period ended December 31, 1994. International Bond Fund for the period May 2, 1994 (commencement of operations) to December 31, 1994. International Equity Focus Fund for the year ended December 31, 1994 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Intermediate Government Bond Fund for the period May 2, 1994 (commencement of operations) to December 31, 1994. Natural Resources Focus Fund for each of the years in the six-year period ended December 31, 1994 and the period June 1, 1988 (commencement of operations) to December 31, 1988. Prime Bond Fund for each of the years in the ten-year period ended December 31, 1994. Quality Equity Fund for each of the years in the ten-year period ended December 31, 1994. Reserve Assets Fund for each of the years in the ten-year period ended December 31, 1994. World Income Focus Fund for the year ended December 31, 1994 and for the period July 1, 1993 (commencement of operations) to December 31, 1993. Contained in Part B: Schedules of Investments as of December 31, 1994. Statements of Assets and Liabilities as of December 31, 1994. Statements of Operations for the year ended December 31, 1994. Statements of Changes in Net Assets for the years ended December 31, 1994 and 1993. C-1 Financial Highlights: American Balanced Fund for each of the years in the five-year period ended December 31, 1994. Basic Value Focus Fund for the year ended December 31, 1994 and the period July 1, 1993 (commencement of operations) to December 31, 1993. Developing Capital Markets Focus Fund for the period May 2, 1994 (commencement of operations) to December 31, 1994. Domestic Money Market Fund for each of the years in the two-year period ended December 31, 1994 and the period February 20, 1992 (commencement of operations) to December 31, 1992. Equity Growth Fund for each of the years in the five-year period ended December 31, 1994. Flexible Strategy Fund for each of the years in the five-year period ended December 31, 1994. Global Strategy Focus Fund for each of the years in the two-year period ended December 31, 1994 and the period February 28, 1992 (commencement of operations) to December 31, 1992. Global Utility Focus Fund for the year ended December 31, 1994 and the period July 1, 1993 (commencement of operations) to December 31, 1993. High Current Income Fund for each of the years in the five-year period ended December 31, 1993. Intermediate Government Bond Fund for the period May 2, 1994 (commencement of operations) to December 31, 1994. International Bond Fund for the period May 2, 1994 (commencement of operations) to December 31, 1994. International Equity Focus Fund for the year ended December 31, 1994 and the period July 1, 1993 (commencement of operations) to December 31, 1993. Natural Resources Focus Fund for each of the years in the five-year period ended December 31, 1994. Prime Bond Fund for each of the years in the five-year period ended December 31, 1994. Quality Equity Fund for each of the years in the five-year period ended December 31, 1994. Reserve Assets Fund for each of the years in the five-year period ended December 31, 1994. World Income Focus Fund for the year ended December 31, 1994 and the period July 1, 1993 (commencement of operations) to December 31, 1993. (B) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION - ---------- ------------------------------------------------------------ 1(a) --Articles of Incorporation of Registrant (a) 1(b) --Form of Articles Supplementary of Registrant (b) 1(c) --Form of Articles of Amendment of Registrant (c) 1(d) --Form of Articles Supplementary of Registrant (d) 1(e) --Form of Articles Supplementary of Registrant (e) 1(f) --Form of Articles Supplementary of Registrant (f) 1(g) --Articles Supplementary to Registrant's Articles of Incorporation relating to the redesignation of shares of common stock as Merrill Lynch Basic Value Focus Fund Common Stock, Merrill Lynch World Income Focus Fund Common Stock, Merrill Lynch Global Utility Focus Fund Common Stock and Merrill Lynch International Equity Focus Fund Common Stock (s)
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EXHIBIT NUMBER DESCRIPTION - ---------- ------------------------------------------------------------ 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) 2 --By-Laws of Registrant, as amended (g) 3 --None 4 --Specimen certificate for shares of common stock of Registrant (h) 5(a) --Investment Advisory Agreement for Merrill Lynch Reserve Assets Fund (i) 5(b) --Investment Advisory Agreement for the Merrill Lynch Prime Bond Fund, Merrill Lynch High Current Income Fund, Merrill Lynch Quality Equity Fund and Merrill Lynch Equity Growth Fund (j) 5(c) --Investment Advisory Agreement for Merrill Lynch Flexible Strategy Fund (k) 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 World Income 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, Merrill Lynch International Bond Fund and Merrill Lynch Intermediate Government Bond Fund (u) 6(a) --Form of Distribution Agreement (n) 7 --None 8 --Form of Custodian Agreement (o) 9(a) --Form of Transfer Agency, and Dividend Disbursing Agreement (p) 9(b) --Form of Agreement relating to the use of the 'Merrill Lynch' name (q) 10 --Opinion of Counsel (filed with Rule 24f-2 Notice on February 24, 1993) 11 --Consent of Deloitte & Touche LLP 12 --None 13 --None 14 --None 15 --None 16 --Calculation of Performance Data (r) 27 --Financial Data Schedules (filed herewith)
- ------------------ (a) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form N-1 (the 'Registration Statement'). (b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 1 to the Registration Statement. (c) Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 7 to the Registration Statement. (d) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 10 to the Registration Statement. C-3 (e) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No. 12 to the Registration Statement. (f) Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No. 16 to the Registration Statement ('Post-Effective Amendment No. 16'). (g) Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 11 to the Registration Statement ('Post-Effective Amendment No. 11'). (h) Incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4 to the Registration Statement ('Post-Effective Amendment No. 4'). (i) Incorporated by reference to Exhibit 5(a) to Post-Effective Amendment No. 8 to the Registration Statement ('Post-Effective Amendment No. 8'). (j) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 8. (k) Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment No. 9 to Registrant's Registration Statement. (l) Incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No. 11. (m) Incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No. 16. (n) Incorporated by reference to Exhibit 6(a) to Amendment No. 1 to Registrant's Registration Statement ('Amendment No. 1'). (o) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 4. (p) Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No. 4. (q) Incorporated by reference to Exhibit 9(b) to Amendment No. 1. (r) Incorporated by reference to Exhibit 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. ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. Registrant does not control any other person. Except that all of Registrant's issued and outstanding shares are and will be held by Merrill Lynch Life Insurance Company, ML Life Insurance Company of New York and Family Life Insurance Company for their Separate Accounts, the Registrant is not under common control with any other person. ITEM 26. NUMBERS OF HOLDERS OF SECURITIES.
NUMBER OF RECORD HOLDERS AT TITLE OF CLASS 1993 MARCH 31, 1995 - ------------------------------------------------------------ -------------- Common stock, par value $0.10 per share, Merrill Lynch Domestic Money Market Fund Class.......................... 2 Common stock, par value $0.10 per share, Merrill Lynch Reserve Assets Fund Class................................. 8 Common stock, par value $0.10 per share, Merrill Lynch Prime Bond Fund Class........................................... 8
C-4
NUMBER OF RECORD HOLDERS AT TITLE OF CLASS 1993 MARCH 31, 1995 - ------------------------------------------------------------ -------------- Common stock, par value $0.10 per share, Merrill Lynch High Current Income Fund Class................................. 8 Common stock, par value $0.10 per share, Merrill Lynch Quality Equity Fund Class................................. 8 Common stock, par value $0.10 per share, Merrill Lynch Equity Growth Fund Class.................................. 12 Common stock, par value $0.10 per share, Merrill Lynch Flexible Strategy Fund Class.............................. 8 Common stock, par value $0.10 per share, Merrill Lynch Natural Resources Focus Fund Class........................ 7 Common stock, par value $0.10 per share, Merrill Lynch American Balanced Fund Class.............................. 6 Common stock, par value $0.10 per share, Merrill Lynch Global Strategy Focus Fund Class.......................... 2 Common stock, par value $0.10 per share, Merrill Lynch Basic Value Focus Fund Class.................................... 6 Common stock, par value $0.10 per share, Merrill Lynch World Income Focus Fund Class................................... 6 Common stock, par value $0.10 per share, Merrill Lynch Global Utility Focus Fund Class........................... 6 Common stock, par value $0.10 per share, Merrill Lynch International Equity Focus Fund Class..................... 6 Common stock, par value $0.10 per share, Merrill Lynch Developing Capital Markets Focus Fund Class............... 7 Common stock, par value $0.10 per share, Merrill Lynch Global Bond Focus Fund Class.............................. 7 Common stock, par value $0.10 per share, Merrill Lynch Intermediate Government Bond Fund Class................... 3
ITEM 27. INDEMNIFICATION. Under Section 2-418 of the Maryland General Corporation Law, with respect to any proceedings against a present or former director, officer, agent or employee (a 'corporate representative') of the Registrant, except a proceeding brought by or on behalf of the Registrant, the Registrant may indemnify the corporate representative against expenses, including attorneys' fees and judgments, fines and amounts paid in settlement actually and reasonably incurred by the corporate representative in connection with the proceeding, if: (i) he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Registrant; and (ii) with respect to any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. The Registrant is also authorized under Section 2-418 of the Maryland General Corporation Law to indemnify a corporate representative under certain circumstances against expenses incurred in connection with the defense of a suit or action by or in the right of the Registrant. Under the Distribution Agreement, the Registrant has agreed to indemnify the Distributor against any loss, liability, claim, damage or expense arising out of any untrue statement of a material fact, or an omission to state a material fact, in any registration statement, prospectus or report to shareholders of the Registrant. Reference is made to Article VI of Registrant's Certificate of Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of the Distribution Agreement. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. Merrill Lynch Asset Management 'MLAM' or the 'Investment Adviser' acts as investment adviser for the following registered investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Merrill Lynch Asset Builder Program Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Convertible Holdings, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets, Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability requirements), Merrill Lynch High Income Municipal Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Institutional C-5 Intermediate Fund, Merrill Lynch Global Holdings, Inc., Merrill Lynch Latin America Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Merrill Lynch Middle East/Africa Fund, Merrill Lynch Municipal Series Trust, Merrill Lynch Global Resources Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Merrill Lynch Variable Series Funds, Inc., Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund. Fund Asset Management, L.P. ('FAM'), an affiliate of the Investment Adviser, acts as the investment adviser for the following registered investment companies: Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, 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, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., The Municipal Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, Inc., MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California Insured Fund II, Senior High Income Portfolio, Senior High Income Portfolio II, MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., Apex Municipal Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield Pennsylvania Fund, Inc., MuniYield Fund, Inc., MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc., Merrill Lynch World Income Fund, Inc. and Worldwide DollarVest, Inc. The address of each of these investment companies is Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2665. The address of the Investment Adviser and FAM is also Box 9011, Princeton, New Jersey 08543-9011. 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. 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 October 31, 1987 for his own account or in the capacity of director, officer, partner or trustee. In addition, Mr. Zeikel is President and Mr. Richard is Treasurer of all or substantially all of the investment companies described in the preceding paragraph. Messrs. Durnin, Giordano, Glenn, Harvey, Hewitt, Kirstein and Monagle are directors or officers of one or more of such companies.
OTHER SUBSTANTIAL BUSINESS, POSITION WITH PROFESSION, VOCATION OR NAME INVESTMENT ADVISER EMPLOYMENT - ------------------------- ------------------------- ------------------------- Arthur Zeikel............ President and Director President and Director of FAM; President and Director of Princeton Services; Executive Vice President of Merrill Lynch & Co. and Merrill Lynch; and Director of MLFD. Terry K. Glenn........... Executive Vice President Executive Vice President and Director and Director of FAM; President and Director of MLFD; Executive Vice President of Princeton Services; President of Princeton Administrators, Inc. and Director of Financial Data Services, Inc.
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OTHER SUBSTANTIAL BUSINESS, POSITION WITH PROFESSION, VOCATION OR NAME INVESTMENT ADVISER EMPLOYMENT - ------------------------- ------------------------- ------------------------- Robert W. Crook.......... Senior Vice President Senior Vice President of MLFD since 1990; Vice President of MLAM and MLFD. Bernard J. Durnin........ Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993. Vincent R. Giordano...... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993. Elizabeth Griffen........ Senior Vice President Norman R. Harvey......... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993. N. John Hewitt........... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993. Philip L. Kirstein....... Senior Vice President, Senior Vice President, General Counsel, General Counsel, Director Director and Secretary and Secretary of FAM; Senior Vice President of Princeton Services since 1993. Ronald M. Kloss.......... Senior Vice President Senior Vice President and Controller of FAM; Senior Vice President of Princeton Services since 1993. Stephen M. M. Miller..... Senior Vice President Executive Vice President of Princeton Administrators, Inc. since 1989; Senior Vice President of Princeton Services since 1993; Vice President and Secretary of Merrill Lynch from 1982 to 1989; Secretary of Merrill Lynch & Co. from 1982 to 1989. Joseph T. Monagle........ Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993. Gerald M. Richard........ Senior Vice President and Senior Vice President and Treasurer Treasurer of FAM; Senior Vice President of Princeton Services since 1993; Vice President and Treasurer of MLFD. Ronald Welburn........... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993. Anthony Wiseman.......... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services since 1993.
ITEM 29. PRINCIPAL UNDERWRITERS. (a) MLFD acts as the principal underwriter for the Registrant and for each of the investment companies referred to in the first paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., C-7 MuniYield Quality Fund II, Inc., Senior High Income Portfolio Inc., Senior High Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest, Inc. (b) Set forth below is information concerning each director and officer of MLFD. The principal business address of each such person is Box 9011, Princeton, New Jersey 08543-9011, except that the address of Officers Crook, Aldrich, Graczyk, Brady, Breen, Fatseas, Wasel, Maguire and Schena is One Financial Center, Boston, Massachusetts 02111-2646.
(2) (3) (1) POSITIONS AND OFFICES POSITIONS AND OFFICES NAME WITH UNDERWRITER WITH REGISTRANT - ------------------------- ------------------------- ------------------------- Terry K. Glenn........... President Executive Vice President Arthur Zeikel............ Director President and Director Philip L. Kirstein....... Director None William E. Aldrich....... Senior Vice President None Robert W. Crook.......... Senior Vice President None Kevin Boman.............. Vice President None Michael J. Brady......... Vice President None William M. Breen......... Vice President None Sharon Creveling......... Vice President and None Assistant Treasurer Mark A. DeSario.......... Vice President None James T. Fatseas......... Vice President None Stanley Graczyk.......... Vice President None Debra W. Landsman-Yaros........... Vice President None Michelle T. Lau.......... Vice President None Gerald M. Richard........ Vice President and Treasurer Treasurer Sal Venezia.............. Vice President None William Wasel............ Vice President None Mark E. Maguire.......... Assistant Vice President None Patricia A. Schena....... Assistant Vice President None Robert Harris............ Secretary None
(c) Not applicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS. All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder will be maintained at the offices of the Registrant, its Investment Adviser and its Custodian and Transfer Agent. ITEM 31. MANAGEMENT SERVICES. Other than as set forth under the captions 'Directors' and 'Investment Adviser' in the Prospectus constituting Part A of the Registration Statement and under the captions 'Management of the Company' and 'Investment Advisory Arrangements' in the Statement of Additional Information constituting Part B of the Registration Statement, Registrant is not a party to any management-related service contract. ITEM 32. UNDERTAKINGS. The Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request, and without charge. C-8 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 THE REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 19TH DAY OF APRIL, 1995. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. (Registrant) By /s/ ARTHUR ZEIKEL --------------------------------- (ARTHUR ZEIKEL, PRESIDENT) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------ ------------------------- -------------------- /S/ ARTHUR ZEIKEL President and Director April 19, 1995 - ------------------------------ (Principal Executive (ARTHUR ZEIKEL) Officer) /S/ GERALD M. RICHARD Treasurer (Principal April 19, 1995 - ------------------------------ Financial and (GERALD M. RICHARD) Accounting Officer) * Director - ------------------------------ (WALTER MINTZ) * Director - ------------------------------ (MELVIN R. SEIDEN) * Director - ------------------------------ (STEPHEN B. SWENSRUD) * Director - ------------------------------ (JOE GRILLS) * Director - ------------------------------ (HARRY WOOLF) *By /S/ GERALD M. RICHARD Attorney-in-Fact April 19, 1995 - ------------------------------ (GERALD M. RICHARD)
C-9 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - ---- ------------ 11 * -- Consent of Deloitte & Touche LLP. 27 * -- Financial Data Schedule.
- ------------------ * Filed herewith EX-99.11 2 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 11 INDEPENDENT AUDITORS' CONSENT MERRILL LYNCH VARIABLE SERIES FUNDS, INC.: We consent to the use in Post-Effective Amendment No. 23 to Registration Statement No. 2-74452 of our report dated February 17, 1995, appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the reference to us under the caption 'Financial Highlights' appearing in the Prospectus, which also is a part of such Registration Statement. Deloitte & Touche LLP Princeton, New Jersey April 27, 1995 EX-27.1 3 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 1 RESERVE ASSETS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 32698577 32670653 89637 53561 0 32813851 580784 0 37036 617820 0 32223955 32223956 30160829 0 0 0 0 (27924) 32196031 0 1465320 0 216442 1248878 1901 (35001) 1215778 0 1248878 1901 0 19180364 18368014 1250777 2028126 0 0 0 0 166992 0 216442 33490260 1.00 .04 0 .04 0 0 1.00 .65 0 0
EX-27.3 4 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 3 PRIME BOND FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 406699207 384799680 6950353 32151 0 391782184 0 0 548009 548009 0 429531303 35173662 24842132 2399783 0 (14592431) 4204953 (21899527) 391234175 0 26769262 72032 1989456 24851838 (18783776) (23383983) (17315921) 0 23986615 4204953 0 9962468 2052800 2421862 77142711 1534560 4191345 0 0 1740429 0 1989456 369912143 12.64 .77 (1.36) .76 .17 0 11.12 .54 0 0
EX-27.4 5 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 4 HIGH CURRENT INCOME FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 273263368 248917211 6949012 80969 0 255947192 0 0 228452 228452 0 279591502 24097990 13556613 2509688 0 (2036293) 0 (24346157) 255718740 334916 22778469 235375 1371582 21977178 (1918504) (28517478) (8458804) 0 20563966 0 0 10081695 1381220 1840902 92290568 1096476 (117789) 0 0 1176777 0 1371582 226575325 12.06 1.05 (1.47) 1.03 0 0 10.61 .61 0 0
EX-27.5 6 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 5 QUALITY EQUITY FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 451573941 464783415 2535818 10843 0 467330076 2644351 0 325843 2970194 0 438124594 16740944 10663572 3329753 0 9696061 0 13209474 464359882 4900901 2816268 18659 2171770 5564058 10329187 (20646284) (4753039) 0 3345688 7187525 0 6335594 476786 218564 154940245 1111383 6554398 0 0 1889188 0 2171770 400511136 29.02 .38 (.74) .25 .67 0 27.74 .54 0 0
EX-27.6 7 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 6 EQUITY GROWTH FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 167284987 169929115 2035778 28683 0 171993576 1430646 0 519307 1949953 0 168998173 8830838 4721063 383328 0 (1982006) 0 2644128 170043623 669729 895389 0 1181790 383328 (1981763) (8755921) (10354356) 0 0 895916 0 4244767 178315 43323 71067199 0 895673 0 0 1062086 0 1181790 142000496 20.96 .05 (1.56) 0 .19 0 19.26 .83 0 0
EX-27.7 8 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 7 FLEXIBLE STRATEGY FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 272948560 273700417 6838727 19080 0 280558224 5768001 0 291957 6059958 0 265282528 18674116 12027465 3474388 0 4982943 0 758407 274498266 2196302 5787799 0 1798136 6185965 4744740 (21104289) (10173584) 0 4296790 6450353 0 6842583 904823 708891 79721750 1585213 6688557 0 0 1598769 0 1798136 246640170 16.19 .37 (1.02) .30 .54 0 14.70 .73 0 0
EX-27.8 9 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 8 AMERICAN BALANCED FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 163046195 156864556 2321115 32370 0 159218041 0 0 267301 267301 0 162468996 12151167 8199743 3297750 0 (251964) 382403 (6181639) 158950740 1706808 4958617 0 921933 5743492 (634222) (11011500) (5902230) 0 3724806 382403 0 4208232 565599 308791 43530820 1279064 382258 0 0 803973 0 921933 145806659 14.08 .48 (1.06) .37 .05 0 13.08 .63 0 0
EX-27.9 10 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 9 NATURAL RESOURCES FOCUS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 40329553 39455573 385909 141455 0 39982937 221257 0 46819 268076 0 40247131 3670928 1365728 289267 0 52494 0 (874031) 39714861 553399 214093 0 241363 526129 102053 (810365) (182183) 0 319496 0 0 2431502 134053 7751 24937299 82634 (49560) 0 0 179492 0 241363 27690089 10.82 .17 (.02) .15 0 0 10.82 .87 0 0
EX-27.10 11 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 10 DOMESTIC MONEY MARKET FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 369315441 369119126 1020024 137008 0 370276158 6775811 0 301247 7077058 0 363395415 363395415 170528619 0 0 0 0 (196315) 363199100 0 12848322 0 1428396 11419926 5347 (199049) 11226224 0 11419926 5347 0 458988915 277547347 11425228 192667747 0 0 0 0 1418479 0 1629682 284475287 1.00 .04 0 .04 0 0 1.00 .57 0 0
EX-27.11 12 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 11 GLOBAL STRATEGY FOCUS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 524369249 512141013 5762143 707019 0 518610175 1306886 0 1895973 3202859 0 519998566 43954297 22155153 7256695 0 0 169671 (11678274) 515407316 5567639 10067955 0 3336174 12299420 (202960) (23383348) (11286888) 0 6805684 1216450 0 22592355 1462140 668929 245780135 1762959 1249740 0 0 2818040 0 3336174 433327880 12.17 .30 (.48) .21 .05 0 11.73 .77 0 0
EX-27.12 13 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 12 BASIC VALUE FOCUS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 168632315 163908366 2791259 10316 0 166709941 1615738 0 787484 2403222 0 160486184 14802400 4313085 1591385 0 6953099 0 (4723949) 164306719 2765969 414252 0 814168 2366053 7037711 (6328115) 3075649 0 928253 0 0 10501448 99204 87071 117099456 153585 (84612) 0 0 683107 0 814168 114164028 10.95 .17 .08 (.10) 0 0 11.10 .72 0 0
EX-27.13 14 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 13 GLOBAL UTILITY FOCUS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 137874783 126191523 690479 89651 0 126971653 562632 0 166214 728846 0 138046094 13359556 9804762 1361234 0 (1447878) 33521 (11683122) 126242807 4474341 1231526 0 943233 4762634 (1481987) (14255796) (10975149) 0 3959983 33522 0 4446449 1299696 408041 21725494 558583 34110 0 0 777517 0 943233 129942200 10.66 .35 (1.25) .29 .02 0 9.45 .73 0 0
EX-27.14 15 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 14 INTERNATIONAL EQUITY FOCUS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 251242293 243907561 4128959 2700786 0 250737306 2203033 0 650498 2853531 0 249892771 22740650 6972495 382131 0 3904078 0 (6295205) 247883775 2235384 1496583 0 1758567 1973400 3850217 (10680341) (4856724) 0 1644756 61190 0 15762751 149766 155170 170977353 53487 115051 0 0 1355159 0 1758567 181130361 11.03 .19 (.13) .18 .01 0 10.90 .97 0 0
EX-27.15 16 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 15 WORLD INCOME FOCUS FUND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 78183750 73560921 3360350 13128 0 76934399 1423345 0 361138 1784483 0 82751667 8196750 4888571 409286 0 (3076667) 101589 (4832781) 75149916 19406 6249764 0 535498 5733672 (3236703) (5553092) (3056123) 0 5598199 101589 0 3613258 870578 565499 24412468 257069 176781 0 0 429608 0 535498 71798000 10.38 .76 (1.19) .76 .02 0 9.17 .75 0 0
EX-27.16 17 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 16 DEVELOPING CAPITAL MARKETS OTHER DEC-31-1994 MAY-02-1994 DEC-31-1994 40275572 37930023 950558 521625 0 39402206 2667845 0 58609 2726454 0 39362624 3855911 800000 330561 0 (672256) 0 (2345177) 36675752 123937 401983 0 195359 330561 (672256) (2345177) (2686872) 0 0 0 0 3089579 33668 0 28675752 0 0 0 0 151621 0 204274 22774339 10.00 .09 (.58) 0 0 0 9.51 1.35 0 0
EX-27.17 18 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 17 INTERMEDIATE GOVERNMENT BOND OTHER DEC-31-1994 MAY-02-1994 DEC-31-1994 17635984 17575242 295332 9653 0 17880227 0 0 69576 69576 0 17853334 1786321 200000 73375 0 (55316) 0 (60742) 17810651 0 295427 0 0 295427 (55316) (60742) 179369 0 222052 0 0 1580746 16719 22294 15810651 0 0 0 0 31692 0 50942 9520715 10.00 .25 (.07) .21 0 0 9.97 .80 0 0
EX-27.18 19 FINANCIAL DATA SCHEDULE
6 0000355916 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. 18 INTERNATIONAL BOND FUND OTHER DEC-31-1994 MAY-02-1994 DEC-31-1994 10713571 10617103 703648 15329 0 11336080 1278189 0 124597 1402786 0 10141269 1024322 500000 54400 0 (98691) 0 (163684) 9933294 0 325753 0 0 325753 (98691) (163684) 63378 0 271353 0 0 532215 35652 27759 4933294 0 0 0 0 30838 0 55475 7720087 10.00 .38 (.35) .33 0 0 9.70 1.08 0 0
EX-99.1(A) 20 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ARTICLE I THE UNDERSIGNED, Edward Gwisdalla, whose post office address is 1633 Broadway, New York, New York 10019, being at least 18 years of age, does hereby act as an incorporator, under and by virtue of the General Corporation Law of the State of Maryland authorizing the formation of corporations and with the intention of forming a corporation. ARTICLE II NAME The name of the corporation is MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ARTICLE III PURPOSE AND POWERS The purpose or purposes for which the Corporation is formed and the business or objects to be transacted, carried on and promoted by it are as follows: (1) To conduct and carry on the business of an in- vestment company of the management type. (2) To hold, invest and reinvest its assets in secur- ities, and in connection therewith to hold part or all of its assets in cash. (3) To issue and sell shares of its own capital stock in such amounts and on such terms and conditions, for such pur- poses and for such amount or kind of consideration now or here- after permitted by the General Corporation Law of the State of Maryland and by these Articles of Incorporation, as its Board of Directors may determine, provided, however, that the value of the consideration per share to be received by the Corpora- tion upon the sale or other disposition of any shares of its capital stock shall be not less than the net asset value per share of such capital stock outstanding at the time of such event. (4) To redeem, purchase or otherwise acquire, hold, dispose of, resell, transfer, reissue or cancel (all without the vote or consent of the stockholders of the Corporation) shares of its capital stock, in any manner and to the extent now or hereafter permitted by the General Corporation Law of the State of Maryland and by these Articles of Incorporation. (5) To do any and all such further acts or things and to exercise any and all such further powers or rights as may be necessary, incidental, relative, conducive, appropriate or desirable for the accomplishment, carrying out or attainment of any of the foregoing purposes or objects. 2 The Corporation shall be authorized to exercise and enjoy all the powers, rights and privileges granted to, or con- ferred upon, corporations by the General Corporation Law of the State of Maryland now or hereafter in force, and the enumera- tion of the foregoing shall not be deemed to exclude any pow- ers, rights or privileges so granted or conferred. ARTICLE IV PRINCIPAL OFFICE AND RESIDENT AGENT The post-office address of the principal office of the Corporation in this state is c/o The Corporation Trust Incor- porated, First Maryland Building, 25 South Charles Street, Baltimore, Maryland 21201. The name of the resident agent of the Corporation in this State is The Corporation Trust Incor- porated, a corporation of this State, and the post-office ad- dress of the resident agent is First Maryland Building, 25 South Charles Street, Baltimore, Maryland 21201. ARTICLE V CAPITAL STOCK The total number of shares of capital stock which the Corporation shall have authority to issue is ONE BILLION (1,000,000,000) shares of the par value of Ten Cents ($0.10) per share and of the aggregate par value of $100,000,000. The shares shall be divided into ten classes of Common Stock, each of which is to consist of One Hundred Million (100,000,000) 3 shares. These classes are hereby designated as Merrill Lynch Reserve Assets Fund Common Stock, and nine classes of Common Stock that are designated Classes A, B, C, D, E, F, G, H, and I, respectively. (a) The holders of each share of stock of the Corpo- ration shall be entitled to one vote for each full share, and a fractional vote for each fractional share of stock, ir- respective of the class, then standing in his name on the books of the Corporation. On any matter submitted to a vote of Stockholders, all shares of the Corporation then issued and outstanding and entitled to vote shall be voted in the aggregate and not by class except that (1) when otherwise expressly required by the Maryland General Corporation Law or the Investment Company Act of 1940, as amended, shares shall be voted by individual class; (2) only shares of the respective classes are entitled to vote on matters concerning only that class; and (3) fundamental policies, as specified in Article XIV of the by-laws, may not be changed, unless a change affects only one class, without the approval of the holders of a majority of the Fund's outstanding voting shares, including a majority (as defined under the Investment Company Act of 1940) of the shares of each class. (b) Each class of stock of the Corporation shall have the following powers, preferences or other special rights, and the qualifications, restrictions, and limitations thereof shall be as follows: 4 (1) The shares of each class, when issued, will be fully paid and non-assessable, have no preference, preemptive, conversion, exchange, or similar rights, and will be freely transferable. (2) The Board of Directors may from time to time declare and pay dividends or distributions, in stock or in cash, on any or all classes of stock, the amount of such dividends and distributions and the payment of them being wholly in the discretion of the Board of Directors. (i) Dividends or distributions on shares of any class of stock shall be paid only out of earned surplus or other lawfully available assets belonging to such class. (ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated investment company" under the Internal Revenue Code of 1954, as amended, or any successor or comparable statute thereto, and Regulations promulgated thereunder, and inasmuch as the computation of net income and gains for Federal income tax purposes may vary from the computation thereof on the books of the Corporation, the Board of Directors shall have the power in its discretion to distribute in any fiscal years as dividends, including dividends designated in whole or in part as capital gains distributions, amounts sufficient in the opinion 5 of the Board of Directors, to enable the Corporation to qualify as a regulated investment company and to avoid liability for the Corporation for Federal income tax in respect of that year. In furtherance, and not in limitation of the foregoing, in the event that a class of shares has a net capital loss for a fiscal year, and to the extent that a net capital loss for a fiscal year offsets net capital gains from one or more of the other classes, the amount to be deemed avail- able for distribution to the class or classes with the net capital gain may be reduced by the amount offset. (3) The assets belonging to any class of stock shall be charged with the liabilities in respect to such class, and shall also be charged with its share of the general liabilities of the Corporation in proportion to the asset values of the respective classes. The determination of the Board of Directors shall be conclusive as to the amount of liabilities, the allocation of the same as to a given class, and as to whether the same or general assets of the Corporation are allocable to one or more classes. (4) Prior to the issuance of any shares of a class, the Board of Directors may by resolution change the designation of such class to the name of the Fund of the Corporation with respect to which such shares will be issued. 6 ARTICLE VI PROVISIONS FOR DEFINING, LIMITING, AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS (1) The number of directors of the Corporation shall be one (l), which number may be increased pursuant to the by-laws of the Corporation but shall never be less than one (1) The name of the director who shall act until the first annual meeting or until his successor is duly elected and qualifies is: William W. Hewitt, Jr. (2) The Board of Directors of the Corporation is hereby empowered to authorize the issuance from time to time of shares of capital stock, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable, subject to such limitations as may be set forth in these Articles of Incorporation or in the by-laws of the Cor- poration or in the General Corporation Law of the State of Maryland. (3) No holder of stock of the Corporation shall, as such holder, have any right to purchase or subscribe for any shares of the cacital stock of the Corporation or any other security of the Corporation which it may issue or sell (whether out of the number of shares authorized by these Articles of Incorporation, or out of any shares of the capital stock of the 7 Corporation acquired by it after the issue thereof, or other- wise) other than such right, if any, as the Board of Direc- tors, in its discretion, may determine. (4) Each director and each officer of the Corporation shall be indemnified by the Corporation to the full extent per- mitted by the General Laws of the State of Maryland. (5) The Board of Directors of the Corporation may make, alter or repeal from time to time any of the by-laws of the Corporation except any particular by-law which is specified as not subject to alteration or reveal by the Board of Direc- tors, subject to the requirements of the Investment Company Act of 1940, as amended. ARTICLE VII REDEMPTION Each holder of shares of capital stock of the Corpora- tion shall be entitled to require the Corporation to redeem all or any part of the shares of capital stock of the Corporation standing in the name of such holder on the books of the Corpo- ration, and all shares of capital stock issued by the Corpora- tion shall be subject to redemption by the Corporation, at the redemption price of such shares as in effect from time to time as may be determined by the Board of Directors of the Corpora- tion in accordance with the provisions hereof, subject to the right of the Board of Directors of the Corporation to suspend 8 the right of redemption of shares of capital stock of the Cor- poration or postpone the date of payment of such redemption price in accordance with provisions of applicable law. The redemption price of shares of capital stock of the Corporation shall be the net asset value thereof as determined by the Board of Directors of the Corporation from time to time in accordance with the provisions of applicable law, less such redemption fee or other charge, if any, as may be fixed by resolution of the Board of Directors of the Corporation. Payment of the redemp- tion price shall be made in cash by the Corporation at such time and in such manner as may be determined from time to time by the Board of Directors of the Corporation. ARTICLE VIII DETERMINATION BINDING Any determination made in good faith, so far as ac- counting matters are involved, in accordance with accepted ac- counting practice by or pursuant to the direction of the Board of Directors, as to the amount of assets, obligations or lia- bilities of the Corporation, as to the amount of net income of the Corporation from dividends and interest for any period or amounts at any time legally available for the payment of divi- dends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creat- ing reserves or as to the use, alteration or cancellation of 9 any reserves or charges (whether or not any obligation or lia- bility for which such reserves or charges shall have been created has been paid or discharged or shall be then or there- after required to be paid or discharged), as to the price of any security owned by the Corporation or as to any other matters relating to the issuance, sale, redemption or other acquisition or disposition of securities or shares of capital stock of the Corporation, and any reasonable determination made in good faith by the Board of Directors as to whether any transaction constitutes a purchase of securities on "margin", a sale of securities "short", or an underwriting of the sale of, or a participation in any underwriting or selling group in con- nection with the public distribution of, any securities, shall be final and conclusive, and shall be binding upon the Corpora- tion and all holders of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be binding as aforesaid. No provision of these Articles of Incorporation shall be effective to (a) require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the Investment Company Act of 1940, as amended, or of any valid rule, regulation or order of the Securities and Exchange Commission thereunder or (b) protect or purport to 10 protect any director or officer of the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. ARTICLE IX PERPETUAL EXISTENCE The duration of the Corporation shall be perpetual. ARTICLE X AMENDMENT The Corporation reserves the right from time to time to make any amendment of its charter, now or hereafter author- ized by law, including any amendment which alters the contract rights, as expressly set forth in its charter, of any outstand- ing stock. IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH VARIABLE SERIES FUNDS, INC. hereby executes the foregoing Articles of Incorporation and acknowledges the same to be his act and further acknowledges that, to the best of his knowledge, the matters and facts set forth therein are true in all material respects under the penalties of perjury. Dated the 14th day of October, 1981. /s/ Edward Gwisdalla ------------------------------- 1633 Broadway New York, N.Y. 10019 11 EX-99.1(B) 21 ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION OF MERRILL LYNCH VARIABLE SERIES FUNDS,INC. Merrill Lynch Variable Series Funds, Inc., a Maryland corporation having its principal office in Baltimore City, Maryland (hereinafter referred to as the "Company"), hereby certifies to the State Department of Assessments and Taxation of Maryland, that: FIRST: Pursuant to authority expressly vested in the Board of Directors of the Company by Article V of the Articles of Incorporation of the Company, the Board of Directors has duly redesignated the Class E, F, G, H and I Common Stock of the Company as, respectively, Merrill Lynch U. S. Government Money Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock and Merrill Lynch Equity Growth Fund Common Stock. SECOND: Except to change, the designations of such classes of the Company's Common Stock, the preferences, conversions and other rights, voting powers, restrictions as to dividends and qualifications of such classes of the Company's Common Stock remain as stated in Article V of the Articles of Incorporation of the Company. IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused these presents to be signed in its name and on its behalf by its President or one of its Vice Presidents and its corporate seal to be hereunto affixed and attested by its Secretary on the 11th day of February, 1982. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/ --------------------------------- [SEAL] Attest: /s/ Philip L. Kirstein ---------------------------- Secretary EX-99.1(C) 22 ARTICLES OF AMENDMENT MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ARTICLES OF AMENDMENT MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a Maryland corporation having its principal office in the City of Baltimore, Maryland (hereinafter called the Corporation), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The charter of the Corporation is hereby amended by striking out in its entirety ARTICLE V and inserting in lieu thereof the following: ARTICLE V CAPITAL STOCK The total number of shares of capital stock which the Corporation shall have authority to issue is TWO BILLION (2,000,000,000) shares of par value of Ten Cents ($0.10) per share and of the aggregate par value of $200,000,000. The shares shall be divided into ten classes of Common Stock designated as follows: Merrill Lynch Reserve Assets Fund Common Stock, Merrill Lynch U.S. Government Money Fund Common Stock, Merrill Lynch Prime Bond Fund Common Stock, Merrill Lynch High Current Income Fund Common Stock, Merrill Lynch Quality Equity Fund Common Stock, Merrill Lynch Equity Growth Fund Common Stock and classes A, B, C, and D Common Stock. The class designated as Merrill Lynch Reserve Assets Fund Common Stock shall consist of ONE BILLION ONE HUNDRED MILLION (1,100,000,000) shares and each of the remaining nine classes shall consist of ONE HUNDRED MILLION (100,000,000) shares. (a) The holders of each share of stock of the Corporation shall be entitled to one vote for each full share, and a fractional vote for each fractional share of stock, irrespective of the class, then standing in his name on the books of the Corporation. On any matter submitted to a vote of Stockholders, all shares of the Corporation then issued and outstanding and entitled to vote shall be voted in the aggregate and not by class except that (1) when otherwise expressly required by the Maryland General Corporation Law or the Investment Company Act of 1940, as amended, shares shall be voted by individual class; (2) only shares of the respective classes are entitled to vote on matters concerning only that class; and (3) fundamental policies, as specified in Article XIV of the by-laws, may not be changed, unless a change affects only one class, without the approval of the holders of a majority of the Fund's outstanding voting shares, including a majority (as defined under the Investment Company Act of 1940) of the shares of each class. (b) Each class of stock of the Corporation shall have the following powers, preferences or other special rights, and the qualifications, restrictions, and limitations thereof shall be as follows: (1) The shares of each class, when issued, will be fully paid and non-assessable, have no preference, preemptive, conversion, exchange, or similar rights, and will be freely transferable. (2) The Board of Directors may from time to time declare and pay dividends or distributions, in stock or in cash, on any or all classes of stock, the amount of such dividends and distributions and the payment of them being wholly in the discretion of the Board of Directors. (i) Dividends or distribu- tions on shares of any class of stock shall be paid only out of earned surplus or other lawfully available assets belonging to such class. (ii) Inasmuch as one goal of the Corporation is to qualify as a "regulated investment company" under the Internal Revenue Code of 1954, as amended, 2 or any successor or comparable statute thereto, and Regulations promulgated thereunder, and inasmuch as the computation of net income and gains for Federal income tax purposes may vary from the computation thereof on the books of the Corporation, the Board of Directors shall have the power in its discretion to distribute in any fiscal years as dividends, including dividends designated in whole or in part as capital gains distributions, amounts sufficient in the opinion of the Board of Directors, to enable the Corporation to qualify as a regulated investment company and to avoid liability for the Corporation for Federal income tax in respect of that year. In furtherance, and not in limitation of the foregoing, in the event that a class of shares has a net capital loss for a fiscal year, and to the extent that a net capital loss for a fiscal year offsets net capital gains from one or more of the other classes, the amount to be deemed available for distribution to the class or classes with the net capital gain may be reduced by the amount offset. (3) The assets belonging to any class of stock shall be charged with the liabilities in respect to such class, and shall also be charged with its share of the general liabilities of the Corporation in proportion to the asset values of the respective classes. The determination of the Board of Directors shall be conclusive as to the amount of liabilities, the allocation of the same as to a given class, and as to whether the same or general assets of the Corporation are allocable to one or more classes. (4) Prior to the issuance of any shares of a class, the Board of Directors may by resolution change the designation of such class to the name of the Fund of the Corporation with respect to which such shares will be issued. 3 (c) The board of directors may classify or reclassify any unissued capital stock of the Corporation from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of such stock. SECOND: The charter of the Corporation is further amended by adding a Paragraph (6) to ARTICLE VI which shall read as follows: (6) These Articles of Incorporation may be amended by the affirmative vote of a majority of the shares of the Corporation entitled to vote on any such amendment. THIRD: The amendment of the charter of the Corporation as hereinabove set forth has been duly advised by the board of directors and approved by the stockholder of the Corporation. FOURTH: (a) The total number of; shares of all classes of stock of the Corporation heretofore authorized, and the number and par value of the shares of each class, are as follows: One Billion (1,000,000,000) shares of capital stock divided into ten classes of Common Stock each of which consists of One Hundred Million (100,000,000) shares of the par value of Ten Cents ($0.10) per share in an aggregate par value amount of all classes of $100,000,000. (b) The total number of shares of all classes of stock of the Corporation as increased, and the number and par value of the shares of each class, are as follows: Two billion (2,000,000,000) shares of capital stock divided into ten classes of Common Stock. The class designated as Merrill Lynch Reserve Assets Fund Common Stock consists of One Billion One Hundred Million (1,100,000,000) shares of the par value of Ten Cents ($0.l0) per share and the nine remaining classes of Common Stock 4 consist of One Hundred Million (100,000,000) shares each of the par value of Ten Cents ($0.10) per share in an aggregate par value amount of all classes of $200,000,000. (c) The information required pursuant to Section 2-607(b)(2)(i) of the General Corporation Law of Maryland was not changed by the foregoing amendment. IN WITNESS WHEREOF: Merrill Lynch Variable Series Funds, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested by its Secretary on July 19, 1984. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/ Arthur Zeikel --------------------- Arthur Zeikel President 5 Attest: /s/ Michael J. Hennewinkel --------------------------------- Michael J. Hennewinkel, Secretary The undersigned, President of MERRILL LYNCH VARIABLE SERIES FUNDS, INC., who executed on behalf of said Corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said Corporation, the foregoing Articles of Amendment to be the corporate act of said Corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Arthur Zeikel --------------------------- Arthur Zeikel President 6 EX-99.1(D) 23 ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. Merrill Lynch Variable Series Funds, Inc. , a Maryland corporation having its principal office in Baltimore City, Maryland (hereinafter referred to as the "Company") , hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to the authority expressly vested in the Board of Directors of the Company by Article V of the Articles of Incorporation of the Company, the Board of Directors has duly redesignated the Class D Common Stock as Flexible Strategy Fund Common Stock. SECOND: Except to change the designation of such class of the Company's Common Stock, the preferences, conversions and other rights, voting powers, restrictions as to the dividends and qualifications of such class of the Company's Common Stock remain as stated in Article V of the Articles of Incorporation of the Company. IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused these presents to be signed in its name and on its behalf by its President or one of its Vice Presidents and its corporate seal to be hereunto affixed and attested by its Secretary on the 21st day of April, 1986. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/Arthur Zeikel ----------------------------- President Arthur Zeikel (SEAL) Attest: /s/ Michael J. Hennewinkel --------------------------- Secretary Michael J. Hennewinkel THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE SERIES FUNDS, INC., who executed on behalf of said corporation the foregoing Articles Supplementary to the Charter, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles Supplementary to the Charter to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/Arthur Zeikel ------------------------ Arthur Zeikel President 2 EX-99.1(E) 24 ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. Merrill Lynch Variable Series Funds, Inc. (the "Company"), a Maryland corporation having its principal office in the City of Baltimore, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to the authority expressly vested in the Board of Directors of the Company by Article V of the Articles of Incorporation of the Company, the Board of Directors has duly redesignated the shares of Merrill Lynch U.S. Government Money Fund Common Stock and Class C Common Stock as shares of Merrill Lynch Natural Resources Focus Fund Common Stock and Merrill Lynch American Balanced Fund Common Stock, respectively. SECOND: Except to change the designation of such classes of the Company's Common Stock, the preferences, conversions and other rights, voting powers, restrictions as to dividends and qualifications of such classes of the Company's Common Stock remain as stated in Article V of the Articles of Incorporation of the Company. IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested by its Secretary on the 11 day of April, 1988. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/ Arthur Zeikel --------------------- Arthur Zeikel President Attest: /s/ Michael J. Hennewinkel -------------------------- Michael J. Hennewinkel Secretary THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE SERIES FUNDS, INC., who executed on behalf of said corporation the foregoing Articles Supplementary to the Charter, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles Supplementary to the Charter to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Arthur Zeikel ------------------------- Arthur Zeikel President EX-99.1(F) 25 FORM OF ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION FORM OF ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. Merrill Lynch Variable Series Funds, Inc. (the "Company"), a Maryland corporation having its principal office in the City of Baltimore, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to the authority expressly vested in the Board of Directors of the Company, the Board of Directors has duly redesignated the shares of Class A Common Stock and Class B Common Stock as shares of Merrill Lynch Global Strategy Focus Fund Common Stock and Domestic Money Market Fund Common Stock, respectively. SECOND: Except to change the designation of such classes of the Company's Common Stock, the preferences, conversions and other rights, voting powers, restrictions as to the dividends and qualifications of such classes of the Company's Common Stock remain as stated in Article V of the Articles of Incorporation of the Company. IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested by its Secretary on the 31st day of December, 1991. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/Arthur Zeikel -------------------------- President Arthur Zeikel (SEAL) Attest: /s/ Michael J. Hennewinkel -------------------------- Michael J. Hennewinkel Secretary THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE SERIES FUNDS, INC., who executed on behalf of said corporation the foregoing Articles Supplementary to the Charter, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles Supplementary to the Charter to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/Arthur Zeikel ------------------------------ Arthur Zeikel President 2 EX-99.1(G) 26 ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. Merrill Lynch Variable Series Funds, Inc.(the "Company"), a Maryland corporation having its principal office in the City of Baltimore, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to the authority expressly vested in the Board of Directors of the Company by Section 2-208 of the Maryland General Corporation Law and Article V, Section (c) of the Articles of Incorporation of the Company, the Board of Directors has duly reclassified 400,000,000 of the authorized but unissued shares of Merrill Lynch Reserve Assets Fund Common Stock as follows: 100,000,000 shares have been reclassified as a new class designated Merrill Lynch Basic Value Focus Fund Common Stock; 100,000,000 shares have been reclassified as a new class designated Merrill Lynch World Income Focus Fund Common Stock; 100,000,000 shares have been reclassified as a new class designated Merrill Lynch Global Utility Focus Fund Common Stock; and 100,000,000 shares have been reclassified as a new class designated Merrill Lynch International Equity Focus Fund Common Stock. SECOND: All of the shares of the Company's Common Stock, as reclassified and redesignated, continue to have the preferences, conversions and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption as set forth in Article V of the Articles of Incorporation of the Company. IN WITNESS WHEREOF, Merrill Lynch Variable Series Funds, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested by its Secretary on the 24th day of June, 1993. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By:/s/Arthur Zeikel ------------------------ Name: Arthur Zeikel Title: President Attest: /s/ Michael J. Hennewinkel ------------------------------- Michael J. Hennewinkel Secretary THE UNDERSIGNED, President of MERRILL LYNCH VARIABLE SERIES FUNDS, INC., who executed on behalf of said corporation the foregoing Articles Supplementary to the Articles of Incorporation of said corporation, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles Supplementary to the Articles of Incorporation of said corporation to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Arthur Zeikel ------------------------------- Name: Arthur Zeikel Title: President EX-99.2 27 FORM OF AMENDED BY-LAWS FORM OF AMENDED BY-LAWS OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ARTICLE I Offices Section 1. Principal Office. The principal office of the Corporation shall be in the City of Baltimore, State of Maryland. Section 2. Principal Executive Office. The principal executive office of the Corporation shall be at 800 Scudders Mill Road, Township of Plainsboro, State of New Jersey. Section 3. Other Offices. The Corporation may have such other offices in such places as the Board of Directors may from time to time determine. ARTICLE II Meetings of Stockholders Section 1. Annual Meeting. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on such day in July of each year as shall be designated annually by the Board of Directors; provided, however, that anything in these By-Laws to the contrary notwithstanding, unless otherwise prohibited by law, so long as the Corporation is registered as an investment company under the Investment Company Act of 1940, as amended, the Corporation shall not be required to hold an annual meeting in any year in which none of the following is required to be acted on by the stockholders of the Corporation under the Investment Company Act of 1940, as amended: (1) election of directors, (2) approval of the Investment Advisory Agreement, (3) ratification of the election of independent public accountants, and (4) approval of a Distribution Agreement. Any business of the Corporation may be transacted at the annual meeting without being specifically designated in the notice, except such business as is specifically required by statute to be stated in the notice. Section 2. Special Meetings. Special meetings of the stockholders, unless otherwise provided by law or by the Articles of Incorporation, may be called for any purpose or purposes by a majority of the Board of Directors, the President, or on the written request of the holders of at least 25% of the outstanding capital stock of the Corporation entitled to vote at such meeting. Section 3. Place of Meetings. The annual meeting and any special meeting of the stockholders shall be held at such place within the United States as the Board of Directors may from time to time determine. Section 4. Notice of Meetings; Waiver of Notice. Notice of the place, date and time of the holding of each annual and special meeting of the stockholders and the purpose or purposes of each special meeting shall be given personally or by mail, not less than ten nor more than sixty days before the date of such meeting, to each stockholder entitled to vote at such meeting and to each other stockholder entitled to notice of the meeting. Notice by mail shall be deemed to be duly given when 2 deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice of any meeting of stockholders shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, or who shall, either before or after the meeting, submit a signed waiver of notice which is filed with the records of the meeting. When a meeting is adjourned to another time and place, unless the Board of Directors, after the adjournment, shall fix a new record date for an adjourned meeting, or the adjournment is for more than thirty days, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. Section 5. Quorum. At all meetings of the stockholders, the holders of a majority of the shares of stock of the Corporation entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for the transaction of any business, except as otherwise provided by statute or by the Articles of Incorporation or these By-Laws. In the absence of a quorum no business may be transacted, except that the holders of a majority of the shares of stock present in person or by proxy and entitled to vote may adjourn the meeting from time to time, without notice other than announcement thereat except as otherwise required by these By-Laws, until the holders of the requisite amount of shares of stock shall be so present. At any such adjourned meeting at which a quorum 3 may be present any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting, in person or by proxy, of holders of the number of shares of stock of the Corporation in excess of a majority thereof which may be required by the laws of the State of Maryland, the Investment Company Act of 1940, as amended, or other applicable statute, the Articles of Incorporation, or these By-Laws, for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat, in person or by proxy, holders of the number of shares of stock of the Corporation required for action in respect of such other matter or matters. Section 6. Organization. At each meeting of the stockholders, the Chairman of the Board (if one has been desig- nated by the Board), or in his absence or inability to act, the President, or in the absence or inability to act of the Chairman of the Board and the President, a Vice President, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 7. Order of Business. The order of business 4 at all meetings of the stockholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute or the Articles of Incorporation, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in his name on the record of stockholders of the Corporation as of the record date determined pursuant to Section 9 of this Article or if such record date shall not have been so fixed, then at the later of (i) the close of business on the day on which notice of the meeting is mailed or (ii) the thirtieth day before the meeting. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in- fact. No proxy shall be valid after the expiration of eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where such proxy states that it is irrevocable and where an irrevocable proxy is permitted by law. Except as otherwise provided by statute, the Articles of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders shall be authorized by a majority of the total votes cast at a 5 meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. If a vote shall be taken on any question other than the election of directors, which shall be by written ballot, then unless required by statute or these By-Laws, or determined by the chairman of the meeting to be advisable, any such vote need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 9. Fixing of Record Date. The Board of Directors may fix, in advance, a record date not more than sixty nor less than ten days before the date then fixed for the holding of any meeting of the stockholders. All persons who were holders of record of shares at such time, and no others, shall be entitled to vote at such meeting and any adjournment thereof. Section 10. Inspectors. The Board may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspec- tors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint inspectors. Each inspector, before entering upon the 6 discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting number of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote in fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. Except as otherwise provided by statute or the Arti- cles of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice 7 and without a vote, if the following are filed with the records of stockholders meetings: (i) a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and (ii) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote thereat. ARTICLE III Board of Directors Section 1. General Powers. Except as otherwise pro- vided in the Articles of Incorporation, the business and affairs of the Corporation shall be managed by the Board of Directors. The Board may exercise all the powers of the Corporation and do all such lawful acts and things as are not by statute or the Articles of Incorporation directed or required to be exercised or done by the stockholders. Section 2. Number of Directors. The number of direc- tors shall be fixed from time to time by resolution of the Board of Directors adopted by a majority of the Directors then in office; provided, however, that the number of directors shall in no event be less than one nor more than fifteen. Any vacancy created by an increase in directors may be filled in accordance with Section 6 of this Article III. No reduction in the number of directors shall have the effect of removing any 8 director from office prior to the expiration of his term unless such director is specifically removed pursuant to Section 5 of this Article III at the time of such decrease. Directors need not be stockholders. Section 3. Election and Term of Directors. Directors shall be elected annually, by written ballot at the annual meeting of stockholders or a special meeting held for that purpose. The term of office of each director shall be from the time of his election and qualification until the annual election of directors next succeeding his election and until his successor shall have been elected and shall have qualified, or until his death, or until he shall have resigned, or have been removed as hereinafter provided in these By-Laws, or as otherwise provided by statute or the Articles of Incorporation. Section 4. Resignation. A director of the Corpora- tion may resign at any time by giving written notice of his resignation to the Board or the Chairman of the Board or the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9 Section 5. Removal of Directors. Any director of the Corporation may be removed by the stockholders by a vote of a majority of the votes entitled to be cast on the matter at any meeting of stockholders, duly called and at which a quorum is present. Section 6. Vacancies. Any vacancies in the Board, whether arising from death, resignation, removal, an increase in the number of directors or any other cause, shall be filled by a vote of the majority of the Board of Directors then in office even though such majority is less than a quorum, provided that no vacancies shall be filled by action of the remaining directors, if after the filling of said vacancy or vacancies, less than two-thirds of the directors then holding office shall have been elected by the stockholders of the Corporation. In the event that at any time there is a vacancy in any office of a director which vacancy may not be filled by the remaining directors, a special meeting of the stockholders shall be held as promptly as possible and in any event within sixty days, for the purpose of filling said vacancy or vacancies. Any directors elected or appointed to fill a vacancy shall hold office only until the next annual meeting of stockholders of the Corporation and until a successor shall have been chosen and qualifies or until his earlier resignation and removal. 10 Section 7. Place of Meetings. Meetings of the Board may be held at such place as the Board may from time to time determine or as shall be specified in the notice of such meeting. Section 8. Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as may be determined by the Board of Directors. Section 9. Special Meetings. Special meetings of the Board may be called by two or more directors of the Corporation or by the Chairman of the Board or the President. Section 10. Annual Meeting. The annual meeting of each newly elected Board of Directors shall be held as soon as practicable after the meeting of stockholders at which the directors were elected. No notice of such annual meeting shall be necessary if held immediately after the adjournment, and at the site, of the meeting of stockholders. If not so held, notice shall be given as hereinafter provided for special meetings of the Board of Directors. Section 11. Notice of Special Meetings. Notice of each special meeting of the Board shall be given by the Secre- tary as hereinafter provided, in which notice shall be stated the time and place of the meeting. Notice of each such meeting shall be delivered to each director, either personally or by telephone, telegraph, cable or wireless, at least twenty-four 11 hours before the time at which such meeting is to be held, or by first-class mail, postage prepaid, addressed to him at his residence or usual place of business, at least three days before the day on which such meeting is to be held. Section 12. Waiver of Notice of Meetings. Notice of any special meeting need not be given to any director who shall, either before or after the meeting, sign a written waiver of notice or who shall attend such meeting. Except as otherwise specifically required by these By-Laws, a notice or waiver of notice of any meeting need not state the purposes of such meeting. Section 13. Quorum and Voting. One-third, but not less than two, of the members of the entire Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and except as otherwise expressly required by statute, the Articles of Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or other applicable statute, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board; provided, however, that the approval of any contract with an investment adviser or principal underwriter, as such terms are defined in the Investment Company Act of 1940, as amended, which the Corporation enters into or any renewal or amendment 12 thereof, the approval of the fidelity bond required by the Investment Company Act of 1940, as amended, and the selection of the Corporation's independent public accountants shall each require the affirmative vote of a majority of the directors who are not parties to any such contract or interested persons of any such party. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting to another time and place until a quorum, shall be present thereat. Notice of the time and place of any such adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless such time and place were announced at the meeting at which the adjournment was taken, to the other directors. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 14. Organization. The Board may, by resolu- tion adopted by a majority of the entire Board, designate a Chairman of the Board, who shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to preside at a meeting, the President, or, in his absence or inability to act, another person chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary (or, in his absence 13 or inability to act, any person appointed by the chairman) shall act as secretary of the meeting and keep the minutes thereof. Section 15. Written Consent of Directors in Lieu of a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the pro- ceedings of the Board or committee. Section 16. Compensation. Directors may receive compensation for services to the Corporation in their capacities as directors or otherwise in such manner and in such amounts as may be fixed from time to time by the Board. Section 17. Investment Policies. It shall be the duty of the Board of Directors to ensure that the purchase, sale, retention and disposal of portfolio securities and the other investment practices of the Corporation are at all times consistent with the investment policies and restrictions with respect to securities investments and otherwise of the Corpora- tion, as recited in the current Prospectus of the Corporation filed from time to time with the Securities and Exchange Com- mission and as required by the Investment Company Act of 1940, as amended. The Board, however, may delegate the duty of 14 management of the assets and the administration of its day to day operations to an individual or corporate management company and/or investment adviser pursuant to a written contract or contracts which have obtained the requisite approvals, including the requisite approvals of renewals thereof, of the Board of Directors and/or the stockholders of the Corporation in accordance with the provisions of the Investment Company Act of 1940, as amended. ARTICLE IV Committees Section 1. Executive Committee. The Board may, by resolution adopted by a majority of the entire Board, designate an Executive Committee consisting of two or more of the direc- tors of the Corporation, which committee shall have and may exercise all the powers and authority of the Board with respect to all matters other than: (a) the submission to stockholders of any action requiring authorization of stockholders pursuant to statute or the Articles of Incorporation; (b) the filling of vacancies on the Board of Direc- tors; (c) the fixing of compensation of the directors for 15 serving on the Board or on any committee of the Board, includ- ing the Executive Committee; (d) the approval or termination of any contract with an investment adviser or principal underwriter, as such terms are defined in the Investment Company Act of 1940, as amended, or the taking of any other action required to be taken by the Board of Directors by the Investment Company Act of 1940, as amended; (e) the amendment or repeal of these By-Laws or the adoption of new By-Laws; (f) the amendment or repeal of any resolution of the Board which by its terms may be amended or repealed only by the Board; and (g) the declaration of dividends and the issuance of capital stock of the Corporation. The Executive Committee shall keep written minutes of its proceedings and shall report such minutes of the Board. All such proceedings shall be subject to revision or alteration by the Board; provided, however, that third parties shall not be prejudiced by such revision or alteration. Section 2. Other Committees of the Board. The Board of Directors may from time to time, by resolution adopted by a majority of the whole Board, designate one or more other com- 16 mittees of the Board, each such committee to consist of such number of directors and to have such powers and duties as the Board of Directors may, by resolution, prescribe. Section 3. General. One-third, but not less than two, of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business and at such meeting, and the act of a majority present shall be the act of such committee. The Board may designate a chairman of any committee and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee 17 shall have or may exercise any authority or power of the Board in the management of the business or affairs of the Corporation. ARTICLE V Officers, Agents and Employees Section 1. Number and Qualifications. The officers of the Corporation shall be a President, who shall be a direc- tor of the Corporation, a Secretary and a Treasurer each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint one or more Vice Presidents and may also appoint such other officers, agents and employees as it may deem necessary or proper. Any two or more offices may be held by the same person, except the offices of President and Vice President, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Such officers shall be elected by the Board of Directors each year at its first meeting held after the annual meeting of stockholders, each to hold office until the meeting of the Board following the next annual meeting of the stockholders and until his successor shall have been duly elected and shall have quali- fied, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these By-Laws. The Board may from time to time elect, or delegate to the President the power to appoint, such officers (including one or 18 more Assistant Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and such agents, as may be necessary or desirable for the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. Section 2. Resignations. Any officer of the Corpora- tion may resign at any time by giving written notice of his resignation to the Board, the Chairman of the Board, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3. Removal of Officer, Agent or Employee. Any officer, agent or employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate such power of removal as to agents and employees not elected or appointed by the Board of Directors. Such removal shall be without prejudice to such person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. 19 Section 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office which shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to such office. Section 5. Compensation. The compensation of the Officers of the Corporation shall be fixed by the Board of Directors, but this power may be delegated to any officer in respect of other officers under his control. Section 6. Bonds or other Security. If required by the Board, any officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety or sureties as the Board may require. Section 7. President. The President shall be the chief executive officer of the Corporation. In the absence of the Chairman of the Board (or if there be none), he shall preside at all meetings of the stockholders and of the Board of Directors. He shall have, subject to the control of the Board of Directors, general charge of the business and affairs of the Corporation. He may employ and discharge employees and agents of the Corporation, except such as shall be appointed by the Board, and he may delegate these powers. 20 Section 8. Vice President. Each Vice President shall have such powers and perform such duties as the Board of Direc- tors or the President may from time to time prescribe. Section 9. Treasurer. The Treasurer shall: (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, except those which the Corporation has placed in the custody of a bank or trust company or member of a national securities exchange (as that term is defined in the Securities Exchange Act of 1934) pursuant to a written agreement designating such bank or trust company or member of a national securities exchange as custodian of the property of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) cause all moneys and other valuables to be depo- sited to the credit of the Corporation; (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and super- vise the investment of its funds as ordered or authorized by the Board, taking proper vouchers therefor; and (f) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board or the President. 21 Section 11. Secretary. The Secretary shall: (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certifi- cates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the President. Section 12. Delegation of Duties. In case of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may confer for the time being the powers or duties, or any of them, of such officer upon any other officer or upon any director. 22 ARTICLE VI Indemnification Each officer, director, employee or agent of the Corporation shall be indemnified by the Corporation to the full extent permitted under the General Laws of the State of Maryland and the Investment Company Act of 1940, as amended, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. ARTCLE VII Capital Stock Section 1. Stock Certificates. Each holder of stock of the Corporation shall be entitled upon request to have a certificate or certificates, in such form as shall be approved by the Board, representing the number of shares of stock of the Corporation owned by him, provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the President or a Vice President and by the Secretary or an Assistant Secretary or the 23 Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still in office at the date of issue. Section 2. Books of Account and Record of Stock- holders. There shall be kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available upon request of any stockholder, in accordance with Maryland law, a record containing the number of shares of stock issued during a specified period not to exceed twelve months and the consideration received by the Corporation for each such share. Section 3. Transfers of Shares. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or cer- 24 tificates, if issued, for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclu- sive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation shall not be bound to recog- nize any equitable or legal claim to or interest in any such share or shares on the part of any other person. Section 4. Regulations. The Board may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, trans- fer and regstration of certficates for shares of stock of the Corporation. It may apoint, or authorize any officer or offi- cers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or sig- natures of any of them. Section 5. Lost, Destroyed or Mutilated Certifi- cates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corpora- tion of any loss, destruction or or mutilation of such certifi- 25 cate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Board may, in its discretion, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlim- ited, and in such form and with such surety or sureties, as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such cer- tificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate, ex- cept pursuant to legal proceedings under the laws of the State of Maryland. Section 6. Fixing of a Record Date for Dividends and Distributions. The Board may fix, in advance, a date not more than sixty days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of common stock or other securities, as the record date for the determi- nation of the stockholders entitled to receive any such divi- 26 dend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. Section 7. The corporaion shall be entitled to re- cognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. Section 8. Information to Stockholders and Others. Any stockholder of the Corporation or his agent may inspect and copy during usual business hours the Corporation's By-Laws, minutes of the proceedings of its stockholders, annual state- ments of its affairs, and voting trust agreements on file at its principal office. Section 9. Involuntary Redemption of Shares. Subject to policies established by the Board of Directors, the Corpora- tion shall have the right to involuntarily redeem shares of its common stock if at any time the value of a stockholder's in- vestment in the Corporation is less than $500. 27 ARTICLE VIII Seal The seal of the Corporation shall be circular in form and shall bear, in addition to any other emblem or device ap- proved by the Board of Directors, the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Maryland". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX Fiscal Year Unless otherwise determined by the Board, the fiscal year of the Corporation shall end on the 31st day of December in each year. ARTICLE X Depositories and Custodians Section 1. Depositories. The funds of the Corpora- tion shall be deposited with such banks or other depositories as the Board of Directors of the Corporation may from time to time determine. Section 2. Custodians. All securities and other investments shall be deposited in the safekeeping of such banks or other companies as the Board of Directors of the Corporation 28 may from time to time determine. Every arrangement entered into with any bank or other company for the safekeeping of the securities and investments of the Corporation shall contain provisions complying with the Investment Company Act of 1940, as amended, and the general rules and regulations thereunder. ARTICLE XI Execution of Instruments Section 1. Checks, Notes, Drafts, etc. Checks, notes drafts, acceptances, bills of exchange and other orders or obligations for the payment of money shall be signed by such officer or officers or person or persons as the Board of Direct- tors by resolution shall from time to time designate. Section 2. Sale or Transfer of Securities. Stock certificates, bonds or other securities at any time owned by the Corporation may be held on behalf of the Corporation or sold, transferred or otherwise disposed of subject to any limits imposed by Article XIV or these By-Laws and pursuant to authorization by the Board and, when so authorized to be held on behalf of the Corporation or sold, transferred or otherwise disposed of, may be transferred from the name of the Corpora- tion by the signature of the President or a Vice President or the Treasurer or the Assistant Treasurer or the Secretary or the Assistant Secretary. 29 ARTICLE XII Independent Public Accountants The firm of independent public accountants which shall sign or certify the financial statements of the Corporation which are filed with the Securities and Exchange Commission shall be selected annually by the Board of Directors and ratified by the stockholders in accordance with the provisions of the Investment Company Act of 1940, as amended. ARTICLE XIII Annual Statement The books of account of the Corporation shall be examined by an independent firm of public accountants at the close of each annual period of the Corporation and at such other times as may be directed by the Board. A report to the stock- holders based upon each such examination shall be mailed to each stockholder of the Corporation of record on such date with respect to each report as may be determined by the Board, at his address as the same appears on the books of the Corporation. Such annual statement shall also be available at the annual meeting of stockholders and be placed on file at the Corporation's principal office in the State of Maryland. Each such report shall show the assets and liabilities of the Corporation as of the close of the annual or quarterly period 30 covered by the report and the securities in which the funds of the Corporation were then invested. Such report shall also show the Corporation's income and expenses for the period from the end of the Corporation's preceding fiscal year to the close of the annual or quarterly period covered by the report and any other information required by the Investment Company Act of 1940, as amended, and shall set forth such other matters as the Board or such firm of independent public accountants shall determine. ARTICLE XIV Fundamental Policies Section 1. Policies Applicable to All Funds. (a) It is the fundamental policy of the Corporation to follow the investment objectives for a Fund that are set forth in the Prospectus contained in the Registration Statement of the Corporation, or Post-Effective Amendment thereto, at the time such Registration Statement, or Post-Effective Amendment, setting forth such objectives for such Fund initially is declared effective. (b) It is the fundamental policy of the Corporation NOT to: 1. Issue senior securities. 2. Act as an underwriter of securities. 31 Section 2. Policies Applicable to Particular Funds. (a) The Corporation has adopted the following fundamental policies with respect to its Merrill Lynch Reserve Assets Fund (the "Reserve Assets Fund"); The Corporation's Reserve Assets Fund may not: 1. Purchase any securities other than money market and other securities described under "Definitions of Investments" in the Prospectus contained in the Corporation's Registration Statement at the time such Registration Statement initially is declared effective. 2. Invest more that 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 United States government securities, government agency securities, or bank money instruments). 3. (a) Invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than United States 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 Reserve Assets Fund's total assets may be invested without regard to such 5% limitation but shall instead be subject to a 10% limitation; and (b) purchase more than 10% of the outstanding securities of an issuer except that such restriction shall not 32 apply to United States government or goverment agency secur- ities, bank money instruments or repurchase agreements. 4. Make investments for the purpose of exercising control or management. 5. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquistion or reorganization. 6. Purchase or sell real estate (other than money market securities secured by real estate or interests therein or money market securites issued by companies which invest in real estate, or interests therein) commodities or commodity contracts, interests in oil, gas or other mineral exploration or development programs. 7. Purchase any securities on margin, except for use of short-term credit necessary for clearance of purchases and sales of portfolio securities. 8. Make short sales of securities or maintain a short position or write, purchase or sell puts, calls straddles, spreads or combinations thereof. 9. Make loans to other persons, provided that the Reserve Assets Fund may purchase money market securities or enter into repurchase agreements and lend securities owned or held by it pursuant to paragraph 10 below. 33 10. Lend its portfolio securities in excess of 20% of its total assets, taken at market value, provided that such loans are made according to the guidelines of the Securities Exchange Commission and the Corporation's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. 11. 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, with respect to which paragraph 16 below applies); however, the Reserve Assets Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities. 12. Mortgage, pledge, hypothecate or in any manner transfer (except as provided in paragraph 10 above), as security for indebtedness any securites owned or held by the Reserve Assets Fund except as may be necessary in connection with borrowings mentioned in paragraph 11 above, and then such mortgaging, pledging or hypothecating may not exceed 25% of the Reserve Assets Fund's total assets, taken at market value. 13. Invest in securities (except for repurchase agreements or variable amount master notes) with legal or 34 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 Reserve Assets 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 Reserve Assets Fund's obligations with respect to reverse repurchase agreements would exceed one-third of the Reserve Assets Fund's net assets (defined to be total assets, taken at market value, less liabilities other than reverse repurchase agreements). (b) The Corporation has adopted the following fundamental policies with respect to its Merrill Lynch U.S. Government Money Fund ("Government Money Fund"), Merrill Lynch Prime Bond Fund ("Prime Bond Fund"), Merrill Lynch High Current Income Fund ("High Current Income Fund"), Merrill Lynch Quality Equity Fund ("Quality Equity Fund") and Merrill Lynch Equity Growth Fund ("Equity Growth Fund"). Each such Fund may not: 35 (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than United States government or government agency securities or, with respect to the Quality Equity Fund and the Equity Growth Fund, securities issued by instrumentalities of the United States Government) of any one issuer (including repurchase agreements with any one bank); (2) alone, or together with any other such Fund or Funds or the Reserve Assets Fund, make investments for the purpose of exercising control or management; (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or, by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities; (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Prime Bond Fund and the High Current Income Fund may purchase securities of issuers which invest or deal in any of the above and the other 36 such Funds may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interests 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, provided, however, the Quality Equity Fund may write "covered call coptions"; (7) make loans to other persons, provided that the Government Money Fund may purchase securities issued or guaranteed by the U.S. government or its agencies; each other such Fund may lend securities owned or held by it pursuant to (8) below; and the Prime Bond Fund and High Current Income Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures, or other corporate debt securities or of Government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances (and, with respect to the Quality Equity Fund, variable amount notes) shall not be deemed the making of a loan; (8) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, 37 provided that such loans are made according to the guidelines set forth in (c) below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned; and provided further that the 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; (9) borrow amounts in excess of 20% in the case of the Government Money Fund, or 5% in the case of the other such Funds, of its total assets, taken at market value (or, in the case of the Quality Equity Fund, acquisition cost if it is lower), and then only from banks as a temporary measure for extraordinary or emergency purposes; the Government Money Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities; or (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) 38 above, and then such mortgaging, pledging or hypothecating may not exceed 25% in the case of the Government Money Fund, 15% in the case of the Quality Equity Fund, or 10% in the case of each of the other Funds, of such Fund's total assets, taken at market value (the deposit in escrow by the Quality Equity Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge). (c) Lending of Portfolio Securities. Subject to the restriction set forth in (b)(8) above, each Fund named in (b) above, other than the Reserve Assets Fund, may from time to time loan securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the United States 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. Such collateral must be invested in short-term securities, the income from which will increase the return to the Fund. The Fund must 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 must be terminable at any time. (d) The Corporation has adopted the following fundamental policies with respect to its Government Money Fund. 39 The Government Money Fund may not purchase any securities other than short-term marketable securities which are issued or guaranteed by the U.S. Government or its agencies and repurchase agreements pertaining to such securities and may not 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. (e) The Corporation has adopted the following fundamental policies with respect to its Prime Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund. Each of the Prime Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund may not: (1) invest in securities of foreign issuers if at the time of acquisition more than 10% (20% in the case of the Equity Growth Fund) of its total assets, taken at market value at the time of the investment, would be invested in such securities; however, up to 25% of the total assets of the Prime Bond Fund or High Current Income Fund may be invested in securities (a) issued, assumed or guaranteed by foreign governments, or political subdivisions or instrumentalities thereof, (b) assumed or guaranteed by domestic issuers, including Eurodollar securities, or (c) issued, assumed or guaranteed by foreign issuers having a class of securities listed for trading on the New York Stock Exchange; 40 (2) invest in securities of issuers having a record, together with predecessors of less than three years of continuous operation if more than 5% of the total assets of the Fund, taken at market value at the time of investment, would be invested in such securities; (3) except for the Quality Equity Fund, invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by a Fund, more than 10% (5% in the case of the Equity Growth Fund) of the total assets of such Fund, taken at market value, would be invested in such securities. In the case of the Prime Bond Fund or High Current Income Fund, if through the appreciation of restricted securities or the depreciation of unrestricted securities held by a Fund, more than 10% of the assets of such Fund should be invested in restricted securities, such Fund will consider appropriate steps to assure maximum flexibility. (The Quality Equity Fund may not invest in securities for which there are legal or contractual restrictions on resale, and it may not invest in securities for which there is no readily marketable market if at the time of acquisition more than 5% of its total assets would be invested in such securities.); or (4) purchase or retain the securities of any issuer, if those individual officers and directors of the Corporation, 41 Merrill Lynch Asset Management, Inc. or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (f) The Corporation has adopted the following fundamental policies with respect to the Prime Bond Fund and High Current Income Fund. Each of the Prime Bond Fund and High Current Income Fund may not: (1) invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers primarily engaged in the same industry; utilities will be divided according to their services; for example, gas, gas transmission, electric and telephone each will be considered a separate industry for purposes of this restriction; (2) participate on a joint (or a joint and several) basis in any trading account in securities (but this does not include the "bunching" of orders for the sale or purchase of portfolio securities with the Corporation's other Funds or with individually managed accounts advised or sponsored by the Investment Adviser or any of its affiliates to reduce brokerage commissions or otherwise to achieve best overall execution); or (3) purchase more than either 10% (a) in principal amount of the outstanding securities of an issuer, or (b) of the outstanding voting securities of an issuer except that such 42 restriction shall not apply to United States Government or Government Agency Securities, bank money instruments or bank repurchase agreements. (g) The Corporation has adopted the following fundamental policies with respect to the Quality Equity Fund. The Quality Equity Fund may not: (1) concentrate its investments in any particular industry; provided that if it is deemed appropriate for the attainment of the Fund's investment objectives, up to 25% of its total assets (taken at acquisition cost at the time of each investment) may be invested in any one industry; (2) invest in securities of any single issuer, if immediately after and as a result of such investment, the Fund owns more than 10% of the outstanding securities, or more than 10% of the outstanding voting securities, of such issuer; or (3) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) (h) The Corporation has adopted the following fundamental policies with respect to the Equity Growth Fund. The Equity Growth Fund may not: (1) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry; 43 (2) invest in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 10% of the outstanding securities, or more than 10% of any class of securities, of each issuer would be owned by the Fund; or (3) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.) (i) The Corporation has adopted the following fundamental policies with respect to its Merrill Lynch Flexible Strategy Fund ("Flexible Strategy Fund"). The Flexible Strategy Fund may not: (1) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than United States government or government agency securities or securities issued by instrumentalities of the United States Goverment) of any one issuer (including repurchase agreements with any one bank); (2) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management; (3) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition 44 or reorganization, or, by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary brokers commission, is involved, and only if immediately thereafter not more than 10% of the Flexible Strategy Fund's total assets, taken at market value, would be invested in such securities; (4) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Flexible Strategy Fund may invest in securities secured by real estate or interests therein or securities issued by companies which invest in real estate or interests 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, provided, however, that the Flexible Strategy Fund may write "covered call options"; (7) make loans to other persons, provided that the Flexible Strategy Fund may lend securities owned or held by it pursuant to (8) below; and provided further that for purposes of this restriction the acquisition of a portion of an issue of 45 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 in (j) below and the guidelines of the Securities and Exchange Commission and the Company's Board of Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned; (9) borrow amounts in excess of 5% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes; (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 Flexible Strategy Fund except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 15% of the Flexible Strategy Fund's total assets, taken at market value (the deposit in escrow by the Flexible Strategy Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge); (11) invest in securities of issuers having a record, together with predecessors, of less than three years of 46 continuous operation if more than 5% of the total assets of the Flexible Strategy Fund, taken at market value at the time of investment, would be invested in such securities; (12) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by the Flexible Strategy Fund, more than 10% of its total assets, taken at market value, would be invested in such securities; (13) purchase or retain the securities of any issuer, if those individual officers and directors of the Corporation, Merrill Lynch Asset Management, Inc. or any subsidiary thereof such owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer; (14) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry; (15) invest in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 10% of the outstanding securities, or more than 10% of any class of securities, of such issuer would be owned by the Flexible Strategy Fund; or (16) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would 47 be invested in warrants. (For purposes of this restriction, warrants acquired by the Flexible Strategy Fund in units or attached to securities may be deemed to be without value.) (j) Lending of Portfolio Securities. Subject to the restriction set forth in (i)(8) above, the Flexible Strategy Fund may from time to time loan securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the United States 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. Such collateral must be invested in short-term securities, the income from which will increase the return to the Flexible Strategy Fund. The Flexible Strategy Fund must 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 must be terminable at any time. (k) The Corporation has adopted the following fundamental policies with respect to its Merrill Lynch Resources Focus Fund ("Resources Focus Fund") and its Merrill Lynch American Balanced Fund ("American Balanced Fund"). Each of the Resources Focus Fund and the American Balanced Fund may not: 48 (1) alone, or together with any other Fund or Funds, make investments for the purpose of exercising control or management; (2) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or, by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved, and only if immediately thereafter not more than 10% of such Fund's total assets, taken at market value, would be invested in such securities; (3) purchase or sell interests in oil, gas or other mineral exploration or development programs, commodities, commodity contracts or real estate, except that the Resources Focus Fund and the American Balanced Fund may each purchase securities of issuers which invest or deal in any of the above, and except further, that the Resources Focus Fund may engage in transactions in currency and options thereon, forward currency contracts, futures contracts and options thereon and purchase, sell or otherwise invest or deal in commodities or commodities contracts. (As a matter of operating policy, however, the Resources Focus Fund at present does not intend to engage in transactions in commodities or commodities contracts, other than in foreign currency, futures contracts and options on futures contracts); 49 (4) purchase any securities on margin except that the Company may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and the Resources Focus Fund may make margin payments in connection with transactions in options, forward currency contracts, futures contracts and options on futures contracts; (5) make short sales of securities or maintain a short position (except that the Resources Focus Fund may maintain short positions in forward currency contracts, options, futures and options on futures contracts); (6) make loans to other persons, provided that the Resources Focus Fund and the American Balanced Fund may each lend securities owned or held by it pursuant to (8) below and the Resources Focus Fund may purchase obligations in private placements; and provided further that for purposes of this restriction the acquisition of a portion of an issue of publicly-distributed bonds, debentures or other corporate debt securities or of Government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed the making of a loan; (7) lend its portfolio securities in excess of 20% of its total assets, taken at market value at the time of the loan, provided that such loans are made according to the guidelines set forth in (n) below and the guidelines of the Securities and Exchange Commission and the Company's Board of 50 Directors, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned; (8) borrow amounts in excess of 10%, in the case of the Resources Focus Fund, or 5%, in the case of the American Balanced Fund, of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes; (9) except as may be necessary for the Resource Focus Fund in connection with transactions in options, foreign currency contracts, futures contracts and options on futures contracts, mortgage, pledge, hypothecate or in any manner transfer (except as provided in (8) above), as security for indebtedness, any securities owned or held by the Resources Focus Fund or the American Balanced Fund, as the case may be, except as may be necessary in connection with borrowings mentioned in (9) above, and then such mortgaging, pledging or hypothecating may not exceed 15%, in the case of the American Balanced Fund, or 10%, in the case of the Resources Focus Fund, of such Fund's total assets, taken at market value (the deposit in escrow by the Resource Focus Fund and the American Balanced Fund of underlying securities in connection with the writing of call options is not deemed to be a pledge); (10) invest in securities of issuers having a record, together with predecessors, of less than three years of 51 continuous operation if more than 5% of the total assets of the Resources Focus Fund or the American Balanced Fund, as the case may be, taken at market value at the time of investment, would be invested in such securities; (11) invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists if, regarding all such securities held by the Resources Focus Fund or the American Balanced Fund, as the case may be, more than 10% of total assets of such Fund, taken at market value, would be invested in such securities; or (12) purchase or retain the securities of any issuer, if those individual officers and directors of the Corporation, Merrill Lynch Asset Management, Inc. or any subsidiary thereof such owning beneficially more than 1/2 of 1% of the securities of such issuer, own in the aggregate more than 5% of the securities of such issuer. (1) The Corporation has adopted the following fundamental policies with respect to the American Balanced Portfolio. The American Balanced Portfolio may not: (1) invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry; (2) invest, either alone or together with any other Fund or Funds, in securities of any one issuer (other than the 52 United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 10% of the outstanding securities, or more than 10% of any class of securities, of such issuer would be owned by the American Balanced Fund; (3) invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. (For purposes of this restriction, warrants acquired by the American Balanced Fund in units or attached to securities may be deemed to be without value.) (4) invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities (other than United States government or government agency securities or securities issued by instrumentalities of the United States Government) of any one issuer (including repurchase agreements with any one bank); (5) write, purchase or sell puts, calls, straddles, spreads or combinations thereof, provided, however, that the American Balanced Fund may write "covered call options"; (m) The Corporation has adopted the following fundamental policies with respect to the Resources Focus Fund. The Resources Focus Fund may not invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers primarily engaged in 53 the same industry, except that when management anticipates significant economic, political or financial instability, the Resources Focus Fund may, invest more than 25% of its total assets in gold-related companies. In determining compliance by the Resources Focus Fund with its policy on investing in the securities of issuers primarily engaged in the same industry, management will rely on industrial classifications contained in Standard & Poor's Register of Corporations, Directors and Executives. (n) Lending of Portfolio Securities. Subject to the restriction set forth in (k)(7) above, the Resources Focus Fund and the American Balanced Fund may each from time to time loan securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the United States 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. Such collateral must be invested in short-term securities, the income from which will increase the return to the Resources Focus Fund or the American Balanced Fund, as the case may be. The Resources Focus Fund and the American Balanced Fund must 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 54 securities to exercise such beneficial rights. Such loans must be terminable at any time. ARTICLE XV Amendments These By-Laws or any of them may be amended, altered or repealed at any regular meeting of the stockholders or at any special meeting of the stockholders at which a quorum is present or represented, provided that notice of the proposed amendment, alteration or repeal be contained in the notice of such special meeting. These By-Laws, except Article XIV hereof, may also be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board of Directors. The By-Laws, or any of them, set forth in Article XIV of these By-Laws, may be amended, altered or repealed only by the affirmative vote of a majority of the outstanding shares (as defined below) of capital stock of each Fund affected by such amendment, at a regular meeting or special meeting of the stockholders, the notice of which contains the proposed amendment, alteration or repeal. For the purpose of amending Article XIV of these By-Laws, a majority of the outstanding shares shall be the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the 55 outstanding shares. A certified copy of these By-Laws, as they may be amended from time to time, shall be kept at the principal office of the corporation in the State of Maryland. Notwithstanding any other provision of this Article XV, Section 2 of Article XIV hereof may be amended by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board of Directors to set forth a restriction applicable only to a particular Fund or particular Funds of the Corporation provided such amendment is adopted prior to the time a Registration Statement of the Corporation, or Post-Effective Amendment thereto, setting forth the investment objective or objectives of such Fund or Funds initially is declared effective. 56 EX-99.5(A) 28 AMENDMENT TO AND RESTATEMENT OF INVESTMENT ADVISORY AGREEMENT AMENDMENT TO AND RESTATEMENT OF INVESTMENT ADVISORY AGREEMENT W I T N E S S E T H: WHEREAS, Merrill Lynch Variable Series Funds, Inc., a Maryland corporation (the "Company"), and Merrill Lynch Asset Management, Inc., a Delaware corporation (the "Adviser"), entered into the Investment Advisory Agreement (the "Agreement") on November 9, 1981; and WHEREAS, the Company is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); and WHEREAS, the Agreement has continued to be in effect at all times from November 9, 1981 through and including the date hereof; and WHEREAS, the Company initially issued shares of only one class of its Common Stock, its Merrill Lynch Reserve Assets Fund Common Stock, but has issued shares of one or more additional classes, and the shareholders of each class will have an interest in the assets of a Fund, which assets and Fund will be separate and distinct from the assets and Fund in which shareholders of any other class have an interest; and WHEREAS, each Fund will pursue its investment objective through separate investment policies; and B-1 WHEREAS, the Adviser is engaged principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Company desires to retain the Adviser to render investment supervisory and corporate administrative services to the Company with respect to its Merrill Lynch Reserve Assets Fund in the manner and on the terms hereinafter set forth; and WHEREAS, the Company and the Adviser desire to amend Article 3, Section (b) of the Agreement; NOW, THEREFORE, in consideration of the foregoing, of mutual promises of the parties hereto and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. Duties of the Adviser. The Company hereby employs the Adviser to act as the investment adviser to and manager of the Company's Merrill Lynch Reserve Assets Fund (the "Fund") and to manage the investment and reinvestment of the assets of and to administer the Fund's affairs, subject to the supervision of the Board of Directors of the Company, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no B-2 authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company. (a) Investment Advisory Services. In acting as investment adviser for the Fund, the Adviser shall regularly provide the Fund with such investment research, advice and supervision as the latter may from time to time consider necessary for the proper supervision of its portfolio and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of the Fund's portfolio shall be held in the various securities in which it may invest, subject always to the restrictions of the Company's Articles of Incorporation and By-Laws, as amended from time to time, the provisions of the Investment Company Act, and the statements relating to the Fund's investment objectives, investment policies and investment restrictions as the same are set forth in the currently effective prospectus of the Company relating to the Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at any time, however, make any definite determination as to investment policy with respect to the Fund and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Company, all actions which it deems necessary to implement the investment policies of the Fund determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for the Fund with B-3 brokers or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for the Fund the most favorable net results for the Fund as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Investment Company Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Company is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform, or supervise the performance of, administrative services in connection with the management of the Company insofar as such services relate to and are required by the Fund. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Company's operations relating to the Fund, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Company relating to the Fund, (ii) provide the Company, at the Adviser's expense, with services of persons competent to perform such administrative and clerical functions as are necessary in order to provide effective administration of the Company to the extent required by the Fund, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of B-4 certain books and records of the Company insofar as they relate to the Fund, and (iii) provide the Company, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in this Agreement. ARTICLE 2. Allocation of Charges and Expenses. (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel, and shall at its own expense provide the equipment, office space and facilities necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Company and the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co. Inc. or its subsidiaries, and shall pay the organization costs of the Company. (b) The Company. The Company assumes and shall pay all expenses of the Fund, including, without limitation: insurance, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates and shareholder reports, charges of the Custodian and Transfer Agent, expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal and state securities laws, fees and expenses of directors who are not interested persons of the Company, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Company. B-5 ARTICLE 3. Compensation of the Adviser. (a) Investment Advisory Fee. For the services rendered, the facilities furnished and expenses assumed by the Adviser, the Company shall pay to the Adviser at the end of each calendar month a fee based upon the average daily value of the net assets of the Fund during such month, as determined and computed in accordance with the description of the method of determination of net asset value contained in the Prospectus, at the annual rate of 0.50% of the average daily value of the net assets of the Fund up to $500,000,000, and at the following annual rates on amounts of the daily net assets of the Fund in excess of $500,000,000: Average Daily Net Assets Annual Rate ------------------------ ----------- Over $500,000,000 up to $750,000,000 . . . 0.425 percent Over $750,000,000 up to $1,000,000,000 . . 0.375 percent Over $1,000,000,000 up to $1,500,000,000 . 0.350 percent Over $1,500,000,000 up to $2,000,000,000 . 0.325 percent Over $2,000,000,000 up to $2,500,000,000 . 0.300 percent Over $2,500,000,000 . . . . . . . . . . . 0.275 percent During any period when the determination of net asset value of the Fund is suspended by the Board of Directors of the Company, the net asset value of a share of the Fund as of the last business day prior to such suspension shall for this purpose be deemed to be the net asset value at the close of each succeeding business day until it is again determined. (b) Expense Limitations. In the event the operating expenses of the Fund, including the investment advisory fee B-6 applicable to the Fund payable to the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect exceed the most restrictive expense limitation under state securities laws or published regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required under any such laws or regulations, will reimburse the Fund in the amount of such excess; provided, however, to the extent permitted under law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Company and allocated to the Fund. Whenever the expenses of the Fund exceed a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. ARTICLE 4. Limitation of Liability of the Adviser. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendation of the Adviser. Nothing herein contained shall be construed to protect the Adviser against any liability to the Company or its security holders to which the Adviser shall otherwise be subject by reason of willful B-7 misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Company, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser. The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, employees and shareholders of the Company are or may become interested in the Adviser, as directors, officers, employees or shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Company, and that the Adviser is or may become interested in the Company as shareholder or otherwise. ARTICLE 6. Duration and Termination of this Agreement. This Agreement shall become effective as of April 1, 1985 and shall remain in force until April 1, 1987 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding shares of the Fund, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purposes of voting on such approval. B-8 This Agreement may be terminated at any time, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding shares of the Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. ARTICLE 7. Definitions. The terms "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. As used with respect to the Company or the Fund, the term "majority of the outstanding shares" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. ARTICLE 8. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Company, or by the vote of a majority of outstanding shares of the Fund, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. B-9 ARTICLE 9. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have hereunto affixed their signatures as of the 23 day of April, 1985. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ATTEST: By: --------------------------------- President - ---------------------------------- Secretary MERRILL LYNCH ASSET MANAGEMENT, INC. ATTEST: By: --------------------------------- Vice President - ---------------------------------- Secretary B-10 EX-99.5(B) 29 AMENDMENT TO AND RESTATEMENT OF INVESTMENT ADVISORY AGREEMENT AMENDMENT TO AND RESTATEMENT OF INVESTMENT ADVISORY AGREEMENT W I T N E S S E T H: WHEREAS, Merrill Lynch Variable Series Funds, Inc., a Maryland corporation (the "Company"), and Merrill Lynch Asset Management, Inc., a Delaware corporation (the "Adviser"), entered into the Investment Advisory Agreement (the "Agreement") on March 16, 1982; and WHEREAS, the Company is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); and WHEREAS, the Agreement has continued to be in effect at all times from March 16, 1982 through and including the date hereof; and WHEREAS, the Company is comprised of six separate funds, each of which pursues its investment objectives through separate investment policies; and WHEREAS, the Adviser is engaged principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Company desires to retain the Adviser to render, in the manner and on the terms hereinafter set forth, investment supervisory and corporate administrative services to the Company with respect to its Merrill Lynch U.S. Government Money Fund (the "Government Money Fund"), Merrill Lynch Prime Bond Fund (the "Prime Bond Fund"), Merrill Lynch High Current Income Fund B-11 (the "High Current Income Fund"), Merrill Lynch Quality Equity Fund (the "Quality Equity Fund") and Merrill Lynch Equity Growth Fund (the "Equity Growth Fund," and together with the other Funds named in this paragraph the "Funds"); and WHEREAS, the Company and the Adviser desire to amend Article 3, Section (b) of the Agreement. NOW, THEREFORE, in consideration of the foregoing, of mutual promises of the parties hereto and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. Duties of the Adviser. The Company hereby employs the Adviser to act as the investment adviser to and manager of the Funds and to manage the investment and reinvestment of the assets of and to administer the Funds' affairs, subject to the supervision of the Board of Directors of the Company, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company. (a) Investment Advisory Services. In acting as investment adviser for the Funds, the Adviser shall regularly B-12 provide the Funds with such investment research, advice and supervision as the latter may from time to time consider necessary for the proper supervision of the portfolio of each Fund and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of each Fund's portfolio shall be held in the various securities in which it may invest, subject always to the restrictions of the Company's Articles of Incorporation and By-Laws, as amended from time to time, the provisions of the Investment Company Act, and the statements relating to each Fund's investment objectives, investment policies and investment restrictions as the same are set forth in the currently effective prospectus of the Company relating to each Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at any time, however, make any definite determination as to investment policy with respect to a Fund and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Company, all actions which it deems necessary to implement the investment policies of each Fund determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for each Fund with brokers or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for each Fund the most favorable net B-13 results for such Fund as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Investment Company Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Company is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform, or supervise the performance of, administrative services in connection with the management of the Company insofar as such services relate to and are required by the Funds. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Company's operations relating to the Funds, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Company relating to the Funds, (ii) provide the Company, at the Adviser's expense, with services of persons competent to perform such administrative and clerical functions as are necessary in order to provide effective administration of the Company to the extent required by the Funds, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of certain books and records of the Company insofar as they relate to the Funds, and (iii) provide the Company, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in this Agreement. B-14 ARTICLE 2. Allocation of Charges and Expenses. (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel, and shall at its own expense provide the equipment, office space and facilities necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Company and the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co. Inc. or its subsidiaries, and shall pay the organization costs of the Company. (b) The Company. The Company assumes and shall pay all expenses of the Funds, including, without limitation: insurance, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates and shareholder reports, charges of the Custodian and Transfer Agent, expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal and state securities laws, fees and expenses of directors who are not interested persons of the Company, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Company. ARTICLE 3. Compensation of the Adviser. (a) Investment Advisory Fee. For the services rendered, the facilities furnished and expenses assumed by the Adviser, the Company shall pay to the Adviser at the end of each calendar month B-15 a fee based upon the average daily value of the net assets of each Fund during such month, as determined and computed in accordance with the description of the method of determination of net asset value contained in the Prospectus, at the annual rate of 0.75% of the average daily value of the net assets of the Equity Growth Fund and at the following annual rates for the following levels of average daily value of the net assets of the following Funds: Average Daily Net Assets Annual Rate ------------------------ ----------- Government Money Fund Not exceeding $500 million . . . . . . . . 0.50% Over $500,000,000 up to $750,000,000 . . . . . 0.425% Over $750,000,000 up to $1,000,000,000 . . . . 0.375% Over $1,000,000,000 up to $1,500,000,000 . . . 0.35% Over $1,500,000,000 up to $2,000,000,000 . . . 0.325% Over $2,000,000,000 up to $2,500,000,000 . . . 0.30% Over $2,500,000,000 . . . . . . . . . . 0.275% Quality Equity Fund Not exceeding $250 million . . . . . . . 0.50% In excess of $250 million but not exceeding $300 million . . . . . . . . . . . 0.45% In excess of $300 million but not exceeding $400 million . . . . . . . . . . . 0.425% In excess of $400 million . . . . . ... 0.40% B-16 Prime Bond Fund and High Current Income Fund High Current Income Fund Prime Bond Fund Not exceeding $250 million . . . 0.55% 0.50% In excess of $250 million but not more than $500 million ... 0.50 0.45 In excess of $500 million but not more than $750 million ... 0.45 0.40 In excess of $750 million ...... 0.40 0.35 The advisory fee rates for the Prime Bond Fund and the High Current Income Fund shall be subject to reduction to the extent that the aggregate average daily net assets of those Funds exceeds $250 million, $500 million or $750 million, as the case may be. The reductions will be applicable to each such Fund regardless of size on a "uniform percentage" basis. Determination of the portion of the net assets of each such Fund to which a reduced rate is applicable is made by multiplying the net assets of that Fund by the "uniform percentage," which is derived by dividing the amount of the portion of the aggregate assets of both Funds to which such rate applies by the total amount of such aggregate assets. During any period when the determination of net asset value of a Fund is suspended by the Board of Directors of the Company, the net asset value of a share of such Fund as of the last business day prior to such suspension shall for this purpose be deemed to be the net asset value at the close of each succeeding business day until it is again determined. (b) Expense Limitations. In the event the operating expenses of any Fund, including the investment advisory fee B-17 applicable to such Fund payable to the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect exceed the most restrictive expense limitation under state securities laws or published regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required under any such laws or regulations, will reimburse such Fund in the amount of such excess; provided, however, to the extent permitted under law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Company and allocated to such Fund. Whenever the expenses of any Fund exceed a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. ARTICLE 4. Limitation of Liability of the Adviser. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendations of the Adviser. Nothing herein contained shall be construed to protect the Adviser against any liability to the Company or its security holders to B-18 which the Adviser shall otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Company, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser. The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, employees and shareholders of the Company are or may become interested in the Adviser, as directors, officers, employees or shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Company, and that the Adviser is or may become interested in the Company as shareholder or otherwise. ARTICLE 6. Duration and Termination of this Agreement. This Agreement shall become effective as of April 1, 1985 and shall remain in force until April 1, 1987 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding shares of the Funds, including a majority of the shares of each Fund, and (ii) a majority of those directors who are not parties to this Agreement B-19 or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time as to a Fund, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding shares of such Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. ARTICLE 7. Definitions. The terms "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. As used with respect to the Company or a Fund, the term "majority of the outstanding shares" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. ARTICLE 8. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Company, or by the vote of a majority of outstanding shares of the Funds, including a majority of the outstanding shares of each Fund, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such B-20 party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE 9. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have hereunto affixed their signatures as of the 23 day of April, 1985. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ATTEST: By: /s/ Arthur Zeikel ------------------------------ President - ------------------------------- Secretary MERRILL LYNCH ASSET MANAGEMENT, INC. ATTEST: By: /s/ Terry K. Glenn ------------------------------ Executive Vice President - ------------------------------- Secretary B-21 EX-99.5(C) 30 INVESTMENT ADVISORY AGREEMENT FORM OF INVESTMENT ADVISORY AGREEMENT AGREEMENT made this day of April, 1988 between Merrill Lynch Variable Series Funds, Inc., a Maryland corporation (the "Company"), and Merrill Lynch Asset Management, Inc., a Delaware corporation (the "Adviser"); W I T N E S S E T H: WHEREAS, the Company is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); and WHEREAS, the Company is comprised of eight separate Funds, each of which pursues its investment objective through separate investment policies; and WHEREAS, the Adviser is engaged principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Adviser is currently serving as the Investment Adviser to the Company's Reserve Assets Fund pursuant to an Investment Advisory Agreement dated November 10, 1981 as amended on April 23, 1985; to the Company's Prime Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund pursuant to an Investment Advisory Agreement dated April 21, 1982 as amended on April 23, 1985; and to the Company's Flexible Strategy Fund pursuant to an Investment Advisory Agreement dated April 16, 1986; and WHEREAS, the Company desires to retain the Adviser to render investment supervisory and corporate administrative services to the Company's Resources Focus and American Balanced Funds (the "Funds" and individually a "Fund"), in the manner and on the terms hereinafter set forth; NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained, the Company and the Adviser hereby agree as follows: ARTICLE 1. Duties of the Adviser. The Company hereby employs the Adviser to act as the investment adviser to and manager of the Funds and to manage the investment and reinvestment of the assets of the Funds, and to administer their respective affairs, subject to the supervision of the Board of Directors of the Company, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for 2 or represent the Company in any way or otherwise be deemed an agent of the Company. (a) Investment Advisory Services. In acting as investment adviser to the Funds, the Adviser shall regularly provide the Funds with such investment research, advice and supervision as the Adviser may from time to time consider necessary for the proper supervision of the Funds and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of each Fund's portfolio shall be held in the various securities in which it may invest, subject always to the restrictions of the Company's Articles of Incorporation and By-Laws, as amended from time to time, the provisions of the Investment Company Act of 1940 (the "Act") and the statements relating to each Fund's investment objectives, investment policies and investment restrictions set forth in the currently effective prospectus of the Company relating to such Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at any time, however, make any definitive determination as to the investment policy of a Fund and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Company, all actions which it deems necessary to 3 implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for each Fund with brokers or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for each Fund the most favorable net results for such Fund as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Company is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform, or supervise the performance of, administrative services in connection with the management of the Company insofar as such services relate to and are required by the Funds. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Company's operations relating to the Funds, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Company relating to the Funds, (ii) provide the Company, at the Adviser's expense, with services of persons competent to perform 4 such administrative and clerical functions as are necessary in order to provide effective administration of the Company to the extent required by the Funds, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of certain books and records of the Company insofar as they relate to the Funds, and (iii) provide the Company, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in this Agreement. ARTICLE 2. Allocation of Charges and Expenses. (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel, and shall at its own expense provide the equipment, office space and facilities, necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Company and the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, and shall pay the organization costs of the Funds. (b) The Company. The Company assumes and shall pay all expenses of the Funds, including, without limitation: insurance, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor), charges of the Custodian and Transfer Agent, 5 expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal and state securities laws, fees and expenses of directors who are not affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Company. ARTICLE 3. Compensation of the Adviser. (a) Investment Advisory Fee. For the services rendered, facilities furnished and expenses assumed by the Adviser, the Company shall pay to the Adviser at the end of each calendar month a fee based upon the average daily value of the aggregate net assets of each Fund, as determined and computed in accordance with the description of the method of determination of net assset value contained in the Prospectus, at the annual rate of 0.65% of the average daily value of the aggregate net assets of the Resources Focus Fund and at the annual rate of 0.55% of the average daily value of the aggregate net assets of the American Balanced Fund. (b) Expense Limitations. In the event the operating expenses of any Fund, including the investment advisory fee applicable to such Fund payable to the Adviser 6 pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect, exceed the expense limitations under state securities laws or published regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required under any such laws or regulations, will reimburse such Fund the amount of such excess; provided, however, to the extent permitted under law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Company and allocated to such Fund. Whenever the expenses of any Fund exceed a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. ARTICLE 4. Limitation of Liability of the Adviser. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendation of the Adviser. Nothing herein contained shall 7 be construed to protect the Adviser against any liability to the Company or its security holders to which the Adviser shall otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Company, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser. The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, employees and shareholders of the Company are or may become interested in the Adviser, as directors, officers, employees or shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Company, and that the Adviser is or may become interested in the Company as shareholder or otherwise. ARTICLE 6. Duration and Termination of this Agreement. This Agreement shall become effective as of May 1, 1988 and shall remain in force until May 1, 1990 and thereafter, but only so long as such continuance is specifically approved at 8 least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding shares of the Funds, including a majority of the outstanding shares of each Fund, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, as to a Fund, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding shares of such Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. ARTICLE 7. Definitions. The terms "assignment," "affiliated person" and "interested person," when used in this Agreement, shall have the respective meanings specified in the Act. As used with respect to the Company or a Fund, the term "majority of the outstanding shares" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. ARTICLE 8. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of 9 Directors of the Company, or by the vote of a majority of outstanding shares of each of the Funds, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE 9. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Act, the latter shall control. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By --------------------------------- President Attest: - ------------------------------------- Secretary MERRILL LYNCH ASSET MANAGEMENT, INC. By --------------------------------- President Attest: - ------------------------------------- Secretary 10 EX-99.5(D) 31 FORM OF INVESTMENT ADVISORY AGREEMENT FORM OF INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 20 day of April, 1988 between Merrill Lynch Variable Series Funds, Inc., a Maryland corporation (the "Company"), and Merrill Lynch Asset Management, Inc., a Delaware corporation (the "Adviser"); W I T N E S S E T H: WHEREAS, the Company is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); and WHEREAS, the Company is comprised of eight separate Funds, each of which pursues its investment objective through separate investment policies; and WHEREAS, the Adviser is engaged principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Adviser is currently serving as the Investment Adviser to the Company's Reserve Assets Fund pursuant to an Investment Advisory Agreement dated November 10, 1981 as amended on April 23, 1985; to the Company's Prime Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund pursuant to an Investment Advisory Agreement dated April 21, 1982 as amended on April 23, 1985; and to the Company's Flexible Strategy Fund pursuant to an Investment Advisory Agreement dated April 16, 1986; and WHEREAS, the Company desires to retain the Adviser to render investment supervisory and corporate administrative services to the Company's Resources Focus and American Balanced Funds (the "Funds" and individually a "Fund"), in the manner and on the terms hereinafter set forth; NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained, the Company and the Adviser hereby agree as follows: ARTICLE 1. Duties of the Adviser. The Company hereby employs the Adviser to act as the investment adviser to and manager of the Funds and to manage the investment and reinvestment of the assets of the Funds, and to administer their respective affairs, subject to the supervision of the Board of Directors of the Company, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for 2 or represent the Company in any way or otherwise be deemed an agent of the Company. (a) Investment Advisory Services. In acting as investment adviser to the Funds, the Adviser shall regularly provide the Funds with such investment research, advice and supervision as the Adviser may from time to time consider necessary for the proper supervision of the Funds and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of each Fund's portfolio shall be held in the various securities in which it may invest, subject always to the restrictions of the Company's Articles of Incorporation and By-Laws, as amended from time to time, the provisions of the Investment Company Act of 1940 (the "Act") and the statements relating to each Fund's investment objectives, investment policies and investment restrictions set forth in the currently effective prospectus of the Company relating to such Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at any time, however, make any definitive determination as to the investment policy of a Fund and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Company, all actions which it deems necessary to 3 implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for each Fund with brokers or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for each Fund the most favorable net results for such Fund as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Company is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform, or supervise the performance of, administrative services in connection with the management of the Company insofar as such services relate to and are required by the Funds. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Company's operations relating to the Funds, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Company relating to the Funds, (ii) provide the Company, at the Adviser's expense, with services of persons competent to perform 4 such administrative and clerical functions as are necessary in order to provide effective administration of the Company to the extent required by the Funds, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of certain books and records of the Company insofar as they relate to the Funds, and (iii) provide the Company, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in this Agreement. ARTICLE 2. Allocation of Charges and Expenses. (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel, and shall at its own expense provide the equipment, office space and facilities, necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Company and the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, and shall pay the organization costs of the Funds. (b) The Company. The Company assumes and shall pay all expenses of the Funds, including, without limitation: insurance, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor), charges of the Custodian and Transfer Agent, 5 expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal and state securities laws, fees and expenses of directors who are not affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Company. ARTICLE 3. Compensation of the Adviser. (a) Investment Advisory Fee. For the services rendered, facilities furnished and expenses assumed by the Adviser, the Company shall pay to the Adviser at the end of each calendar month a fee based upon the average daily value of the aggregate net assets of each Fund, as determined and computed in accordance with the description of the method of determination of net assset value contained in the Prospectus, at the annual rate of 0.65% of the average daily value of the aggregate net assets of the Resources Focus Fund and at the annual rate of 0.55% of the average daily value of the aggregate net assets of the American Balanced Fund. (b) Expense Limitations. In the event the operating expenses of any Fund, including the investment advisory fee applicable to such Fund payable to the Adviser 6 pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect, exceed the expense limitations under state securities laws or published regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required under any such laws or regulations, will reimburse such Fund the amount of such excess; provided, however, to the extent permitted under law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Company and allocated to such Fund. Whenever the expenses of any Fund exceed a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. ARTICLE 4. Limitation of Liability of the Adviser. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendation of the Adviser. Nothing herein contained shall 7 be construed to protect the Adviser against any liability to the Company or its security holders to which the Adviser shall otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Company, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser. The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, employees and shareholders of the Company are or may become interested in the Adviser, as directors, officers, employees or shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Company, and that the Adviser is or may become interested in the Company as shareholder or otherwise. ARTICLE 6. Duration and Termination of this Agreement. This Agreement shall become effective as of May 1, 1988 and shall remain in force until May 1, 1990 and thereafter, but only so long as such continuance is specifically approved at 8 least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding shares of the Funds, including a majority of the outstanding shares of each Fund, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, as to a Fund, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding shares of such Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. ARTICLE 7. Definitions. The terms "assignment," "affiliated person" and "interested person," when used in this Agreement, shall have the respective meanings specified in the Act. As used with respect to the Company or a Fund, the term "majority of the outstanding shares" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. ARTICLE 8. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of 9 Directors of the Company, or by the vote of a majority of outstanding shares of each of the Funds, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE 9. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Act, the latter shall control. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By ------------------------------ President Attest: - ---------------------------------- Secretary MERRILL LYNCH ASSET MANAGEMENT, INC. By ------------------------------ President Attest: - ---------------------------------- Secretary 10 EX-99.5(E) 32 INVESTMENT ADVISORY AGREEMENT INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 16th day of October, 1991 between Merrill Lynch Variable Series Funds, Inc., a Maryland corporation ("the Company"), and Merrill Lynch Asset Management, Inc., a Delaware corporation (the "Adviser"); WITNESSETH: WHEREAS, the Company is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); and WHEREAS, the Company is currently comprised of ten separate Funds, each of which pursues its investment objective through separate investment policies; and WHEREAS, the Adviser is engaged principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Adviser is currently serving as the Investment Adviser to the Company's Reserve Assets Fund pursuant to an Investment Advisory Agreement dated November 10, 1981 as amended on April 23, 1985; to the Company's Prime Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund pursuant to an Investment Advisory Agreement dated April 21, 1982 as amended on April 23, 1985; to the Company's Flexible Strategy Fund pursuant to an Investment Advisory Agreement dated April 16, 1986; and to the Company's Resources Focus Fund and American Balanced Fund pursuant to an Investment Advisory Agreement dated April 20, 1988; and WHEREAS, the Company desires to retain the Adviser to render investment supervisory and corporate administrative services to the Company's Domestic Money Market and Global Strategy Focus Funds (the "Funds" and individually a "Fund"), in the manner and on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained, the Company and the Adviser hereby agree as follows: ARTICLE 1. Duties of the Adviser. The Company hereby employs the Adviser to act as the investment adviser to and manager of the Funds and to manage the investment and reinvestment of the assets of the Funds, and to administer their respective affairs, subject to the supervision of the Board of Directors of the Company, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adivser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company. (a) Investment Advisory Services. In acting as investment adviser to the Funds, the Adviser shall regularly provide the Funds with such investment research, advice and supervision as the latter may from time to time consider necessary for the proper supervision of the Funds and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of each Fund's portfolio shall be held in the various securities in which 2 it may invest, subject always to the restrictions of the Company's Articles of Incorporation and By-Laws, as amended from time to time, the provisions of the Investment Company Act of 1940 (the "Act") and the statements relating to each Fund's investment objectives, investment policies and investment restrictions set forth in the currently effective prospectus of the Company relating to such Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at any time, however, make any definitive determination as to the investment policy of a Fund and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Company, all actions which it deems necessary to implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for each Fund with brokers or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for each Fund the most favorable net results for such Fund as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Investment Company Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Company is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform, or supervise the performance of, administrative services in connection with the management of the Company insofar as such services relate to and are required by the Funds. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Company's operations relating to the Funds, including the 3 coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Company relating to the Funds, (ii) provide the Company, at the Adviser's expense, with services of persons competent to perform such administrative and clerical functions as are necessary in order to provide effective administration of the Company to the extent required by the Funds, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of certain books and records of the Company insofar as they relate to the Fund, and (iii) provide the Company, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in the Agreement. ARTICLE 2. Allocation of Charges and Expenses. (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel, and shall at its own expense provide the equipment, office space and facilities, necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Company and the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co. Inc. or its subsidiaries, and shall pay the organization costs of the Company. (b) The Company. The Company assumes and shall pay all expenses of the Funds, including, without limitation: insurance, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor), charges of the Custodian and Transfer Agent, 4 expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal and state securities laws, fees and expenses of directors who are not affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or nonrecurring expenses, and other expenses properly payable by the Company. ARTICLE 3. Compensation of the Adviser. (a) Investment Advisory Fee. For the services rendered, the facilities furnished and expenses assumed by the Adviser, the Company shall pay to the Adviser at the end of each calendar month a fee of .50% of the average daily net assets of the Domestic Money Market Fund and .65% of the average daily net assets of the Global Strategy Focus Fund, as determined and computed in accordance with the description of the method of determination of net asset value contained in the Prospectus. (b) Expense Limitations. In the event the operating expenses of any Fund, including the investment advisory fee applicable to such Fund payable to the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect, exceed the expense limitations under state securities laws or published regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required under any such laws or regulations, will reimburse such Fund in the amount of such excess; provided, however, to the extent permitted under law, there shall be excluded from 5 such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Company and allocated to such Fund. Whenever the expenses of any Fund exceed a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. ARTICLE 4. Limitation of Liability of the Adviser. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendation of the Adviser. Nothing herein contained shall be construed to protect the Adviser against any liability to the Company or its security holders to which the Adviser shall otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Company, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser. The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, 6 employees and shareholders of the Company are or may become interested in the Adviser, as directors, officers, employees or shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Company, and that the Adviser is or may become interested in the Company as shareholder or otherwise. ARTICLE 6 Duration and Termination of this Agreement. This Agreement shall become effective as of the effective date of the Company's Post-Effective Amendment No. 16 to its Registration Statement, and shall remain in force until May 1, 1993 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding shares of the Funds, including a majority of the outstanding shares of each Fund, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purposes of voting on such approval. This Agreement may be terminated at any time, as to a Fund, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding shares of such Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. 7 ARTICLE 7. Definitions. The terms "assignment," "affiliated person" and "interested person," when used in this Agreement, shall have the respective meanings specified in the Act. As used with respect to the Company or a Fund, the term "majority of the outstanding shares" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. ARTICLE 8. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Company, or by the vote of the majority of outstanding shares of each of the Funds, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE 9. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Act. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Act, the latter shall control. 8 MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ATTEST: By: -------------------------- President - ---------------------------------- Secretary MERRILL LYNCH ASSET MANAGEMENT, INC. ATTEST: By: -------------------------- Vice President - ---------------------------------- Secretary 9 EX-99.5(F) 33 INVESTMENT ADVISORY AGREEMENT INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 14th day of June, 1993 between Merrill Lynch Variable Series Funds, Inc., a Maryland corporation (the "Company") , and Merrill Lynch Asset Management, Inc. , a Delaware corporation (the "Advisor"); W I T N E S S E T H: WHEREAS, the Company is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); and WHEREAS, the Company is currently comprised of fourteen separate Funds, each of which pursues its investment objective through separate investment policies; and WHEREAS, the Adviser is engaged in principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Adviser is currently serving as the Investment Adviser to the Company's Reserve Assets Fund pursuant to an Investment Advisory Agreement dated November 10, 1981 as amended on April 23, 1985; to the Company's Prime Bond Fund, High Current Income Fund, Quality Equity Fund and Equity Growth Fund pursuant to an Investment Advisory Agreement dated April 21, 1982 as amended on April 23, 1985; to the Company's Flexible Strategy Fund pursuant to an Investment Advisory Agreement dated April 16, 1986; to the Company's Natural Resources Focus Fund and American Balanced Fund pursuant to an Investment Advisory Agreement dated April 20, 1988; and to the Company's Domestic Money Market Fund and Global Strategy Focus Fund pursuant to an Investment Advisory Agreement Dated October 16, 1991; and WHEREAS, the Company desires to retain the Adviser to render investment supervisory and corporate administrative services to the Company's Basic Value Focus Fund, World Income Focus Fund, Global Utility Focus Fund and International Equity Focus Fund (the "Funds" and individually a "Fund"), in the manner and on the terms hereinafter set forth. NOW THEREFORE, in consideration of the premises and the covenants hereinafter contained, the Company and the Adviser hereby agree as follows: ARTICLE 1. Duties of the Adviser. The Company hereby employs the Adviser to act as the investment adviser to and manager of the Funds and to manage the investment and reinvestment of the assets of the Funds, and to administer their respective affairs, subject to the supervision of the Board of Directors of the Company, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent 2 the Company in any way or otherwise be deemed an agent of the Company. (a) Investment Advisory Services. In acting as investment adviser to the Funds, the Adviser shall regularly provide the Funds with such investment research, advice and supervision as the latter may from time to time consider necessary for the proper supervision of the Funds and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of each Fund's portfolio shall be held in the various securities in which it may invest, subject always to the restrictions of the Company's Articles of Incorporation and By- Laws, as amended from time to time, the provisions of the Investment Company Act of 1940 (the "Act") and the statements relating to each Fund's investment objectives, investment policies and investment restrictions set forth in the currently effective prospectus of the Company relating to such Fund under the Securities Act of 1933 (the "Prospectus"). Should the Board of Directors of the Company at any time, however, make any definitive determination as to the investment policy of a Fund and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Company, all actions which it deems necessary to implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for each Fund with brokers 3 or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for each Fund the most favorable net results for such Fund as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Investment Company Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Company is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform, or supervise the performance of, administrative services in connection with the management of the Company insofar as such services relate to and are required by the Funds. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Company's operations relating to the Funds, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Company relating to the Funds, (ii) provide the Company, at the Adviser's expense, with services of persons competent to perform such administrative and clerical functions as are necessary in order to provide effective administration of the Company to the extent required by the Funds, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of certain books and records of the Company insofar as they relate to 4 the Fund, and (iii) provide the Company, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in the Agreement. ARTICLE 2. Allocation of Charges and Expenses. (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel, and shall at its own expense provide the equipment, office space and facilities, necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Company and the fees of all directors of the Company who are affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, and shall pay the organization costs of the Company. (b) The Company. The Company assumes and shall pay all expenses of the Funds, including, without limitation: insurance, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor), charges of the Custodian and Transfer Agent, expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under federal and state securities laws, fees and expenses of directors who are not affiliated persons of Merrill Lynch & Co. , Inc. or its subsidiaries, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or nonrecurring expenses, and other expenses properly payable by the Company. 5 ARTICLE 3. Compensation of the Adviser. (a) Investment Advisory Fee. For the services rendered the facilities furnished and expenses assumed by the Adviser, the Company shall pay to the Adviser at the end of each calendar month a fee of .60% of the average daily net assets of each of the Basic Value Focus Fund, World Income Focus Fund, and Global Utility Focus Fund and .75% of the average daily net assets of the International Equity Focus Fund, as determined and computed in accordance with the description of the method of determination of net asset value contained in the Prospectus. (b) Expense Limitations. In the event the operating expenses of any Fund, including the investment advisory fee applicable to such Fund payable to the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect, exceeds the expense limitations under state securities laws or published regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required under any such laws or regulations, will reimburse such Fund in the amount of such excess; provided, however, to the extent permitted under law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Company and allocated to such Fund. Whenever the expenses of any Fund exceed 6 a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. ARTICLE 4. Limitation of Liability of the Adviser. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Company in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendation of the Adviser. Nothing herein contained shall be construed to protect the Adviser against any liability to the Company or its security holders to which the Adviser shall otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Company, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser. The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, employees and shareholders of the Company are or may become interested in the Adviser, as directors, officers, employees or 7 shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Company, and that the Adviser is or may become interested in the Company as shareholder or otherwise. ARTICLE 6. Duration and Termination of this Agreement. This Agreement shall become effective as of the effective date of the Company's Post Effective Amendment No. 20 to its Registration Statement, and shall remain in force until May 1, 1995 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding shares of the Funds, including a majority of the outstanding shares of each Fund, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purposes of voting on such approval. This Agreement may be terminated at any time, as to a Fund, without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding shares of such Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. 8 ARTICLE 7. Definitions. The terms "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Act. As used with respect to the Company or a Fund, the term "majority of the outstanding shares" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. ARTICLE 8. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Company, or by the vote of the majority of outstanding shares of each of the Funds, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE 9. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict 9 with the applicable provisions of the Investment Company Act, the latter shall control. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. ATTEST: By: ----------------------------- President - -------------------------------- Secretary MERRILL LYNCH ASSET MANAGEMENT, INC. ATTEST: By: ---------------------------- President - -------------------------------- Secretary 10 EX-99.6(A) 34 DISTRIBUTION AGREEMENT DISTRIBUTION AGREEMENT AGREEMENT made this 7th day of April, 1994, between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corporation organized under the laws of Maryland (the "Company"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation (the "Distributor"); W I T N E S S E T H: WHEREAS, the Company is registered under the Investment Company Act of 1940, as amended to date (the "Investment Company Act"), as a diversified open-end investment company and it is affirmatively in the interest of the Company to offer its shares for sale continuously to certain insurance companies for their respective separate accounts pursuant to a currently effective prospectus (the "Prospectus") under the Securities Act of 1933 (the "Securities Act"); and WHEREAS, the Company currently is comprised of seventeen Funds, but may be comprised of additional separate funds, each of which existing or additional funds will pursue its investment objective through separate investment policies (such existing funds and any additional fund being referred to as "Funds"); and WHEREAS, the Distributor is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Company and the Distributor wish to enter into an agreement with each other with respect to the continuous offering to certain insurance companies for their respective separate accounts of shares of the Common Stock, par value $.10 per share, of the Funds (the "shares"), in order to promote the growth of the Funds and facilitate the distribution of their shares. NOW, THEREFORE, the parties agree as follows: Section 1. Appointment of the Distributor. The Company hereby appoints the Distributor as the principal underwriter and distributor of the Funds to sell their respective shares to such insurance companies as the Company may designate in writing from time to time for their respective separate accounts, and the Distributor hereby accepts such appointment. The Company during the term of this Agreement shall sell its shares to the Distributor upon the terms and conditions set forth below. Section 2. Exclusive Nature of Duties. The Distributor shall be the exclusive representative of the Company to act as principal underwriter and distributor of the shares. Section 3. Purchase of Shares from the Company. (a) The Company will offer its shares and the Distributor shall have the right to buy from the Company the shares needed, but not more than the shares needed (except for clerical errors in transmission) to fill unconditional orders for the shares placed with the Distributor by the designated insurance companies for their separate accounts. The price which the Distributor shall pay for the shares so purchased from the Company shall be the net asset value per share, determined as set forth in Section 3(c) hereof. 2 (b) The shares of each Fund are to be resold by the Distributor to the designated insurance companies for their separate accounts at the net asset value per share of such Fund. (c) The net asset value of the shares of each Fund shall be determined by the Company or any agent of the Company at such time and on such days as is designated in the Prospectus, in accordance with the method set forth in the Prospectus of the Company and guidelines established by the Board of Directors of the Company. The Company may also cause the net asset value of the shares to be determined in substantially the same manner or estimated in such manner and as of such other hour or hours as may from time to time be agreed upon in writing by the Company and the Distributor. All payments to the Company hereunder shall be made in the manner set forth in Section 3(e). (d) The Company shall have the right to suspend the sale of the shares at times when redemption of any such shares is suspended pursuant to the condition set forth in Section 4(b) hereof. The Company shall also have the right to suspend the sale of the shares if trading on the New York Stock Exchange shall have been suspended, if a banking moratorium shall have been declared by Federal or New York authorities, or if there shall have been some other extraordinary event, which, in the judgment of the Company, makes it impracticable to sell any such shares. (e) The Company, or any agent of the Company designated in writing by the Company, shall be promptly advised of all purchase orders for the shares received by the Distributor. The Company (or its agent) will confirm orders upon their receipt, 3 will make appropriate book entries and upon receipt by the Company (or its agent) of payment therefor, will deliver deposit receipts or certificates for such shares pursuant to the instructions of the Distributor. Payment shall be made to the Company in New York Clearing House funds. The Distributor agrees to cause such payment and such instructions to be delivered promptly to the Company (or its agent). Section 4. Repurchase or Redemption of Shares by the Company. (a) Any of the outstanding shares may be tendered for redemption at any time, and the Company agrees to repurchase or redeem any such shares so tendered in accordance with its obligations as set forth in Article VII of its Articles of Incorporation, as amended from time to time, and in accordance with the applicable provisions set forth in the Prospectus of the Company. The price to be paid to redeem or repurchase shares shall be equal to the net asset value per shares calculated in accordance with the provisions of Section 3(c) hereof. All payments by the Company hereunder shall be made in the manner set forth below. The Company shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of the Distributor in New York Clearing House funds on or before the fourth business day subsequent to its having received the notice of redemption in proper form. (b) Redemption of shares of a Fund or payment therefor may be suspended at times when the New York Stock Exchange is closed, when trading on said Exchange is closed, when trading on 4 said Exchange is restricted, when an emergency exists as a result of which disposal by the Company of securities owned by it for such Fund is not reasonably practicable or its is not reasonably practicable for the Company fairly to determine the value of the net assets of the Fund, or during any other period when the Securities and Exchange Commission, by order, so permits. Section 5. Duties of the Company. (a) The Company shall furnish to the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of shares of the Company, and this shall include one certified copy, upon request by the Distributor, of all financial statements prepared for the Company by independent public accountants. The Company shall make available to the Distributor such number of copies of its Prospectus as the Distributor shall reasonably request. (b) The Company shall take, from time to time, but subject to any necessary approval of its shareholders, all necessary action to fix the number of its authorized shares and to register shares under the Securities Act, to the end that there will be available for sale such number of shares as investors may reasonably be expected to purchase. (c) The Company shall use its best efforts to qualify and maintain the qualification of an appropriate number of the shares for sale under the securities laws of such states as the Distributor and the Company may approve, if such qualification is required by such securities laws. Any such qualification may be 5 withheld, terminated or withdrawn by the Company at any time in its discretion. The expense of qualification and maintenance of qualification of the shares shall be borne by the Company. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Company in connection with such qualification. (d) The Company will furnish, in reasonable quantities upon request by the Distributor, copies of annual and interim reports of the Company. Section 6. Duties of the Distributor. (a) The Distributor shall devote reasonable time and effort to effect sales of shares of the Company, but shall not be obligated to sell any specific number of shares. The services of the Distributor hereunder are not to be deemed exclusive and nothing herein contained shall prevent the Distributor from entering into distribution arrangements with other investment companies so long as the performance of its obligations hereunder is not impaired thereby. (b) In selling the shares of the Company, the Distributor shall use its best efforts in all respects duly to conform with the requirements of all federal and state laws and regulations and the regulations of the National Association of Securities Dealers, Inc. (the "NASD"), relating to the sale of such securities. Neither the Distributor nor any Selected Dealer nor any other person is authorized by the Company to give any information or to make any representations, other than those 6 contained in the registration statement or related Prospectus and any sales literature specifically approved by the Company. Section 7. Payment of Expenses. (a) The Company shall bear all costs and expenses of the Company relating to the Fund, including fees and disbursements of its counsel and auditors, in connection with the preparation and filing of any required registration statements and prospectuses under the Investment Company Act and the Securities Act, and all amendments and supplements thereto and the expense of preparing, printing, mailing and otherwise distributing prospectuses, annual or interim reports to shareholders and proxy materials. (b) The Company shall bear the costs and expenses of qualification of the shares for sale, and, if necessary or advisable in connection therewith, the Company shall bear the cost and expense of qualifying the Company as a broker or dealer, in such states of the United States or other jurisdictions as shall be selected by the Company and the Distributor pursuant to Section 5(c) hereof and the cost and expenses payable to each such state for continuing qualification therein until the Company decides to discontinue such qualification pursuant to Section 5(c) hereof. Section 8. Indemnification. (a) The Company shall indemnify and hold harmless the Distributor and each person, if any, who controls the Distributor against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable 7 counsel fees incurred in connection therewith) arising by reason of any person acquiring any shares, which may be based upon the Securities Act, or on any other statute or at common law, on the ground that the registration statement or related prospectus, as from time to time amended and supplemented, or the annual or interim reports to shareholders of the Company relating to the Fund, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, information furnished to the Company in connection therewith by or on behalf of the Distributor; provided, however, that in no case (i) is the indemnity of the Company in favor of the Distributor and any such controlling persons to be deemed to protect the Distributor or any such controlling persons thereof against any liability to the Company or its security holders to which the Distributor or any such controlling persons would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under this Agreement, or (ii) is the Company to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against the Distributor or such controlling persons, unless the Distributor or such controlling persons, as the case may be, shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the 8 Distributor or such controlling persons (or after the Distributor or such controlling persons shall have received notice of such service on any designated agent), but failure to notify the Company of any such claim shall not relieve it from any liability which it may have to the person against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Company will be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it and satisfactory to the Distributor or such controlling person or persons, defendant or defendants in the suit. In the event the Company elects to assume the defense of any such suit and retain such counsel, the Distributor or such controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, but, in case the Company does not elect to assume the defense of any such suit, it will reimburse the Distributor or such controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Company shall promptly notify the Distributor of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the shares. (b) The Distributor shall indemnify and hold harmless the Company and each of its directors and officers and each person, if any, who controls the Company against loss, 9 liability, claim, damage or expense described in the foregoing indemnity contained in subsection (a) of this Section, but only with respect to statements or omissions made in reliance upon, and in conformity with, information furnished to the Company in writing by or on behalf of the Distributor for use in connection with the registration statement or related prospectus, as from time to time amended, or the annual or interim reports to shareholders. In case any action shall be brought against the Company or any persons so indemnified, in respect of which indemnity may be sought against the Distributor, the Distributor shall have the rights and duties given to the Company, and the Company and each persons so indemnified shall have the rights and duties given to the Distributor by the provisions of subsection (a) of this Section 8. Section 9. Duration and Termination of This Agreement. This Agreement shall become effective as of the date first above written and shall remain in force until April , 1996 and, as to each Fund, thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company, or by the vote of a majority of the outstanding voting securities of such Fund, cast in person or by proxy, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting upon such approval. This Agreement may be terminated as to any Fund at any time without the payment of any penalty, by the Board of Directors of the Company or by vote of a majority of the outstanding voting 10 securities of such Fund, or by the Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. The term "vote of a majority of the outstanding voting securities," "assignment," "affiliated persons" and "interested person," when used in this Agreement, shall have the respective meaning specified in the Investment Company Act. Section 10. Amendments of This Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Company, or by the vote of a majority of outstanding voting securities of each Fund affected by the amendment, and (ii) a majority of those directors of the Company who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. Section 11. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York and the applicable provisions of the Investment Company Act. To the extent the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. 11 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written in New York, New York. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By ---------------------------- President MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ---------------------------- President 12 EX-99.8 35 CUSTODY AGREEMENT CUSTODY AGREEMENT AGREEMENT made this 15th day of March, 1982, between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corpo- ration organized and existing under the laws of the State of Maryland, having its principal office and place of business at 165 Broadway, New York, New York 10080 (hereinafter called the "Company"), and THE BANK OF NEW YORK, a corpora- tion organized and existing under the laws of the State of New York, having its principal office and place of business at 48 Wall Street, New York, New York 10015 (hereinafter called the "Custodian"). W I T N E S S E T H: That for and in consideration of the mutual promises hereinafter set forth the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS Whenever used in this Agreement, the following words and phrases shall have the following meanings: 1. "Authorized Person" shall be deemed to include the Treasurer, the Controller or any other person, whether or not any such person is an Officer or employee of the Com- pany, duly authorized by the Board of Directors to give Oral Instructions and Written Instructions on behalf of the Com- pany and listed in the Certificate annexed hereto as Appendix A or such other Certificate may be received by the Custodian from time to time. 2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry system for the United States government and federal agency securities, its successor or successors and its nominee or nominees. 3. "Certificate" shall mean any notice, instructions, or other instrument in writing, authorized or required by this Agreement to be given to the Custodian which is actu- ally received by the Custodian and signed, or reasonably believed by the Custodian to have been signed, on behalf of the Company by any two Officers of the Company. 4. "Depository" shall mean The Depository Trust Com- pany ("DTC"), a clearing agency registered with the Secu- rities and Exchange Commission, its successor or successors and its nominee or nominees, provided the Custodian has received a certified copy of a resolution of the Company's Board of Directors specifically approving deposits in DTC. The term "Depository" shall further mean and include any other person authorized to act as a depository under the Investment Company Act of 1940, its successor or successors and its nominee or nominees, specifically identified in a certified copy of a resolution of the Company's Board of Directors approving deposits therein by the Custodian. 5. "Money Market Security" shall be deemed to include, without limitation, short term United States government securities, government agency securities, certif- icates of deposit, bankers' acceptances, non-convertible corporate debt instruments, commercial paper, and repurchase and reverse repurchase agreements. 6. "Officers" shall be deemed to include the Presi- dent, any Vice President, the Secretary, the Treasurer, the Controller, any Assistant Controller, any Assistant Treas- 2 urer, or any other person or persons duly authorized by the Board of Directors of the Company to execute any Certifi- cate, instruction, notice or other instrument on behalf of the Company and listed in the Certificate annexed hereto as Appendix B or such other Certificate as may be received by the Custodian from time to time. 7. "Oral Instructions" shall mean verbal instructions actually received by the Custodian from an Authorized Person or from a person reasonably believed by the Custodian to be an Authorized Person. 8. "Security" shall be deemed to include, without limitation, Money Market Securities and such other secu- rities which the Company is authorized to invest in pursuant to its current prospectus. 9. "Series" shall mean the various funds of the Com- pany as described from time to time in the Company's current prospectus including, but not limited to, the Merrill Lynch Reserve Asset Fund. 10. "Shares" shall mean the classes of capital stock of the Company, each of which is specifically allocated to a particular Series. 11. "Written Instructions" shall mean written communi- cations actually received by the Custodian from an Author- ized Person or from a person reasonably believed by the Custodian to be an Authorized Person by telex or any other such system whereby the receiver of such communications is able to verify by codes or otherwise with a reasonable degree of certainty the authenticity of the sender of such communication. 3 ARTICLE II APPOINTMENT OF CUSTODIAN 1. The Company hereby constitutes and appoints the Custodian as custodian of Securities and moneys owned by the Company during the period of this Agreement. 2. The Custodian hereby accepts appointment as said custodian and agrees to perform the duties thereof as here- inafter set forth. ARTICLE III CUSTODY OF CASH AND SECURITIES 1. The Company will deliver or cause to be delivered to the Custodian Securities and moneys owned by it, includ- ing cash received for the issuance of Shares, during the period of this Agreement and shall specify the Series to which the same are specifically allocated. The Custodian shall segregate, keep, and maintain the assets of the Series separate and apart. The Custodian will not be responsible for such Securities and such moneys until actually received by it. The Custodian will be entitled to reverse any credits made for a Series on the Company's behalf where such credits have been previously made and moneys are not finally collected. The Company shall deliver to the Custodian a certified resolution of the Board of Directors of the Com- pany approving, authorizing and instructing the Custodian on a continuous and on-going basis to deposit in the Book-Entry System all Securities eligible for deposit therein, regard- less of the Series to which the same are specifically allo- cated, and to utilize the Book-Entry System to the extent 4 possible with respect to such Securities in connection with settlements of purchases and sales of Securities, loans of Securities and deliveries and returns of Securities collat- eral, regardless of the Series to which the same are speci- fically allocated. Prior to the deposit of Securities specifically allocated to a Series in the Depository, the Company shall have received a certified resolution of the Board of Directors of the Company specifically approving deposits by the Custodian on behalf of the Company of the Securities specifically allocated to such Series in the Depository. Securities and moneys of a Series deposited in either the Book-Entry System or the Depository will be represented in accounts which include only assets held by the Custodian for customers, including, but not limited to, accounts in which the Custodian acts in a fiduciary or representative capacity and shall be specifically allocated on the Custodian's books to the separate account for such Series. 2. The Custodian shall establish and maintain sepa- rate accounts, each in the name of the Company and each for a particular Series only, and shall credit to the separate account established and maintained for a particular Series all moneys received by it for the account of the Company with respect to such Series. Moneys credited to a separate account for a Series shall be disbursed by the Custodian only: (a) In payment for Securities purchased for such Series, as provided in Article IV hereof; (b) In payment of dividends or distributions with respect to Shares of such Series, as provided in Article V hereof; 5 (c) In payment of original issue or other taxes with respect to the Shares of such Series, as provided in Article VI hereof; (d) In payment for Shares of such Series redeemed by it, as provided in Article VI hereof; (e) Pursuant to a Certificate, setting forth the name and address of the person to whom the payment is to be made, the amount to be paid, the Series account from which the payment is to be made, and the purpose for which payment is to be made; or (f) In payment of the fees and in reimbursement of the expenses and liabilities of the Custodian attribut- able to such Series, as provided in Article IX hereof. 3. Promptly after the close of business on each day the Custodian shall furnish the Company with a written statement (i) summarizing all transactions and entries for the account of the Company during said day and specifying the Series to which each transaction and entry relates, and (ii) confirming any purchase or sale of Securities during said day and specifying the Series to which each purchase or sale relates. Where Securities are transferred to the account of the Company for a Series, the Custodian shall also by book entry or otherwise identify as belonging to the Company and specifically allocated to such Series a quantity of Securities in a fungible bulk of Securities registered in the name of the Custodian (or its nominee) or shown on the Custodian's account on the books of the Book-Entry System or the Depository. At least monthly and from time to time, the Custodian shall furnish the Company with a detailed state- ment of the Securities and moneys held for the Company under this Agreement with respect to each Series. 6 4. All Securities held for the Company, which are issued or issuable only in bearer form, except such Secu- rities as are held in the Book-Entry System, shall be held by the Custodian in that form; all other Securities held for the Company may be registered in the name of the Company, in the name of any duly appointed registered nominee of the Custodian as the Custodian may from time to time determine, or in the name of the Book-Entry System or the Depository, or their successor or successors, or their nominee or nomi- nees. The Company agrees to furnish to the Custodian appro- priate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of its registered nominee or in the name of the Book- Entry System or the Depository any Securities which it may hold for the account of the Company and which may from time to time be registered in the name of the Company. The Cus- todian shall hold all such Securities which are specifically allocated to a Series and not held in the Book-Entry System or in the Depository in a separate account in the name of the Company for such Series physically segregated at all times from those of any other person or persons. 5. Unless otherwise instructed to the contrary by a Certificate, the Custodian by itself, or through the use of the Book-Entry System or the Depository with respect to Securities therein deposited, shall with respect to all Securities held for the Company in accordance with this Agreement: (a) Collect all income due or payable; (b) Present for payment and collect the amount payable upon all Securities which may mature or be called, redeemed, or retired, or otherwise become payable; 7 (c) Surrender Securities in temporary form for definitive Securities; (d) Execute, as custodian, any necessary declara- tions or certificates of ownership under the Federal Income Tax Laws or the laws or regulations of any other taxing authority now or hereafter in effect; (e) Hold directly, or through the Book-Entry Sys- tem or the Depository with respect to Securities therein deposited, for the account of the Company and the particular Series all rights and similar securities issued with respect to any Securities held by the Custodian for such Series hereunder; and (f) Deliver to the Company all notices of meet- ings of Shareholders and proxies received relating to Secu- rities held by the Custodian hereunder. 6. Upon receipt of a Certificate and not otherwise, the Custodian, directly or through the use of the Book-Entry System or the Depository, shall: (a) Execute and deliver to such persons as may be designated in such Certificate proxies, consents, authoriza- tions, and any other instruments whereby the authority of the Company as owner of any Securities held for the Series specified in such Certificate may be exercised; (b) Deliver any Securities held for the Series specified in such Certificate in exchange for other Securi- ties or cash issued or paid in connection with the liquida- tion, reorganization, or refinancing, merger, consolidation or recapitalization of any corporation, or exercise of any conversion privilege and receive and hold hereunder specifi- 8 cally allocated to such Series any cash or other Securities received in exchange; (c) Deliver any Securities held for the Series specified in the Certificate to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, re- capitalization or sale of assets of any corporation, and receive and hold under the terms of this Agreement specifi- cally allocated to such Series such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery; and (d) Make such transfers or exchanges of the assets of the Series specified in such Certificate and take such other steps as shall be stated in said Certificate to be for the purpose of effectuating any duly authorized plan of liquidation reorganization, merger consolidation or re- capitalization of the Company. ARTICLE IV PURCHASE AND SALE OF INVESTMENTS OF THE FUND 1. Promptly after each purchase of Securities by the Company, the Company shall deliver to the Custodian a Cer- tificate, or with respect to a purchase of Money Market Securities, a Certificate, Written Instructions or Oral Instructions, specifying with respect to each such purchase: (a) the Series to which the purchased Securities are to be specifically allocated, (b) the name of the issuer and the title of the Securities, (c) the number of shares or the principal amount purchased and accrued interest, if any, (d) the date of purchase and settlement, (e) the purchase price 9 per unit, including accrued interest, if any, (f) the total amount payable upon such purchase, including accrued inter- est, if any, and (g) the name of the person from whom or the broker through whom the purchase was made. The Custodian shall upon receipt of Securities purchased by or for the Company pay out of the moneys held for the account of the Series to which the purchased Securities are to be specifi- cally allocated the total amount payable to the person from whom or the broker through whom the purchase was made, pro- vided that the same conforms to the total amount payable as set forth in such Certificate, Written Instructions, or Oral Instructions. 2. Promptly after each sale of Securities by the Com- pany, the Company shall deliver to the Custodian a Certifi- cate, or with respect to a sale of Money Market Securities, a Certificate, Written Instructions or Oral Instructions, specifying with respect to each sale: (a) Series to which such Securities were specifically allocated, (b) the name of the issuer and the title of the Security, (c) the principal amount sold, and accrued interest, if any, (f) the total amount payable to the Fund upon such sale, including accrued interest, if any, and (g) the name of the broker through whom or the person to whom the sale was made. The Custodian shall deliver the Securities upon receipt of the total amount payable to the Company upon such sale, provided that the same conforms to the total amount payable as set forth in such Certificate, Written Instructions or Oral Instructions. Subject to the foregoing, the Custodian may accept payment in such form as shall be satisfactory to it, and may deliver Securities and arrange for payment in accordance with the customs prevailing among dealers in Securities. 10 ARTICLE V PAYMENT OF DIVIDENDS OR DISTRIBUTIONS 1. The Company shall furnish to the Custodian a copy of the resolution of the Board of Directors, certified by the Secretary or any Assistant Secretary, either (i) setting forth with respect to the Series specified therein the date of the declaration of a dividend or distribution, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share of such Series to the shareholders of record as of that date and the total amount payable to the Transfer Agent of the Company on the payment date, or (ii) authorizing with respect to the Series specified therein the declaration of dividends and distributions on a daily basis and authorizing the Custodian to rely on Oral Instructions, Written Instruc- tions, or a Certificate setting forth the date of the decla- ration of such dividend or distribution, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share of such Series to the shareholders of record as of that date and the total amount payable to the Transfer Agent on the payment date. 2. Upon the payment date specified in such resolu- tion, Oral Instructions, Written Instructions, or Certifi- cate, as the case may be, the Custodian shall pay out of the moneys held for the account of the Company the total amount payable to the Transfer Agent of the Company. 11 ARTICLE VI SALE AND REDEMPTION OF SHARES 1. Whenever the Company shall sell any Shares, it shall deliver to the Custodian a Certificate duly specify- ing: (a) The Series and number of Shares sold, trade date, and price; and (b) The amount of money to be received by the Custodian for the sale of such Shares and specifically allo- cated to the separate account in the name of the Company for such Series. 2. Upon receipt of such money from the Transfer Agent, the Custodian shall credit such money to the separate account in the name of the Company for the Series for which such money was received. 3. Upon issuance of any Shares in accordance with the foregoing provisions of this Article, the Custodian shall pay, out of the money held in the separate account in the name of the Company for the Series of Shares issued, all original issue or other taxes required to be paid by the Company in connection with such issuance upon the receipt of a Certificate specifying the amount to be paid. 4. Whenever the Company shall hereafter redeem any Shares it shall furnish to the Custodian a Certificate specifying: (a) The Series and number of Shares redeemed; and 12 (b) The amount to be paid for the Shares of such Series redeemed. 5. Upon receipt from the Transfer Agent of an advice setting forth the Series and number of Shares received by the Transfer Agent for redemption and stating that such Shares are valid and in good form for redemption, the Custo- dian shall make payment to the Transfer Agent out of the moneys held in the separate account in the name of the Com- pany for such Series of the total amount specified in the Certificate issued pursuant to the foregoing paragraph 4 of this Article. ARTICLE VII OVERDRAFTS OR INDEBTNESS 1. If the Custodian should in its sole discretion advance funds on behalf of the Company for a Series which results in an overdraft because the moneys held by the Cus- todian in the separate account in the name of the Company for such Series shall be insufficient to pay the total amount payable upon purchase of Securities to be specifi- cally allocated to such Series as set forth in a Certifi- cate, Written Instructions or Oral Instructions issued pur- suant to Article IV, or which results in an overdraft in the account for such Series for some other reason, or if the Company is for any other reason indebted to the Custodian with respect to a Series, such overdraft or indebtedness shall be deemed to be a loan made by the Custodian to the Company for such Series payable on demand and shall bear interest from the date incurred at a rate per annum (based on a 360-day year from the actual number of days involved) equal to 1/2% over Custodian's prime commercial lending rate 13 in effect from time to time, such rate to be adjusted on the effective date of any change in such prime commercial lend- ing rate but in no event to be less than 6% per annum. In addition thereto the Company hereby agrees that the Custo- dian shall have a continuing lien and security interest in and to any property specifically allocated to such Series at any time held by it for the benefit of the Company or in which the Company may have an interest which is then in the Custodian's possession or control or in possession or control of any third party acting in the Custodian's behalf. The Company authorizes the Custodian, in its sole discretion, at any time to charge any such overdraft or indebtedness together with interest due thereon against any balance of account standing to the Company's credit on the Custodian's books and specifically allocated to such Series. 2. The Company will cause to be delivered to the Cus- todian by any bank (including the Custodian) from which it borrows money for temporary or emergency purposes using Securities as collateral for such borrowings, a notice or undertaking in the form currently employed by any such bank setting forth the amount which such bank will loan to the Company against delivery of a stated amount of collateral. The Company shall promptly deliver to the Custodian a Cer- tificate specifying with respect to each such borrowing: (a) the Series to which such borrowing relates, (b) the name of the bank, (c) the amount and terms of the borrowing, which may be set forth by incorporating by reference an attached promissory note, duly endorsed by the Fund, or other loan agreement, (d) the time and date, if known, on which the loan is to be entered into (the "borrowing date"), (e) the date on which the loan becomes due and payable, (f) the total amount payable to the Company on the borrowing date, (g) the market value of Securities specifically allo- cated to such Series to be delivered as collateral for such 14 loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, (h) whether the Custodian is to deliver such collateral through the Depository, and (i) a statement that such loan for temporary or emergency purposes is in conform- ance with the Investment Company Act of 1940 and the Com- pany's current prospectus. The Custodian shall deliver on the borrowing date such specified collateral and the executed promissory note, if any, against delivery by the lending bank of the total amount of the loan payable, pro- vided that the same conforms to the total amount payable as set forth in the Certificate. The Custodian may, at the option of the lending bank, keep such collateral in its pos- session, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement. The Custodian shall deliver in the manner directed by the Company from time to time such Secu- rities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this paragraph. The Company shall cause all Securities released from collateral status to be returned directly to the Custodian, and the Cutodian shall receive from time to time such returns of collateral as may be tendered to it. In the event the Custodian fails to specify in a Certificate the name of the issuer, the title and num- ber of Shares or the principal amount of any particular Securities to be delivered as collateral by the Custodian, the Custodian shall not be under any obligation to deliver any Securities. Collateral returned to the Custodian shall be held hereunder as it was prior to being used as collat- eral. - 15 - ARTICLE VIII LOAN OF PORTFOLIO SECURITIES OF THE FUND 1. If the Company is permitted by the terms of its Articles of Incorporation and as disclosed in its most recent and currently effective prospectus to lend portfolio Securities specifically allocated to a Series, within 24 hours after each loan of portfolio Securities the Fund shall deliver or cause to be delivered to the Custodian a Certifi- cate specifying with respect to each such loan: (a) the name of the issuer and the title of the Securities, (b) the number of shares or the principal amount loaned, (c) the date of loan and delivery, (d) the total amount to be deliv- ered to the Custodian against the loan of the Securities, including the amount of cash collateral and the premium, if any, separately identified, (e) the name of the broker, dealer, or financial institution to which the loan was made, and (f) the name of the Series to which the loaned Secu- rities are specifically allocated. The Custodian shall deliver the Securities thus designated to the broker, dealer or financial institution to which the loan was made upon receipt of the total amount designated as to be delivered against the loan of Securities. The Custodian may accept payment in connection with a delivery otherwise than through the Book Entry System or Depository only in the form of a certified or bank cashier's check payable to the order of the Company or the Custodian drawn on New York Clearing House funds and may deliver Securities in accordance with the customs prevailing among dealers in securities. 2. Promptly after each termination of the loan of Securities by the Company, the Company shall deliver or cause to be delivered to the Custodian a Certificate specifying with respect to each such loan termination and 16 return of securities: (a) the name of the issuer and the title of the Securities to be returned, (b) the number of shares or the principal amount to be returned, (c) the date of termination, (d) the total amount to be delivered by the Custodian (including the cash collateral for such Securities minus any offsetting credits as described in said Certifi- cate), (e) the name of the broker, dealer, or financial institution from which the Securities will be returned, and (g) the name of the Series to which the loaned Securities are specifically allocated. The Custodian shall receive all Securities returned from the broker, dealer, or financial institution to which such Securities were loaned and upon receipt thereof shall pay, out of the moneys held for the account of the Company, the total amount payable upon such return of Securities as set forth in the Certificate. ARTICLE IX CONCERNING THE CUSTODIAN 1. Except as hereinafter provided, neither the Custo- dian nor its nominee shall be liable for any loss or damage including counsel fees, resulting from its action or omis- sion to act or otherwise, except for any such loss or damage arising out of its own negligence or willful misconduct. The Custodian may, with respect to questions of law, apply for and obtain the advice and opinion of counsel to the Com- pany or of its own counsel, at the expense of the Company, and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice or opinion. The Custodian shall be liable to the Company for any loss or damage resulting from the use of the Book-Entry System or any Depository arising by reason of any negligence, misfeasance or misconduct on the part of the Custodian or any of its employees or agents. 17 2. Without limiting the generality of the foregoing, the Custodian shall be under no obligation to inquire into, and shall not be liable for: (a) The validity of the issue of any Securities purchased by or for the Company, the legality of the pur- chase thereof or the propriety of the amount paid thereof; (b) The legality of the sale of any Securities by or for the Company, or the propriety of the amount for which the same are sold; (c) The legality of the issue or sale of any shares of the capital stock of the Company, or the suffi- ciency of the amount to be received therefor; (d) The legality of the redemption of any shares of capital stock of the Fund, or the propriety of the amount to be paid therefor; (e) The legality of the declaration or payment of any dividend by the Company; (f) The legality of any borrowing by the Company using Securities as collateral; or (g) The legality of any loan of portfolio Securi- ties pursuant to Article VIII of this Agreement, nor shall the Custodian be under any duty or obligation to see to it that any collateral delivered to it by a broker, dealer, or financial institution or held by it at any time as a result of such loan of portfolio Securities of the Company is ade- quate collateral for the Company against any loss it might sustain as a result of such loan. The Custodian speci- fically, but not by way of limitation, shall not be under 18 any duty or obligation periodically to check or notify the Company that the amount of such collateral held by it for the Company is sufficient collateral for the Company, but such duty or obligation shall be the sole responsibility of the Company. In addition, the Custodian shall be under no duty or obligation to see that any broker, dealer or finan- cial institution to which porfolio Securities of the Company are lent pursuant to Article VIII of this Agreement makes payment to it of any dividends or interest which are payable to or for the account of the Company during the period of such loan or at the termination of such loan, provided, how- ever, that the Custodian shall promptly notify the Company in the event that such dividends or interest are not paid and received when due. 3. The Custodian shall not be liable for, or consid- ered to be the Custodian of, any money, whether or not represented by any check, draft, or other instrument for the payment of money, received by it on behalf of the Company until the Custodian actually receives and collects such money directly or by the final crediting of the account representing the Company's interest at the Book-Entry System or the Depository. 4. The Custodian shall not be under any duty or obli- gation to take action to effect collection of any amount due to the Company from the Transfer Agent of the Company nor to take any action to effect payment or distribution by the Transfer Agent of the Company of any amount paid by the Cus- todian to the Transfer Agent of the Company in accordance with this Agreement. 5. The Custodian shall not be under any duty or obli- gation to take action to effect collection of any amount, if the Securities upon which such amount is payable are in de- 19 fault, or if payment is refused after due demand or presen- tation, unless and until (i) it shall be directed to take such action by a Certificate and (ii) it shall be assured to its satisfaction of reimbursement of its costs and expenses in connection with any such action. 6. The Custodian may appoint one or more banking in- stitution as Depository or Depositories or as Sub-Custodian or Sub-Custodians, including, but not limited to, banking institutions located in foreign countries, of Securities and moneys at any time owned by the Company, upon terms and con- ditions approved in a Certificate. 7. The Custodian shall not be under any duty or obli- gation to ascertain whether any Securities at any time de- livered to or held by it for the account of the Company and specifically allocated to a Series are such as properly may be held by the Company and allocated to such Series under the provisions of its Articles of Incorporation or its pro- spectus. 8. The Custodian shall be entitled to receive and the Company agrees to pay to the Custodian with respect to each Series such compensation as may be agreed upon from time to time between the Custodian and the Company. The Custodian may charge such compensation and any expenses incurred by the Custodian in the performance of its duties with respect to a Series pursuant to such agreement against any moneys specifically allocated to such Series. Unless and until the Company instructs the Custodian by a Certificate to appor- tion any loss, damage, liability or expenses among the Series in a different manner, the Custodian shall also be entitled to charge against any money held by it for the account of a Series such Series' pro-rata share (based on the relationship of such Series' net asset value at the time 20 of the change to the aggregate net asset value of all Series at that time) the amount of any loss, damage, liability or expense (including counsel fees) for which it shall be entitled to reimbursement under the provisions of this agreement. The expenses which the Custodian may charge against the account of a Series include, but are not limited to, the expenses of Sub-Custodians and foreign branches of the Custodian incurred in setting outside of New York City transactions involving the purchase and sale of Securities of such Series. 9. The Custodian shall be entitled to rely upon any Certificate, notice or other instrument in writing received by the Custodian and reasonably believed by the Custodian to be genuine and to be a Certificate. The Custodian shall be entitled to rely upon any Oral Instructions and any Written Instructions actually received by the Custodian pursuant to Articles IV and V hereof and reasonably believed by the Cus- todian to be genuine and to be given by an Authorized Person. The Fund agrees to forward to the Custodian a Cer- tificate or facsimile thereof confirming such Oral Instruc- tions or Written Instructions in such a matter so that such Certificate or facsimile there is received by the Custodian, whether by hand delivery, telecopier or other similar devices, or otherwise by the close of business on the same day that such Oral Instructions or Written Instructions are given to the Custodian. The Company agrees that the fact that such confirming Certificate or facsimile thereof is not received by the Custodian shall in no way affect the validity or enforceability of the transactions, hereby authorized by the Company. The Company agrees that the Cus- todian shall incur no liability to the Company in acting upon Oral Instructions or Written Instructions given to the Custodian hereunder concerning such transactions provided such instructions reasonably appear to have been received from an Authorized Person. 21 10. The Books and records of the Custodian shall be open to inspection and audit at reasonable times by Officers and auditors employed by the Company. 11. The Custodian shall provide the Company with any report obtained by the Custodian on the system of internal accounting control of the Book-Entry System and the Deposi- tory and with such reports on its own systems of internal accounting control as the Company may reasonably request from time to time. 12. The Custodian shall have no duties or responsibil- ities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no cove- nant or obligation shall be implied in this Agreement against the Custodian. ARTICLE X TERMINATION 1. Either of the parties herto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice. In the event such notice is given by the Company, it shall be accompanied by a copy of a resolution of the Board of Directors of the Company, certified by the Secre- tary or any Assistant Secretary, electing to terminate this Agreement and designating a successor custodian or custo- dians, each of which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. In the event such notice is given by the Custodian, the Company shall, on or before the termination 22 date, deliver to the Custodian a copy of a resolution of its Board of Directors, certified by the Secretary of any Assis- tant Secretary, designating a successor custodian or custo- dians. In the absence of such designation by the Company, the Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus, and undivided pro- fits. Upon the date set forth in such notice this Agreement shall terminate, and the Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and moneys then owned by the Company and held by it as Cus- todian, after deducting all fees, expenses and other amounts for the payment of reimbursement of which it shall then be entitled. 2. If a successor custodian is not designated by the Company or the Custodian in accordance with the preceding paragraph, the Company shall, upon the date specified in the notice of termination of this Agreement and upon the deliv- ery by the Custodian to the Company of all Securities (other than Securities held in the Book-Entry System which cannot be delivered to the Company) and moneys then owned by the Company, be deemed to be its own custodian and the Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities held in the Book-Entry Systems which cannot be delivered to the Company to hold such Securities hereunder in accordance with this Agreement. 23 ARTICLE XI MISCELLANEOUS 1. Annexed hereto as Appendix A is a Certificate signed by two of the present Officers of the Company under its corporate seal, setting forth the names of the signa- tures of the present Authorized Persons. The Company agrees to furnish to the Custodian a new Certificate in similar form in the event that any such present Authorized Person ceases to be an Authorized Person or in the event that other or additional Authorized Persons are elected or appointed. Until such new Certificate shall be received, the Custodian shall be fully protected in acting under the provisions of this Agreement upon Oral Instructions, Written Instructions or signatures of the present Authorized Persons as set forth in the last delivered Certificate. 2. Annexed hereto as Appendix B is a Certificate signed by two of the present Officers of the Company under its corporate seal, setting forth the names and the signa- tures of the present Officers of the Company. The Company agrees to furnish to the Custodian a new Certificate in similar form in the event that any such present Officer ceases to be an Officer of the Company, or in the event that other or additional Officers of the Company, are elected or appointed . Until such new Certificate shall be received, the Custodian shall be fully protected in acting under the pro- visions of this Agreement upon the signatures of the Officers as set forth in the last delivered Certificate. 3. Any notice or other instrument in writing, author- ized or required by this Agreement to be given to the Custo- dian, shall be sufficiently given if addressed to the Custo- dian and mailed or delivered to it at its offices at 90 24 Washington Street, New York, New York 10015, or at such other place as the Custodian may from time to time designate in writing. 4. Any notice or other instrument in writing, author- ized or required by this Agreement to be given to the Com- pany shall be sufficiently given if addressed to the Company and mailed or delivered to it at its office 165 Broadway, New York, New York 10080, or at such other place as the Com- pany may from time to time designate in writing. 5. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties with the same formality as this Agreement, and authorized and approved by a resolution of the Board of Directors of the Company. 6. This Agreement shall extend to and shall be bind- ing upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Company without the written consent of the Custodian or by the Custodian without the written consent of the Company, authorized or approved by a resolu- tion of its Board of Directors. 7. This Agreement shall be construed in accordance with the laws of the State of New York. 8. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an origi- nal, but such counterparts shall, together, constitute only one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate 25 Officers, thereunto duly authorized and their respective cor- porate seals to be hereunto affixed, as of the day and year first above written. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/ Harold R. Groom Jr. ------------------------- Attest: /s/ Philip L. Kirstein ---------------------- THE BANK OF NEW YORK By: ------------------------ Attest: /s/ - ----------------------------------- 26 APPENDIX A I, , President and I, , Secretary of MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a Maryland Corporation (the "Company"), do hereby certify that: The following individuals have been duly authorized in conformity with the Company's Articles of Incorporation and ByLaws to give Oral Instructions and Written Instructions on behalf of the Company, and the signatures set forth opposite their respective names are their true and correct signa- tures: Name Signature APPENDIX B I, ,President and I, Secretary of MERRILL LYNCH VARIABLE SERIES FUNDS, INC. , a Maryland Corporation (the "Company"), do hereby certify that: The following individuals serve in the following posi- tions with the Company and each individual has been duly elected or appointed to each such position and qualified therefor in conformity with the Company's Articles of Incor- poration and By-Laws, and the signatures set forth opposite their respective names and are their true and correct signa- tures: Name Position Signature EX-99.9(A) 36 TRANSFER AGENCY AGREEMENT TRANSFER AGENCY AGREEMENT TRANSFER AGENCY AGREEMENT made this 15th day of March, 1982 between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a corporation organized and existing under the laws of the State of Maryland, having its principal office and place of business at 165 Broadway, New York, New York 10080 (hereinafter called the "Company"), and THE BANK OF NEW YORK, a corporation organized and existing under the laws of the State of New York, having its principal office and place of business at 48 Wall Street, New York, New York 10015 (hereinafter called the "Transfer Agent"). W I T N E S S E T H: that for and in consideration of the mutual promises herein- after set forth, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS Whenever used in this Agreement, the following words and phrases shall have the following meanings: 1. "Certificate" shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to the Transfer Agent by the Com- pany which is signed by any Authorized Officer, as herein- after defined. 2. "Custodian" shall mean the custodian of all of the securities and all moneys owned by the Company. 3 "Authorized Officer" shall be deemed to be the Company's President, any Vice President of the Company, the Company's Secretary, the Company's Treasurer, the Company's Controller, any Assistant Controller of the Company, any Assistant Treasurer of the Company, and any other person duly authorized by the Board of Directors of the Company to execute any Certificate, instruction, notice or other instrument on behalf of the Company and named in Appendix A hereto as such Appendix may from time to time be amended, and any person believed by the Transfer Agent to be such a person. 4. "Series" shall mean the various funds of the Com- pany as described in the Company's prospectus from time to time, including, but not limited to, the Merrill Lynch Reserve Asset Fund. 5. "Shares" shall mean the classes of Capital Stock of the Fund, each of which is allocated to a particular Series. ARTICLE II APPOINTMENT OF TRANSFER AGENT 1. The Company hereby constitutes and appoints the Transfer Agent as transfer agent for all of the authorized Shares of the Company during the period of this Agreement as the same shall from time to time be constituted. 2. The Transfer Agent hereby accepts appointment as such transfer agent and agrees to perform the duties thereof as hereinafter set forth. 2 3. In connection with its appointment, there shall be filed with the Transfer Agent the following documents: (a) A certified copy of the Certificate of Incor- poration or other document evidencing the Company's form of organization (such document being hereinafter referred to as "the Charter") and all amendments thereto; (b) A certified copy of the by-laws of the Com- pany; (c) A certified copy of a resolution of the Board of Directors of the Company appointing the Transfer Agent and appointing an authorized officer of the Company to execute this Transfer Agency Agreement; (d) A certificate of the Secretary of the Company specifying by Series the number of authorized Shares and the number of such authorized Shares currently outstanding, the address of the Company, the names and specimen signatures of the officers of the Company and the name and address of the legal counsel for the Company; (e) Specimen share certificates for each Series in the form approved by the Board of Directors of the Com- pany, with the certificate of the Secretary of the Company as to such approval; (f) Copies of the Company's Registration State- ment, as amended to date, and the most recently filed Post- Effective Amendment thereto, filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and the Registration Statement, as amended to date, filed with the Securities and Exchange Com- mission under the Investment Company Act of 1940, as 3 amended, together with any application filed in connection therewith, (g) Opinion of counsel for the Company with respect to the validity of the authorized and outstanding Shares and the status of such Shares under the Securities Act of 1933, as amended, and any other applicable federal or state law or regulation, and (h) A signature card bearing the signatures of the authorized officers of the Company who will sign Share certificates or sign written instructions or requests. 4. The Company shall furnish the Transfer Agent with a sufficient supply of blank Share certificates of each Series and from time to time will renew such supply upon request of the Transfer Agent. Such blank Share certifi- cates shall be properly signed by officers of the Company authorized by law or by the by-laws to sign Share certifi- cates, and, if required, shall bear the corporate seal or facsimile thereof. The Company agrees to indemnify and exonerate, save and hold the Transfer Agent harmless, from and against any and all claims or demands that may be asserted against the Transfer Agent concerning the genuine- ness of any Share certificates supplied to the Transfer Agent pursuant to this Agreement. 5. Notwithstanding anything elsewhere contained in this Agreement to the contrary, the Transfer Agent shall be the Transfer Agent hereunder for a particular Series of Shares only when it shall have received the documents speci- fying such particular Series of Share listed in Section 3c through 3h and Section 4 of this Article. 4 ARTICLE III AUTHORIZATION AND ISSUANCE OF SHARES 1. In connection with the appointment of the Transfer Agent for all of the authorized Shares, where there is any increase or decrease in the total number of authorized Shares of any Series, the Fund shall file with the Transfer Agent: (a) A certified copy of the amendment to the Charter giving effect to such increase or decrease; (b) In the case of an increase, an opinion of counsel for the Company with respect to the validity of the Shares of such Series and the status of such Shares under the Securities Act of 1933, as amended and any other appli- cable federal or state law or regulation; and (c) In the case of an increase, if the Authority of the Transfer Agent was theretofore expressly limited to a specified number of Shares, a certified resolution of the Board of Directors of the Company modifying the authority of the Transfer Agent. 2. In the case of the issuance of any additional Shares, pursuant to stock dividends and stock splits, the Company shall file with the Transfer Agent: (a) A certified copy of the resolution(s) adopted by the Board of Directors and/or the shareholders of the Company authorizing such issuance of additional Shares; and (b) An opinion of counsel for the Company with respect to the validity of the Shares and the status of such 5 Shares under the Securities Act of 1933, as amended, and any other applicable Federal or State law or regulation. ARTICLE IV RECAPITALIZATION OR CAPITAL ADJUSTMENT 1. In the case of any recapitalization or other capi- tal adjustments requiring a change in the form of Share cer- tificates for any Series, the Transfer Agent will issue Share certificates in the new form in exchange for, or upon transfer of, outstanding Share certificates in the old form, upon receiving: (a) A Certificate authorizing the issuance of Share certificates in the new form; (b) A certified copy of the amendment to the Charter effecting the change; (c) Specimen Share certificates in the new form approved by the Board of Directors of the Company, with a Certificate of the Secretary of the Company as to such approval; and (d) An opinion of counsel for the Company with respect to the validity of the Shares in the new form and the status of such Shares under the Securities Act of 1933, as amended, and any other applicable federal or state law or regulation. 2. The Company shall furnish the Transfer Agent with a sufficient supply of blank Share certificates in the new form, and from time to time will replenish such supply upon 6 the request of the Transfer Agent. The Company agrees to indemnify and exonerate, save and hold the Transfer Agent harmless, from and against any and all claims or demands that may be asserted against the Transfer Agent concerning the genuineness of any Share certificate supplied to the Transfer Agent pursuant to this Agreement. ARTICLE V ISSUANCE, TRANSFER AND REDEMPTION OF SHARES OF THE FUND 1. Whenever the Company shall sell or cause to be sold any Shares, it shall cause to be delivered to the Transfer Agent written notification signed by an Authorized Officer specifying: (a) The name of the purchaser, the number and Series of Shares sold, the trade date and price per Share of such Series; and (b) The amount of money to be delivered to the Custodian of the Company for the sale of such Shares. 2. Upon notification from the Custodian that such money has been received by it, together with the notifica- tion required under paragraph 1 hereof, the Transfer Agent shall issue to the purchaser or his authorized agent, such Shares of such Series as he is entitled to receive, based on the appropriate net asset value of the Shares of such Series, determined in accordance with applicable Federal law or regulation. In issuing Shares to a purchaser or his authorized agent, the Transfer Agent shall be entitled to rely upon the latest written instructions, if any, previ- ously received by the Transfer Agent from the purchaser or his authorized agent concerning the delivery of such Shares. 7 3. The Transfer Agent shall not be required to issue any Shares where it has received from an authorized officer of the Company or from any appropriate Federal or state authority, written notification that the sale of the Shares has been suspended or discontinued, and the Transfer Agent shall be entitled to rely upon such written notification. 4. Upon the issuance of any Shares in accordance with the foregoing provisions of this Article, the Transfer Agent shall not be responsible for the payment of any original issue or other taxes required to be paid by the Company in connection with such issuance. 5. Shares will be transferred or redeemed upon pre- sentation to the Transfer Agent of Share certificates or instructions properly endorsed for transfer or redemption, accompanied by such documents as the Transfer Agent may deem necessary to evidence the authority of the person making such transfer or redemption and bearing satisfactory evi- dence of the payment of stock transfer taxes. In the case of small estates, where no administration is contemplated, the Transfer Agent may, when furnished with an appropriate surety bond, and without further approval of the Company, transfer or redeem Shares registered in the name of a dece- dent where the current market value of the Shares being transferred does not exceed $2,000.00 or such amount as may be prescribed by the various states. The Transfer Agent reserves the right to refuse to transfer or redeem Shares until it is satisfied that the endorsement on the Share cer- tificate or instructions is valid and genuine, and for that purpose it will require a guarantee of signature by a member firm of a national securities exchange or by a bank or trust company acceptable to the Transfer Agent. The Transfer Agent also reserves the right to refuse to transfer or 8 redeem Shares until it is satisfied that the requested transfer or redemption is legally authorized, and it shall incur no liability for the refusal, in good faith, to make transfers or redemptions which the Transfer Agent, in its judgment, deems improper or unauthorized, or until it is satisfied that there is no basis to any claims adverse to such transfer or redemption. The Transfer Agent may, in effecting transfers, rely upon the Uniform Act for the Sim- plification of Fiduciary Security Transfers or the Uniform Commercial Code, as the same may be amended from time to time, which in the opinion of legal counsel for the Company or of its own legal counsel protect it in not requiring cer- tain documents in connection with the transfer or redemption of Shares of the Company, and the Company shall indemnify the Transfer Agent for any act done or omitted by it in reliance upon such laws or opinions of counsel of the Com- pany or of its own counsel. 6. Where Shares of the Company are redeemed, the Transfer Agent shall upon receipt of the instructions and documents in proper form, required pursuant to paragraph 5 of this Article IV, deliver to the Custodian and the Company a notification setting forth the number and Series of Shares to be redeemed and stating that such Shares are in good form for redemption. 7. The Transfer Agent shall, upon receipt of the moneys paid to it by the Custodian for the redemption of Shares, pay to the shareholder, his authorized agent, or legal representative, such moneys received from the Custo- dian. 8. Shares which are subject to restriction on trans- fer or redemption (e.g., Shares acquired pursuant to an 9 investment representation, Shares held by controlling persons, Shares subject to shareholder's agreements, etc.) must be issued in Share certificate form and must be stamped on the face thereof with a legend describing the extent and conditions of the restriction or referring to the source of such restriction. Such Shares may not be transferred or redeemed except upon receipt by the Transfer Agent of an opinion of counsel for the Company stating that such trans- fer or redemption is rightful and may be properly effected. The Transfer Agent shall be entitled to rely upon such opin- ion and shall be indemnified by the Company for the transfer or redemption made in reliance upon any such opinion. 9. Notwithstanding the foregoing, in connection with the issuance, redemption and transfer of Shares, the Trans- fer Agent, upon receipt of a Certificate, shall accept, from any person or entity believed by the Transfer Agent to be a person or entity specified in such Certificate, computer tape instructions in a form satisfactory to the Transfer Agent. After receipt of such computer tape instructions and such Certificate and other documentation or information as the Transfer Agent deems necessary to effect transactions, the Transfer Agent shall effect the transactions specified in the computer tape instructions, provided, however, that the Transfer Agent shall not be required to inquire into the actual authority of the person or entity furnishing any instructions to give such instructions or the legality or propriety of the transactions specified in such instruc- tions. The Transfer Agent shall be fully protected in effecting any transaction in accordance with computer tape instructions and written instructions received pursuant to this paragraph 9. 10 ARTICLE VI CONCERNING THE COMPANY 1. The Company shall promptly file with the Transfer Agent written notice of any change in the officers autho- rized to sign Share certificates, Certificates, written instructions or requests, together with a specimen signature of each newly Authorized Officer. In case any officer of the Company who shall have signed manually or whose fac- simile signature shall have been affixed to blank Share cert- tificates shall die, resign or be removed prior to issuance of such Share certificates, the Transfer Agent may issue such Share certificates of the Company notwithstanding such death, resignation or removal, and the Company shall promptly file with the Transfer Agent such approval, adop- tion or ratification as may be required by law. 2. At any time the Transfer Agent may apply to an Authorized Officer of the Company for instructions, and may consult counsel for the Company or its own counsel at the expense of the Company with respect to any matter arising in connection with its appointment or its duties or responsi- bilities as Transfer Agent. The Transfer Agent shall not be liable for any action taken or omitted by it in good faith in accordance with such instructions or such counsel consul- tation. 3. The copy of the Company's Charter and copies of all amendments thereto shall be certified by the Secretary of State (or other appropriate official) of the state of incorporation, and if such Charter and/or amendments are required by law to be also filed with a county or other officer or official body, a certificate of such filing shall be filed with a certified copy submitted to the Transfer 11 Agent. The copy of the By-Laws and copies of all amendments thereto, and copies of resolutions of the Board of Directors of the Company, shall be certified by the Secretary of the Company under the corporate seal. ARTICLE VII CONCERNING THE TRANSFER AGENT 1. The Transfer Agent shall be protected in acting upon any paper or document believed by it to be genuine and to have been signed by the proper person or persons and shall not be held to have any notice of any change of autho- rity of any person until receipt of written notice thereof from the Company. It shall also be protected in processing Share certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Company and the proper counter-signature of the Transfer Agent. 2. The Transfer Agent may establish such additional rules and regulations governing the transfer or registration of Share certificates as it may deem advisable and consis- tent with such rules and regulations generally adopted by bank transfer agents. 3. The Transfer Agent shall keep such records in the form and manner as it may deem advisable but not inconsis- tent with the rules and regulations of appropriate govern- ment authorities. The Company, or the Company's authorized representatives, shall have access to such records during the Transfer Agent's normal business hours. Upon the rea- sonable request of the Company, copies of any such records shall be provided by the Transfer Agent to the Company or 12 the Company's authorized representative at the Company's expense. 4. In addition to the duties that the Transfer Agent assumes under this Agreement, the Transfer Agent shall per- form the duties and functions as set forth in Appendix B hereto which is incorporated herein and made a part hereof. The duties and functions to be performed by the Transfer Agent as set forth in Appendix B may be amended from time to time as agreed upon by the Company and the Transfer Agent. In consideration for all of the services to be performed by the Transfer Agent as set forth herein and in Appendix B hereto the Transfer Agent shall be entitled to receive reim- bursement for all out-of-pocket expenses and such compensa- tion as may be agreed upon from time to time between the Company and the Transfer Agent. As of the date of this Agreement such compensation shall be in the amounts set forth in Appendix B hereto and shall be full compensation for all the services to be rendered by the Transfer Agent hereunder and pursuant to Appendix B hereto. 5. The Transfer Agent may, in connection with the appointment as Transfer Agent, employ agents or attorneys- in-fact at the expense of the Company, and shall not be liable for any loss or expense arising out of or in connec- tion with its actions or the actions or omissions to act of its agents or attorneys-in-fact so long as the Transfer Agent acts in good faith and is not negligent or guilty of any willful misconduct. 6. The Company hereby agrees to indemnify and exoner- ate, save and hold harmless the Transfer Agent from and against any and all claims, demands, expenses (including attorneys' fees) and liabilities (whether with or without 13 basis in fact or law) of any and every nature which the Transfer Agent may sustain or incur or which may be asserted against the Transfer Agent by any person by reason of or as a result of any action taken or omitted to be taken by the Transfer Agent without bad faith, negligence or willful mis- conduct or in good faith in reliance upon any Certificate, instruction, notice, computer tape, order, opinion of coun- sel or Share certificate believed by it to be genuine and, to be signed, countersigned or executed by any duly author- ized person or persons. The Company further agrees to indemnify and exonerate, save and hold the Transfer Agent harmless from and against any and all claims, demands, expenses (including attorneys fees) and liabilities (whether with or without basis in fact or law) of any and every nature which the Transfer Agent may sustain or incur or which may be asserted against the Transfer Agent by any person by reason of or as a result of any action taken or omitted to be taken by the Transfer Agent in good faith in reliance upon the Company's prospectus, any law, act or regulation, or interpretation of the same, even though the same may thereafter have been altered, changed, amended or repealed. 7. Specifically, but not by way of limitation, the Company agrees to indemnify and exonerate, save and hold the Transfer Agent harmless from and against any and all claims, demands, expenses (including attorneys fees) and liabilities (whether with or without basis in fact or law) of any and every nature which the Transfer Agent may sustain or incur or which may be asserted against the Transfer Agent by any person in connection with the genuineness of a Share certi- ficate, the Transfer Agent's capacity and authorization to issue Shares, and the form and amount of authorized Shares. 14 8. When mail is used for delivery of non-negotiable Share certificates, the value of which does not exceed the limits of the Transfer Agent's Blanket Bond, the Transfer Agent will send such non-negotiable certificates by first class mail, and such deliveries will be covered while in transit by the Transfer Agent's Blanket Bond. Non-negoti- able Share certificates, the value of which exceeds the limits of the Transfer Agent's Blanket Bond will be sent by insured registered mail. Negotiable Share certificates will be sent by insured registered mail. 9. The Transfer Agent may issue new Share certifi- cates in place of Share certificates represented to have been lost, stolen, seized or destroyed upon receiving writ- ten instructions from the Company and indemnity satisfactory to the Transfer Agent and the Company. Such instructions from the Company shall be in such form as approved by the Board of Directors of the Company in accordance with the provisions of the law or of the By-Laws of the Company governing such matters. If the Transfer Agent receives written noti- fication from the owner of the lost, destroyed, seized or stolen Share certificate within a reasonable time after he has notice of it, the Transfer Agent shall promptly notify the Company and shall act pursuant to the written instruc- tions of the Company. If the Company receives such written notification from the owner of the lost, destroyed, seized or stolen Share certificate it shall promptly send written instructions to the Transfer Agent. The Transfer Agent shall not be liable for any act done or omitted by it pursu- ant to or while awaiting the written instructions of the Company. The Transfer Agent may issue new Share certifi- cates in exchange for, and upon surrender of, mutilated Share certificates. 15 10. The Transfer Agent will issue and mail subscrip- tion warrants for Shares, Shares representing stock divi- dends, exchanges or splits, or act as conversion agent upon receiving written instructions from an Authorized Officer of the Company and such other documents as the Transfer Agent may deem necessary. 11. The Transfer Agent will supply shareholder lists to the Company from time to time upon receiving a request therefor from an Authorized Officer of the Company. 12. At the request of an Authorized Officer of the Company, the Transfer Agent will address and mail such appropriate notices to shareholders as the Company may direct. 13. The Transfer Agent may deliver from time to time at its discretion, to the Company, for safekeeping or dispos- sition by the Company in accordance with law, such records, papers, Share certificates which have been cancelled in transfer, exchange or redemption, or documents accumulated in the execution of its duties as such Transfer Agent, as the Transfer Agent may deem expedient, and the Company assumes all responsibility for any failure thereafter to produce any record, paper, cancelled Share certificates, or document so returned, if and when required. The records maintained by the Transfer Agent pursuant to Section 3 of this Article, including the records described in Appendix B which is attached hereto and made a part hereof, which have not been previously delivered to the Company pursuant to the foregoing provisions of this Sec- tion, shall be considered to be the property of the Company and such records shall be delivered to the Company on the 16 date of termination of this Agreement, as specified in Article IX hereof, in the form and manner kept by the Trans- fer Agent on such date of termination. 14. In case of any request or demand for the inspec- tion of the shareholder records of the Company, the Transfer Agent will endeavor to notify the Company and to secure instructions from an Authorized Officer of the Company as to such inspection. The Transfer Agent reserves the right, however, to exhibit the shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the shareholder records to such person. ARTICLE VIII PAYMENT OF DIVIDENDS OR DISTRIBUTIONS 1. The Company shall furnish to the Transfer Agent a copy of a resolution of its Board of Directors, certified by the Secretary or any Assistant Secretary, either (i) setting forth with respect to a Series of Shares the date of the declaration of a dividend or distribution, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share to the shareholders of record as of that date, the total amount payable to the Transfer Agent on the payment date and whether such dividend or distribution is to be paid in Shares of such class at net asset value, or (ii) author- izing with respect to a Series of Shares the declaration of dividends and distributions on a daily basis, and authoriz- ing the Transfer Agent to rely on a Certificate setting forth with respect to such Series of Shares the date of the declaration of a dividend of distribution, the date of pay- 17 ment therefor, the record date as of which shareholders entitled to payment shall be determined, the amount per Share of such dividend or distribution, and the total amount payable to the Transfer Agent on the payment date. 2. Upon the payment date specified in accordance with Section 1 of this Article, the Company shall cause the Cus- todian of the Company to pay to the Transfer Agent suffi- cient cash to make payment to the shareholders of record of such Series as of such payment date. The Transfer Agent will, upon receipt of such cash, make payment of such divi- dends or distributions to the shareholders of record of such Series as of the record date. The Transfer Agent shall not be liable for any payments made in accordance with the reso- lution of the Board of Directors of the Company or a Certif- icate. If the Transfer Agent shall not receive from the Custodian sufficient cash to make payment to all share- holders of a Series as of the record date, the Transfer Agent shall upon notifying the Company, withhold payment to all shareholders of record of such Series as of the record date until such sufficient cash is provided to the Transfer Agent. 3. It is understood that the Transfer Agent shall in no way be responsible for the determination of the rate of any dividend or capital gains distributions due to the shareholders of any Series. 4. It is understood that the Transfer Agent shall file such appropriate information returns concerning the payment of dividends and capital gains distributions with the proper Federal, State and local authorities as are required by law to be filed by the Company but shall in no way be responsible for the. collection or withholding of 18 taxes due on such dividends or distributions due to share- holders unless required of it by applicable law. ARTICLE IX TERMINATION 1. Either of the parties hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than 90 days after the date of receipt of such notice. In the event such notice is given by the Company, it shall be accompanied by a copy of a resolution of the Board of Directors of the Company, certified by the Secretary or any Assistant Secretary, electing to terminate this Agreement and designating a successor transfer agent or transfer agents. In the event such notice is given by the Transfer Agent, the Company shall, on or before the termination date, deliver to the Transfer Agent a copy of a resolution of its Board of Directors certified by the Secretary or any Assis- tant Secretary designating a successor transfer agent or transfer agents. In the absence of such designation by the Company, the Transfer Agent may designate a successor trans- fer agent. If the Company fails to designate a successor transfer agent and if the Transfer Agent is unable to find a successor transfer agent, the Company shall upon the date specified in the notice of termination of this Agreement be deemed to be its own transfer agent and the Transfer Agent shall thereby be relieved of all duties and responsibilities pursuant to this Agreement. 19 ARTICLE X MISCELLANEOUS 1. Notwithstanding any of the foregoing provisions of this Agreement, the Transfer Agent shall be under no duty or obligation to inquire into, and shall not be liable for: (a) The legality of the issue or sale of any Shares of any Series, or the sufficiency of the amount to be received therefor; (b) The legality of the redemption of any Shares of any Series, or the propriety of the amount to be paid therefor; (c) The legality of the declaration of any divi- dend by the Company, or the legality of the issue of any Share of any Series in payment of any stock dividend; (d) The legality of any recapitalization or read- justment of the Shares of any Series. 2. Any notice or other instrument in writing author- ized or required by this Agreement to be given to the Com- pany shall be sufficiently given if addressed to the Company and mailed or delivered to it at its office at or at such other place as the Company may from time to time designate in writing. 3. Any notice or other instrument in writing, author- ized or required by this Agreement to be given to the Trans- fer Agent shall be sufficiently given if addressed to the Transfer Agent and mailed or delivered to it at its office at 48 Wall Street, New York, New York 10015 or at such other 20 place as the Transfer Agent may from time to time designate in writing. 4. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties with the formality of this Agreement, and authorized or approved by a resolution of the Board of Directors of the Company. 5. This Agreement shall extend to and shall be bind- ing upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Company without the written consent of the Transfer Agent. 6. This Agreement shall be construed in accordance with the laws of the State of New York. 7. This Agreement may be executed in any number of counterparts each of which shall be deemed to be an origi- nal; but such counterparts shall, together, constitute only one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate officers, thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/ Harold R. Groom Jr. -------------------------- 21 ATTEST: /s/ Philip L. Kirstein ---------------------- THE BANK OF NEW YORK By: -------------------- ATTEST: ---------------------------- 22 TRANSFER AGENCY AGRREEMENT APPENDIX A I, , President and I, , Secretary of (the "Company"), do hereby certify that: The following individuals have been duly authorized by the Board of Directors of the Company in conformity with the Company's Articles of Incorporation and By-Laws to execute any certificate, instruction, notice or other instrument or to give oral instructions on behalf of the Company, and the signatures set forth opposite their respective names are their true and correct signatures: Name Signature ---- --------- - ----------------------------------- ------------------------------- - ----------------------------------- ------------------------------- TRANSFER AGENCY AGREEMENT APPENDIX B The Transfer Agent shall keep the following records on behalf of the Company on an ongoing basis, except as other- wise indicated: 1. Daily Journals consisting of the following: 1.1 All new accounts subsequent payments, all types of liquidations and transfers 1.2 All code changes 1.3 All address changes 2. Daily Dividend Journal 2.1 All dividends accrued daily for each account 3. Application File 3.1 Applications 3.2 Redemption correspondence with copy of redemption check 4. General Correspondence File 5. Company Daily Recap Letters 5.1 The Company record of all daily transactions that either increased or decreased the Company's out- standing shares 6. Master File Disc 6.1 Name and address 6.2 Balance of shares (Certificate and Book form) (Appendix-B continued) 6.3 Expedited redemption address 6.4 All applicable plan coding 7. Year-end ledger on microfilm 7.1 All transactions per year for each shareholder 8. Payment correspondence (Six Months) 9. Address changes (Three Months) 10. Blue Sky reports (Yearly) 11. T-Load report (Yearly) 11.1 Daily analysis of accounts by beneficial owner code 11.2 Daily share analysis by state 11.3 Daily share range analysis 11.4 Daily type plan report 11.5 Daily new account report 11.6 Daily ten largest shareholder report 2 EX-99.9(B) 37 LICENSE AGREEMENT RELATING TO USE OF NAME LICENSE AGREEMENT RELATING TO USE OF NAME AGREEMENT made as of the 16th day of October 1981, by, between and among MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, a Delaware corporation ("Merrill Lynch"), MERRILL LYNCH ASSET MANAGEMENT, INC., a Delaware corporation ("MLAM") and MERRILL LYNCH VARIABLE SERIES FUNDS, INC., a Maryland corporation (the "Company"); W I T N E S S E T H : WHEREAS, Merrill Lynch was incorporated under the laws of the State of Delaware on November 10, 1958 under the corporate name "Merrill Lynch, Pierce, Fenner & Smith Incorporated" and has used such name at all times thereafter; WHEREAS; Merrill Lynch was duly qualified as a foreign corporation under the laws of the State of New York on January 2, 1959 and has remained so qualified at all times thereafter; WHEREAS, MLAM was incorporated under the laws of the State of Delaware on March 22, 1976 under the corporate name "Merrill Lynch Money Management Services, Inc." which name was changed on April 13, 1976, pursuant to an amendment of MLAM's Certificate of Incorporation, to "Merrill Lynch Asset Management, Inc." and MLAM has used such name at all times thereafter; WHEREAS, MLAM was duly qualified as a foreign corporation under the laws of the State of New York on April 26, 1976 and has remained so qualified at all times thereafter; WHEREAS, the Company was incorporated under the laws of the State of Maryland on October 16, 1981 as a series company which may consist of one or more funds (the "Funds"); and WHEREAS, the Company desires to qualify as a foreign corporation under the laws of the State of New York and has requested Merrill Lynch and MLAM to give their con- sent to the use of the name "Merrill Lynch" in the Company's corporate name or in the name of any of its Funds. NOW, THEREFORE, in consideration of the premises and of the covenants hereinafter contained, Merrill Lynch, MLAM and the Company hereby agree as follows: 1. Merrill Lynch and MLAM hereby grant the Company a non-exclusive license to use the words "Merrill Lynch" in its corporate name or in the name of any of its Funds. 2. Merrill Lynch hereby consents to the qualifi- cation of the Company as a foreign corporation under the laws of the State of New York with the words "Merrill Lynch" in its corporate name and agrees to execute, or to cause its affiliates to execute, such formal consents as may be 2 necessary in connection with such filing; and MLAM joins in such consent. 3. The non-exclusive license hereinabove referred to has been given and is given by Merrill Lynch and MLAM on the condition that they may at any time, in their sole and absolute discretion, withdraw the non-exclusive license to the use of the words "Merrill Lynch" in the name of the Company or any of its Funds; and, as soon as practicable after receipt by the Company of written notice of the with- drawal of such non-exclusive license, and in no event later than ninety days thereafter, the Company will change its name and the names of any of its Funds that include the words "Merrill Lynch" so that such names will not thereafter include the words "Merrill Lynch" or any variation thereof. 4. Merrill Lynch reserves and shall have the right to grant to any other company, including without limitation, any other investment company, the right to use the words "Merrill Lynch" or variations thereof in its name and no consent or permission of the Company shall be necessary; but, if required by any applicable laws of any state, the Company will forthwith grant all requisite consents. 5. The Company will not grant to any other company the right to use a name similar to that of the Company or Merrill Lynch without the written consent of Merrill Lynch. 3 6. Regardless of whether the Company should hereafter change its name or the names of any of its Funds that include the words "Merrill Lynch" and eliminate the words "Merrill Lynch" or any variation thereof from such names, the Company hereby grants to Merrill Lynch and MLAM the right to cause the incorporation of other corporations or the organization of voluntary associations which may have names similar to that of the Company or any of its Funds or to that to which the Company may change its name or the names of any of its Funds and to own all or any portion of the shares of such other corporations or associations and to enter into contractual relationships with such other corporations or associations, subject to any requisite appro- val of a majority of the Company's shareholders and the Securities and Exchange Commission and subject to the payment of a reasonable amount to be determined at the time of use, and the Company agrees to give and execute any such formal consents or agreements as may be necessary in connection therewith. 7. This Agreement may be amended at any time by 4 a writing signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By /s/ George Y. Bromwell -------------------------------------- Vice President MERRILL LYNCH ASSET MANAGEMENT, INC. By /s/ Harold R. Groom Jr. -------------------------------------- Vice President MERRILL LYNCH VARIABLE SERIES FUNDS, INC. BY /s/ -------------------------------------- President 5 -----END PRIVACY-ENHANCED MESSAGE-----